When you buy life insurance, you know how much life insurance costs for the duration of the policy. But later in life your budget may not have room for the life insurance bill. Premiums may become unmanageable if you’re on a fixed income or lose your job.
With term life insurance, you generally lose your policy entirely if you fail to make the required premium payments. With permanent policies, however, there are some ways to maintain coverage even if you can’t keep up with premiums. In the end, you may find that it’s better to surrender your policy altogether, but there are alternatives to explore first.
Keeping your coverage
If you have a large estate or still have dependents, you’ll probably want to keep your whole life insurance, or another type of permanent plan, in force. In this case, you may be able to:
Pay premiums with your cash value. If you’ve held a permanent life insurance policy for many decades, it should have built up significant cash value, which you can use to pay premiums. Keep in mind that taking out cash value will reduce the amount of your death benefit if you don’t pay it back, and if you deplete your cash value too much, your policy will lapse. A reduced death benefit, however, is better than no death benefit.
Pay premiums with your dividends. Some permanent life insurance policies pay dividends on the investments within the policy. You can also use these to offset your premiums.
Reduce the policy’s face amount. Most life insurance companies will allow you to lower the amount of your death benefit in exchange for a lower premium. If you lower the face amount of a permanent life insurance policy enough, your carrier may consider you “paid up” and allow you to stop paying premiums entirely. You also may be able to drop policy riders -- add-ons to your basic insurance -- to reduce your monthly costs.
Use a rider if you’re eligible. If a disability is keeping you from working and making it difficult to pay premiums, you may have a rider that can help. The waiver of premium allows you to stop paying your bill but keeps your benefits in place, as long as your disability meets your carrier’s rules.
Switch to term life insurance. In some cases, you can discontinue your permanent policy, take the cash value (minus any fees for cancellation) and use the money to buy a term policy. Remember that term life insurance premiums are less expensive than those for permanent plans, but you only receive a death benefit if you die within the term covered by the policy.
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Dropping your policy
If you’ve paid off your major expenses and your children are independent, it’s possible that you no longer need life insurance. It’s certainly a nice bonus for your beneficiaries, but if it’s putting a strain on your budget, you might consider dropping the policy.
If you’ve built up cash value in your policy, canceling — or “surrendering” — it may become a little less painful. Your agent or insurance company can tell you the current surrender value of your policy. Any money you receive that comes from your policy’s gains will be taxable.
The bottom line
No longer have a life insurance need? There’s no reason to keep a policy in force, especially if it stresses you financially. But if you do need coverage, do your best to keep your policy. Buying a new one later will mean higher premiums, based on your older age.
Even if your old life insurance carrier agrees to reinstate your policy, the company probably will require a new medical exam and ask you to pay your missed premiums with interest. If you are interested in reinstating a lapsed policy, check with your agent or insurance company, since there often is a time limit for this feature.
Permanent life insurance isn’t cheap, but if you want to keep your policy, ask your agent or insurer for more suggestions.