Even though millions of people pay good money for it, life insurance is one of those things people hope they don’t have to use. So when times get hard and people start looking for ways to trim the budget and save some money, one of the first options they think of is dropping their life insurance policy. Here’s why this is one approach to saving money you should never do.
Life Insurance is Your Best Financial Protection Tool.
If anyone – spouse, children, dependent parents, etc. – depends on you for financial support, dropping your life insurance involves a huge risk. The average cost of life insurance isn’t that high, making it the cheapest and most cost-effective way to provide financial protection for your loved ones. If you die unexpectedly without leaving behind a sufficient death benefit payout from your life insurance policy, you could doom your surviving family to a life of struggling just to pay the rent and put food on the table. That’s a lot of risk just to save a few dollars each month.
It Provides Peace of Mind for You and Your Family.
A common misunderstanding about life insurance is that it applies a monetary value to your life, which is not true. Instead, it helps compensate for the financial consequences that inevitably accompany the loss of life, especially if you are the main bread winner in the household. The primary purpose of life insurance is to help those left behind cover the cost of living day in and day out by replacing your income. It can also be used to provide for final expenses, pay off outstanding debts (such as a home mortgage) set aside funds for college for the kids and other financial uses.
Having life insurance can also lessen the financial burdens at a time when surviving family members are struggling to deal with the unexpected loss of a loved one. It also provides peace of mind for you, the policy holder, knowing your family will be taken care of after you’re gone.
Life Insurance is A Risk Management Tool, Not An Investment.
Certain types of life insurance policies, such as whole life, offer a savings component that allows you to build up a significant cash value over time. However, buying life insurance primarily as an investment is not the most efficient or effective way to achieve your financial goals. Life insurance involves less risk than other types of financial investments because the return doesn’t depend on the ups and downs of the economy or the whims of investors. You pay a monthly premium and the policy guarantees a set payout upon your death. A small monthly premium is a small price to pay for that kind of financial security.
It May Cost More To Purchase A New Policy When Times Get Better.
Suppose you cancel your life insurance policy but your health takes a turn for the worse. If you decide to buy a new policy in the future, you will likely pay more for less coverage. And that’s assuming you qualify for the coverage. Depending on your age and circumstances, the insurance carrier may decide you pose too much of a risk to offer a policy. That’s why it always best to buy a policy when you’re young and healthy and hang on to it through thick and thin.
How To Keep Your Life Insurance Policy and Save Money
Here’s another good reason for not terminating your life insurance policy due to financial difficulties: you can often save money by negotiating with your insurance agent to make adjustments to your policy. This can include:
Reduce The Face Value of Your Policy.
Many insurers will allow you to lower the face value or reduce the term length once during the lifetime of your policy. You pay less in monthly premiums and retain all the benefits of your policy.
Use Your Policy’s Cash Value To Pay The Premiums.
If you have a universal or whole life policy with some cash value built up in it, you may be able to reduce your premiums by using the cash value to make the monthly payments. The amount of cash value in the policy will determine whether you can afford to skip a payment or two or months at a time. This option is not available with term policies because they don’t carry any cash value.
Buy A Less Expensive Policy.
How much does life insurance cost? Prices often fluctuate, especially with term life insurance. If they have dropped recently, you may be able to replace your current term life policy with a new one that provides the same benefits for lower monthly premiums. If you have a whole life policy, you may be able to do a “1035 Exchange,” which lets you transfer your cash value into a different permanent policy. Choosing a less expensive guaranteed universal life policy would save some money and maintain your financial protection.
Making a change to your life insurance policy is not something to be done lightly, and these options are not available to all policy holders. To make the best decision for you and your family, take the time to discuss with your life insurance agent the options that are available to you, and make sure you understand how they will affect both the cost and the benefits of your policy. Making a hasty decision could jeopardize the value and the ability of your policy to pay for the financial security your family needs.
Dropping your life insurance coverage may provide a small amount of savings over the short-term. But the potential long-term consequences could be disastrous. Instead, explore options for paying less on your policy. Look for other areas of the family budget to cut costs. In a pinch, you could even ask relatives or parents to help out with the premiums for a while. If and when the day comes when your family needs the money from your policy, they will be forever grateful you made the right decision.