Protecting your life insurance after layoffs

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• Life insurance is an investment vehicle that can boost your savings.
• You may be able to take loans from your permanent life insurance policy.
• Life insurance should be part of your financial plan, even after layoffs.

Layoffs are part of the business cycle as companies prepare for projected drops in the market. From the mortgage market to tech firms and accounting, compensation plans can vary just as much as layoffs. As a result, some employees may be left scrambling for a new job, while others are financially prepared for several months.

For employees being forced back into the job market, the most basic instinct is to constrict and start cutting costs while dusting off your resume. For some people, this means canceling even the best life insurance policy.

Different types of life insurance are more prone to this. A good life insurance plan is one of the best financial vehicles. Don't give up on it quite yet.

Can I keep my workplace life insurance if laid off?

Unfortunately, your workplace plan will not go with you when separating from your employer. The good news is employees typically get group plans without medical exams, deductions (unless they opt for more coverage), etc. The bad news is it's not transferable in the way a 401k would be.

If your only life insurance plan is connected to your employer, it's time to start shopping. Talk to your benefits representative to see exactly how much the company is willing to transfer in employer paid benefits. In any event, your own life insurance plan may be cheaper than you think.

Should I let my life insurance lapse?

One of the most important things we can advise is to talk to your life insurance agent or company. The exact rules and guidelines vary widely between companies. However, if you're working with larger providers like New York Life, Columbus, or MassMutual, the process is extensively thought out and simplified for agents and buyers.

However, misunderstandings about life insurance are common, and the terms of separation are no exception.

What options do I have if I miss payments on permanent life insurance?

Permanent life insurance policies can be structured with different limits, rules, and riders. So give your life insurance agent a call if you have questions about your policy. However, in most cases, you have a few options if you can't make your regular payment:

• Let your life insurance policy pay for itself: Permanent life policies often rely on investment and growth on the company's end. The growth rate is tied to the S&P or other common indexes depending on the type of policy you buy.
  
  If your policy has enough cash value, some companies will allow you to make payments with the current value.
• Cash out your policy: This may be the most plausible option, particularly if you just opened the policy. The balance is small, and you haven't surpassed the traditional waiting periods.
  
  If you want life insurance in the future, you'll need to open a new policy. But you can take the cash value and put it elsewhere.
• Reduced paid-up: You need to talk to your life insurance agent to ensure this option is available with your plan. Some life insurance companies allow buyers to stop paying into the policy with the understanding that the provider would reduce the death benefit.
• Policy lapse: In this case, your policy would become defunct. If you were to die after this point, the insurer would not pay any benefit to your loved ones. You also lose early withdrawals, loans, and any other investment tools with a permanent policy.
  
  Some insurance companies will allow you to reinstate a lapsed life insurance policy with a new medical exam. If you reinstate your policy within 15-30 days, you may not need a medical exam. In this event, the sooner you can reinstate it, the better.

Is it time to convert your term life insurance policy?

If you stop making payments on a term policy, the policy will lapse. Individual companies may or may not have options for reinstatement as you would expect with a permanent life insurance policy. For some recently laid-off workers, this is an opportunity to think strategically and ask yourself:

• Are there options for converting term life insurance to permanent life insurance for your policy?
• How much will premiums be if you convert?
• Can you move money from your savings to pay monthly premiums on a whole life policy?
• Do you have a return of premium rider on your current term policy?

If you purchased a return of premium rider on your term policy, you're eligible to get a refund on the premiums you paid if the policy expires without paying out. But this is partially dependent on not letting the policy lapse.

On the other hand, if you don't have a return of premium rider, your policy becomes a use-it-or-lose-it plan. So converting becomes the only way to get a death benefit if you outlive the policy.

Unfortunately, life is often unpredictable. You never know when your health might change. Being laid off could prompt you to nail down a permanent plan while you're still healthy.

Stop thinking of life insurance as just the death benefit

In the long term, policyholders with savings should consider life insurance an issue of redistributing assets. Ultimately, life insurance is much more than a death benefit. Calling it insurance is a misnomer with permanent insurance plans.

Rather than the use-it-or-lose-it mentality, many life insurance plans have become more comparable to high-performing 401(k)s or other robust investment vehicles. If you ask a financial planner where you should put $1,000 a month, many will tell you to buy a robust life insurance plan.

Policyholders can use permanent plans while alive. Some may ask themselves when is it okay to draw cash from a life insurance policy? The answer is potentially now. If you take out loans, you can maintain your policy value. But you don't have to go through a formal loan process. More importantly, it doesn't hurt your credit if you miss a payment.

Some buyers take out a loan against their life insurance and never pay it back, eventually leading to the policy closure or a reduction in value. When you think of it this way, redistributing other savings to maintain and grow your life insurance savings is easier.

Should I take out life insurance loans if I'm laid off?

You should make this decision based on your situation. Ask yourself how much value you have accrued in your policy. What are the terms of your policy? What do your other savings look like right now? How much do you need to supplement unemployment and savings?

If the answers to these basic questions make sense, taking a loan could reduce stress levels. Ultimately, it could give some workers more flexibility in finding the right job.

How can I reinstate my life insurance policies?

Keeping your life insurance plan active after being laid off is not always possible. Unfortunately, life insurance seems more like an extra expense if you don't have significant savings or are unemployed for an extended period. Maybe you forgot to pay, and your policy lapsed.

Policyholders can reinstate a typical life insurance plan without a new medical exam or other complications within 30 days. You would pay any outstanding premium to bring it up to date if reinstating within 30 days. If your policy lapses for longer than 30 days, you can talk to your life insurance company about reinstating the policy.

In many cases, this is the best way to keep your future premiums low. But you may need to go through a new medical exam.

It's incredibly stressful to be laid off. But, no matter where you start, stabilizing your finances is crucial to avoid losing footing and preparing for the new chapter in your life.