What to do if you can't afford your whole life insurance premiums


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Philadelphia resident Mike Silverstein is semi-retired and, like many others, navigating his way through the never-ending recession. Facing hard times, he recently eyed the $50,000 whole life insurance policy on which he’d dutifully paid the premiums since his son was born 40 years ago. Why not let it lapse? Or better yet, cash it out?

whole life insurance premiumsOn the surface, it might make sense. In bad times people pare down expenses by economizing on entertainment, keeping the old car running or even letting the house fall into foreclosure. So that whole life policy – the kind of insurance that builds cash value until you die and pays your beneficiaries the death benefit – could easily wind up in the throw-away pile. A nearly a third of us get by without any life insurance at all, according to the life insurance research organization LIMRA.

Americans are suffering financially, and Silverstein is among those feeling the pain. “I consider myself in the ‘post-asset generation,’” complains the 69-year-old. “I no longer own any stocks, bonds, mutual funds, real estate or even a car. I rent a room in a friend’s apartment and get by on money earned from a few odd jobs and Social Security.” But that doesn’t mean he’ll let go of the one asset he has left and, upon his death, intends to pass along to his son.

Hang onto whole life insurance

It’s a stubbornness that he shares with previous generations. In the 1900’s Irish immigrants would go without food in order to pay that $1 a month for life insurance, a theme of the classic A Tree Grows in Brooklyn. During the Great Depression, gritty films showed fathers trying to “accidently” kill themselves so their children would get their life insurance money.

Judging by recent figures, the current generation feels the same way. They are not cashing out their life insurance policies in order to access instant cash, according to annual statements from the National Association of Insurance Commissioners and National Underwriter data. Lapses in ordinary life insurance reached a high of 9 percent during the mini-recession of 2001-2002. But they were only a shade over 7 percent in 2008 and even dropped a percentage point in 2009.

A guaranteed investment

“The lapses weren’t as severe because it’s a guaranteed investment,” says economist Steve Weisbart of the Insurance Information Institute, who compiled the data.

During the long-running bull market, financial advisers often told clients to forgo whole life insurance in favor of term life insurance. In other words, pay only what’s needed to insure your life for a year and put the rest of your disposable income into stocks. But when the stock market tumbled 50 percent in 2007, whole life insurance policies, based on conservative investments like U.S. Treasuries, began to look a lot better. The death benefit of a whole life policy transfers tax-free to the next generation, a big reason why it is favored by the wealthy. Whole life insurance is a sure thing in a world of uncertainty: It will pay off as long as you pay the premiums.

Strategic life insurance alternatives

But what if you’re having trouble making your premium payments? American Council of Life Insurers spokesperson Steven Brostoff says there are several options. Each, however, should be evaluated depending on your individual circumstances.

Reduce the face amount to paid up status if there’s cash value in the policy.

“Reduced paid up” is a fairly standard option in life insurance contracts. But, like your original purchase decision, Brostoff says this should take into account your insurance needs in the future.

Exchange the life insurance policy’s cash value for an annuity to eliminate premium payments.

The exchange is tax-free, making this an attractive option. But the annuity should have a guaranteed rate of return with either a fixed interest rate or a preset level if the stock market declines.

Switch to term life by using the whole life insurance policy’s surrender value.

If you know you want out of your whole life policy but you still need life insurance, you could cancel your whole policy and use the surrender value to buy a small term life policy. You’ll be re-underwritten for the term life insurance policy, so it may not be a good move if you’ve had health issues.

Borrow from yourself by taking out a loan against the cash in your insurance policy.

Policy loans are certainly available, says Brostoff, and the loans can be used to pay premiums.

Since the life insurance company bears no risk on your loan, rates are usually reasonable. This seems to be what most people are doing. Policy loans rose to $14 billion in the first quarter of this year, up from $10 billion during the 2001 recession, according to Weisbart.

Have your cake and eat it too

No one needs to be told that it’s tough to get a bank loan these days, or that tapping credit cards at 18 percent interest or more is not a good idea. But a quick mathematical review of his policy showed Silverstein a more palatable solution: He could have his cake and eat it too.

Silverstein plans to take out a loan on his life insurance policy at a 6 percent interest rate and use the yearly dividend he gets from the policy to pay the interest on the loan. In other words, borrow from Mike to pay Mike. So while he won’t add to the cash value inside the insurance policy, he will keep the policy intact as a small but important inheritance for his son.

 

More from Ed Leefeldt here

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