What to Do If Your Clients Can No Longer Afford Their Permanent Life Insurance Premiums

Are your clients struggling to pay their permanent life insurance premiums? They have options other than letting their policies lapse! Here’s how you can help them salvage their benefits.

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Even before the coronavirus pandemic, many Americans were struggling financially, living paycheck to paycheck with little in savings. Now, the situation’s even worse, with many recently losing jobs, working reduced hours, and having to take unpaid time off to keep their families safe, schooled, and well-cared for. In an effort to save the money they’d spend in premium, you may find that your clients think they have to let their permanent life policies lapse. However, this could negate all of the premiums they’ve already paid and take away the valuable financial security they’ve invested in.

There are several ways you can help them to keep, at least some, life insurance in place. We’ll cover the most effective ones below.

Solution 1: Use the Cash Value in the Policy to Cover Payments

If your client feels that they will be able to continue paying their permanent life policy’s premiums in the future, but just need a temporary break, they could use the cash value in the policy to cover the payments for a short period of time. You can ask the carrier for an in-force illustration to see how the break will affect the value of the policy for your client. If the client needs a longer break from paying their premium than what the cash value can cover, it may be better to go with Solution 2 or 3 (below).

Solution 2: Activate the Waiver of Premium Rider

If your client has lost their job but purchased a Waiver of Premium rider when they purchased the policy, the rider may allow them to waive their premiums in the case of unemployment. Many Waiver of Premium riders can only be used in the case of a disability, but it’s a good idea to check to be sure!

Solution 3: Take Advantage of the Policy’s Non-Forfeiture Option

Many policies have a “reduced-paid-up” option, allowing the owner to stop paying the premiums and convert the policy to a permanent policy at a reduced face amount. If your client has this option, they can keep some of the face value, without having to worry about paying future premiums. You or your client would need to reach out to the carrier to discuss a reduced paid-up option. The carrier should then provide you or the client with an illustration of what the current cash value would provide in reduced face amount, and then the client would have to agree to convert their policy.

Solution 4: Use the Cash Value to Buy a Single Premium Whole Life Policy

Does your client have enough cash value in their current permanent policy to purchase a single premium whole life (SPWL) policy? SPWL is a permanent, paid-up life insurance policy, meaning no additional premiums will be due at any point in the future. Like multi-pay permanent life insurance, SPWL insurance guarantees a benefit will be paid to the policyholder’s designated beneficiaries upon the death of the insured. The carrier determines the face amount of a SPWL policy based on the amount of the initial (single premium) payment and the applicant’s health at the time of the purchase. Initial face amounts often begin at $5K and go up to $10K, but some carriers will issue lower amounts. Ask us for help with finding and contracting with these carriers!

Additional reasons to consider SPWL:

  • Because the policy is paid up (there is no monthly or annual bill), it will never lapse!
  • SPWL offers continued cash growth through interest earned on the policy.
  • Carriers may have a declared minimum interest rate of return for the policy.
  • Some carriers offer participating policies, which can earn dividends, also increasing the cash value over the life of these policies.
  • SPWL’s tax advantages allow the cash value to grow tax-free and the death benefit to pass to beneficiaries tax-free.
  • The policyholder can borrow against the cash value of the policy tax-free.

Note: If the policyholder withdraws funds from their SPWL policy, they will have to pay tax on the interest built up inside the policy.

Solution 5: Have Their Life Insurance Fund a Funeral Trust

Clients who can’t afford to keep their permanent life insurance can also convert the cash value in it into a funeral trust, which would earn interest with no further payments needed. Funeral trusts, also known as funeral expense trusts, or burial trusts, are made up of money that’s set aside to fund anticipated funeral and burial costs. You can help a client arrange a funeral trust with a specific funeral home or cemetery or with an insurance company, if they’d like the flexibility to use the trust at any funeral home. Most states have a limit as to how much someone can place in a funeral trust, typically around $15K. Any funds that remain after the funeral and burial costs are met will go to named beneficiaries.

Additional reasons to consider a funeral trust:

  • Creating a funeral trust with the carriers Ritter offers does not involve legal fees.
  • Funeral trusts can be revocable or irrevocable.
  • A funeral trust may be considered exempt under Medicaid spend-down requirements, which typically involve a five-year lookback.
  • Since your client would be using life insurance to fund the trust, interest earned within the trust and trust proceeds are income-tax-free and exempt from probate.
  • This enables a client to pre-plan their funeral, sparing their loved ones a lot of difficult decisions during an already difficult time.

Note: We talk more about funeral trusts in The Complete Guide on How to Sell Final Expense Insurance. Download it for free here to learn more.

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Paying life insurance premiums often falls to the bottom of Americans’ list of priorities; and we’d say this is likely even more true during times of financial hardship. If you have clients whose financial situations have changed, reassess their life insurance needs for the different stages of life they’re in. They may need some extra wiggle room in their budget now, but it doesn’t have to cost them the life insurance they’ve been paying for all these months and years! With your help, they can salvage their “peace-of-mind” investment and hold on to some future financial security.

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