When life insurance premiums become difficult to pay, many people consider giving up the policies entirely or replacing them with cheaper ones. But giving up an existing life insurance policy isn’t cheap. When you give up a cash-value insurance policy, there are often surrender changes—which are sometimes very steep—so you’ll likely walk away with less than you might think.
Here’s how to make your current policy cheaper to own—and earn more on your savings.
• Pay your premium annually—not monthly or quarterly—no matter what type of policy you own.
Insurance premiums are always lowest when you pay in one lump sum, once a year, rather than spreading out the payments.
If you can pay the single premium, you will save between 6% and 20%, depending on the interest rate your insurer charges for the luxury of paying in installments.
• Drop unnecessary riders. Nearly every life insurance policy (including term policies and whole life policies) offers riders—extras that push up the cost of owning the policy— for which you may have signed up and aren’t aware you own.
Call your insurer or agent for a list of the riders in your policy and an explanation of each one. Then determine which to keep and which to eliminate. Two examples of riders that have little value and can be removed.
• Waiver of premium for disability. If you’re already receiving disability coverage at work or through a policy you bought on your own, coverage through your life insurance policy may be unnecessary. Even if you don’t have any disability coverage, you’re better off eliminating this rider and using the extra money to help pay for a high-quality disability plan with better features.
• Accidental death coverage. This rider doubles the amount of coverage a family receives if the policyholder’s death comes as a result of an accident. Your family’s protection needs don’t depend on how you die, so this rider is for gambling, not for financial planning. ’
• Get higher policy dividends by switching to a variable interest rate on policy loans. If you own a cash-value policy, your insurer pays annual dividends on the cash portion you have invested.
• Reduce your policy’s face value to improve performance. Most people don’t realize this option exists. Here’s when it makes sense:
You now have a cash-value policy that pays you an attractive interest rate—but its internal costs are no longer competitive.
You can make the policy more attractive by reducing the face amount—and, therefore, the internal charges—and continue to enjoy the high-interest rate. You may also want to reduce the face amount to cut the premium you need to pay.
• Convert existing policies to other types. You may need some help with this one from an independent insurance consultant or a financial planner. Here’s the basic premise.
An existing insurance policy is too costly to keep and impossible to alter using one of the strategies already mentioned.
By converting from one type of policy to another, you can still salvage some of the policy’s underlying value.
Example: Let’s say you own a universal life insurance policy and have paid $50,000 so far in premiums. A universal policy has a flexible premium, and your savings earn a rate of return that changes periodically. Let’s assume that if you gave up the policy, you would only be left with about $10,000 after paying the surrender charge.
Strategy: Exchange the insurance policy for a variable annuity, which lets you invest your savings in a family of mutual funds.
You preserve the $50,000 you’ve invested in premiums by using it as a deduction against future earnings generated by the annuity.
Even though your annuity’s cash value starts at $10,000, your cost basis for tax purposes will be $50,000.
So—if you wait until the value of your annuity grows to $50,000, you’ll be able to withdraw the entire sum without paying income taxes on it.
Result: You’ve been able to salvage real value—in the form of a tax shelter—from an existing policy that you believed was nearly worthless. Just be sure the annuity company follows proper procedures to make sure the exchange qualifies for tax-free treatment.
Laura Bushnell is Editor in Chief for National Review Brand Foundation of Consumer Updates and based in Boston. Previously, she held senior VP level positions in corporate finance and consumer financial planning firms.