Don’t Drop Your Life Insurance

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If you’re thinking about dropping your life insurance premiums to save a few bucks, you’re not alone. According to a 2010 report from life insurance research group LIMRA, 35 million U.S. households have no life insurance coverage, an increase of 11 million households since 2004. More than 40% of Americans say fiscal pressures are one reason life insurance isn’t a priority.

The problem with letting go of your life insurance to save money is that in the event of a disaster, it could wind up costing your family thousands they may not be able to afford. Even when you’re ready to get your insurance back, there’s a good chance you’ll pay substantially higher premiums if your health or age has significantly changed.

Industry experts say that for those facing hard economic times, dropping coverage isn’t the only option. Here are a few alternatives to dumping your insurance.

Use Cash Value

Consumers with cash value policies might not need to worry about skipping premium payments, says Tommy Smoot, second vice president of life product development for The Guardian Life Insurance Company of America in New York.

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“With (cash value) insurance, if you’re in a situation where you can’t pay your premium, you can actually tap into those values as a way to pay,” he says. “It’s called an automatic premium loan feature.”

How long policyholders can use cash value reserves to pay their life insurance premiums depends on how long they’ve owned the policy and the reserve they’ve built up, Smoot says. However, there is a catch. Automatic premium loans can prevent a policy lapse, but you’ll also get charged interest. For whole-life holders just looking for a small fiscal boost, Smoot recommends using policy dividends to temporarily lower premiums.

Drop the Riders

One of the fastest ways to lower your life insurance premiums on permanent and term policies is to drop policy riders. Dumping pricey add-ons such as waiver of premium or accidental death and dismemberment riders can substantially lower your premiums. But the amount varies between companies and policies, says William Rowan, president of the term life insurance rating site

“You have to work with an insurance agent if you’re thinking about dropping riders,” says Rowan, adding that some companies allow policyholders to drop certain riders. Other companies won’t let you have certain riders back without additional medical underwriting.

Before letting go of riders, Rowan says policyholders should ask their provider how much the move could lower premiums and how easy it would be to add riders back on later.

Accelerate Your Benefits

If chronic illness or disability caused your financial hardship, you could be eligible to access your benefits early. Known as an accelerated death benefit, the feature is standard on certain life insurance policies and available as an additional rider on others, says Smoot. Consumers only pay if they actually use it.

“With an (accelerated death benefit) the carrier is paying the premium, so the value of the policy continues to grow,” says Smoot.

To collect benefits early, Smoot says policyholders will have to prove they are seriously ill or disabled and should discuss the monetary ramifications of pulling benefits early with their financial planner.

Get Temporary Coverage

If a pricey individual policy is putting you in a financial crunch, investigate other options.

“Temporary coverage through a plan offered at your work is better than no coverage at all,” says Andrew Hutchison, vice president of product development for Mutual of Omaha. He adds that “most policies (permanent and term) have reinstatement provisions, so you can get your (old) policy back later.”

After a plan lapses, Hutchison says policyholders generally have approximately three years to reinstate it, provided they can pay all back premiums on the policy and their health hasn’t significantly changed.

Lower Your Benefit

“If you have a 20-year policy for $500,000, you will always have the option of reducing the base amount of $250,000 and effectively cut your premiums in half,” says Rowan. “When you’re back on your feet, assuming your health doesn’t change, you can always apply for more insurance.”

Lowering your benefit can help you get through a tough time, but it could cost more in the end. Once a policyholder is prepared to raise his or her benefit, Rowan says that he or she might have to go through medical underwriting again. If the person’s health or lifestyle changed during the interim, premiums could increase.

Switch From Perm to Term

Instead of going without insurance, Hutchison says cash value policyholders can trade a permanent policy for a cheaper term one.

“If you have a permanent policy, you can always surrender it for cash value,” says Hutchison.

Hutchison warns that surrendering a policy means that policyholders can only pull the current cash value of the account minus any loans or outstanding premiums. Money pulled out of a permanent policy can also have tax consequences. While most of the money you pull out will simply be premiums you paid into the policy, any funds above that amount — for example, if your policy has performed particularly well — will be taxable income.


11 thoughts on “Don’t Drop Your Life Insurance”

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  4. You should drop life insurance in only a few instances, as this leaves your loved ones unprotected and uninsured in the event of your death. The ideal answer to this question is to never drop your life insurance if there are people who are dependent on your income or caretaking abilities.

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    However, there are certainly instances that call for this action, whether there is a problem with your life insurance company’s financial stability or your coverage no longer is adequate for your needs. Further, this answer truly depends on two questions:

    What type of life insurance policy do you currently hold and are you switching to a different type of insurance?
    Should I drop life insurance if I can’t afford the premiums?

    Unfortunately the most common reason that people drop their life insurance is that they can no longer afford the premiums. And obviously if there is a question of paying the life insurance premium or buying groceries for the family, life insurance should not be the priority. However, if this is your predicament, there may be ways to avoid this depending on the type of life insurance policy you currently hold.

    If you have some version of a permanent life insurance policy with a cash value amount, you can actually borrow from the cash value to pay the premiums on the policy. This will decrease your death benefit, but it will also allow you to continue coverage and keep your family protected.

    If you have whole life insurance and either do not have enough built up or enough left in your cash value to help pay premiums, it could be time to look at other options.

    There are other less expensive options for life insurance. The most similar to a whole life insurance policy is called a no load policy. This type of policy does not include commission or other fees, so ends up having lower premiums but with the benefit of a whole life term and a cash value account. The other one is referred to as a term life insurance policy, which will only last for a set amount of years, but is typically the cheapest option.

    If you know that you need life insurance coverage, but are struggling with the premiums, look at other policy types, companies and payment options before dropping your coverage. It will likely be more expensive to obtain a few years down the road.
    Should I drop my life insurance policy if the company is about to go bankrupt?

    First off, get in touch with your state guaranty fund. This is similar to the federal backing of banks; if a bank fails, your account will be protected up to a certain amount. This is the same with a state guaranty fund.

    However, you will still want to start comparing policies to find a replacement policy. Most importantly, make sure that your new policy goes into effect before you drop your old life insurance policy so that you do not suffer a lapse of insurance.
    Should I drop my life insurance policy if I find one that’s cheaper and a better fit?

    First, look into the penalties that you will be subject to if you cancel during the term period. Some companies will charge exorbitant amounts for canceling early from a life insurance policy- especially in the early years of a whole life insurance policy. Calculate the cancelation fee from your existing policy and then calculate the potential savings from the new policy. If you do not come up on top with your new policy, consider sticking with your current policy- unless of course the death benefits no longer meet your family’s needs.
    4 Things to Consider Before Dropping a Policy

    If you are simply just considering dropping your life insurance because you don’t feel like it is a quality use of your dollars, here are some factors to examine before dropping your coverage.

    First, just because you are healthy now does not mean that will continue for you.
    Second, if you decide to re-obtain life insurance in the future, you will most certainly have to retake the health exams and that could mean higher premiums in the future. Similarly, by canceling now you will lose your guaranteed rate (if you have that type of a policy).
    Third, many drop life insurance because their new employer offers it; however, employer plans can change as well as employers. It never hurts to have an additional plan that will remain in place no matter where your place of employment is.
    Fourth and finally, remember that sometimes the worst can happen anytime.

    Although those morbid thoughts are never fun, they will help to keep your family protected in the instance of a worst case scenario. Also, many of these plans can help your family pay the mortgage or at least give them a steady replacement income in the absence of your salary. To ensure that you are making the right decision about whether to keep or drop your life insurance, use the comparison tool above or read through additional articles on life insurance right on this website.

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