Retirees Quietly Drop This One Insurance at 70 — And It Can Free Up Hundreds per Month
Life insurance can be a financial safety net for families who depend on someone’s income. But by age 70, circumstances may have changed.
In some cases, dropping a life insurance policy that’s not needed could save hundreds of dollars a month. However, canceling coverage without careful consideration could mean giving up benefits that would be difficult or expensive to replace.
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How To Decide Whether To Drop a Term Life Insurance Policy
Tiff O'Connell, CEO and founding partner, O'Connell Law LLC, said that before dropping a term life insurance policy, it’s important to consider whether the death benefit is still needed for any of the following:
Financial protection for a spouse
Preserving assets
Paying debts
Funding a trust
Providing for a beneficiary who may need extra protection
If none of those needs apply, she said, then dropping the coverage may make sense. However, if less coverage is needed, reducing the death benefit may be better than canceling entirely.
She also recommended being cautious about canceling.
“Once a policy is canceled, the insured may not be able to qualify for new insurance later if family or financial circumstances change,” she said.
Surrendering a Whole Life Policy
Unlike term life insurance, whole life insurance builds cash value and can provide lifelong coverage as long as the required premiums are paid, per Mutual of Omaha.
Braxton Mondell, COO at Checkmate Financial Group, recommended thinking twice before surrendering a whole life policy. If the amount received from surrendering the policy is more than the policyholder’s cost in the policy, the difference may be taxable, he said. Surrender charges may also apply, and replacing the same coverage at age 70 could be difficult or much more expensive, he said.
Mondell suggested the following alternatives:
A reduced paid-up option that eliminates future premiums in exchange for a smaller death benefit
A policy loan if cash is needed, however, keep in mind that loans can reduce the death benefit if they are not repaid, per the National Association of Insurance Commissioners
A 1035 exchange that allows the policyholder to exchange one policy for another without immediately recognizing a taxable gain
Lowering the Premium Instead of Canceling the Policy
The available options depend on the type of policy. Mondell said term and permanent life insurance policyholders may be able to reduce the death benefit or remove riders that no longer provide enough value to justify their cost.
Whole life policyholders may have additional choices, he said. They may be able to select reduced paid-up coverage, which eliminates future premiums in exchange for a smaller death benefit. Those with participating policies may also be able to apply dividends toward their premiums.
Before changing the policy, O’Connell recommended getting professional advice.
“The insurance professional can explain the product options; the estate planning attorney can help decide how much protection the plan still needs,” she said.
How Much Could You Save by Dropping Your Life Insurance Policy?
“It depends on face amount, policy type and issue age,” Mondell said.
Among policies reviewed by Policy Review Center, premiums charged after a term life policy’s fixed-rate period ends commonly run several hundred dollars a month and rise each year, Mondell said. With a whole life policy, choosing reduced paid-up coverage eliminates future premiums in exchange for a smaller death benefit.
He added that the actual policy must be reviewed to determine how much the policyholder would save by canceling.
O’Connell said savings could be modest or substantial but are only one part of the analysis. She said that, as an estate planning attorney, her focus is on the amount of risk the family takes on by giving up the death benefit.
“If the policy no longer supports their goals, reducing or dropping it may be reasonable,” she said. However, if the policy still provides liquidity, family protection or planning flexibility, keeping it may make more sense, she said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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