The Contract

• Whether it's car insurance, health insurance or life insurance -- insurance is a contract. The insurance company agrees to do one thing or one set of things in exchange for those things you agree to do -- pay premiums on time. This transaction of premium payment in exchange for coverage is not governed by what seems fair; it is governed by a written contract agreed upon by both parties, which in the case of insurance is the policy.
  
  

A Binary Test

• With some contracts, grey areas exist. For example, two parties might agree to something, and if the agreement doesn't specify in detail every possibility, a court, arbitrator or the parties to the contract might strike a compromise. This is only likely to happen if the language in the contract can be reasonably interpreted in favor of both sides. Whether or not insurance is in force, however, is not such a contract. Whether insurance is in force or not is a binary test: it either is, or it isn't. If it is in force, you are due whatever coverage is defined in the policy. If the policy is not in force, you do not have any coverage.
  
  

Whole Life Insurance

• Some types of policies, such as whole life policies, will likely continue to have a cash value even if the premium payments are not continued. You should think of whole life policy payments as being the the same as any other policy; if you don't pay, you're not insured. However, whole life policies are a different class of insurance. They are conceptually more complex and have additional considerations and implications. Life insurance should be thought of as both an insurance policy and an investment. Where coverage is concerned, the language in the policy and the laws in which the policy was created will dictate whether or not it's in force in any given circumstance. The policy will also dictate the disposition of any cash value. However, the lapse of a life insurance policy may have tax implications too, as it may create a "taxable event" meaning the point at which the policy lapses, you incur potentially taxable income. As a rule of thumb, your rent or mortgage, and your insurance policies are the worst possible payments to make late.
  
  

State Law and Federal Law

• Every state has its own insurance laws which govern the insurance business in that state. Conceptually, here is a rule of thumb for contracts and state laws. First, a contract must be legal. If the contract is legal and in force, it is binding. If it is unclear whether a contract itself is legal or how a circumstance should be treated within the language of the contract, the state law will shape the outcome so long as it is not in conflict with any federal law. That's how the hierarchy works. This hierarchy is important to understand if you have a situation that is unclear under the terms of your policy. For example, let's say you mailed your premium to your insurance company in cash in time for it to receive it without lapsing the policy. That's unwise, because it doesn't document the receipt of payment. However, if it results in a conflict in which you believe coverage was in force and your insurance company says it was not, the sequence of answering the questions is generally to read the policy, then check the state laws -- preferably with the help of an attorney. Federal laws may or may not come into play. An example of how federal laws might apply -- if it was noted that an insurance company seemed to have a pattern of losing payments made by minorities, it could support a claim under federal laws, not state laws, that the money was received but not applied appropriately. This test goes full circle; if the contract was legal to begin with and according to the contract, the policy was not in force, there is no benefits of coverage, except in certain types of life insurance.