As the nation and world continue to struggle with regaining its foothold on the economy, it is no surprise that Wisconsinites are among those who are still monitoring spending habits looking for ways to stretch their hard-earned dollars. Although it may seem logical to some to cancel out insurances that may appear useless or wasteful, it is advisable to re-evaluate that decision before those policies are allowed to lapse.
An individual must understand how their current insurance plans and policies work before a determination can be assessed to their usefulness or necessity. Yes, it is true that not all policies are created equally and that the inner workings: that is, the exclusions, benefits, underwriting criteria, premium waivers, etc., differ greatly from insurance company to insurance company and from policy to policy. It is the differences that create the uniqueness in the policies’ designs.
Several scenarios are presented in this evaluation.
A 30-year old man may purchase a term life insurance policy along with his whole life policy for extra protection in the untimely event of his death to help support his wife and young children. The advantages of a term policy include a greater death benefit for a lower premium for a specified period of time. The disadvantage of a traditional term policy is that when the term is over, so is the insurance. While it is possible to purchase another term policy, the premium will be higher based on the applicant’s age, and developed health conditions may create problems in underwriting.
Let’s now assume that the company employing the 30-year old man has suffered losses during the recent recession and that his employment is terminated. Unemployment insurance may offer relief from lost wages; however, financial strain can still create a situation where the lost wage base is not enough to sustain.
The young family now faces several possible solutions.
The first solution includes keeping the whole life policy along with the term policy. While this solution is the most expensive in the present situation, it keeps the benefits of both policies in force in the event of his death. An important note to consider in this scenario is that only the life of the husband is insured unless additional riders are placed on the policies for additional individuals to be covered.
The second solution includes keeping the whole life policy and letting the term policy lapse or cancel. This will still leave one policy in force for the life of the husband that will continue to cover his whole life rather than just a certain amount of years.
The third solution includes keeping the term policy and letting the whole life policy lapse or cancel. The decision for this action must include the realization that the term policy will end after a specific time, ending the coverage regardless of the lack of other insurance. The whole life policy is more expensive than term; however it sets up a situation where no insurance may be present eventually.
With the second and third solutions, a potentially dangerous problem develops. While it is possible to purchase another policy in the future, it must be realized that the applicant will be subject to full underwriting for the new policy. In simpler terms, any health condition that is developed may present problems during the underwriting phase of the application process. Diabetes, high blood pressure, cancer, heart conditions, and others may be listed as “knock-out conditions” where their presence may not allow coverage. In addition, the applications for new insurance will be at higher rates due to the increased age of the applicant.
It is advisable for all families looking to reduce expenses to fully and completely review their policies and coverages thoroughly before deciding to take any drastic measures in regards to insurances. While it appear to be a logical solution to eliminate a policy or two, this decision may create a severely gaping financial exposure that may be more difficult to cover.