Life can be full of uncertainties. If you run into financial difficulty, paying your life insurance premiums could take money away from other priorities like paying down your mortgage or buying groceries.
But life insurance is a very valuable asset, which is much easier to cancel than to restore. If you have trouble paying your premiums, here are some other options to consider:
Switch to monthly premiums
Paying premiums annually usually saves you money but it can be tougher for budgeting purposes. When you receive your renewal notice, you can switch to monthly premiums. Since switching takes time, be sure to ask for this change early.
Reduce your coverage
You can ask your insurance company to reduce the amount of life insurance to suit your budget. This option isn’t ideal because you can’t automatically restore the coverage later. You’ll need to undergo new underwriting to qualify and may need to buy another policy (which includes overhead costs). Since you’ll be older, new coverage will usually cost more.
Switch to cheaper insurance
If you have permanent life insurance, you could switch to temporary coverage (also called term life insurance). This may require you to buy a new contract and cancel the old one. You should only cancel once the new coverage is in place.
Look for other sources of money
Life insurance gives you leverage that other investments can’t match. A small premium buys a large death benefit that can pay out anytime. What other vehicle allows that? Maybe you can pay premiums from other investment accounts, including your TFSA.
Buy new insurance
Sometimes new life insurance costs less. This is especially likely if you have temporary life insurance like term 10 or term 20 and your premiums renew. Since getting approved for new life insurance takes time, start looking two to three months before rates increase. You may not get enough advance notice (if any) from your insurance advisor or the insurance company. Be proactive and put the key dates in your calendar.
Whole life and some universal life insurance plans have insurance rates that increase every year (called yearly renewable term). Affordability becomes increasingly difficult if you haven’t made extra deposits and earned good returns. Newer universal life insurance contracts offer a level cost of insurance (the same premium rates every year) for lifelong affordability regardless of investment returns.
Take a premium holiday
If you have permanent life insurance with a cash value, you can often suspend your premium payments for months or years if you’ve contributed more than the minimum in the past and have earned good investment returns.
With universal life insurance, your coverage continues as long as your policy has enough savings to cover the monthly charges. Whole life insurance forces you to pay more than the true minimum premium and often allows automatic premium loans, which borrow against the savings to pay premiums.
Reduced paid-up insurance
The cash value in your permanent life insurance may let you buy a reasonable amount of death benefit with no further premiums. This is called reduced paid-up (RPU) insurance.
Plan before you buy
Once you buy life insurance, your choices are limited. For instance, term 100 and universal life insurance with a level cost of insurance have similar prices. If you miss premiums on term 100, you lose your coverage. Universal life lets you pay more than the minimum premium for tax-sheltered growth and to protect against hurdles paying your premiums in the future.
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