For generations, life insurance has been a safety net for a dramatic worst-case scenario -- an early death that leaves survivors in a financial predicament. Yet these days, many people are wondering whether it's a good idea to keep paying life insurance premiums when they face so many other pressing financial matters: mortgage payments, credit card bills and so on.
So is there any way to lower the cost of your life insurance, or should you just get rid of your coverage altogether? Ask yourself these five questions to help find the answers.
Am I suffering financially?
If you're unemployed or otherwise feel like you're on thin financial ice, the first thing to do is resolve to keep some form of life insurance, experts say.
"You probably need the same -- or more -- coverage, because you still need to provide for your family if something were to happen to you," says Ron Nathan, president of The Nathan Agencies in Amherst, Mass. "If you cannot save (money) in other ways due to job loss, then insurance may be even more important."
In fact, the death of an uninsured primary breadwinner, even an unemployed one, all but guarantees financial ruin for surviving relatives. Seventy percent of all households with children under 18 say they'd have trouble paying the bills after several months if the primary breadwinner died today, according to a 2010 study by LIMRA, a trade association for the life insurance industry.
LIMRA found that in 2010:
• 30 percent of U.S. households carried no life insurance at all.
• 50 percent of U.S. households indicated they needed more life insurance.
• Among U.S. households with children under age 18, about 11 million had no life insurance.
Do I have too much life insurance?
Typical rules of thumb regarding coverage generally revolve around current income. But the question really should revolve around how much money your family will need to meet immediate obligations if you die (including funeral expenses and uncovered medical costs), and how much it will need to sustain the household in the future, send your kids to college or pay off the mortgage and other debts.
There's no one-size-fits-all answer, but calculators are available that take into account more than just your current paycheck. If you use one of these calculators, you may realize the old "10 times your income" theory is causing you to be overinsured, and you can save money by lowering the face amount of your policy.
Can I tap into the cash value of my life insurance?
Holders of life insurance policies who need to preserve cash have several alternatives. Permanent insurance, which most commonly takes the form of whole life or universal life, never expires and combines a death benefit with a savings mechanism that accumulates a cash value.
"Many options will be available, such as borrowing from the cash value," Nathan says. In that scenario, policyholders can use the proceeds to pay premiums, essentially paying for the policy with the policy. If the policy pays dividends, policyholders can apply those toward the premiums.
"If the policy is term," Nathan warns, "the only real choices would be to lower the face amount of coverage, change the length of the term from, say 20 years to 10 years, or to lose the coverage."
Should I shop around?
Rates for term life insurance are "probably as low as they have ever been, and some new products such as guaranteed universal life have taken hold," Nathan says. "However, insurance companies are running a finer line on profit because of lower sales and lower returns on their investments, so it is difficult for them to lower premiums."
Policyholders can't really renegotiate existing policies with their carriers, Nathan says. But lower sales mean the carriers' competitors probably will be happy to talk to you, he says.
"It might be possible that since you took out the policy, they have come up with a slightly cheaper one that you might switch to," Nathan says. "However, it would require proof of insurability." If you're in an upper age bracket or you aren't healthy, this can be a challenge.
The National Association of Insurance Commissioners notes that life insurance is a competitive business, and much of the competition focuses on price. After you've decided which kind of life insurance is best for you, compare similar policies from different companies to find which one is likely to give you the most value for your money, the association says.
"Don’t drop one policy and buy another without a thorough study of the new policy and the one you currently have," the insurance commissioners' association says.
Should I opt for the policy at work?
In general, don't be tempted to cancel your existing policy and settle for your employer's life insurance offering, experts say.
"Most employer plans are not cheaper," Nathan says. "They may be 'guaranteed issue,' so the insurer has to insure everyone, making the overall rates higher. The plan may also be age-weighted, which means as a younger employee you may be paying a higher rate."
Losing your job or retiring means the end of this coverage -- another reason that you may not want to rely on your employer-sponsored life insurance.