3 things to keep in mind when considering canceling life insurance
July 7, 2023
We are often asked by our customers whether they should continue or cancel their life insurance policy. Here are three things to consider when considering this subject in your own family.
First, ask yourself if you still need life insurance. Think about why you purchased this insurance in the first place. Here are some frequently asked answers:
- Financial support for dependents: If you have loved ones who depend on your income, life insurance can provide financial support to replace lost income in the event of your death.
- Debt repayment: If you have outstanding debts, such as a mortgage, car loan, or credit card balance, life insurance can help cover these obligations so that your loved ones will know when you die. You can avoid being in debt.
- Funeral and Final Expenses: Life insurance covers funeral, burial or other end-of-life related expenses to ease the financial burden on your family.
- Business Continuity: If you own a business, life insurance can help keep your business running by providing funding for succession planning, settling business debts, or compensating for the loss of key persons in your organization. can be secured.
- Estate Planning: Life insurance plays a role in estate planning by providing liquidity to pay inheritance taxes (if applicable), ensuring that heirs receive an inheritance without having to sell the property. increase.
If you need help calculating your life insurance needs, read Jim’s Calculating Your Life Insurance Needs article. To see if you have enough life insurance, see Anna’s Is Your Life Insurance Enough post?
As you get older, your life changes and you may no longer need insurance. Maybe you’re nearing retirement and no longer need to replace your income. Your children are grown and independent. You have accumulated a lot of resources that you can pass on if you die prematurely. If you decide you don’t need insurance, read on.
Next, check the type and cost of your insurance.
There are various types of life insurance.
- term life insurance. This common type of insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. If the insured dies during the period of insurance, a death benefit is paid. Insurance has no cash value and the premium is fixed for the entire policy period.
- Whole life insurance, universal life insurance, variable life insurance, index variable life insurance. All these types of life insurance policies are perpetual protection options that provide a death benefit and accumulate cash value over time. Some policies allow a portion of the premium to be invested in various investment options of your choice or linked to the performance of stock indices such as the S&P 500. The cost of this type of insurance is an annual premium (subject to increase). There are policy administration fees, death fees, surrender fees (for early surrender of the policy) and investment administration fees (for policies with an investment component).
If you want to learn more about Whole Life as an investment, be sure to read Jim’s article, Is Whole Life Insurance an Investment?
Third, what are the costs and implications of canceling a policy?
Term insurance is the easiest to cancel. Life insurance expires when you stop paying premiums. Insurance has no cumulative cash value, so there is no tax impact.
Surrendering and cashing out term life insurance can have the following effects:
- Surrender Fees: Some types of whole life insurance, such as whole life insurance and universal life insurance, may incur surrender fees associated with early surrender of the policy. These charges will be deducted from the cash value at the time you cancel the policy, which may reduce the amount you receive.
- Tax implications: Income tax may be levied if the amount received exceeds the premium paid on the policy (ie, the increase in cash value). Additionally, if the policy was held within investment-oriented policies such as variable life insurance or indexed universal life insurance, there could be potential tax implications upon realization. .
In some cases, it may make sense to leave a term life insurance policy in place. In this case, you can ask the insurance company how much the death benefit will be if you stop paying the premium. The accumulated cash value will continue to pay these premiums on your behalf for some time until your 100th birthday.
We hope this article has helped you understand the considerations for continuing or surrendering/redeeming your life insurance policy. These policies are very opaque and completely non-transparent. At MainStreet, we work with life insurance professionals to analyze your policy. If you have an insurance policy, we would be happy to see it.