A common question about starting a whole life insurance policy is “What if I cannot afford the premiums?”
This line of thinking results in either you being too afraid to start a policy or starting a policy with a minimal premium payment, so you can “manage” the premium if you fall on difficult financial times.
However, know this, you have alternatives. Despite the seeming rigidity of whole life insurance, the policy is actually quite flexible when it comes to your options if you cannot or don’t want to pay your whole life insurance premiums.
Please note, we are specifically addressing a participating whole life policy from a mutual insurance company built for cash value growth.
10 Alternatives to Paying Your Whole Life Insurance Premium
Choose Limited Pay Whole Life Insurance
Limited pay whole life insurance allows you to structure your policy so that it is paid-up after a specific number of years.
For example, you can structure your policy so that premium payments are due for the first 7 years, 10 years, 15 years 20 years, or to age 65.
Once the required time has passed, your whole life policy is paid-up and you no longer have to make premium payments.
But what if you cannot continue to pay your whole life insurance premium payment, even with a limited pay policy?
Request a reduced paid-up policy
Another option to is request that your cash surrender value be used to purchase a reduced paid-up insurance policy.
The insurance company will apply your cash surrender value to a paid-up policy, and you will not have to make another premium payment.
The downside is that you will not be able to contribute any more cash into your policy.
Request that premiums be paid from your cash surrender value
You can use your cash value to pay the premium on your whole life insurance policy for a period of time.
How long you can choose this option depends on how much cash you have accumulated in your policy, coupled with your interest earned and any dividend payments received.
The more cash in your policy, the longer it can be used to pay your premiums.
The downside to this option is you are depleting your cash value and consequently lowering your death benefit in the process.
Use Your Dividend To Make Premium Payments
You can direct the insurance company to use the life insurance dividend payment to pay your premium payments for a time.
The longer you have had the whole life policy, the larger your potential dividend will be.
Therefore, the longer you have had the policy the more the dividend will cover your premium owed.
Borrow against your cash value
You can also request a life insurance loan using your cash value as collateral and simply borrow money from the life insurance company. You can use the money for anything your want, including making premium payments.
A potential downside to this option is you cannot repay your loan and you borrow too much money, causing your policy to lapse. This could result in a taxable event as the government would want taxes on any gains you benefited from above your initial payment into the policy.
Ditch the PUA rider
By choosing to forego paying your paid-up additions rider you can greatly reduce your required whole life premium payment.
Properly designed policies have high PUA rider payments early in the life of the policy. You can make your base premium payment and chose to not pay your paid-up additions for that particular pay period.
For example, a policy with a $12,000 annual premium may require $3,000 in base premiums and another $9,000 in PUAs. You have the option of paying your base premium and not paying your PUAs for that year, saving you the $9,000.
The downside is that it will slow down the high early cash value growth of your policy. However, if your concerned with simply making your premium payment, this is a great option to use.
Request Your Chronic Illness or Long Term Care Benefit
Your lack of ability to pay your whole life insurance premium may be due to you being diagnosed with a terminal or chronic illness. If so, you can request the insurance company to exercise your chronic illness rider or long term care rider.
Many companies offering whole life will include a chronic illness rider at no additional charge.
The benefit is you can access your death benefit while you are still alive for financial help.
The downside is it will diminish your death benefit you plan on leaving to your beneficiaries.
Cancel your whole life insurance.
You can always cancel whole life insurance. The insurance company is contractually obligated to you, as the policyholder. However, you have no such obligation and you are free to cancel the policy at any time.
Now, if you choose to cancel the policy you may be subject to tax on any gains in the policy above the basis, i.e. what you paid into the policy. So, it may be wise to consider one of the other options if you want to avoid paying premiums and you do not need to cash in.
Get someone else to start paying.
Now this may seem like an unlikely scenario at first, but the truth is, it happens all the time. You see, over time as an your life insurance needs change, you may come to the realization that you don’t necessarily need your insurance any longer and decide that you don’t want keep paying for it.
Much to the dismay of…
Which is why, in some cases, the original owner/payor of the life insurance policy may choose to allow others with a potential “financial interest” in keeping the policy in question in force by taking over the required premium payments.
We see this most frequently when adult children who are no longer financially dependent upon their parents would still like to remain the beneficiaries of a whole life insurance policy that was taken out to protect their financial futures earlier in life, or in cases when a married couple decide to separate and one spouse would like to keep a life insurance policy in place while the other spouse doesn’t see the need.
You could always die and the life insurance company would pay out a death benefit to your beneficiary.
The upside is your beneficiary gets a large death benefit income tax free.
The downside is your dead.
Hey, it’s life insurance. This stuff can be boring so it is important to add some levity when possible.
And there you have it. 10 options if you stop paying your whole life insurance premiums. Hopefully we have addressed any fears or apprehension in starting your policy.
So what are you waiting for? Give us a call today to see what we can do for you.