Life Insurance

How to Tell When You Should Cancel Your Life Insurance

Most people don't need to carry a life insurance policy for their whole lives. If you've paid for your life's most significant expenses, you may be able to drop your policy.
Man reviews his financial situation
Man reviews his financial situation Source: Getty Images

Life insurance is a tool for reducing the risk of financial troubles for your loved ones after your death. You should reassess that risk every few years to see if it has changed, especially if the premiums are high. You shouldn't hesitate to cancel a life insurance policy — or allow it to expire — if you've determined that you no longer need it.

Could my family lose the house or car?

Most people buy life insurance around major milestones. If you own a house, for example, you may have a long-term mortgage. If your family can't keep up with those payments in your absence, it will cost them their home. If your life insurance policy is nearing the end of its term or 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 a car? Think of any major property that your lenders could repossess if the outstanding loans aren't paid Then evaluate your family's ability to pay them off in your absence.

In some situations, such as being 20 years into a 30-year mortgage, it may be better to reduce, rather than cancel, the life insurance coverage you carry. Doing so would continue to alleviate your family's risk while reducing the cost of coverage.

If your mortgage is paid in full or your family's savings and supplemental income are 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, such as credit cards, and future financial obligations like college tuition before you cancel your life insurance.

For example, if your spouse is a cosigner on your credit card, they will be responsible for any debt associated with that account. Paying it down without your income could be difficult. Or, if you're helping your children pay off their student loans, they may struggle to keep up with payments on their own.

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? Or for a wedding sometime down the road? If the answer is yes, consider holding onto your insurance policy.

If you meet the following criteria, you could consider canceling your policy.

  • *Your mortgage is nearly paid off.
  • *Your biggest 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 this, you may not need life 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 biggest consideration, don'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 support themselves and your children without your salary? You can consider canceling your policy if your family can afford daily expenses, pay their bills, and retire comfortably without life insurance funds.

Should I convert my term insurance into a whole life policy?

If you have term life insurance and are nearing the end of your term, you may receive messages from your agent or insurance company, encouraging you to convert to a whole life policy.

While life insurance for your whole life may sound appealing, whole life insurance is much more expensive than term life. And the rate of return on the investment portion of insurance premiums is often low. Average policyholders would do better to maintain their current policies to the end of the term and invest the difference themselves in premiums.

However, if you believe your heirs will be hit with a hefty estate tax or you have a preexisting medical condition, you might want to consider buying whole life insurance.

How much am I leaving to my heirs?

In 2024 the estate tax exemption amount is $13.61 million per individual ($23.16 million for couples). Any assets over this limit will be taxed at 40% when passed to your beneficiaries. If you're part of this small pool of individuals, maintaining a whole life policy that covers your estate tax obligation could provide liquid assets (quickly convertible cash) to your heirs. Doing so would enable them to pay these taxes without liquidating your property, such as your house.

Do I have any preexisting conditions?

People with significant preexisting medical conditions may want to consider whole life insurance.

One of the few benefits of converting a term life policy into a whole life policy is that insurability often isn't required. This means even if you have significant medical issues, you may be able to obtain coverage you wouldn't usually qualify for — at least not at average rates. In some cases, you may have the option of renewing your term policy without a new medical exam, but it's uncommon.

This is one rare occasion when life insurance could be used as a sound investment. Individuals who anticipate dying 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' prognosis. You may have preexisting conditions and live 15 to 20 more years, which diminishes the value of a whole life policy.