Most Americans are feeling a pinch in their wallets these days, and the hesitancy in the financial markets is only making matters worse. If you are among the millions of Americans who are struggling to make ends meet, you are probably searching for places to trim the family budget. However, reduced spending should not include canceling your life insurance policy.
The LIFE Foundation reviews often-overlooked consequences of canceling a life insurance policy and offers tips for how people can save money on premiums.
“One of our recent surveys shows that 75 percent of Americans with dependents are worried about how their family would manage financially should they die tomorrow. Canceling your life insurance policy will only increase the chances of such a fear becoming a reality,” said Marvin H. Feldman, CLU, ChFC, RFC, president and CEO of the LIFE Foundation. “With life insurance premiums more affordable than ever, the savings Americans will gain by dropping their coverage will never outweigh the financial devastation that would occur in the event of premature death.”
For those considering dropping their life insurance coverage to free up money for other uses, the LIFE Foundation reviews four of the most overlooked consequences of canceling a policy.
Your rate may go up. Be aware that life insurance premiums increase as you age, so the rate you currently have locked in may not be available to you at a later date. If you have to re-apply for coverage, you may end up paying more for the same amount and type of coverage that you currently own.
You may have to retake a medical exam. If you drop your coverage now but decide to purchase a policy later, you’ll likely be asked to take another health exam. Since you’ll be older, your health status might have worsened, in which case it may be harder to qualify for coverage at an affordable rate.
Policy provisions start over. Most life insurance policies include a number of incontestability clauses. These provisions specify that after a policy has been in force for a certain length of time, typically two years, the insurance company can no longer contest or void it except for nonpayment of premiums. If you cancel a policy and have to apply for coverage again, you’ll be subject to a new incontestability period.
Surrender charges may apply. Permanent life insurance policies almost always have a surrender charge period, typically in the seven-year range. If you decide to cash out before it has expired, you may sacrifice some of the cash value you’ve earned over time.
Ways to Save on Life Insurance Premiums
Instead of canceling a life insurance policy, the LIFE Foundation urges Americans to review the policies they own with an insurance professional to see if they have the ability to qualify for a lower premium. LIFE offers the following three tips to help people obtain a better deal:
If you have quit smoking, lost a substantial amount of weight or have made significant improvements to your health, you may be able to qualify for a lower premium. Consider that smokers pay anywhere from 100 to 150 percent more on life insurance premiums than nonsmokers.
Rates Have Declined
Even if your health condition hasn’t changed, you still may be able to get a better rate on your coverage because life insurance rates have never been lower. In fact, the cost of basic term life insurance has fallen by about 50 percent over the past decade. If you decide to apply for new coverage in search of a better rate, make sure you don’t drop your current coverage until the new policy is in force.
Circumstances Have Changed
It is smart to review your policy every year to make sure it’s adequate and up-to-date. If the kids are out of the house, your mortgage has been paid off, you’ve gotten divorced or family members no longer need your financial support, your need for life insurance coverage may have decreased. A smaller face amount policy will save you money.