From all the articles you have read on life insurance, you must now know what is a life insurance premium? Premiums are paid by policyholder every year till the policy matures. However, there are times when you just cannot make the payment. What happens in this situation? While it depends on the policy you have taken, but most term life insurance plans lapse when you don't pay the premium by the specified due date. Thankfully, the situation is not all bleak when it comes to non-payment of premiums.
What to do if you Cannot Pay Premiums?
As mentioned before, non-payment of your term life insurance premium results in a lapse. However, there are some options with the whole life insurance policies and permanent life insurance policies to keep the coverage.
1. Payment grace period
According to the IRDAI (Insurance Regulatory and Development Authority of India), all life insurance policies must incorporate a grace period of 30 days from the due date of payment. During this period, the policy will be in lapse-pending status. You should keep in contact with the insurer to find out how long the insurance policy will remain active if the premiums are not paid timely.
2. Use waiver of premium riders
You may skip a premium payment but continue to avail of the insurance benefits if you have a waiver of premium rider. The waiver may kick in if a disability is exempting you from working and earning and thus, making it difficult for you to pay premiums.
The waiver of premium rider will work as long as your disability to work copes with your carrier's rule. Some riders even waive premiums because of unemployment. This option won't be helpful in sudden financial emergencies as the waiver rider begins after some waiting period during which you have to continue making payments.
3. Use dividends to pay the premium
Dividends are received in the whole life insurance policy. When the insurance companies are performing well, mutual companies pay dividends to the policyholder that can be used to increase the cash value. Dividends can also be used to offset premiums. For this, you need to check out with the insurance company how many dividends apply to premiums. However, the benefits may not be immediate.
4. Use the cash value to pay the premium
Permanent life insurance builds up a significant amount of cash value through the years, which can be used to pay for the premiums. You can also borrow against this amount and use that money to pay for the premium amount or any other expense you might have. However, there will be interest charged on the amount borrowed against the cash value.
When the loan is never paid back, the death benefits will decrease, and the beneficiaries will receive a lower amount. The cash value can be withdrawn directly. However, you will need to pay taxes if the amount withdrawn is larger than the cash value portion of the life insurance policy. The withdrawal of cash value also reduces the death benefits.
5. Use paid-up option
Yet another option is using the cash value to convert the policy to paid-up status. It helps the policyholder to keep a certain amount of coverage aside without paying additional premiums. However, this method is also likely to reduce the death benefits received by the beneficiaries. The longer the term of the policy is, the higher the cash value will be.
6. Policy face value
You can also directly reduce the premium payment if the policy's face value is decreased. It may affect the overall cash value and the death benefit proceeds, but it is a much better option than policy termination. Some insurance companies allow the policyholder to go back to the original benefit amount, and some do not.
You should contact the insurance company to know the procedure to convert back to the original amount. It would be better if you take the consent of the beneficiaries as they are the ones who are going to be influenced by this.
7. Switching to level benefit
With most policies, you have the option of increasing the death benefits by paying the higher premiums over time. However, you can also reduce the premium amount by switching from an increasing benefit to a level benefit. Reducing to level benefit may affect the ultimate death benefits received by the beneficiary, but it sorts out the problem of paying a higher premium amount to some extent.
8. Switching to term life insurance
Term life insurance premium is cheaper than the permanent policy. You can discontinue the permanent policy and take out the cash value to use it to buy a term policy like Canara HSBC Life Insurance iSelect Star. However, in the case of a term policy, the death benefits are only received in case the policyholder dies within the policy period. You must keep on paying the premiums of the term plan on time, or the plan will lapse.
9. Cancelling the policy
It might occur that you no longer need life insurance after all your children's expenses you have planned for have been paid off. In this case, you might consider dropping off the policy by surrendering it and get the taxable surrender value. Cancelling a term life policy is simple but cancelling a permanent life insurance policy is a bit complex and time-consuming.
If you miss out on paying premiums, then your term life insurance policy will get lapsed. However, you have some options with the whole life insurance and the permanent life insurance where you can either entirely drop off the policy or use some additional options to keep the coverage amount. It is advisory to contact the insurance agent or financial advisor before finalizing any decision as a wrong decision may put the future of your family and children at stake.