Life insurance itself is the foundation of financial stability. It provides you with the comfort that your family would be taken care of if something were to happen to you. What, though, would occur if you were to let life insurance premiums lapse? That is more of a question than you might know, and the result is based on what you have in policy. Let’s explore this question further and uncover the potential implications and solutions.
Understanding Life Insurance Policies
It’s helpful to have some understanding of the two types of life insurance policies before getting into specifics:
Term Life Insurance: It’s for a specific time, like 10, 20, or 30 years. If you pass away within that time, the survivors get the death benefit. But if the term expires and you live, the policy generally lapses unpaid.
Permanent Life Insurance: Permanent life, like whole or universal life insurance, insures you for life if you continue to pay premiums. Certain policies have a cash value feature that builds up over time and can be accessed to cover other financial responsibilities.
What if you stop paying premiums?
How the stopping of paying premiums will treat you is determined by the nature of your life insurance policy. Recap:
1. Term Life Insurance:
- Policy Lapses: The moment you’ve stopped paying a premium on a term life insurance, coverage will be lost after a waiting period (30 to 60 days, usually). Your beneficiary will get no death benefit in case you lapse from the policy and die.
- No Cash Value: No cash value element since term policies are not comparable to other permanent life insurance products, i.e., no money can be repaid or withdrawn at policy term maturity.
- Reinstatement Options: Certain insurance providers allow you to reinstate a lapsed policy within a specified time period, but at the expense of all back premiums plus interest and possibly having to take a new medical exam.
2. Permanent Life Insurance:
- Cash Value Utilization: Cash value is available on permanent policies, and you may utilize it in a desperate move to pay premiums until you cease. Your insurer can take the money out automatically from the cash value since you are stopping the payment of premiums to keep the policy running. After using up all the cash value, your policy will lapse.
- Policy Loans: You borrow against the contract’s cash value to cover premiums, but you owe loans that will reduce the death benefit.
- Surrendering the Policy: To surrender your policy in its entirety, you’ll get the surrender value, which is the cash value less the surrender charges. Keep in mind, however, that surrendering the policy is giving up future protection.
Effects of a Lapsed Policy:
Halting premium payments has the following effects:
- Loss of Coverage: The first loss is financial security for your family. Without life insurance, your family will be struggling to pay bills such as mortgage, college tuition, or living expenses upon your death.
- Higher Reinstatement or New Policy Premiums: If you allow your policy to lapse and reinstate it or purchase a new policy after some time, you will have to pay more as premium since your age or health has risen.
- Missed Opportunity for Future Savings: Life insurance permanent contracts build a cash value with the elapsing time, an investment. Prepayment of premiums is a method of staying away from it and keeping the overall benefit you will pay in total through the policy low.
Staying Away from Your Policy Growth
In a situation where finances will be stressful and premiums unbearable due to money struggles, consider using these so as to stay insured on loved ones:
- Call Your Insurer: Most companies offer flexible payment plans or temporary premium discounts as an option to help policyholders in a time of need.
- Draw on Your Cash Value: If you possess a permanent policy, check whether you can borrow the accumulated cash value temporarily to cover premiums.
- Cut Back on Your Coverage: It is possible to cut back on your coverage by converting to a lower coverage amount or term period. This can lower your premium cost without leaving you with nothing at all.
- Switch to the Less Expensive Term Life Insurance: If your policy is too expensive, switch to a less expensive term life insurance policy. Term policies are less expensive and offer adequate coverage for most people.
When Cancelling Premiums Makes Sense
In certain situations, premium payment halt is the optimal choice. For instance:
- Policy No Longer Needed: Should your kids become independent and you have all loans paid off, you no longer need life insurance.
- Better Elsewhere: If you find a better policy with better rates or lower premiums, it is definitely worth the change. Be sure to implement the new policy before you nullify the old one.
Reassessing Your Life Insurance Needs
Life insurance is not a one-size-fits-all solution. It’s essential to reassess your needs periodically, especially after major life events like marriage, the birth of a child, or retirement. Doing so ensures you’re neither over-insured nor under-insured.
If you’re unsure about your needs, consult a financial advisor or use online tools to compare policies and determine the best term life insurance for your situation.
Conclusion:
Payback of life insurance premiums is extremely expensive, but is not always death. Knowing the terms of your policy and planning ahead for possibilities will lead to good decisions. If you have a term or permanent policy, you should always be most concerned with providing for your dependents financially. Consider long and hard about your current needs and future needs when making decisions to modify your policy.
Keep in mind that life insurance is not a backup fund tiny investment; it is a financially sound part of an overall well-considered plan. Becoming a participant and learning the ways can ensure your family is secure regardless of what the future may bring.
