Should you drop your life insurance policy?

BY: ANDREW STEWART 

“Life insurance isn’t about protecting you, it’s about protecting those you love. If those you love don’t need protection, then some would argue you don’t need life insurance.” That’s how some people and advisors feel about it. Below is an example of when to know it’s time to walk away from your policy and the expense.

Life insurance is probably one of the least understood major expenses. Many people buy it when they don’t need it. Just as many need it and don’t buy it. This is an email I received last month…

I am wondering if I should drop my whole life insurance policy, I feel that this has been a  total waste of my money. I’ve had the policy for over 20 years. My children are grown up and have families of their own, my house is paid off, and I have a decent amount of money in the bank. But I pay monthly for life insurance. I feel that when the time comes, my children or siblings can use my savings for any expenses. I hope this is enough information. Please tell me, what do you think?

Thank you,

Ann-Marie

A major component of life insurance is if those you leave behind will suffer financially from your death. This is typical when you have kids, debt, and a one-income household – that’s when losing a breadwinner can be tragic. When you’ve paid off the house, the kids are gone, the savings account is topped off, and your death is just a reason for your family and friends to get together and celebrate your life, then the need for life insurance is not so critical.

Anne-Marie told us two things suggesting it may be ok to drop her policy:

Kids are all grown up – Parents often consider dropping or reducing their coverage once the kids are out of the house and on to their own careers and lives. Anne-Marie’s death may be sad for those she leaves behind, but it won’t be financially catastrophic. This is the primary reason for life insurance, and she doesn’t need it for that purpose.

Her house is paid off – When you die and leave your mortgaged house to a loved one like a spouse. They can just assume the mortgage, but with children, the transfer of the house will cause taxable consequences for them. In either case, however, the mortgage might not be affordable. So, life insurance can come in handy by paying off the mortgage. Since Anne-Marie’s is paid off, once again life insurance isn’t needed for that purpose.

Was it really a waste of money?

In Ann-Marie’s case, it may not have been a total waste of money. That’s because she has a whole life policy, as opposed to a term policy. I’ve talked about the differences, the benefits and disadvantages of the two before. When you buy a term policy, you have to die to get money from the insurance company. But whole life combines a death benefit with a savings account.

A couple of options she has available to her would be; she could just surrender the policy and take her money just like closing a bank account. She should be aware of taxes though. The interest she earned on the savings portion of her policy was tax-deferred, meaning she didn’t pay income taxes on it. When she takes it out, she’ll have to pay taxes. An option that bypasses taxes would be to borrow against the savings with a policy loan. Another option would be for Ann-Marie to stop making premium payments in two different ways. The first way is for the insurance company to use her accumulated savings to continue funding her premiums until they’re used up. The second is called reduced paid-up insurance, meaning she can stop the coverage amount at the amount she has fully paid for and drop the rest. 

If the premiums are unmanageable, she could ask the beneficiary to help make them. Then she could continue paying the policy and transfer the death benefit tax-free. The main point here is to educate yourself on all your options by speaking with experienced professionals.