Life insurance is a multi-dimensional product. Take whole or permanent life products as an example. You have a death benefit that your beneficiaries can use to pay off debt, replace your income, pay funeral expenses, pay estate taxes, pay college tuition expenses—really, anything you can imagine. In addition to the death benefit, with a whole life insurance policy, you also have a cash value. The cash value can be taken if you surrender the procedure and can be borrowed during the policy’s life.
When you obtain a life insurance policy during your twenties or thirties, you generally have more bills and debt than you will by the time you retire. In addition, you likely have fewer assets than you do in your golden years, so a life insurance policy is a must for your family. Because of these differences in your financial situation, retirement is a great time to reevaluate your policy and decide whether it is in your best interests to keep it in force. Here are a few questions you should ask yourself before you allow your policy to lapse:
Do you or your beneficiaries need the death benefit?
If your estate is subject to estate taxes, you own a business, or you have income from a straight life annuity; you may need to keep some life insurance. Otherwise, your heirs will be forced into quickly selling off assets to pay estate taxes, own a business afloat while looking for a buyer, or find another source of retirement income.
Are you in good health?
If you decide to let your policy lapse, make sure that you either no longer need a life insurance policy or that you are in good enough health to get a new one with a lower death benefit.
Will your lower death benefit policy be less expensive?
Your rate per $1,000 of death benefit increases with age and with any chronic health conditions you may have, so make sure you compare the speed of your new policy with that of your old policy before letting your old policy lapse.
Type of policy
If you decide that you no longer need your policy, your next step will depend on the type of policy you currently have.
If you have a term policy, chances are your policy will terminate somewhere in early retirement. Since you don’t have any cash values, there is no vested interest in the policy unless you have a return of premium rider. You can stop if you no longer want the policy and think it doesn’t make sense to continue paying the premiums.
If you have a whole-life policy that you deem inappropriate for your needs, you can surrender the policy for the cash surrender value. If you have had the procedure for several years, you should be outside the surrender period.