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When Retirees Should Let Their Life Insurance Lapse

March 19, 2015
Insurance, Life Insurance
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Many young families choose term life insurance policies over whole life insurance for a few reasons. Not only are term policies less expensive, but in most cases the family’s life insurance needs really are temporary.

Life insurance policies exist so families can meet financial obligations in the event the insured person dies. In retirement, you may be free of debt and no longer rely on a job for income. You may not think of yourself as someone who needs life insurance anymore. But before you stop paying for a policy, consider the reasons you bought it in the first place. If those reasons still exist, it probably doesn’t make sense to ditch your life insurance. Also, consider whether you have new reasons to maintain life insurance, such as new debts or caring for a grandchild.

On the other hand, if any of the following are true, you may no longer need insurance coverage.

  • Your children are self-sufficient. Raising children is expensive. A child born in 2013 will cost the parents an average of $245,340 to raise, considering food, housing, child care and education, according to estimates from the U.S. Department of Agriculture. And that’s not including college costs. The average “sticker price” for a private four-year college is $31,231 this year, according to the College Board, while tuition at a public school averages $9,139 for in-state students. But once these expenses are behind you and your children are paying their own bills, your income can go much further.
  • You’ve paid off your home. For many people, a home is the largest purchase they’ll ever make, one that takes years to finish paying for. The median sale price for an existing home in the United States in January was $199,600, according to the National Association of Realtors. If you have a 30-year mortgage at 4.5% interest on a $199,600 house, you’ll pay $164,484 in interest over the life of your loan, in addition to repaying the principal. Once your home is paid off, though, you’ll have much more disposable income.
  • You’re done working. Income replacement is an important reason to purchase life insurance. If you don’t have an income to replace and are living off savings and investments, you have one less reason to carry a policy.
  • Your premium is unmanageable. If you’re on a fixed income, you may find that premiums take up too much of your budget. If you’re struggling with basic living expenses, paying for a life insurance policy may not make sense.
  • You won’t have a large estate. Some people maintain permanent life insurance policies so their heirs can use the money to pay estate taxes, rather than sell off assets to pay the tax man. If your estate is not large enough to be subject to estate taxes, this won’t be a concern for you. In 2015, estate taxes apply only to estates that exceed $5.43 million.

If you’d prefer not to drop life insurance but your budget is tight, you do have options. If you have a permanent life insurance policy, you can use your cash value to pay the premiums, or you can ask your agent to lower your policy’s death benefit so your cash value covers all future premiums. If you have term life insurance, you may be able to lower the death benefit and reduce premiums.

But in some cases, dropping your policy is the right choice. Term policies are easy to get out of. Notify your agent or simply stop paying your premiums, and your coverage will end. If you calculated your needs accurately when you purchased the term life policy, it may be set to expire anyway.

Note that there may be tax consequences or fees associated with surrendering a whole life insurance policy.

No matter what type of policy you have, keeping life insurance you don’t need is a waste of money. And if you can do without it, it’s one less expense you’ll have to budget for with your retirement dollars.

Alice Holbrook is a staff writer covering insurance and investing for NerdWallet

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