Are you the sole earner in your family? Then life insurance is a valuable tax-free financial protection for your family and is often part of a solid overall financial plan.
But the coverage comes with monthly or annual costs that may be hard to keep up with at times of financial crisis – say, you have incurred debt hogging most of your cash flow.
Fortunately, you have a few options if you’re faced with paying off debt and want to keep your insurance. But before we get into it, let’s address why holding onto your life insurance is essential and why you should try to keep up with your premiums.
Why Life Insurance is Essential
Life insurance can give you lasting peace of mind since you’re providing your family a safety net to fall back on in case you’re not there.
Imagine what will happen to your family without financial security if your income disappears overnight. With life insurance, you can help ensure that your loved ones have the necessary money after your death to meet their daily needs.
And, if you have debt like a mortgage or credit card debt co-signed by your spouse or a student loan that you’re helping your child to pay off, holding onto your insurance policy becomes much more critical.
If you die and your income stops, your spouse and child will have to bear the burden of your debt without your income.
What Will Happen if You Miss Your Life Insurance Premiums
Your life insurance grace period will kick in if you don’t pay your premiums. Typically a grace period is 30 days from the due date. Some companies also provide an additional 30 days.
If you don’t make your payment in that time, your insurance policy will lapse, and your family will not be able to get the benefits that a life insurance policy offers.
Now that you know the importance of holding onto your insurance and what will happen if you miss your premium payment, let’s see how you can save your insurance while paying off debt.
Options to Consider If You Can’t Pay for Life Insurance Due to Debt
Take Advantage of Your Life Insurance Grace Period
As mentioned, most life insurance companies give policyholders 30 days (some give 60 days) from the due date to make their payment. The policy stays in the “lapse pending” status in that period.
Call your insurance company to find out how long your policy will be valid without paying premiums and what will happen to your policy if you don’t pay within that period. Also, find out how much you’ll have to pay in the future to make up for the amount unpaid.
Try Debt Relief Options
If your monthly debt payments are too much to endure and limit your ability to pay life insurance premiums, you can try refinancing, debt management, or debt settlement.
Through refinancing, you can roll your high-interest debts into another lower-interest loan. You can do this by taking a new low-interest personal loan or using a balance transfer credit card.
You can go for debt management if you don’t qualify for a loan or balance transfer card.
Debt management programs help lower interest rates and monthly payments and sidestep any late fees and penalties. However, this option only works if your debt is about 30% – 40% of your income.
If your account is severely delinquent or in collections, and your debt-to-income ratio (DTI) is higher than 50%, it’s best to go for debt settlement. This option involves negotiating with your creditors and persuading them to reduce your debt.
Try Lowering your Policy’s Value
Lowering the policy’s value is a good option if the premiums have become unaffordable. All you need to do is ask your insurance company, and they will reduce the policy’s value.
For example, you could drop a $1 million policy to $500,000 in coverage.
Ask your insurer whether you can convert back to your original benefit amount and if you’ll have to take another life insurance medical exam. Also, ask whether the premium will be based on your age when the original policy was issued or the age at which you boosted the benefit.
However, before you go ahead and reduce your coverage amount, consider talking to your beneficiaries. They’re the ones who’ll be most affected by the decision.
Use Cash Value To Cover Premiums
If you have a permanent life insurance policy and have saved enough cash value, you can use it to pay your insurance premiums.
Most life insurance companies will agree to this request. Using this method, you could save yourself from using your limited cash flow on life insurance and more on your debt.
Change Your Whole Life Policy to Term Life
If you have whole-life insurance and struggle to keep up with the premiums, switching to term life insurance is a good idea.
Whole-life policies can be as much as five to 15 times costlier than term policies. Hence, the switch can save you a lot on your premiums and help you focus on paying off your debts.
The Bottom Line
What happens after death is an unexplored territory. But amidst the mass of uncertainty, with life insurance, you can be sure that your family will get the help they need while adjusting to a life without you.
So, if your family depends on you, it’s best to hold onto this safety net as long as possible. But it’s easier said than done. The premiums can become a burden, especially during crises like paying off high-interest debt.
But, if you leverage some of the above-mentioned options, you can save your family’s safety net while demolishing your debt.
Author Bio: Attorney Loretta Kilday has more than 36 years of litigation and transactional experience, specializing in business, collection, and family law. She frequently writes on various financial and legal matters. She is a graduate of DePaul University with a Juris Doctor degree and a spokesperson for Debt Consolidation Care (DebtCC) online debt relief forum. Please connect with her on LinkedIn for further information.