In a standard life insurance policy situation, the policy holder is required to pay premiums in regular installments to keep the policy active. Many times, the policy holder will have taken out the policy during a time of financial stability or prosperity. However, many individuals go through hard times in life and find themselves in a much weaker financial situation at some point down the road. When this happens, individuals often have choices to make as to which bills to pay or where else to cut spending. Quite often, preparing for your future with a financial tool like life insurance may not be high on the priority list if the present seems bleak. So what do you do if you find yourself in a situation where you can no longer afford to pay your premiums? We will cover a few options in this blog article and discuss repercussions for each choice.
This is the option that takes the least amount of affirmative action from the policy holder. Just like you would with any bill, if you stop paying then you will likely find yourself cut off from the benefits. A life insurance policy is no exception to this. If you simply stop paying your premiums, the policy will lapse. This option is by far the worst outcome, as you may have invested several years worth of payments in to a plan just to have it throw away for nothing. Once a policy has lapsed, there is essentially no shot at retrieving any benefits from it and you will generally not be able to simply “start up where you left off” once you can afford payments again. There is no incentive for an insurance provider to help out individuals that do not pay and they will gladly pocket your previous payments while allowing your policy to terminate.
Allow Others to Pay for You
Similar to other expenses in life, it may require a loan or simply a good faith gesture by a family member, but having others cover your expenses in the short term is an option. In this case, there may be individuals that are willing to cover your premium payments because they may benefit from the plan as beneficiaries. It is in their best interest to help you out if it secures their future financials. While forcing the policy holder to keep you on as a beneficiary in consideration of the payments may or may not be legally enforceable, this may be an angle some beneficiaries will try to take.
Take the Cash and Leave
Not all life insurance policies offer this option, but some providers will allow you to “cash out” a policy. This is often a calculation of the overall value of the policy and the amount of premiums already paid, but walking away with some of the money versus nothing can be beneficial to a policy holder that is about to let a policy lapse. This also works in the favor of the provider as it will remove the liability of the full payout from their books, while still letting them make a smaller profit on the premiums previously paid.
Sell the Policy
If you can no longer afford to pay your premiums, there may be individuals that are willing to take on your policy instead. By selling for a lower amount, someone else can step in and take over the policy and receive the benefit of prior payments you may have made. Before doing this, be sure your provider allows for this so that you do not end up being liable to the buyer for a misrepresentation on the sale. This option may be the most difficult to pull off, but may also be the most beneficial from a cash standpoint for the policy holder in financially difficult times.
After evaluating your options, you will have to decide which outcome works best for your current situation. Walking away from a life insurance policy early is a tough hit to take, but putting yourself in a deeper financial hole with premium payments may simply not be feasible in your current situation. Each situation is unique and various factors can all play a role in the eventual outcome. Feel free to discuss your options with an attorney and a financial planner if such advice would help ease your mind.