Years ago, when your kids were little and your mortgage was big, you probably bought some life insurance. If you had a friend or family member who worked for an insurance company, odds are good that it was a whole life policy. These policies often come with a hefty monthly premium that you are going to pay for… well, your whole life.
Today, however, life is different. Your kids have kids of their own and the mortgage has been paid. Your need for life insurance has gone away, but those hefty monthly insurance premiums; they are here to stay.
A question I am often asked is, “Should I cancel my old life insurance policy?”
Before I provide an answer, there is a much bigger issue that needs to be addressed: Are you absolutely, 100% sure you really, really don’t need your old life insurance policy any more?
Yes, the kids are grown, the mortgage is paid and of course, you are tired of making premium payments month after month, year after year. But are you certain that you really don’t have a need for life insurance?
Before you make the irrevocable decision to drop your life insurance, ask yourself the following questions.
Do you have any other debts? OK, the mortgage is paid off, but do you have any other debts or financial obligations? Perhaps a home equity line of credit? A mortgage on your cabin or a car loan? What about student loans? If not, your need for insurance may be less than it was when you first bought your policy, but that doesn’t necessarily mean you (or someone you love) don’t have a need for the death benefit that the policy will pay in the future.
Consider the following:
Does anyone still rely on you for financial support? Perhaps a spouse or even an adult child or grandchildren may rely on you to provide financial support. Sometimes these financial needs continue indefinitely. For most married couples, it will continue at least until retirement. If you were to die and no longer be around to support your family, do they have the financial resources to be able to maintain their lifestyle after you are gone?
Perhaps your adult child or grandchildren have special needs or are experiencing a rough patch in their financial lives. Is it possible that your life insurance may provide the support they need if you weren’t here to do so? Even if you and your spouse no longer need the death benefit provided by your insurance, perhaps other family members do. A simple change of beneficiary on your old policy can make sure that happens (more on that in my next post).
Do you or your spouse continue to make contributions to an IRA or retirement plan at work? People often make the mistake of thinking, that since the kids are grown and the mortgage is paid for, their need for life insurance is over. I would say their need for insurance may be less, but it’s not necessarily over.
Here’s why: unless they are already retired, most couples depend on one or the other to continue to work, contribute to the 401(k), receive company matching contributions, grow their pension benefits, fund Roth IRAs and save for retirement. In the later years of your career, these additional savings can be significant – perhaps $24,000 a year or more – especially if you add in the company match on your 401(k).
$24k a year adds up. If you were to die and no longer contribute to your retirement savings, it could create a financial burden to the surviving spouse and make a serious dent in their retirement plan. Your old life insurance policy could be used to replace the lost retirement savings from the deceased spouse.
How will your spouse make up for lost social security benefits after you die? Married couples also need to consider their future social security benefits. During retirement, most married couples receive their own social security benefit, plus any benefits their spouse is entitled to.
Upon death, social security benefits end for the deceased person and the surviving spouse chooses between continuing their own benefit, or taking over their spouses benefit if it is larger. Either way, social security benefits for the surviving spouse are lower than they were when both partners were still alive.
The average social security benefit is $1,360 per month and a person can live another 20 years or more after they begin receiving benefits. Adding it all equates to $326,400 or more in lost benefits due to an early death. Life insurance can help replace those lost social security benefits when your husband or wife dies.
Are you eligible to receive a pension? If you are eligible to receive pension benefits upon retirement, I generally recommend that you choose the pension benefit option that continues to pay a benefit to your surviving spouse after you die for the remainder of their life.
However, one strategy for people who have existing life insurance (or who are healthy enough to buy life insurance when they start their pension) is to choose the maximum pension benefit for them and $0 to their surviving spouse. The life insurance policy can then be used to provide additional money to the surviving spouse, if the pensioner were to die first.
For example, pension option 1 offers a $1,000 benefit with $0 to the surviving spouse. Pension option 2 offers a $800 benefit that lasts through both spouses’ lifetime. Option 1 sounds like a great plan, unless the wrong spouse dies first!
Generally, I recommend Option 2. That way, pension benefits continue regardless of who dies first. The exception is when clients have life insurance. With life insurance, the spouse with the pension can choose option 1 with the higher income benefit and if the wrong spouse dies first, the survivor still has the life insurance death benefit from their old life insurance policy.
If you cancel your life insurance, what will you do with the money from the premiums you no longer pay? Paying $200 a month or more in life insurance premiums on a policy that will never benefit you in your lifetime just plain stinks. Getting out from under that would be awesome, but what are you doing to do with the money? If you are going to put this money to good use for other expenses like health care, cost of living or other types of insurance like long-term care insurance then redirecting those dollars may be wise.
However, if you are simply going to save and invest the premiums elsewhere, the math often doesn’t add up. If you die next month an extra, $200 in your savings or investment account isn’t going to go far. Even if you die 10 or 20 years from now, you will probably put more money in your beneficiary’s pocket with the insurance policy than you are likely to accumulate in a $200 per month savings plan.
Are you in good health? No one wants to think about their own mortality, but if you aren’t healthy, you might want to rethink canceling the life insurance. All to often people cancel their life insurance policies at a time in life when their likelihood of making a claim is the greatest it’s ever been. The reason why term insurance is so cheap, is that most people live beyond the term of the policy and the policy expires with no claim being paid out. With permanent policies like universal and whole life insurance a claim will be made some day as long as the policy doesn’t laps or isn’t canceled.
If you are healthy and confident that you will live a long life, then canceling your policy may make sense. But unless you can guarantee that you will live forever, keeping your old policy might be a good idea.
Once you have decided that you are absolutely, 100% sure you really, really don’t need your old life insurance policy any more, then you might want to consider some alternatives to that old, expensive policy.
Read my next post to find out more.