You should drop life insurance in only a few instances, as this leaves your loved ones unprotected and uninsured in the event of your death. The ideal answer to this question is to never drop your life insurance if there are people who are dependent on your income or caretaking abilities.
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However, there are certainly instances that call for this action, whether there is a problem with your life insurance company’s financial stability or your coverage no longer is adequate for your needs. Further, this answer truly depends on two questions:
- What type of life insurance policy do you currently hold and are you switching to a different type of insurance?
- Should I drop life insurance if I can’t afford the premiums?
Unfortunately the most common reason that people drop their life insurance is that they can no longer afford the premiums. And obviously if there is a question of paying the life insurance premium or buying groceries for the family, life insurance should not be the priority. However, if this is your predicament, there may be ways to avoid this depending on the type of life insurance policy you currently hold.
If you have some version of a permanent life insurance policy with a cash value amount, you can actually borrow from the cash value to pay the premiums on the policy. This will decrease your death benefit, but it will also allow you to continue coverage and keep your family protected.
If you have whole life insurance and either do not have enough built up or enough left in your cash value to help pay premiums, it could be time to look at other options.
There are other less expensive options for life insurance. The most similar to a whole life insurance policy is called a no load policy. This type of policy does not include commission or other fees, so ends up having lower premiums but with the benefit of a whole life term and a cash value account. The other one is referred to as a term life insurance policy, which will only last for a set amount of years, but is typically the cheapest option.
If you know that you need life insurance coverage, but are struggling with the premiums, look at other policy types, companies and payment options before dropping your coverage. It will likely be more expensive to obtain a few years down the road.
Should I drop my life insurance policy if the company is about to go bankrupt?
First off, get in touch with your state guaranty fund. This is similar to the federal backing of banks; if a bank fails, your account will be protected up to a certain amount. This is the same with a state guaranty fund.
However, you will still want to start comparing policies to find a replacement policy. Most importantly, make sure that your new policy goes into effect before you drop your old life insurance policy so that you do not suffer a lapse of insurance.
Should I drop my life insurance policy if I find one that’s cheaper and a better fit?
First, look into the penalties that you will be subject to if you cancel during the term period. Some companies will charge exorbitant amounts for canceling early from a life insurance policy- especially in the early years of a whole life insurance policy. Calculate the cancelation fee from your existing policy and then calculate the potential savings from the new policy. If you do not come up on top with your new policy, consider sticking with your current policy- unless of course the death benefits no longer meet your family’s needs.
4 Things to Consider Before Dropping a Policy
If you are simply just considering dropping your life insurance because you don’t feel like it is a quality use of your dollars, here are some factors to examine before dropping your coverage.
- First, just because you are healthy now does not mean that will continue for you.
- Second, if you decide to re-obtain life insurance in the future, you will most certainly have to retake the health exams and that could mean higher premiums in the future. Similarly, by canceling now you will lose your guaranteed rate (if you have that type of a policy).
- Third, many drop life insurance because their new employer offers it; however, employer plans can change as well as employers. It never hurts to have an additional plan that will remain in place no matter where your place of employment is.
- Fourth and finally, remember that sometimes the worst can happen anytime.
Although those morbid thoughts are never fun, they will help to keep your family protected in the instance of a worst case scenario. Also, many of these plans can help your family pay the mortgage or at least give them a steady replacement income in the absence of your salary. To ensure that you are making the right decision about whether to keep or drop your life insurance, use the comparison tool above or read through additional articles on life insurance right on this website.
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