To pay or walk away: Are these the only life insurance options?

By Frank N. Darras

DarrasLaw


Some baby boomers find themselves in the unfortunate position of not being able to make their life insurance premiums because of hard times. Does that mean they should just lose all the money they have put in to their policy? What happens to the cash that’s been paid? Should the insurance company reap the benefit of all these premiums without providing any options or payback?

How would you like to pay and pay and pay for something, perhaps your whole life, just to have all that money vanish? It would be a little like putting money into a savings account just to have it all disappear. As baby boomers get older, and as the current economy creates insurmountable difficulties for some of them, that’s what is happening to their life insurance policies. They are given the option to “pay or walk away.”

Some baby boomers find themselves in the unfortunate position of not being able to make their life insurance premiums because of hard times. Does that mean they should just lose all the money they have put in to their policy? What happens to the cash that’s been paid? Should the insurance company reap the benefit of all these premiums without providing any options or payback?

The insurance company has had the benefit of and has been making investment income on those premiums since the policy’s inception. Do the people who pay those stiff premiums just lose everything? By the time you receive a policy lapse notice, many of the options are gone. Periodic review and annual update meetings with your clientele may create opportunities and prevent a fatal lapse.

California, Washington State, New Hampshire, Oregon, Wisconsin and Maine have passed some form of consumer disclosure laws focusing on life insurance. While some of the major insurance companies say they think more information will just confuse policyholders, it is hard to argue that consumers don’t have the right to know just how they can manage this important asset.

The National Conference of Insurance Legislators (NCOIL) has been trying to make changes; in Nov. 2010 NCOIL passed the Life Insurance Consumer Disclosure Model Act with hopes that it would be introduced at the state levels in 2011. This act makes insurance companies responsible for informing their policyholders of options available other than just walking away and letting a life insurance policy lapse.

There are eight options in the model laws which include:
  • Accelerated death benefits – Using part of the death benefit to pay for enormous medical expenses or end of life necessities
  • Assignment of the policy as a gift – This is simply assigning or giving the policy benefits to someone else.
  • Life settlement – You can sell the policy to a third party for more than the cash value, but less than the face value of the policy.
  • Policy replacement – This means a new policy replaces the old one for a variety of reasons (lapses, forfeitures, assignments, better premiums etc.)
Riders
There are many different types of riders to help you accomplish your financial goals. Consider selling a disability rider to provide monthly disability benefits and a waiver of the premium feature so that if the client can’t perform the important duties of their own occupation or are unable to do any occupation for which they are trained, educated, or suited, the policy doesn’t lapse.
  • Maintenance of policy through an internal policy loan – Some policies can be maintained by borrowing against the policy’s cash value to make the necessary premium payments.

  • Conversion from a term policy to a permanent whole or universal life policy – The policyholder can convert term insurance to permanent insurance if time-sensitive conditions are met.

  • Conversion to long term care insurance or long term care benefit plan – The policyholder can elect to convert some of the built up cash value to long term care benefits.
Life insurance is no longer just about the death benefit to loved ones. In today’s’ economy, a life insurance policy may take different forms.

Life insurance is a living asset that can be added to or changed over the years to fit the needs of the consumer. As the boomers grow older, their death benefits can be useful to them while they are still alive. And, with so many options available, policyholders should be able to avoid just having to walk away from a lifelong investment.

Smart agents will jump on the information bandwagon by sitting down quarterly, semi-annually or yearly to review how their client’s life policy can provide the cash, the benefits, or the gifting options they need.