Author: P.V. Subramanyam
When an insurance adviser approaches us, we are normally not in too much of a mood to buy life insurance! However, his persuasion (perhaps our awakening!) makes us buy a life insurance policy. This is not a great product - we hardly get any ``personal satisfaction`` buying this product. We are now motivated enough to make the payment. Sometimes the motivation lags! Or we are not convinced that the life insurance was a necessity…so we become lax.
Unexpected expenses can catch you short at times. There comes a day when the kids need braces, the car needs a new transmission, the wife needs a new car (oops sorry!), the floating rate EMI has increased, the college bills come due or there`s a medical emergency. Sometimes it is the Options trading which has cleaned out your account. Sometimes it is the marginal call from your broker! 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 endowment policies, many types of contracts allow you to decide to allocate cash value to pay premiums. 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.
Some policies (like Unit linked endowment plans) are designed with flexible premiums, so that policy owners 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, policy owners 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. Sadly thanks to some aggressive companies and their agents many of us believe that a Unit Linked Endowment policy will be permanently available to you even if you pay premium only for 3 years. This is wrong.
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 link that can complete your estate if you die prematurely. Death benefit proceeds from a life insurance policy can provide the liquidity to settle final expenses, pay the college fees, pay off debts and - at the very minimum - give surviving family members ``breathing room`` to adjust. (It takes a long time to adjust to the cash flow suspension)
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 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? Have I added to my assets by borrowing more money? Has my spouse quit his / her job? Do I need less coverage? More? If so, you should consider adjusting your coverage. Let your 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 an annual premium, perhaps you would find it easier to budget for a quarterly or monthly premium. Or you might consider a monthly bank deduction. The point is that you do have options. Exercise it.
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.
P.V. Subramanyam is a financial domain trainer
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