Why insurance gets the axe when times get rough

BY ANDREW STEWART

Why is it that in a time of financial difficulty or dire distress, we look at our life and health insurance as discardable products? Were they too expensive to afford? Did we buy the wrong type of insurance and now have buyer’s remorse? Did we purchase it as a favor to a friend who joined the business? Did something happen to change our belief in them? It doesn’t matter what the individual question and answer is, what matters is the possible risk we’ve unknowingly put our families, businesses and loved ones in.

Now I am fully aware that every situation is different and sometimes we have to tighten the preverbal budget belt to keep food on the table and a roof over our heads. But we must use caution before canceling our life and health insurance policies. Have you covered all the angles, because you may have only one chance to make the right decision? Once you cancel, it could be tough to get back in and in many cases, you won’t be able to get it back. I know the tendency is to think our financial difficulty is temporary and when we get back on our feet we’ll just reinstate.

Let’s think about this for a minute. Most companies allow 2-3 months to reinstate without having to provide full medical information again. But you have to catch up on all the premiums missed, and that could be a large amount depending on what your monthly premiums are. If you can’t afford that and decide to start over, your age of insurance might have changed. That means your premiums will be higher than before. The worst scenario is if you can’t re-qualify due to changes in your health.

Here are some risks to think about before you cancel any insurance policy.

Your beneficiaries: These people are most likely the reason why you purchased the policy, to begin with. It makes sense to communicate with them about why they may want to help keep the policy in place. Insurance is the primary way to provide and protect household income. If you were already struggling financially, then your death or severe sickness will only exacerbate the situation even more. It could save your family from having to move.

Savings and assets: Short-term savings, retirement funds and any other assets are now at risk. The financial obligations and day-to-day household costs such as daycare, cooking, cleaning, driving, children activities don’t go away. If you are a business owner or self-employed then multiply that risk x 10. The whole purpose of having insurance is for us to transfer the risk of loss onto the insurance companies.

Keep permanent life insurance. This one might be the most difficult because by its nature it might your biggest expense. It is tough to replace permanent policies because they become more valuable, the longer you own them. Much of the costs happen upfront in the early years. Later in life, it is difficult to replace these policies because you can never buy the insurance cheaper. A fantastic benefit of these policies is the cash values can be used to pay the premiums if enough has been accumulated.

Speak with your beneficiaries and your insurance broker before making the decision to cancel. It could be a financial life-saving conversation.