Job uncertainty is at the highest it’s been since the Great Depression due to stay-at-home orders and the economic shutdown brought on by the coronavirus. Many life insurance policyholders are wondering how to pay their premiums. It might be tempting to let your policy lapse when you’re financially struggling, but here’s why you shouldn’t:
Consequences of Letting a Policy Lapse
Giving up on your policy now and assuming you can get a new one later when you’re financially secure is a poor assumption to make. You’ll likely pay more in the future for the same coverage you have now because age plays a factor in the amount of your premium. Letting your policy lapse now will cost you more in the long run.
Further, if your health deteriorates in the future, you might not be able to get insurance coverage at all. Letting your policy lapse and gambling on your health is a risky move to make.
The cash value accumulated in your policy is tax-deferred. If you surrender your policy, the insurance company will pay out your cash value, but you’ll likely pay taxes on a portion of that value. Whatever exceeds the amount of the premiums you’ve paid may be considered taxable income.
The reasons you bought whole life insurance in the first place are more important now than ever. Your policy is your financial foundation, your emergency fund, your bank, and protects your family. It’s an asset you can’t afford to lose.
While some insurance carriers have extended premium due dates, and some states have put regulations in place for insurance companies to protect policyholders, these measures aren’t your only safety nets.
Whole life insurance policies are built for times like these. Insurance carriers offer multiple options for policyholders to pay their premiums, because the consequences of losing your policy can have lasting ramifications.
8 Ways to Pay Your Policy Premium
There are eight options for paying your policy premium when times are hard. The right option for you depends on the cash value of your policy and your financial needs and goals. Speak with your Wealth Strategist for help choosing the best path to take.
1. Reduce Paid-Up Additions
If your policy has a Paid-Up Additions rider, you can reduce the amount you pay on that rider down to $100-$250. This is often the easiest and most recommended way to free up funds for paying policy premium.
2. Natural Vanish
Natural Vanish occurs when your policy is paid up to a point where it no longer requires a premium. With maximum Paid-Up Additions, your policy may reach Natural Vanish within 7-10 years of ownership. Without Paid-Up Additions, policies typically take 17-20 years to reach Natural Vanish.
3. Use Dividends to Pay Your Premium
If you have a mature whole life insurance policy, you may have earned enough in dividends over the years to pay your policy premium. Oftentimes policyholders don’t use their dividends or don’t realize how much they have accumulated. Check with your Wealth Strategist to examine your dividend balance and see if this option applies to your situation.
4. Change Your Payment Plan
Just like you can determine the payment schedule of a policy loan, you can usually determine the payment schedule of your policy premiums. Options include monthly payments, quarterly payments, or annual payments.
5. Take Out a Policy Loan
One of the greatest features of whole life insurance is the policy loan. This is an ideal option for short-term cash flow issues. You can borrow against the cash value of your policy to pay your premium while continuing to earn interest and dividends, increasing your overall cash value. You’re essentially recycling your money and earning interest in the process. This can be done for years, if needed.
6. Withdraw Your Cash Value
If you don’t think you’ll be able to pay back a policy loan or the associated interest, you have the option of withdrawing your cash value to pay your policy premium. This is a permanent decision, and you’ll have to start accumulating new cash value from square one. Additionally, you may be taxed on the amount of cash value you withdraw. Check with your Wealth Strategist and tax advisor for details.
7. Rearrange Cash Flow
A great way to get control of your finances is to use a policy loan to pay down high-interest debt, like your credit card. Policy loans typically charge between 6-8% APR, which is much less interest than most credit cards. This frees up extra cash you can funnel into your policy premium. Further, because you determine the payback schedule of your policy loan, you have greater flexibility and control.
Another way to rearrange cash flow is to pause IRA/401(k) contributions. Given current market volatility, investing in these financial products is especially risky right now. Whole life insurance has better benefits that offer you more control with much less risk.
8. Reduce Policy Premiums and Policy Coverage
As a last resort, you can reduce your policy premium by reducing the amount of coverage you have. When you reduce your death benefit, your family or other beneficiaries will receive less from your policy, but you’ll still be able to earn dividends and increase cash value, so your living benefits are still intact. If no other options work for your financial situation, at least this way you still have some coverage. Keep in mind you can’t increase coverage at a later date; you have to take out a new policy.
Finally, if you can’t find any other way to pay your premium, you can sell your policy. This option should only be considered if you don’t have much cash value accumulated. In this case, selling the policy could earn you more than the cash value you would have otherwise withdrawn. You can either sell your policy back to the insurance company, or sell it to a family member. Be sure to speak with your Wealth Strategist before considering this permanent decision.
At Paradigm Life, we’re here to help. Your goals are our goals and we’re with you every step of the way. If you’re concerned about how to pay your policy premiums, schedule a consultation and we’ll guide you to a more certain financial future.