You buy life insurance to protect your loved ones, whether that means your children or your spouse. But what if you reach an age in which these loved ones no longer need the payout on your policy to pay off their mortgage loans, cover their daily living expenses or pay their other bills? What if your loved ones no longer depend on the income you make?
Have you gotten too old to be paying for life insurance, and it is time to cancel your life insurance policy?
“The reason we purchase life insurance is to protect your loved ones financially,” says Paul Moyer, owner of the personal-finance site SavingFreak.com in Williamston, South Carolina, and a licensed insurance agent. “If you have reached a place financially where the payout on the life insurance policy is only a bonus to your loved ones instead of a needed infusion of cash, that is when it is OK to dump your term life policy.”
It’s not easy to determine when it’s time to cancel your life insurance policies. But it helps to take a close look at who depends on you financially. Would your loved ones face a financial burden if you were to suddenly die? If the answer to this question is “no,” paying for life insurance might no longer make financial sense. The smarter move is to cancel your policy and the payments that go with it.
Cancel life insurance? A tough question
Life insurance has become an easy sell: Consumers are buying it, after all, to make sure that their loved ones don’t suffer financially. According to the latest numbers from the American Council of Life Insurers, U.S residents bought $2.8 trillion of new life insurance coverage in 2013.
Few people ever cancel this insurance. The American Council of Life Insurers reported that consumers canceled only 5.7 percent of their individual life insurance policies in 2013.
Maybe this cancellation rate should be higher. There often comes a point in people’s lives when paying for life insurance no longer makes financial sense. Surprisingly, age isn’t the key factor here.
Yes, when you get older the odds are higher that your dependents will no longer need the payout from your life insurance policy to survive. But even in your retirement years, the beneficiaries of your life insurance might still need that payout. Consider this: If you died tomorrow, would your spouse need that payout to survive?
It’s not all about age
"The life insurance cancellation decision process isn't so much focused around a certain age, but is more of an evaluation based on the need to cover a risk," says Christian Sees, owner of Integrus Financial in Wayne, New Jersey. "If the untimely death of the insured would cause a financial hardship for the beneficiary, then there is a need to maintain the coverage."
The cancellation decision will differ depending on who you are attempting to protect. If your spouse is your beneficiary, you might decide to hold onto your policy even as you enter your retirement years.
Sees puts it this way: What if you die at 67 and your spouse lives past 80? Will your spouse struggle financially without the payout from your insurance policy? If the answer to that question is "yes," then you should keep your life insurance. You might also keep your policy if it provides living benefits such as critical care or chronic illness coverage, Sees says.
What about the children?
But what if you took out life insurance to protect your children? You might decide to cancel your policy at an earlier age. The odds are that your children, as they become adults of their own, will no longer need the financial protection of a payout as you get older.
"It's important to remember that life insurance is a risk-management tool," says David Born, president of BORN Investment Management in Austin, Texas. "The first question to ask is, 'Who am I protecting?' If you took the policy out to protect a child that is now an adult, it's time to reassess the situation."
Other questions to ask
There are other factors to consider when deciding whether it is time to cancel your life insurance. Maybe your beneficiaries don't need your death benefits to pay their own bills. But what if your policy's payout makes it easier for them to handle your estate upon your death?
Valerie Rind, financial expert and author of the book "Gold Diggers and Deadbeat Dads," says you might consider keeping your life insurance if you still owe a mortgage loan on your home. If you suddenly die, your life insurance payout can help your survivors pay off that mortgage. If you want to leave your home to your survivors, giving them the financial ability to pay off the mortgage makes it less likely that your lender will actually end up with the residence.
Maybe your estate won't have enough cash to cover your final expenses. Rind says a life insurance payout could pay for your funeral, without placing a financial burden on your survivors.
But if your beneficiaries no longer depend on you and if your death won’t cause anyone a financial hardship? Then it might be time to cancel that policy.
"Don't consider an insurance payout as a nice parting gift to your heirs," Rind said. "You need term life insurance only if people are dependent on your income. Evaluate if your spouse, minor children or other survivors would be disadvantaged."