Life insurance is a tool for reducing the risk of financial troubles for your loved ones after your death. You should reassess that risk regularly to see if it has changed every few years, especially if the premiums are high. You shouldn’t hesitate to cancel a life insurance policy—or allow it to expire—if you've identified that you no longer need it.
Could my family lose the house or car?
Most people purchase life insurance around major milestones. If you own a house, for example, you may have long-term payments on a mortgage. If your family can't keep up with those payments in your absence, it cost them their home. If your life insurance policy is nearing the end of its term, or if you're considering canceling it, you need to revisit these obligations.
Do you still have several years left on your mortgage? Did you recently finance the purchase of a car? Think of major property that could be repossessed by your lenders if the outstanding loans aren't paid off, and evaluate your family's ability to pay them off in your absence.
In some situations, such as if you're 20 years into a 30-year mortgage, it may be a better option to reduce rather than cancel the amount of life insurance coverage you carry. Doing so would continue to alleviate your family from risk while reducing the cost of your coverage.
If your mortgage is paid in full, or your family’s savings and supplemental income is large enough to keep up with payments, you could consider canceling your term-life coverage.
Do I have any present or future financial obligations?
You should review other outstanding debts, like credit cards, and future financial obligations, like college, before you cancel your life insurance.
For example, if your spouse is a co-signer on your credit card, they will still be held responsible for any debt associated with that account. Paying it down without your income could be difficult for your spouse. Or, if you're helping your children pay off their student loans, they may struggle to keep up with payments in your absence.
You should also think of financial obligations you haven't taken on yet. Are you planning to pay for your child's college tuition five years from now? Do you expect to pay for a wedding sometime down the road? If the answer is yes to these types of life questions, you may want to consider holding onto your insurance policy.
If you can meet these metrics, then you could consider canceling your policy.
- *Your mortgage is nearly paid off
- *Your significant financial obligations are settled
- *You have accumulated significant savings in your retirement fund
What about your burial expenses? The average funeral costs around $10,000. If your family can afford these expenses without taking on new debt, you may not need your insurance; otherwise, a generous death benefit could cover these costs.
Will my family be able to keep up with daily expenses without me?
While large financial obligations should be your most significant consideration when determining whether you need life insurance, you shouldn't discount the financial burden of everyday life.
Your family could be debt-free and still struggle to pay for gas and groceries without your income, especially if you’re the breadwinner. Can your partner or spouse support themselves and your children (if you have them) without your salary? If your family can afford daily expenses, pay their bills, and retire in comfort without the use of life insurance funds, you may want to consider canceling your policy.
Should I convert my term insurance into a whole life policy?
If you carry a term life insurance, and you're nearing the end of your term, you may start to receive messages from your agent or insurance company encouraging you to convert your insurance into a whole life policy.
While "life insurance for your whole life" may sound appealing, keep in mind: whole life insurance is much more expensive than term life, and the rate of return on the investment portion of your insurance premiums is often low. Average policyholders would do better to maintain their current policies to the end of their terms and then invest the difference in premiums themselves.
However, if you believe your heirs will be hit with a hefty estate tax bill, or if you have a pre-existing medical condition, you might want to consider purchasing whole life insurance.
How much am I leaving to my heirs?
In 2020, the estate tax exemption amount is $11.58 million per individual ($23.16 million for couples). Any assets over this limit will be taxed at 40% when they are passed to your beneficiaries. If you fall into this small pool of individuals, maintaining a whole life policy covering an amount equal to your estate tax obligation could provide liquid assets to those inheriting your wealth. Doing so would enable them to pay these taxes without liquidating your property, such as your house, to pay the associated taxes.
Do I have any pre-existing conditions?
People with significant pre-existing medical conditions may want to consider whole life insurance.
One of the few benefits of converting a term life insurance policy into a whole life policy is that you often aren't required to prove insurability. This means that those with significant medical issues may be able to obtain the coverage they wouldn't usually qualify for—at least not at average rates. In some cases, you also may have the option to renew your term policy without a new medical examination, but it’s uncommon.
This is one rare occasion when life insurance could be used as a sound investment. Individuals who expect to pass away within the next five years could take advantage of a policy conversion to provide a windfall for their beneficiaries without having to pay decades of whole life insurance premiums.
However, keep in mind that many people outlive their doctors' prognoses. You may have pre-existing medical conditions and live for 15 or 20 more years. If you do, the value of a whole life policy diminishes accordingly.