When an insurance advisor approaches us, we are normally not in too much of a mood to buy life insurance!
So when you are short of money, or if you (or your spouse) have lost your job the first casualty is the life insurance premium!
You have just joined the 500,000 people who have lost their jobs in INDIA since September ’08.
Then your life insurance premium notice arrives. What do you do?
It’s good to know the possible 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 stop paying premiums, your coverage lapses! With endowment policies, many types of contracts allow you to decide to allocate cash value to pay premiums. Depending on the policy and amount of cash value, the result could be a significant reduction in cash value over time, decrease in death benefit and, finally, policy lapse.
There are largely the following types of policies that a person could (did I say should?!) have:
Home Insurance: Normally a low premium policy meant to reimburse you if there is some robbery, fire, etc. in you house. Just continue this policy – the cash implication cannot be much.
Medical Insurance: An absolute must. In case you were dependant on the company’s ‘group medical insurance’ the first thing you SHOULD do if you have lost your job is to get yourself a MEDICAL insurance.
Critical Care Insurance: Very useful to have. If you do not have it already do not buy it if you are under 35 years of age. It is slightly different from medical insurance – it pays a lump-sum on the occurrence of an event – like contracting cancer or having a heart attack.
Term life insurance: If you took a term life insurance so that your child will be educated, your wife choose what to do with her time, your loans would get paid off, – and none of these conditions have changed, continue paying the premium! If your policy lapses because of non-payment, you will bear the tough consequences.
Classic Endowment Policy: If you have an old classic endowment (traditional or non-ulip) policy, you could borrow money against the policy and use that amount to pay the premium apart from using the money for other things.
Unit linked Policy: If you have a unit linked endowment policy and have already paid the premium for 4-5 years (minimum 3 years) you could allow the cash value in the policy to fund the ‘risk charges’.
Thus not paying the premium is all right only in case you have a fairly old (say at least 5 years) ENDOWMENT plan.
Some policies are designed with flexible premiums, so that policy owners have the option to pay more or less than the recommended premium or to skip premiums from time to time. Even with these policies, however, policy owners should check with their agents before suspending premium payments for extended periods because there must be enough cash value to pay the monthly charges to prevent a policy lapse. Sadly thanks to some aggressive companies and their agents many of us believe that a Unit Linked Endowment policy will be permanently available to you even if you pay premium only for 3 years. This could be wrong.
The biggest concern: If you stop paying premiums and let your policy lapse, you would lose valuable protection, possibly leaving your family at financial risk.
Life insurance can automatically complete your goals 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 very minimum — give surviving family members time to adjust.
Other concerns: If you want to obtain 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 more money in the long run.
• You may not be able to get coverage again …at any price. If you experience health problems, 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 cash value. That’s because any cash value in your policy has accumulated on a tax-deferred basis. However, if you terminate your policy and take the cash value (not the same as policy loans, which are generally not taxable), a portion of the cash value could be considered ordinary income and be taxed at your current tax rate.
Let us take an example. A 40 year old had taken term insurance of Rs. 10 lakhs at an annual premium of Rs. 5300 – 7 years back. Now he loses his job and lets his policy lapse. The new policy will be available from the same company at a price of Rs. 10,200. Now this is actually a simple problem.
The worse problem is he could be denied Term insurance because a) he is unemployed or b) he has developed some medical complications!
Assuming that the term life insurance will be reinstated at the same original terms is utopian!
Before you decide to skip premiums or let your policy lapse, ask yourself these questions:
• Why did I purchase this policy? Was it to help protect my family’s future by replacing my income if I died prematurely? Make sure education funds are available for my children? Retire the mortgage or pay off other debts? If these goals still exist, do you want to jeopardize your life insurance?
• Have my needs or situation changed? Have I added to my assets by borrowing more money? Has my spouse quit his / her job? Do I need less coverage? More? If so, you should consider adjusting your coverage.
• What are my alternatives? If you are paying an annual premium, perhaps you would find it easier to budget for a quarterly or monthly premium. Or you might consider a monthly bank deduction. You may consider reducing the sum assured (some providers provide for that). Ask. That is the only way to get an answer!
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