Buying a life insurance policy is a smart decision if you have someone who is dependent on you. So it’s no wonder that about 54% of Americans have some type of life insurance. That figure only rose in the wake of COVID-19, which increased demand for life insurance policies. If you’re young, recently married, or looking to start a family, most agree that the right path is clear: you should purchase a life insurance policy.
But what if, 20 or 30 years later, if all goes well, your policy expires or the financial well-being of your loved ones has changed dramatically? You might think that’s the obvious and that just buying a new policy is always the best solution, but it’s not quite the case.
The point is, in some cases letting your policy expire before it’s even about to expire may be the best choice. The sense of security that such a policy gives you is always comforting, but in some cases that feeling may be wrong.
It is difficult to find reliable sources of information on this topic, as most will offer a financial incentive to get you to renew your policy or buy a new one. Here we’ll cover the situations in which you should renew your policy, but we’ll also highlight an often overlooked topic: When is it wise to let your policy expire?
A life insurance policy is a contract that is signed between you, as the policyholder, and an insurer. It guarantees that the beneficiaries you designate in the contract will receive a sum of money upon your death. In return, you will have to pay premiums, usually in the form of a lump sum or regular monthly payments.
Should the worst happen, your beneficiaries will receive the death benefit or face value of the contract. You can choose what that amount will be, based on your estimate of how much money is needed to keep your loved ones safe.
When you buy a policy, you will go through the underwriting process – the insurance company will assess the level of risk it is exposed to, based on factors such as your age, gender, health, background, and occupational hazards.
If you have a term life insurance policy and it expires during your lifetime, your beneficiaries will not receive a payment. Your policy will expire if you stop paying the premiums and you will not receive any refund for the premiums paid up to that point.
However, missing a single payment will not automatically void your life insurance policy. All life insurance policies in the United States must offer a grace period by law, typically 30 days – although with the advent of the coronavirus, many life insurance providers have extended this grace period by through 60 or even 90 days.
Keep in mind, however, that grace period payments are usually considerably higher than regular payments. After the grace period expires, your policy is officially void in most cases. However, some insurance companies offer a period, called a replenishment period, during which you can renew your contract.
You should always know if your insurer offers such an option. In the vast majority of cases, if applicable, you can reinstate your no-subscription policy within one month of your policy forfeiting.
However, if you go past your reinstatement period, the insurance company will most likely want to know if your risk profile has changed. Fortunately, the underwriting process required to reinstate a policy is much less lengthy and exhausting than the initial process of purchasing a life insurance policy.
There is always a cost to reinstating a policy. Overall, however, reinstating a policy is much cheaper than purchasing a new life insurance policy. If you do not reinstate the policy, it will lapse.
Now let’s take a look at some of the reasons why you might decide to let this happen.
The easiest way to find the answer to this question is to ask yourself: If I died tomorrow, would someone who depended on me face significant financial challenges?
If you’ve saved enough for retirement, paid off the house, and don’t have significant debt, letting your policy lapse may be the most profitable decision. Keep in mind that renewing your policy always comes with much higher premiums – and since the policy is renewed year after year, it is perfectly reasonable to determine whether the payment for such coverage has an ongoing value.
If your family is able to meet their regular payments (mortgage, car loan, student debt, etc.) while maintaining their current standard of living and if your financial obligations are settled, there is little reason to renew your policy. The purpose of life insurance is to maintain the financial security of our loved ones if we are successful – and if the criteria listed above are met, your family is probably already in a safe position. So renewing your policy could just put a strain on your finances.
Conversely, if you still have a large debt to settle or if you do not have enough savings for your retirement, renewing your contract is a good way to ensure the security of your beneficiaries in the years to come. come, no matter what.
Although the premiums are higher when you renew a life insurance policy, you can still choose to purchase a smaller, but more affordable payment for your current needs.
In your twenties or thirties, leaving a spouse or children without your financial support makes policies with $ 1 million or even more justified. However, if you are nearing retirement age, a few hundred thousand dollars could be more than enough if the worst were to happen.
Keep in mind that some employer sponsored policies may come with tax benefits. Group life insurance policies, for example, are not taxable for the first $ 50,000 of coverage, allowing you to reduce your taxable income by a significant amount.
You should also keep in mind that many life insurance policies also come with living benefits. If you experience long-term health complications, it can dramatically reduce the financial burden you and your family will be subjected to.