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What should I do if I can’t afford my life insurance premiums?

Amy Higgins

During tough financial times, it’s a good idea to cut back on spending. But if you’re considering cancelling your life insurance policy because you’re having trouble paying the premium, be sure you understand the possible repercussions. It can be a risky move to cancel your life insurance policy if you have loved ones who rely on you.

Some financial hardships families face after a loved one dies include funeral costs, taxes, credit card bills, mortgage payments and daily living expenses. Among households with children under 18, four in 10 say they would immediately have trouble meeting everyday living expenses if a primary wage earner died today, according to LIMRA’s 2010 Life Insurance Ownership study.

Even if you are married and do not bring home an income, the National Association of Insurance Commissioners recommends having a life insurance policy because, if you were to die, your surviving spouse or partner would need to shoulder all household responsibilities.

Coverage consequences

Stop making premium payments on a term life insurance policy, and your coverage will end. If you decide down the road that you would like to purchase a new policy, it’s likely you will have a higher rate because as you age, your probability of dying increases. You probably will have to take a medical exam to assess your current health.

With a permanent life insurance policy, you have more options. If you insist on canceling your permanent life insurance policy, you have the following options, according to the Insurance Information Institute:

  • Forfeit your coverage and collect the cash savings you’ve accumulated. However, you may have to pay taxes on some of the cash value if the sum exceeds what you’ve paid in premiums.
  • Look into non-forfeiture options. If your policy includes a reduced paid-up option, you can stop making payments in return for a reduced death benefit and no cash savings. Some permanent life insurance policies can be converted to an extended term policy. In this case, your term policy will be paid with your existing policy’s cash savings — and it essentially will become a term policy with a fixed expiration date.
  • Some insurers may allow you to reinstate your policy if you do it within five years of lapsing, but you likely will have to pass a physical exam and pay back the premiums you would have paid (plus interest).

Explore your options

Before you settle on canceling your life insurance policy, the LIFE Foundation suggests reviewing your policy with a professional to see whether you qualify for a lower premium. If there has been an improvement in your health, you may be eligible for a reduced premium.

If, for instance, you have quit smoking or lost a significant amount of weight, you may get a reduced rate. The Insurance Information Institute estimates that the annual premium for a 40-year-old male smoker buying a $500,000 20-year term life insurance policy in 2008 would have been between $1,400 and $1,775. If that man were a nonsmoker, he would have paid between $350 and $725 annually.

The cost of basic term life insurance has fallen by about 50 percent over the past decade, the LIFE Foundation says, so you may be able to snatch a better rate. However, if you decide to apply for new coverage, don’t cancel your current policy until your new one is in force.

Review your policy and make sure it is up to date. If you’ve had a significant decrease in debt or if you no longer are financially supporting others, you may be able to lower your policy’s face amount, LIFE says.

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