When those vanishing premiums don't vanish

Second, call your agent or insurance company and ask them to provide "in-force illustrations" that assume you do one of the following four actions, with the first option clearly your best:

1. Continue to pay premiums until the premium vanishes.

When you receive the illustrations, look at what year the premium vanishes under current rates and 2 percentage points lower. Could you afford to keep paying for those additional years?

If not, consider the one of these three additional options.

2. Borrow from cash value to pay the premiums.

You can always borrow the premium from the cash value, if there is enough, at an interest rate that is usually well below 10%. This way, you keep the death benefit (although your policy loan is subtracted from it) and the cash value continues to increase each year.

• Advantage: You can keep the policy in force with little or no out-of-pocket cost.

• Disadvantage: If you continue borrowing to pay the premiums, all of your cash value eventually will be used up in paying premiums. Your policy will lapse and you will end up with no life insurance coverage at all.

• Questions to ask: How long will the insurance stay in force, assuming current rates and 2 percentage points less? Will you need insurance coverage beyond that point? Would you prefer to keep paying for this policy or try to buy a new one? (Consider your health before you assume you can get a new policy.)

3. Change the policy to extended term.

With this technique, your permanent life insurance policy becomes a term insurance policy, and the cash value is slowly used up over time to pay the term insurance premiums. The more cash value you have, the longer you can keep the policy in force. Another factor is your age; the younger you are, the lower your term insurance premiums will be.

• Advantage: You'll have insurance for more years than if you use up the cash value to keep the permanent policy in force because the term life premiums probably are lower than those for the permanent insurance.

• Disadvantage: At some point, the extended term coverage will lapse and you will end up with no death benefit. Any premiums you paid on the permanent policy are essentially wasted.

• Questions to ask: What year does the coverage lapse under current rates and 2 percentage points lower? Will you need insurance beyond that point, keeping your health and age in mind?

Video: How much life insurance is right?

4. Rewrite the policy with a lower death benefit.

The insurance company takes your existing permanent life insurance policy and uses the cash value in it to buy a "paid-up" policy instead. A paid-up policy is one that is guaranteed to remain in force for your lifetime, and it guarantees that you will never owe premiums on it. It differs from a "self-supporting" policy in that self-supporting policies don't guarantee that premiums will never be due on them.

• Advantage: You have life insurance coverage without any out-of-pocket cost.

• 

  More on common insurance scams

  Disadvantage: You're going to end up with a substantially lower death benefit than you currently have.

• Questions to ask: What is the death benefit under current rates and 2 percentage points lower? Is the amount of insurance under the paid-up policy enough for your needs, and if not, how expensive would it be to buy additional term insurance?

Updated Sept. 23, 2009

< previous |  1 | 2 |