When you acquire life insurance, you know how much it will cost for the whole lifetime of the coverage. However, as you get older, your budget may not allow for the cost of life insurance. Premiums can become overwhelming if you have a fixed income or lose your job.
If you fail to make the required premium payments on your term life insurance policy, you will usually lose it totally. However, with permanent insurance, there are certain options for maintaining coverage even if you are unable to pay your premiums. In the end, you may decide that it is preferable to surrender your insurance entirely, but there are alternatives to consider first.
Keeping your coverage
If you have a substantial estate or still have dependents, you should probably maintain your whole life insurance or another sort of permanent plan in place. In this scenario, you might be able to:
Pay premiums using your cash value. If you’ve had a permanent life insurance policy for decades, it should have accumulated significant cash worth that you can use to pay premiums. Keep in mind that withdrawing cash value will diminish the amount of your life insurance death benefit if you do not repay it, and if you deplete your cash value too quickly, your policy will lapse. A lower death benefit, however, is preferable than no death benefit.
Pay premiums using your dividends. Some permanent life insurance policies pay dividends on the investments included in the policy. You can also utilize them to reduce your premiums.
Reduce the policy’s face amount. Most life insurance companies will allow you to reduce the size of your death benefit in return for a reduced premium. If you reduce the face amount of a permanent life insurance policy sufficiently, your carrier may consider you “paid up” and allow you to discontinue paying premiums totally. You may also be able to minimize your monthly costs by dropping policy riders, which are add-ons to your base insurance.
Use a rider if you are eligible. If a disability prevents you from working and makes it difficult to pay premiums, a rider may be available to help. The waiver of premium allows you to cease paying your bill while keeping your benefits in place, as long as your handicap matches your carrier’s requirements.
Switch to term life insurance. In some situations, you can cancel your permanent insurance, receive the cash value (less any cancellation fees), and use the funds to purchase a term policy. Remember that term life insurance premiums are lower than those for permanent plans, but you will only receive a death benefit if you die during the term of the policy.
Dropping your policy
If you’ve paid off your primary expenses and your children are financially independent, you may no longer require life insurance. It’s a wonderful benefit for your beneficiaries, but if it’s causing a hardship on your finances, you might consider canceling the insurance.
If you’ve built enough cash value in your coverage, canceling — or “surrendering” — may be less traumatic. Your agent or insurance provider can provide you with the current surrender value of your policy. Any income you get from your policy’s gains will be taxed.
The bottom line
Are you no longer in need of life insurance? There’s no reason to have insurance in force, especially if it causes you financial stress. However, if you do require coverage, try your utmost to keep your policy. Purchasing a new one later will result in higher premiums because of your older age.
Even if your old life insurance company agrees to restore your coverage, they will most likely require a fresh medical exam and ask you to pay your missing premiums with interest. If you want to reinstate a lapsed policy, check with your agent or insurance company beforehand, as this function generally has a time limit.
Permanent life insurance is not inexpensive, however if you want to preserve your coverage, consult your agent or insurer for additional recommendations.
