Canceling a life insurance policy is not always the best or most lucrative option for those who feel they no longer need the coverage. To be proper stewards of our finances, we must consider the most efficient use of our resources and all possible courses of action. For example, instead of canceling your policy, selling your policy as part of a life settlement could result in a higher financial gain.
However, deciding when to stop a life insurance policy can be challenging. You must weigh numerous factors like your age, health, financial needs, dependents, and so much more. As your life evolves, there may come a time when you wonder if the policy benefits still outweigh the hefty premiums.
If you’re reevaluating your life insurance policy, you’ve come to the right article. We’ll answer common queries about stopping your life insurance policy, when to end your policy, and advantageous alternatives to canceling your policy.
At What Point Do You No Longer Need Life Insurance?
You no longer need life insurance when the cost is not worth the benefits of keeping the policy. To determine if that time is now, start by asking yourself these questions:
- How much annual income would be necessary to provide for your dependent loved ones?
- How many years would your dependents require financial assistance after your passing?
- What is the total amount of debt that you would like to settle?
- If you wish to assist with your kids’ or grandkids’ college tuition expenses, what amount would you prefer to contribute?
- How much would you like to set aside for end-of-life expenses?
- What is the extent of your savings?
The total of your answers will give you a good idea of how much life insurance you need. For example, let’s say you respond to the above questions as follows:
- My loved ones need $100,000 in annual income.
- They need five years of $100,000 after my passing.
- I have $300,000 of debt to settle.
- I want to contribute $50,000 to my child’s college education.
- I want to set aside $20,000 for my end-of-life expenses.
- I have $500,000 in savings.
First, multiply $100,000 of annual income by five years of need, which equals $500,000. Add on $300,000 of debt, $50,000 of college expenses, and $20,000 for end-of-life expenses for $870,000 total. Then, subtract savings of $500,000, which equals $370,000 of recommended policy coverage.
($100k annual income x 5 years) + $300k debt + $50k college expenses + $20k end-of-life expenses – $500k savings = $370,000 recommended policy coverage
If your current assets, including savings or other life insurance policies, exceed your needs, maintaining your life insurance policy may not be necessary. Let’s look at two more hypothetical situations where these questions could help folks decide whether or not to keep their policy.
Charlie, the 69-Year-Old Retiree
Charlie has accumulated significant wealth in his lifetime and finally decides to retire at age 69. He has a whole life insurance policy with a death benefit of $1 million. Charlie’s spouse passed away last year, and their children are grown with stable jobs. His mortgage is paid-off, there is no outstanding debt, and Charlie’s savings account is sizable enough to cover his end-of-life expenses multiple times over. Charlie’s been asking himself lately, “Do I need life insurance if I’m single with no dependents and have a good amount in savings?”
In this case, the benefits of having a life insurance policy no longer exist for Charlie. He has no dependents who would financially suffer if he passed away, and he’s confident his savings will cover anything else that arises. Charlie could even look into a life settlement, which involves selling his life insurance policy for more than the surrender value and up to 25% of its face value. This route could result in a potential return of $250,000!
Sara, the 50-Year-Old Business Owner
Sara is a 50-year-old business owner experiencing financial difficulties due to the COVID-19 pandemic. She has a life insurance policy with a death benefit of $500,000, but she is considering surrendering the policy to help alleviate her family’s financial stress. Sara has two young children and a spouse who cares for their children full-time.
Her spouse and children would need about $85,000 to keep up with their ideal lifestyle. If she passes unexpectedly, she knows her spouse will go back to school to get a higher-paying job, but that could take up to five years. They have around $60,000 in business debt and hope to pay at least $20,000 of each child’s college tuition. Sara thinks $10,000 will cover funeral expenses, and their savings account is around $35,000.
Ultimately, Sara decides it’s too risky to surrender the policy right now. Her family relies on her and her entrepreneurial spirit to support them, and she recognizes her death would result in severe financial hardship for her loved ones.
What Happens When You Cancel Your Life Insurance?
When you cancel your life insurance policy, you’re essentially ending the contract and stopping any more payments. Depending on your policy type, you may get back some of the money you put in (more on that in the next section).
Additionally, keep in mind that your loved ones will no longer receive any money in the event of your death after you cancel your policy. And if you cancel now and decide you need life insurance again at a later time, you will likely have to pay higher premiums due to your older age and potential new health conditions.
Can Life Insurance Be Canceled Because of Illness?
If you’ve been paying your premiums on time and were honest about your health conditions when you applied for your life insurance policy, your provider cannot cancel your policy just because you fall ill. So factors like—
- Getting older
- Developing a chronic disease
- Starting an unhealthy habit, like smoking
—will not result in the cancellation of your current life insurance policy.
Can I Cash Out My Life Insurance Policy?
You can cash out some life insurance policies, but not all. Let’s look at the two major categories of policies: permanent and term.
Can You Cash Out a Permanent Life Insurance Policy?
Typically, permanent life insurance policies—such as whole life, universal life, and variable life insurance policies—have a cash value component that accumulates over time. If you want to access this cash, you can surrender the policy, which means giving up the policy in exchange for a lump sum payment from the insurance company.
For example, let’s answer, “How much do you get back if you cancel a whole life insurance policy worth $500,000?”
- Cash Value Over Time – If you’ve owned this policy for a while, like 20 years, your policy probably has a relatively high cash value. This value could be higher or lower depending on various factors, like your insurer’s investment performance. For the sake of this example, let’s say your policy has a cash value of $150,000.
- Surrender Fees – The amount you receive will be the cash value minus any insurance company surrender fees. To determine your exact surrender fees, check your policy terms or ask your agent, as these fees will vary from company to company and among various policy types. A surrender fee that’s 5% of the cash value would be $7,500 in this example (or 5% of $150,000).
- Taxes – Surrendering a life insurance policy may have tax implications, especially if the cash value has grown significantly. Whether or not you pay taxes will depend on your policy’s cash surrender value, the amount you’ve paid in premiums, and the terms of the policy. It’s best to consult with a tax professional to understand any potential tax consequences.
So if you’ve had a $500,000 whole life insurance policy for 20 years, with an accumulated cash value of $150,000 and a $7,500 surrender fee, you could receive $142,500 for canceling your policy ($150,000 minus $7,500).
Instead of canceling a life insurance policy with cash value, consider a life settlement as a liquidation option for permanent life insurance policies. A third-party investor will purchase a life insurance policy for more than the policy’s cash surrender value but less than the death benefit. To qualify for a life settlement, you must:
- Own a policy with a face value of at least $100,000
- Be 65 years or older
- Have a life expectancy of under 15 years
- Have had a change of health since your policy was first issued
Can You Cash Out a Term Life Insurance Policy?
No, you cannot cash out a term life insurance policy, as these policies do not have a cash value component. This means you cannot cash them out in the same way as permanent life insurance policies. Term life insurance policies are simpler and more affordable than permanent, as it’s less risky to cover someone for a set time period (usually five to 30 years) as opposed to their entire life.
If you have a convertible policy, however, you might be able to partially or fully convert your term policy into a permanent policy. This transition will include higher premiums, but you can accumulate cash value and increase your eligibility for a life settlement.
Is It OK to Have No Life Insurance?
Whether or not you have life insurance truly depends on your life circumstances. The answer to this question will also likely change throughout your life. If you have no dependents, no one relying on your income, and plenty of savings and investments, then it’s probably OK to live without life insurance.
However, you may find yourself in a situation where you would like to keep your policy, but you need cash more. This could be due to hardships like:
- Unexpected medical or legal expenses
- Job loss or other income reduction
- A separation or divorce
In a joint study by the Life Insurance Marketing and Research Association (LIMRA) and Life Happens, nearly 50% of policyholders and non-policyholders stated they do not have the life insurance coverage they need simply because it’s too expensive. So if you find yourself in a similar situation, know that you are not alone.
The nice thing about a life settlement is that you don’t have to sell your entire policy—you can instead sell only a portion of your policy. This selling scenario looks something like the following:
- The third-party buyer purchases and owns the portion of your life insurance policy that you sell. This ownership includes taking over all premium payments. Upon your death, the buyer will receive the death benefit for the percentage they bought.
- You receive a lump sum payment right away for the portion of your policy that you sell.
- Your beneficiaries still receive a death benefit for the remainder of your policy that you keep.
- You are no longer responsible for any premium payments (the buyer is).
At What Age Should You Cancel Life Insurance?
There’s no set age when you should cancel your life insurance policy. It depends on your individual needs and money goals. If you have people depending on your income or big debts to pay off, it might be good to keep your insurance going. As you get older and things change, you might not need as much insurance.
The wide range of unique circumstances is why it’s so tricky giving a definitive answer to questions like “Do you need life insurance after 65?” or “Is it worth having life insurance after retirement?” Sometimes folks still have young kids at age 65, others are newly married, and some may be well into retirement.
It’s always a wise move to check your life insurance every now and then, especially when big things happen, like getting married, having a child, or retiring. Along with your own research, an insurance professional or financial advisor can help you make an informed decision about whether or not you still need your life insurance policy.
Why Would Someone Surrender A Life Insurance Policy Over Selling It?
Our team at Life Settlement Advisors finds that people who consider surrendering their life insurance policy either:
- Don’t know that life settlement is an option; or
- Have misconceptions about how life settlements work.
Life settlements are highly regulated legal transactions that serve many hardworking people who no longer need or want their life insurance policies. You don’t even need to be ill to sell your life insurance policy! Imagine using the proceeds from a life settlement for enjoyable activities while you’re still living, like vacations, family gifts, or philanthropic activities.
If you’d like to investigate the life settlement route, click here to run through our qualification calculator. The payout of a life settlement will depend on various factors included in this calculator, like:
- The type of policy you have
- The death benefit
- Your current health
- Your age
- Your cash surrender value
- Your policy’s annual premium
Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.
I am always happy to answer any and all questions about these life-transforming transactions.
