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In retirement, you say goodbye to so much – a job, gossip at the water cooler, and/or a commute to your job. What about your life insurance policy?
That’s a tricky question, because much depends on your situation. However, there are some guidelines to help you decide what to do with that life insurance policy.
When it’s okay to surrender your policy:
In most cases, many financial planners view life insurance as an income-replacement tool in order to provide support when one of the primary earners of the household passes away unexpectedly. In many cases, this need goes away in retirement, although this might not be the case if there is a pension that would cease at the primary income earner’s death.
If the children are grown, out of the house, supporting themselves, and you’ve acquired enough assets to comfortably provide for both spouses throughout retirement, a life insurance policy may no longer be necessary. The money saved from eliminating premium payments may be put to better use elsewhere.
There may be no reason to retain a life insurance policy if it was purchased for a specific need that no longer exists. For example, you have purchased a policy to cover a mortgage and it has been paid off.
Another example: If the insured survives a beneficiary, there are no other beneficiaries and the policy has no cash value, then the combined circumstances may mitigate the need for the policy.
The decision to get rid of a policy should not be made lightly and careful consideration should be given before canceling a life insurance policy. Someone in poor health would likely want to maintain any life insurance policies they have in place.
You should keep your policy if:
- There is a specific need for liquidity at one’s death, such as an expected estate tax liability.
- A policy has accumulated enough cash value so that it can be maintained with relatively small premium payments
What if you can’t afford your policy?
Sometimes, budgets can be tight in retirement. Certain types of policies may become very expensive.
What if you can no longer afford your premiums but you want to keep your policy? The good news is, you have options. You can ask family member beneficiaries to help pay the premiums. A life settlement may be an option. By definition, it is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. The policyholder or family receives a lump sum payment which can be used for any purpose, from paying bills to funding long-term care. This process may become more mainstream as states like Texas recently changed its Medicaid laws, requiring individuals with life insurance to explore life settlement options before becoming eligible for state-sponsored medical care.
Another alternative is to see if the policy premium can be lowered and made affordable by lowering the death benefit. Deciding to let your life insurance go is a big decision. As with all tough calls, you want to get input from your financial advisor.
