Is it ever a good idea to cancel or terminate a life insurance policy?
My wife and I are ready to retire debt-free. When does it make sense not to have life insurance? Or, should you always have life insurance?
The way I think about life insurance is that fundamentally, it serves the purpose of income replacement. Therefore, you only need coverage for as long as you and your spouse are working. I see a lot of people who have been oversold on their life insurance policies and have coverage until they are in the 80s or beyond, and in my financial planning world the only person who benefits from this scenario is the agent who sold the policy and received a higher commission for a longer term. Your retirement plan should include income streams such as Social Security, pensions, and portfolio withdrawals that will preserve your lifestyle for as long as you need.
Some sophisticated estate planning techniques use life insurance policies to reduce the size of the taxable estate or distribute wealth to beneficiaries more effectively, but these situations are relatively rare. Nor is life insurance a good investment vehicle, as many "cash value" policies such as whole or variable life claim to be. The raft of fees associated with cash value policies often negate any benefits they may have, and professional investment management of this same money often yields higher returns. Without seeing the details of your policies and knowing your personal financial situation, it does seem like you should consider cancelling any policy you may have!
Life insurance is intended to provide income replacement for those who are dependent on your income. If you are retiring, you will no longer have income from your salary, so you may not have a need for life insurance unless you have a life-only pension payment. Other reasons to maintain life insurance would be for final expenses, debt elimination, and education funding. If you have sufficient assets to cover your final expenses, you have no debt, and your kids/grandkids are not dependent on you for education expenses, then you may not need life insurance any longer.
This is a great question and one we get frequently because we work primarily with those getting ready to retire or recently retired. You are right to be asking the question because term life insurance should only be carried for as long as you need it, barring major health concerns of course. My recommendation would be to spend a few minutes generating an analysis somewhere such as:
This will allow you to thoroughly consider what financial needs would occur if you were to pass away. If the calculator agrees that you don't need the insurance, and if you're in decent health, then it may make sense to cancel the policy and put your premium money to better use.
Best of success!
It sounds like you are financially set. No debt. You have enough assets and income to cover both you and your wife throughout both your lifetimes. Life insurance was probably bought to both replace earned income and pay off creditors. So, it is no longer needed for that purpose.
How about making your favorite charity the beneficiary? Many people have a favorite religious, political, medical, educational, or other organization with a higher purpose. Perhaps your experience at a university helped you launch your career. Maybe health-related research resulted in a medical treatment that benefited a loved one. Perhaps your local church became a second home for your kids growing up.
All these organizations need a constant influx of money. Many supporters of them use their life insurance policies for that reason. Their immediate family may not need the benefit, but that charity always will. You can simply assign the charity as the beneficiary of the policy, and make sure you keep it in force. When your time comes, you will be making a very significant contribution to a good cause.
There are definitely individuals and families that may reach a point where life insurance is no longer required or necessary. However, this is a very personal decision and in my experience, is based entirely on a discussion of cash flow. If you've already retired and your cash flow covers all of your expenses both now and those anticipated in the future, there is a possibility that the need for life insurance has expired. This is not a statement indicating that you should cancel the insurance, but you can make a calculation that will help you determine whether in fact it still "needed". Assuming you've covered yourself with long-term care insurance and your cash flow is adequate to cover both current and anticipated expenses in the future, you might want to hire a fee-only financial advisor on a project basis to help you determine if the insurance is needed for the future. Nobody in their right mind is going to tell you to "cancel" your policy. What they may do is tell you that in their professional judgment, the policy is no longer required to meet your needs. It will then be up to you to determine whether in fact to cancel the policy. Let me carry this one step further. Assuming you are still paying premiums, whether it's term insurance or cash value insurance, you might want to ask your children whether they'd like to keep the policy in force by picking up the premiums at their expense. If they agree and actually want to keep the policy in force, he would name them the beneficiary rather than your spouse and you would have no further financial responsibility for the maintenance of the policy. Again, I think some professional help would be worthwhile. I hope this helps and good luck.