Unexpected expenses can catch you short at times. There comes a day when the kids need braces, the car needs a new transmission, the college bills come due or there's a medical emergency. Out-of-the-ordinary expenses can tip the budget out of balance and leave you searching for ways to keep your income and outgo in sync.
Then your life insurance premium notice arrives. What do you do?
It's good to know the possible consequences of not making a premium payment on your life insurance policy. The effect depends on the type of policy and coverage you have and the policy terms and conditions. With a term policy, if you stop paying premiums, your coverage lapses. With permanent policies, many types of contracts allow you to decide to allocate cash value to pay premiums.1 Depending on the policy and amount of cash value, the result could be a significant reduction in cash value over time, decrease in death benefit and, finally, policy lapse.
Note: Some policies are designed with flexible premiums, so that policyowners have the option to pay more or less than the recommended premium or to skip premiums from time to time. Even with these policies, however, policyowners should check with their agents before suspending premium payments for extended periods because there must be enough cash value to pay the monthly charges to prevent a policy lapse.*
* See policy terms and conditions.
The biggest concern: If you stop paying premiums and let your policy lapse, you would lose valuable protection, possibly leaving your family at financial risk. Very often, life insurance is the linchpin, the link that can automatically complete your estate if you die prematurely. Life insurance can provide the liquidity to settle final expenses, pay off debts and — at the very minimum — give surviving family members "breathing room" to adjust.
Other concerns: If you want to obtain new coverage later...
- You will likely pay more for the same coverage. A key factor in premium rates is your age. The older you are at the time of issue, the higher your rate will be. In short, if you will need to buy coverage later, letting your policy lapse now could cost you more money in the long run.
- You may not be able to get coverage again ...at any price. If you experience health problems, you could become uninsurable. Under your existing coverage, changes in your health do not affect your premium. However, if you let your policy lapse and then apply for new coverage later, your health changes can mean the coverage would cost more (if you are rated as a substandard risk)...or you could be denied altogether.
- There could be tax implications if you actually cancel coverage and take the cash value. That's because any cash value in your policy has accumulated on a tax-deferred basis. However, if you terminate your policy and take the cash value (not the same as policy loans, which are generally not taxable), a portion of the cash value could be considered ordinary income and be taxed at your current tax rate.
Before you decide to skip premiums or let your policy lapse, ask yourself these questions:
Why did I purchase this policy? Was it to help protect my family's future by replacing my income if I died prematurely? Make sure education funds are available for my children? Retire the mortgage or pay off other debts? If these goals still exist, do you want to jeopardize your life insurance?
Have my needs or situation changed? Do I need less coverage? More? If so, you should consider adjusting your coverage. Let your New York Life agent know. There are a number of viable options you can pursue that will enable you to keep your protection in force without putting your current finances under undue stress.
What are my alternatives? You have a number. For example, if you are paying a semi-annual or annual premium, perhaps you would find it easier to budget for a quarterly premium. Or you might consider automatic monthly bank deductions. The point is that you do have options. 2
1 Premiums are paid by using non-guaranteed policy values. A reduction in the applicable dividend scale or interest crediting rate for the policy may result in further out-of-pocket cash premium payments being made necessary.
2 If you pay your premium other than annually, the total premium you pay each year will be more than the annual premium.
The bottom line: Adequate life insurance protection can be the bedrock of a family's financial stability. No other financial product delivers the value and advantages of life insurance in the same exact way. If you are unsure about being able to pay a premium, be aware that there are many alternatives to help you keep your life insurance coverage intact, even during demanding financial times. Talk to your New York Life agent to learn more about the best options for your situation.
