21 February 2014 0 Comments

Reducing May Not Be Easy

shutterstock_146340752It’s good to always be right.  And it’s also good to be king.  But neither of these usually befalls us.  So, it’s time for me to admit that I may have erred in at least one concept I suggested.  In the more than 100,000 words I have put forth about life insurance in this blog, I recall I may have suggested that you could reduce the face amount of a term insurance policy anytime after it was issued.  For example, buy a $500,000 20 year term policy and if after 10 years you decided  you only wanted to continue with $250,000 of coverage, simply ask the insurance company to reduce your policy and premium.  That seems like an easy request.  After all, the insurance company is not being asked to assume more risk; they will have less at risk.

But, that request won’t always be honored.  The right to reduce the face amount of a policy is not contractual; so if such a reduction is allowed it is only by company practice.  When I surveyed 20 insurance companies noted for their competitive term premiums, here’s what I found to be their practices:

  • 10 companies allowed for multiple reductions, with 1 of those only allowing for the reduction after 3 years, 8 of them after 1 year and 1 at any time.
  • 5 companies allowed for a single reduction during the life of the policy.
  • 5 companies did not allow reduction in the face amount at any time.

When a reduction in face amount is allowed, the remaining policy must be for no less than the minimum size policy issued for new applicants.

If you decided to convert a portion of your term to permanent insurance and maintain the balance as term insurance, this would not be allowable with the 5 companies who do not allow for any term insurance reduction.

If you definitely plan to reduce the amount of insurance in the future you should always check out the cost of purchasing multiple term policies of different durations, even if a reduction is allowed.  This will probably produce a lower cost, especially if this can be accomplished by a policy rider rather than separate policies.  Even if you’re not planning on a future policy reduction, if there is little difference in cost, go with the company that allows for reductions.

Coming up, I’ll be revealing the biggest mistake people make when buying life insurance.

 

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