One major challenge advisors face when times get tough is to prevent clients from cashing out or canceling life insurance.

“Spouses that find out the life insurance is canceled will cover their heads with their pillows at night,” warns Graydon Coghlan, a San Diego-based fee-based financial planner. “You need to develop a well thought-out financial plan that takes into account worst case scenarios and make sure your clients have at least a year’s worth of cash.”

Nevertheless, one of 20 life insurance policies typically are surrendered or terminated, according to the American Council of Life Insurers, Washington, D.C.  

The situation worsens dramatically in economic downturns. In 2002, one of 12 policies lapsed. And in 2008, one of 15 policies lapsed.

By knowing what types of situations can lead to policy lapses, you can help protect clients. According to a joint study by LIMRA and the Society of Actuaries, here is what to expect:

* Policies are in the greatest danger of lapsing during the first five to ten years.

* Policies with small death benefits are typically canceled during the policy’s early years.

* Those in good health, rated as a preferred risk rather than a standard risk, tend to give up their policies in years five to seven.

* Younger people typically give up policies during the first five to ten years of ownership.

* Smokers either abandon policies in the first year, or hold on to them.

* Whole life insurance policies often are surrendered in later years by those in late middle age.

* There is not much difference in lapse rates between men and women.

* At age 65, people start cashing out policies to help fund retirement.

* People who pay annually tend to lapse less frequently than those who pay monthly—unless monthly payments are automatically deducted from bank accounts.

Certain life insurance policy riders can help prevent future problems.

Alan Lurty, senior vice president and head of business development for ING U.S., Windsor, CT, says that a number of insurers will cover premium payments if a person gets laid off. This rider is common on a simple issue policy, which offers a death benefit of up to $250,000 for annual policy premiums of $800 to $900, depending on age and face amount. This type of policy does not require a health exam.

Other important riders, which may add at least $50 annually to the cost of the life insurance premium, should be discussed with clients.

Lurty says the two most frequently selected and used riders include:

A waiver of premium rider, which waives the responsibility to pay the premium in the event of a disability that results in loss of income.

A similar disability income rider is available on life insurance. Some insurers also include critical illness coverage with this rider.

An accelerated death benefit rider lets the insured collect either all or a portion of a life insurance policy while alive. The insured can claim this rider if he or she is diagnosed with a terminal illness or requires long-term care or admission to a nursing home.

Existing clients who have problems paying life insurance premiums also have options.

Financial planner Coghland suggests taking advantage of a policy’s non-forfeiture option. There may be a “reduced paid-up” option, which means the client can stop paying premiums completely in return for a reduced death benefit and no cash value. The client also may be able to convert the permanent policy to an extended-term policy for a period, based on the policy amount of accumulated cash savings.

In addition, clients typically can get a policy reinstated if they can’t pay for the coverage over the short term.Some insurers may let clients repay missed premiums plus interest within, say, five years of lapsing. The client most likely will need to pass a physical exam, according to the Insurance Information Institute.

Another option is a life settlement. A policyholder can sell his or her life insurance policy on the secondary market. The proceeds can be used to pay for health care.

But to avoid problems that can force clients to sell life insurance to pay for home health care, assisted living or a nursing home, Elaine Marven a financial planner with OneAmerica, Indianapolis, suggests using whole life insurance with a long- term care insurance rider. This type of policy pays two to three times the death benefit for long-term care expenses.

“If you don’t use the long-term care coverage, you don’t lose the policy,” she says. “You can leave a legacy to your loved ones. Insurance companies are raising long-term care insurance coverage premiums to existing policyholders. But with a life insurance policy with a long-term care rider, you lock into permanent rate.”