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Lately, Michael Whitman has been hearing from clients who are looking for ways to spend less. Whitman, a Certified Financial Planner and managing partner for Millennium Planning Group,says the first thing they consider cutting isnt cable TV, a subscription service or other nonessential expense. Its their life insurance policy.
Other financial plannersalso say that clients have contacted them during the coronavirus pandemic because theyre having trouble paying permanent life insurance premiums. Because a permanent life insurance policy provides coverage for life, as long as you pay the premiums due, its more expensive than a term life insurance policythat provides coverage only for a certain number of years.
The higher cost of permanent life insurancewhich includes whole life and universal life insurance policiesis a key reason some experts caution against it.
If someone is struggling to pay their whole life insurance premiums, they probably shouldnt have whole life insurance to begin with, says Mark Beaver, a partner and senior financial advisor with Keeler & Nadler Family Wealth.
Manypolicyholders likely have had their finances hit unexpectedly by the pandemic. A policy that once was affordable might seem like a liability if you have lost a job or have had a business go under. Ditching that policy, though, can be even more disastrous if someone would need the payout if you pass away.
Fortunately, with permanent life insurancepolicies, you do have several options to keep your coverage if youre having trouble making premium payments.
Take Advantage of the Payment Grace Period
Most insurance companies give policyholders a 30-day grace period from when the premium is due to pay it. Typically, you can go another 30 days without paying, and the policy will be in lapse pending status, Whitman says. Hes recommending that clients who are facing temporary hardship to take advantage of this two-month break on payments.
Some insurance companies are offering grace periods that are even more lenient because of the coronavirus, and some states are requiring insurers to offer more flexibilityfor payments. Call your insurer to find out how long your policy will remain in force if you dont make a payment. Ask for an in-force illustration to see what the impact of not paying will have on your policy and how much youll have to pay going forward to make up the difference.
Use Your Waiver of Premium Rider
You might be able to skip payments but continue your insurance benefits if you have a waiver of premium rider. Typically, the waiverkicks in if youre unable to pay the premium because of a disability. However, some riders waive premiums for unemployment, Whitman says.
Theres typically a waiting period, though, before the waiver rider kicks in, during which time youll have to continue making payments. So this option wont be ideal if you need immediate financial relief.
Use Dividends to Pay Premiums
If you have a whole life insurance policy, you might be receiving dividends. Mutual insurance companies pay out dividendsto policyholders in years when the companies are performing well.
Dividends can be used to increase your cash value. They also can be used to offset premiums. This will reduce the amount you need to pay out-of-pocket for the policy, but you need to check with the insurance company to find out how dividends are applied to premiums. The benefit you get might not be immediate. For example,MassMutualdividends can be used to reduce the following yearspremiums. Prudentialstates that dividends are credited on your policy anniversary, so only that bill is reduced.
Use the Cash Value Cover the Payment
One of the benefits of permanent life insurance is that it builds up cash value. There are a variety of ways you can use the cash valueto pay premiums.
If youve had the policy for several years, you might have built up enough cash value to cover some payments. Whitman recommends ordering an in-force illustration to see what impact using the cash value to cover premiums will have on the overall value of your policy.
You also might be able to borrow against the cash value then use that money to pay your premium (or other expenses you might have). Be aware that interest will accrue on the amount you borrow. If you pay back the loan quickly, the interest will be miniscule, Whitman says. If you dont ever pay back the loan, your death benefit will be reduced and your beneficiaries will get a lower payout.
You also can simply withdraw your cash value. However, if the amount you withdraw exceeds the amount youve paid toward the cash value portion of your policy, youll pay taxeson the difference. Withdrawals also reduce the death benefit.
See Forbes ratings of the best life insurance companies for cash value policies.
Use the Paid-Up Option
You also might be able to use the cash value to convert your policy to paid-up status. This will allow you to keep some coverage in place without paying additional premiums. However, this maneuver will also likely reduce the death benefit paid to beneficiaries.
The older someone is, the better this option is because theyve had more time to build up that cash value, says Stephen Lovell, a Chartered Life Underwriter and president ofLovell Wealth Management.
Reduce Your Policy Face Value
You can lower your premium by asking your insurance company to reduce the policys face value. For example, you could drop a $1 million policy to $500,000 in coverage.
You might cringe at the idea of lowering the coverage but, as Lovell says, Somethings better than nothing. Youve got to think why you bought this insurance contract in the first place. You bought it to protect your spouse and children. That need doesnt go away because your income has dropped.
Ask your insurer whether you will have the option to convert back to your original benefit amount and if youll have to take another life insurance medical exam, or go through other medical underwriting,to do so, Lovell says. Also ask whether the premium will be based on your age when the original policy was issued or the age at which you boosted the benefit.
Before you reduce your coverage amount, consider talking to your beneficiaries. Theyre the ones most affected by the decision. Whitman recommends asking them if theyd be willing to pay your premium temporarily to maintain the payout amount theyll receive. They could think of it as an investment. Where else would they get a payout that is higher? Whitman says.
Switch to a Level Benefit
Some policies allow you to increase the death benefit youll receive by paying higher premiums over time. You might have opted for this if you bought life insurance as an investmentto provide income in retirement. However, if youre strapped for cash now, Lovell says you can reduce your premium by switching from an increasing benefit to a level benefit.
Reconsider Your Need for Life Insurance
You may no longer need life insurance if you have no major debts, your beneficiaries no longer need financial support from you and your funeral expenses can be covered. If thats the case, you can eliminate this expense by surrendering your policy.
If you have built up cash value, you could get money back when you surrender your policy. Youll receive the cash value minus any surrender charge. There may be taxes on a portion of the cash you receive, depending on the portion thats investment gain.
Thats why he says its a good idea to review the pros and cons of this optionas well as any of the options listed abovewith your insurance agent or financial advisor before making any decisions. You dont want to create more problems in an attempt to fix what could just be the temporary financial hurdle of paying your life insurance premiums.
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Life Insurance Premiums FAQs
What are my options if I cant pay my term life insurance bill?
Term life insurance has fewer options than cash value life insurancewhen it comes to premium payments. Thats because you dont have any cash value account to tap for help.
But check to find out the grace period for payment, and whether your state has a temporary moratorium during the pandemic on insurance cancellations due to non-payment.
What happens if I stop paying my life insurance?
If you stop making payments on term life insurance, the policy will lapse and end after the grace period.
If your payments stop on cash value life insurance, the insurer will generally use any cash value in the policy to cover the premiums. Once the cash value is exhausted, the policy will end.
Can I lower my life insurance premiums if Im in better health now?
If you bought a life insurance policy that was priced based on a health status that has since improved, you may be able to get a better price by being re-rated. For example, you may have lost substantial weight (and kept it off). Or you may have gotten smokers rates for life insuranceand have since quit smoking.
Re-rating is essentially like applying for a new policy, as all your personal information will be assessed again. Having improved one health condition wont necessarily lead to a better life insurance rate. Youll be priced at your new, older age, and on any new health conditions.