Changing Your Life Insurance Policy: Are You Meeting Your Needs?
Families can fall apart if their deceased loved one didn’t have life insurance. Life insurance is a taboo topic, and I completely understand why. Discussing it can leave you with an eerie feeling. After all, no one wants to talk about losing a loved one or dying themselves. But as Benjamin Franklin once said, “Failing to plan is planning to fail.”
Staying current on your life insurance can give both you and your loved ones financial peace of mind in the face of an uncertain future. Changing your life insurance policy as your life changes is an essential part of financial planning. So when and how should you do it?
What Happens If You Skip a Payment?
If you skip a payment on your term life (i.e., temporary) insurance policy, there are two options available to you as a policyholder.
“You can first explore reducing the face amount,” says Anthony Martin, owner and CEO of Choice Mutual. “If that can’t be done, canceling it and buying a new policy is essentially your only recourse.”
But if it’s a permanent policy, you may be able to cash it out or take advantage of the nonforfeiture option.
A nonforfeiture option is a clause of a life insurance policy that allows the insured individual to receive a partial (or full) refund of the premiums paid thus far. This clause becomes relevant in the event that the insured individual skips a premium payment. It prevents the policy from simply vanishing into thin air.
Using the premiums refunded from the nonforfeiture clause prevents you from losing the money paid thus far.
What If I Can’t Afford My Premiums?
Now, maybe you’re thinking to yourself, “I have a policy intact, but I’m experiencing financial hardship and can no longer afford to make the premium payments.”
The good news is that you may have options to prevent your policy from lapsing.
Option 1: Waiver of Premium Rider
If you recently developed a disability that prevents you from working and worry about being able to pay your life insurance premium, you may want to invoke a waiver of premium rider if it’s included in your policy.
“A waiver of premium rider simply waives, or eliminates, the life insurance premium if you become disabled and are unable to work to pay the premiums,” says Sa El, co-founder of Simply Insurance. This allows policyholders to benefit from their insurance policy, even if they can’t work to pay their premiums.
If you paid for this option when securing the policy, contact your provider promptly to learn more about eligibility requirements. There may be a minimum waiting period or age requirement to exercise this option. Plus, you’ll have to be diagnosed with a qualifying illness or disability. But if you’ve met the minimum criteria, you can stop making payments and the policy will remain intact.
Option 2: Use Dividends to Pay the Premiums
If you have a permanent life insurance policy, review your policy documents to determine if your policy pays dividends.
Once you accumulate a certain sum, you may be able to apply a portion of the funds to offset premium payments.
A word of caution: This isn’t a long-term solution, since you’re thwarting your earning potential each time you touch the dividends.
Option 3: Reduce the Value of the Policy
You may also be able to reduce the value of the policy or the amount of the death benefit. While you may not have the same level of coverage, it beats having nothing at all.
“If someone is having trouble paying their premiums on a term policy, their best option is to reduce the face amount of the policy,” Martin says. “For a permanent policy, I’d recommend taking a loan against their policy to make the premium payments. But if they can’t do that, they should explore reducing the face amount.”
And if you want to take things a step further, consider dropping the riders when you reduce the value of the policy if you can afford to take the risk. Note that some riders, such as the waiver of premium rider, can be added to a policy only when first applying for insurance. In this case, if you drop it, you can’t add it back at a later date.
Option 4: Let It Go, Let It Go!
As a last resort, you can always cash out the policy and use the funds to open a new product elsewhere if you have a nonforfeiture clause.
Alternatively, policyholders can opt to sell their life insurance if they can’t pay the premiums on their policy.
“Before someone cancels a policy, be it term or permanent, they should consider a ‘life settlement,’” Martin says. “This is where an investor buys the policy from you; they take over the payments and become the beneficiary. You’ll receive a cash payment upon execution of the settlement.”
You can use this cash to open a new policy with a lower premium. So even in this worst-case scenario, you’ll be able to secure new life insurance through a new policy provider.
If you decide to open a new policy at a different company, providers like Haven Life offer affordable term life insurance plans and aim to make the process of obtaining life insurance simple. Plus, you can get an accurate quote estimation for free.
Whether you use your refund for a new policy or continue paying into an old one, you’ll have peace of mind, knowing that you’re covered.
A Final Option for Changing Your Life Insurance Policy
If you’ve done everything you can to keep your life insurance policy afloat and you’re running out of options, contact your insurance agent. He or she may be able to offer an alternative course of action that is exclusive to your organization. Otherwise, you may be able to restructure your policy so that it’s more affordable and better suited to your financial needs.