Life changes and, sometimes, rather quickly. It can impact your well-being across the board, including financially. If you find yourself struggling to meet your monthly life insurance premiums, you have options. The last thing you want to do is simply stop paying and lose all the benefits you’ve been paying for since you first purchased your policy. If you have accumulated cash value in your whole life policy, this can be the tool you need to get yourself out of a tight financial spot.
Quick Links
In order to maintain a life insurance policy, you’ll need to keep up with monthly premiums. However, sometimes your financial status may change and you might begin to struggle to make those payments. While this can happen for a variety of reasons, it doesn’t mean you need to go without life insurance.
The premium associated with your policy can be established by a variety of factors. One of the main determinants of a premium is the age of the policyholder. The younger you are, the lower your premium will be. This is important to remember as when transferring your policy to another type of life insurance, you might be expected to pay higher premiums because you’re older than when you originally purchased a policy.
Another factor that can determine premiums is health. In order to qualify for life insurance, many insurance companies will require a medical exam to determine how healthy you are, though some policies might use an accelerated underwriting process to forgo medical exams. Similarly, if you are a frequent smoker or are currently healthy but have a history of serious medical conditions in your family, you might be required to pay a higher premium amount.
No matter the premium, life insurance is important for anyone looking for financial security for both themselves and their family. While premiums can limit the options available for people with serious health conditions or financial limitations, there are many ways to maintain life insurance coverage at a value that works for you.
While premiums are important for sustaining your life insurance coverage, there are a variety of ways that you can reduce the burden of monthly payments. Some insurance policies have cash value that can contribute to your regular payments, while others require a single up-front payment without any monthly premiums. Here are a few options to consider when balancing your budget and maintaining life insurance coverage.
Many life insurance policies have increasing death benefits. If you’re looking for more financial support in the future, you’ll need to increase your premium payments. However, this isn’t a great option if you’re already struggling to make premium payments. Instead, ask your insurance agent about a level benefit.
With a level benefit in place, the death benefit from your policy will remain the same, regardless of when the insured individual passes away. Level benefits offer lower premiums than increasing benefits, but the death benefit won’t grow overtime.
You can take out a loan from the cash value portion of your paid-up policy. There are a couple of catches, though. First, you’ll have to pay taxes on a loan you take from a single-pay policy because it’s classified as a modified endowment contract (MEC). MECs are subject to the Internal Revenue Service’s (IRS) excise tax, which means if you are under 59 ½ years old and take a distribution, a 10% penalty will be applied.
The second catch is that the loan amount plus the interest on the loan will decrease the amount of death benefit the policy pays out to your heirs. Be sure to consult with your insurance agent and your tax professional before making a final decision.
Did you know dividends can be used to reduce premiums on life insurance policies? Depending on how well the insurance company performs in a given year, and whether or not your policy has a cash value, you may be eligible for dividends. While dividends are not guaranteed, they can provide some financial support for those struggling to meet premium payments. When receiving dividends, policyholders have several options for what they can do with the payout. Many people who are looking to reduce their monthly payments choose to use their dividends to contribute to ongoing premiums.
Reducing your policy’s cash value also requires you to reduce the amount of coverage you’re receiving. While this may seem like a step backward, maintaining some coverage is better than having no coverage at all. By doing this, you’ll also reduce the cost of premium payments and find a coverage option that is in line with your budget.
If you surrender your whole life insurance policy, you’ll receive the cash value, minus any applicable surrender fees. Additionally, cash you receive from a surrendered life insurance policy (unlike loans from a non-MEC) is subject to income tax—and if you took out loans before surrendering your policy, those become taxable, too, once the policy is surrendered. Of course, there will be no death benefit, since you will no longer have the life insurance policy.
If doing away with the monthly premium payments on your whole life insurance policy is what you need to make ends meet, it is possible to do this while maintaining a death benefit for your heirs and avoiding incurring additional tax liability. Instead of withdrawing the cash value from the policy (or surrendering it entirely), you can use that cash value to purchase a single-premium whole life insurance policy. In fact, many whole life policies provide a non-forfeiture option called “reduced paid-up insurance” that allows you to do this immediately without having to open a new policy.
Single-premium whole life insurance allows you to transfer wealth to your heirs tax-free in most cases, just like a traditional whole life policy. Be aware, however, that estate taxes apply to sufficiently large estates. Instead of making monthly payments, you can use the cash value that’s accumulated in your current policy to purchase the single-premium policy outright—so you never owe another penny. The purchase is an income tax-free exchange under IRS code Section 1035.
When considering single-premium whole life insurance, you’ll be expected to pay a single lump sum premium instead of smaller, monthly payments. This single payment will be enough to fund the policy, including the death benefit that beneficiaries will receive after the policyholder passes away. Plus, this type of policy, depending on your insurance provider, can help cover the cost of long-term care by adding a rider or using a policy loan.
Here at ELCO Mutual, we strive to provide life insurance products that will provide financial support for yourself and for your family. Single-premium whole life insurance is just one of the many ways that we accomplish this goal.
Our Platinum Eagle single-premium whole life policy provides guaranteed cash value accumulation in addition to the potential for dividend growth. An accelerated death benefit rider is available on all standard issue policies, allowing you to access a portion of the death benefit in the event that you become chronically or terminally ill, require home health care, or become confined to a nursing home. Even if you don’t meet any of the criteria for receiving the early death benefit, you will still be able to access the cash value that accumulates on the single-premium policy via loans, as described above. The Platinum Eagle policy is available to individuals from age six months through 85 years and does not require a medical exam.
To learn more about the Platinum Eagle policy and other whole life insurance products from ELCO, get in touch with one of our independent insurance agents today!