Life insurance can be expensive—but it’s also important to own. Especially if you have expenses that will continue to haunt your beneficiaries after you pass away.
Think about funeral expenses, death taxes, mortgage payments, debts, and more. You don’t want your family to be stuck with the financial burden of your death.
So if you don’t have life insurance, or assume you can’t afford it, think again. There are plenty of ways to afford it, no matter your financial situation.
Can’t Afford Life Insurance
What happens when you can’t afford your life insurance payments? This depends on the type of policy you hold.
This policy covers you for a period of time, such as 10, 20, or 30 years. Pass away within that period and your beneficiaries can cash out your policy. Don’t pass away during that time and no one receives anything.
And if you stop paying your premiums, your coverage will lapse and you and your beneficiaries will be left with nothing. Thankfully, there are a few alternatives.
- Payment grace period—Most insurers give you a 30-day grace period after the due date to send in your payment. Before you decide to use it, though, notify your insurer. This will keep you from looking negligent.
- Reinstate a lapsed policy—What happens if your policy lapses because you’re unable to pay your premiums? Many insurers will let you reinstate your policy up to five years after your grace period. The downside is you’ll have to go through an underwriting process again.
If you own a whole life policy, the consequences for not paying your premiums are less detrimental to your bank account.
Can’t pay your premiums on time? The Insurance Information Institute (III) suggests you:
- Cash out—The nice thing about whole life insurance is that it builds up a cash value you can borrow against. So if you’re no longer able to afford the policy, terminate it and collect the savings. Just keep in mind you’ll have to pay taxes on the cash if the amount exceeds what you paid in premiums.
- Non-forfeiture—With this option, you can stop paying your premiums in return for a small death benefit for your beneficiaries. But you won’t be able to cash out on any of the savings from the policy.
- Reinstate a lapsed policy—According to the III, you may be able to reinstate your policy within five years of it lapsing. The downside is you’ll have to pay back the premiums you neglected to pay—plus interest. You’ll also have to go through an underwriting process again, in which case your premiums have the potential to rise.
Making Your Policy More Affordable
Want to prevent your coverage from lapsing in the first place? Here are a few tips.
Reduce the face value
Want to ensure you’ll never miss an insurance payment? Try reducing the face value (death benefits) of your policy. “If you can reduce the face value to a point where the payment is acceptable, problem solved,” says Anthony Martin, owner and CEO of Choice Mutual.
He also says “this will inherently reduce your monthly premiums.” And reducing your premiums will reduce your deductible.
The downside is the lump sum paid out to your beneficiaries won’t be as much because of the reduced face value. But the upside is you’ll actually be able to pay your premiums each month.
Transfer your policy
If you’re looking to save some cash, transfer your whole life policy to a term one. The premiums will be less expensive, and you can choose whether to pay annually, quarterly, or monthly.
Should you want to stick with a permanent life policy, consider transferring your whole life policy to a universal one.
A universal policy is similar to a whole life policy in that it covers you until you die. However, a universal policy’s premium payments and face value are much more flexible. You’ll be able to adjust your premiums, how often you pay them, and the amount of coverage. The premiums are also often deducted from the cash value of the account.
Just be aware that a universal policy can be time-consuming to maintain, and there are many nuances involved. Talk with your insurer before switching.
Waiver of Premium (WOP) rider
If you’re worried a disability could prevent you from paying your premiums in the future, consider purchasing a WOP rider. This will cover the cost of your premiums for the period of time you are on disability.
Keep in mind that by purchasing a WOP rider, you’ll add around 25 percent or more to your monthly premiums.
Apply for reconsideration of health classification
Did you have a pre-existing condition that caused your rates to spike when you first got your life insurance policy? And has the condition subsided since? For example, maybe your cancer went into remission or you quit smoking?
If so, you may apply for a reconsideration of health classification. Depending on whether or not your application gets approved, you could receive lower and more affordable rates on your life insurance policy.
“There are many scenarios where improving health can give someone the opportunity to qualify for a better rating with a new company, which results in lower payments,” Martin says.
So whether you’re applying with the same company or new one, you’re almost guaranteed to find cheaper rates than when you first applied for a policy.
Reduced paid-up policy
Under this policy, you pay the premiums through the cash value of the whole life policy. This is to prevent the policy from lapsing if you can’t afford to pay for it. The downside is this reduces the face value of the policy.
Sell your policy
This is also known as a life settlement. And according to the Life Insurance Settlement Association, “A life settlement is the sale of a life insurance policy to a third party for a value in excess of the policy’s cash surrender value, but less than its face value, or death benefit.”
So the third-party recipient pays all future premiums and receives the death benefits when the insured dies.
It’s great for people who can no longer afford their insurance premiums. Yet, most insurers will only let people over the age of 65 and those whose policy has accumulated enough face value to sell their policies.
Frequently Asked Questions
Q: What should I do if I want life insurance but can’t afford it?
A: Well, there are a few options. Here are a handful:
- Purchase a term life policy—Term rates will be much more affordable than any type of permanent life policy. Just be aware that most term life policies only cover you for up to 30 years. After this, you’ll have to renew your policy and watch your rates go up. So if you’re looking to save but don’t want a permanent policy, purchase a term policy with the highest amount of “time coverage.” In this case, 30 years. This will keep you from having to continuously renew a 10- or 20-year policy and watch your rates go up every time you do.
- Buy a policy ASAP—Consider purchasing coverage earlier in life, rather than later. The younger you are, the cheaper your premiums will be. So if you’re younger, don’t have a life insurance policy, and are reading this—get to shopping now. The easiest way to find an affordable policy is to shop around with multiple companies to find the best rates. You can even do so through QuoteWizard.
- Pay premiums annually—Pay your insurance premiums once a year rather than monthly. The reason being? You’ll get to skip the processing fee you get charged for paying monthly.
- Quit Smoking—A history as a smoker is guaranteed to cause your rates to spike. Quit, though, and in a few years you can re-apply and see your rates go down and become more affordable.
Q: What are some of the reasons why you wouldn’t be able to afford life insurance?
A: If you smoke, have a pre-existing condition, or health issues, you will find your life insurance rates to be much higher than the average person.
Life insurers determine rates based on your risk profile. They don’t want you to die, because then they’ll have to pay out your life policy to your beneficiaries. So to compensate for the high risk you pose, they raise your rates.
When applying for life insurance, insurers will place you in a category based on your health. From most ideal to least, the categories are:
- Preferred Select
- Standard Plus
- Preferred Smoker
- Standard Smoker
If you have health issues or are an extremely risky individual, you’ll get a table rating. This tacks on an extra percentage to your original premiums.
Should you fall into one of the not-so-ideal categories, shop around and get quotes from multiple companies until you find the most affordable rates.
Q: What else can I do to make life insurance more affordable?
A: Besides the tips listed above, Martin says to ask yourself which luxuries you can live without. “Figure out how you can cut out all the non-essentials, and hopefully you can afford to pay for your life insurance so your family isn't dead broke if something happens to you.”
He also says to “get a piece of paper out and write down all your expenses. Identify which costs are essential (rent/mortgage, food, utilities, phone), and which are non-essential (nights out, Starbucks, movies).”
Take into account all the expenditures you can drop before considering cutting your life policy. Chances are, there’s a lot you can eliminate.
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