Many policyholders ask the same question later in life: Should I cancel my life insurance?
There are pros and cons to this approach. If you need cash to help cover unexpected costs or prefer to reinvest the money somewhere else, canceling your policy could be beneficial. If, however, your policy premiums are fairly inexpensive and your coverage is substantial, you may want to keep your current policy.
Let’s examine some of the top reasons to cancel life insurance, explore your options for canceling insurance, and offer actionable steps to get you started on the process.
4 COMMON REASONS TO CANCEL LIFE INSURANCE
Our clients often cite four common reasons for canceling their life insurance:
1. The Cost of Premiums
To keep your policy current, you pay a premium every month. These premiums vary based on factors including your age, lifestyle and type of insurance. Consider these options:
- Term life insurance, $250,000 coverage for a 60-year-old male: $149.38 per month
- Whole life insurance, $250,000 coverage for a 60-year-old male: $957 per month
- Universal life insurance, $250,000 coverage for a 60-year-old male: $520 per month
Given that the average retirement income for people over 65 is just over $47,000 per year, life insurance can quickly become expensive. Add in other expenses, such as housing, food, clothing and entertainment (it’s your retirement, after all!) and the cost of insurance can negatively impact your ability to relax and enjoy life.
2. The Need for More Profitable Investments
While some life insurance policies also function as low-yield investment accounts, they won’t offer the same return as dedicated investment options. Canceling or selling your policy provides you with a cash payout you can reinvest elsewhere.
3. The Expense of Healthcare and Other Emergencies
U.S. households led by someone 65 to 74 spend an average of $5,956 on healthcare each year. If you have a chronic illness or are unexpectedly injured, these costs could double or triple.
Housing is another large expense. From the cost of your mortgage to necessary repairs such as roofing to the unexpected failure of furnaces or water heaters, the cost of maintaining your home is often your top budget item.
4. The Growing Impact of Inflation and Economic Unrest
Markets today remain unsettled, which in turn has led to fluctuations in the value of stocks and bonds. As a result, many older Americans are looking to shore up their available cash in the event of an economic downturn. Selling your life insurance policy provides a way to access a lump sum you can save, invest or simply have on hand.
OPTIONS FOR CANCELING YOUR LIFE INSURANCE
You have two options for canceling a life insurance policy: Surrender or sell.
In the case of surrender, you cancel the policy and receive its “surrender value.” This is equal to the total amount of premiums you’ve paid, minus the cost of insurance and any surrender fees. If you receive more than the total value of your premiums due to investments or interest, you owe taxes on the difference. Once your policy is canceled, you no longer pay premiums. Any value accrued in the policy becomes yours, but the tradeoff is that your beneficiaries no longer have coverage.
You can also choose to sell your policy via a life settlement. In this case, you don’t cancel the policy. Instead, you sell it to an interested buyer, such as an investor or an investment firm, and receive a cash payout. This payout varies based on factors including your age, life expectancy, policy type, premium amount and death benefit amount. In most cases, settlements are more cost- effective than surrenders, with policyholders potentially receiving four to eight times the value of cash surrender.
In a settlement, your policy becomes the property of the buyer. This means they take on the cost of your premium and receive the death benefit of the policy when you pass away. Buyers evaluate the potential returns before making an offer.
GETTING STARTED WITH THE CANCELLATION PROCESS
It’s not bad to cancel life insurance. But if you’re asking yourself “Should I cancel my whole life policy or pursue a settlement for my term life policy?” it’s worth being prepared. Here’s what you need to know about starting the cancellation process.
Weigh Your Options
While you can cancel your policy at any time, getting your premiums back in full typically means canceling during the free look period, which ranges from 10 to 30 days. After that, you can surrender your policy to get a portion of your premiums back.
Whole life, term, second-to-dieand universal policies are eligible for a life settlement. The value of your settlement depends on multiple factors, including:
- Life expectancy: You must have a life expectancy of 15 years (or less) to qualify.
- Age: Typically, settlements are offered to people 65 or older.
- Premium amount: The lower your monthly premium, the more likely your policy will sell.
- Death benefit amount: Your death benefit must be $100,000 or more to pursue a settlement.
- Length of policy ownership: Your policy must be at least 2 years old to qualify for a settlement.
Payouts Differ Significantly
It’s also worth noting that payouts differ significantly from surrender to settlement, and within both of these categories.
If you choose to surrender your policy, you can only surrender it to the original policy issuer. Your surrender value depends on the fee and penalty structure your issuer has in place. If you seek out a settlement, your payout will depend upon your policy type, death benefit and the amount of premiums required to keep the policy in force.
As a result, there’s no “standard” payout amount.
Selling Is Easier With Expert Help
While you can choose to sell your whole policy, you can also sell a portion of your coverage. You keep some of your benefits while still receiving a payout. The challenge? With so many potential buyers, finding the best deal can be complicated and time-consuming. Working with an expert life settlement advisor, however, gives you access to years of experience and market expertise.
SEE HOW LIFE SETTLEMENT ADVISORS CAN HELP
Is canceling life insurance a good idea?
In many cases, yes. Life settlements are a straightforward and profitable method to improve your financial stability. At Life Settlement Advisors, it’s our mission to help seniors free themselves from unwanted life insurance policies and enjoy greater financial freedom in retirement.
Ready to explore the opportunities of life insurance settlements? See if you qualify or sign up for a free consultation.
