WASHINGTON, June 22, 2013 ― A common life insurance myth is that life insurance policies are signed in blood, then etched in stone. That isn’t the case.
It’s actually fairly common for people to cancel their policies for one reason or another. Here are some of the most common reasons for doing so.
Kids are out of the nest
The time has finally come. No matter how long it takes for your youngest to depart and strike off on their own, it can be difficult to come home to an empty nest. But of course, there are plenty of upsides to go along with your children being independent, one of which being that you can consider cancelling your life insurance policy.
Why do you buy term life insurance in the first place? It’s not like health or disability insurance that will directly benefit you should you become hurt or disabled and need to protect your income or medical expenses. Rather, life insurance is designed to offer a financial cushion for your family should you pass away while they still depend on you.
For some people this could be in as little as 20 years, but for most families these days the cord isn’t cut completely well into your children’s adult life. Even after your children are financially independent, it may still be a good idea to hold on to your policy for a type of “grief insurance,” even if the financial need for the policy is gone.
If you bought the policy when you were younger and with limited funds, the time may come when you’ve amassed enough capital through savings and investments that paying for a life insurance policy stops being a good ROI. This could happen anytime in your life – the trick is knowing how much you’ll be able to leave your family should you pass away without life insurance benefits helping to cushion the blow.
Clear of outstanding loans
This is related to financial independence, but might be a bigger focus for those in their 20’s and 30’s who have amassed credit card debt, student loans, mortgages or other forms of debt. It’s becoming more common for people in debt to take out life insurance policies in order to protect their parents or spouses from outstanding debt that would be passed on to them should the debtor die. Once the outstanding debts are paid off, the need for the policy disappears. Of course, by that time their own children might be on the way and a life insurance policy might be needed for a more traditional reason.
You need cash ― NOW
No, this isn’t a reference to those J.G. Wentworth commercials. Your finances can quickly go south, and you can find yourself in dire need to cut costs and get some cash in your pocket immediately. While life insurance should rarely be used as an investment or savings option, if you have had a whole life policy for 10 or 20 years, you may have a significant buildup of cash which you can borrow on a tax free basis, or simply take out the cash. Just remember that there may be tax consequences to a full surrender of the policy’s cash value.
While life insurance policies only work if you do in fact have them active, there are plenty of reasons why you might choose to cancel. In the end it boils down to comfort. If you can still afford the policy and it provides you with a sense of security (even if you don’t need the financial benefits from the policy in full) it could still be a good idea to keep it, or at least negotiate for lower premiums and less benefits.
Liran Hirschkorn is an independent agent representing the best life insurance companies through his company, ChooseTerm. He also specializes in high risk life insurance; helping previously declined applicants get coverage. He started the column, Rest Insured, because he is trying to make life insurance a more accessible topic to everyday Americans.