Reduce Your Budget Not Your Insurance

There’s no denying that the recession has played havoc with the household budget of most Americans. Income has gone down as prices have gone up, with “robbing Peter to pay Paul” a frequent, if undesired, activity each payday. As times get tougher, you may be looking for ways to get your budget under control, evaluating each line item to see if it can be reduced or perhaps even eliminated.

While there may be some places to cut back, your insurance coverage shouldn’t be one of them. If you are considering canceling your life insurance policy to add a few more dollars to your bank account, consider these points:

• Chances are when you took out the policy, you were in good health. Can you guarantee that the same will hold true a few years from now, when you decide you can afford to buy insurance again? If an unexpected illness occurs, insurance coverage may no longer be an option.
• If you’re between 25 and 44, you might think you have plenty of time to worry about what would happen to your loved ones when you die. But according to the CDC figures for 2010, approximately 112,178 of those who died were in that same age bracket, with accidents responsible for more than 34% of them.

However, knowing all the reasons to keep your policy in force doesn’t solve the economic issue. But a meeting with your insurance advisor could provide you with a few options. Start by discussing the situation, and whether it’s a temporary issue (you’re between jobs, for example) or something more serious, such as a terminal illness.

In the latter case, your policy may allow you to take advantage of an accelerated death benefit, where you can draw some or all of the death benefit to handle current expenses, with the remainder provided to your beneficiaries upon your death. This can be very useful if you are unable to work and your loved ones depend on your income to pay the mortgage, for example.

Other possible solutions, depending on your situation, may include borrowing against your policy or allocating its cash value to pay the premiums, thereby keeping it in force. (Keep in mind this could reduce its cash value and death benefit amount.) Some policies come with flexible premiums, allowing you to pay more or less, or even skip premiums. Even changing how you pay the premium—monthly or quarterly rather than on an annual basis—may give you a little breathing room.

Other alternatives suggested by the Oregon Insurance Division website include converting your policy to a paid-up policy, reducing the death benefit to lower the amount of your premium payments or even asking your beneficiaries to help pay the premiums so they can keep the financial protection you want for them.

Once you and your advisor have decided on a workable solution, it’s time to take a hard look at your overall household budget. Look for areas where you can shave a little from your outgo and save a little more for unexpected expenses. It’s what money guru David Bach refers to as the Latte Factor—taking the money spent on unnecessary “little” expenditures and putting it into your savings account. Just $5 a day—the price of a latte in most areas—can add up to an impressive $1,825 a year stashed away for a rainy day!

The key is to make the right choice not only for the immediate future but also for the long term. You made a wise decision when you purchased your policy. Make another smart solution to keep it in force—for you and those you love.