If your money runs out long before the month does, you might be thinking about dropping your life insurance coverage. Eliminating premiums, particularly on pricey whole and universal life policies, can free up money in your budget for more pressing needs.
But don't let that policy lapse just yet. According to Marv Feldman, CEO and president of Life Happens, a nonprofit group that provides educational resources about the insurance industry, many people don't realize that they may have ways to maintain their coverage or even make money off a plan they can't afford.
From downsizing the death benefit to selling your coverage for a profit, here's what you should know about your life insurance options.
Decide if you need life insurance. Before taking any action, experts say you should start by evaluating your need for life insurance.
"Life insurance is probably the most overbought product out there in my opinion," says Michael McCloskey, an associate professor at Temple University's Fox School of Business who teaches about insurance, risk and health care. Life insurance isn't unnecessary, but many people buy it without understanding how it fits into their financial big picture, McCloskey says.
For instance, retirees may not need life insurance if there are no children in the house or there's no mortgage to pay off. Single people may also be able to do without a large life insurance death benefit. In both cases, a smaller burial policy may be sufficient.
If you have enough money in the bank to cover final expenses and meet other financial goals, you may be safe canceling a policy. Otherwise, there are several strategies to keep coverage, depending on the type of plan you have.
Limited options with term policies. A term life insurance policy offers coverage for a set period of years. If someone holding a term policy dies during that period of time, his or her beneficiaries receive the death benefit. If the terms ends and the policyholder is still alive, no benefits are paid. Virtually all insurance carriers, including MetLife, Liberty Mutual and State Farm, offer term policies.
The simplicity of term life insurance means there aren't a lot of options for someone who has a policy they can no longer afford. "There's not a ton of wiggle room," McCloskey says. The only way to reduce premiums on a term policy is to lower the death benefit or find group coverage that may have lower costs. "You may look to see if your employer has a cheaper option available," McCloskey says.
Reducing the death benefit isn't something that can be done on an existing policy though, says Hal Rogers, president of advisory firm Gold Tree Financial in Jacksonville, Florida. Instead, a person needs to apply for a new policy with a lower benefit.
Changes in age and health may mean there is no guarantee someone will be approved for a new life insurance policy, and if they are, the premiums may not represent a significant savings. Given that, it is important to have a new policy in place prior to canceling an old term life plan.
Use cash value for permanent plans. Whole life and universal life insurance policies offer more options if you can't afford premiums.
"With a whole life policy, you [could] take a loan from the cash value to pay the premiums," Feldman says. Loans against the cash value of a plan don't have to be paid back, but any outstanding balance will be deducted from the death benefit upon a policyholder's passing. If a policy pays dividends, those could also be used to reduce or eliminate premium payments.
Buying a new policy with a lower death benefit is also a possibility, though, as with term plans, people shouldn't assume they'll be eligible for a new coverage. Secure a new plan before giving up the old one.
Surrendering a policy can also be a good option if you're in greater need of cash than life insurance. When a plan is surrendered, "they [insurance companies] write you a check for the cash value," Rogers says. That money can then be used to purchase a paid-up life insurance policy or pay for other family needs.
Consider selling your insurance. Life settlements have been around for more than 20 years, but many people still don't know about them. They allow people to sell their life insurance policy to companies known as life settlement providers. States regulate the practice with most requiring providers be licensed.
The provider pays a lump sum that is usually more than any cash value in the policy but less value than the death benefit. After payment is made, the provider becomes responsible for paying future premiums, and the company receives the death benefit when the seller passes away.
Terminally ill patients in need of cash for medical treatments or other expenses were originally those who pursued life settlements. "That's really where the industry started," says Bryan Freeman, president of Atlanta-based Habersham Funding LLC, a life settlement provider. However, life settlement companies today will buy term, whole, universal and even group life insurance from those who aren't diagnosed with a life-threatening illness.
There is no standard rate for life settlement payments. "It's all over the board," Freeman says. A 40-year-old in perfect health probably won't even qualify for a settlement offer, but a senior with some ailments may find their coverage is more valuable. "If life expectancy is very short, the valuation is much higher," Freeman says.
Feldman says there is some division within the life insurance industry about settlements. While some see them as a benefit to policyholders, others worry they take advantage of people in vulnerable situations. Feldman says the decision to pursue a life settlement ultimately depends upon a person's particular circumstances and preferences. "Some people are uncomfortable knowing someone else has a policy on them," he says.
Ask for guidance. Since life insurance can be complex, experts urge people to seek professional assistance in evaluating their options. That's especially true when considering a life settlement. "That is a very complicated market and if you don't know what you're doing, you can be taken advantage of hugely," Rogers says.
An insurance professional can also help consumers understand their options with whole life and universal life policies. For instance, there may be tax implications, and a lump sum payout of the cash value could affect Medicaid eligibility.
Feldman recommends looking for someone who belongs to a professional organization that has a code for ethics for members. He notes Life Happens maintains a database of agents on its website.
A trusted professional can help you fully understand the advantages and disadvantages of all your options. If you have life insurance, you may be sitting on a valuable asset. Before you let a policy lapse, explore your options to maintain your coverage or turn it into cash.