Thursday, October 21, 2010

When You Can't Pay Your Life Insurance Premium

Unforeseen expenses can catch you short sometimes. There comes a day when the children need braces, the automobile needs a brand spanking new transmission, the college bills come due or there's a medical emergency. Out-of-the-ordinary expenses can tip the budget out of balance and leave you searching for ways to keep your income and outgo in sync.

Then your life insurance premium notice arrives. What do you do?

It's lovely to know the feasible consequences of not making a premium payment on your life insurance policy. The effect depends on the type of policy and coverage you have and the policy terms and conditions. With a term policy, if you cease paying premiums, your coverage lapses. With permanent policies, many types of contracts let you choose to allocate funds value to pay premiums.1 Depending on the policy and amount of funds value, the result could be a significant reduction in funds value over time, decrease in death benefit and, finally, policy lapse.

Note: Some policies are designed with flexible premiums, so that policyowners have the choice to pay more or less than the recommended premium or to skip premiums from time to time. Even with these policies, however, policyowners should check with their agents before suspending premium payments for extended periods because there has to be funds value to pay the monthly charges to prevent a policy lapse.*

The largest concern: If you cease paying premiums and let your policy lapse, you would lose valuable protection, possibly leaving your relatives at financial risk. often, life insurance is the linchpin, the link that can automatically complete your estate if you die prematurely. Death benefit proceeds from a life insurance policy can provide the liquidity to settle final expenses, pay off debts and — at the maximum — give surviving relatives members "breathing room" to adjust.

1 Premiums are paid by using non-guaranteed policy values. A reduction in the applicable dividend scale or interest crediting rate for the policy may lead to further out-of-pocket funds premium payments being made necessary.

* See policy terms and conditions

Before you choose to skip premiums or let your policy lapse, ask yourself these questions:

Why did I buy this policy? Was it to help protect my family's future by replacing my income if I died prematurely? Make positive schooling funds are available for my children? Retire the mortgage or pay off other debts? If these goals still exist, would you like to jeopardize your life insurance?

Have my needs or situation changed? Do I need less coverage? More? If so, you ought to think about adjusting your coverage. Let your new york Life agent know. There are a considerable number of viable options you can pursue that will enable you to keep your protection in force without putting your current finances under undue stress.

what are my options? you have a number. For example, if you are paying a semiannual or annual premium, perhaps you would find it not as hard to budget for a quarterly premium. Or you might think about automatic monthly bank deductions. The point is that you do have options.2

Other concerns: If you require to receive new coverage later...
You will likely pay more for the same coverage. A key factor in premium rates is your age. The older you are at the time of issue, the higher your rate will be. In short, if you will need to buy coverage later, letting your policy lapse now could cost you extra funds in the long run.

You may not be able to get coverage again ...at any cost. If you experience health issues, you could become uninsurable. Under your existing coverage, changes in your health do not affect your premium. However, if you let your policy lapse and then apply for new coverage later, your health changes can mean the coverage would cost more (if you are rated as a substandard risk) ...or you could be denied altogether.
There could be tax implications if you actually cancel coverage and take the funds value. That's because any funds value in your policy has accumulated on a tax-deferred basis. However, if you terminate your policy and take the funds value (not the same as policy loans, which are usually not taxable), a portion of the funds value could be thought about ordinary income and be taxed at your current tax rate.

This material is being provided for informational purposes only. Neither new york Life nor its agents provide legal, tax or accounting advice. contact your own advisors for legal, tax and accounting advice.

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