Life insurance, at least most forms of it, tend to be needed less and less as you age. Everyday people let their life insurance policy lapse. Either they don’t need what they needed before or it’s too difficult to pay for, there’s a number of very understandable reasons people would leave their life insurance policy and let it expire.
There’s also a number of reasons you shouldn’t do this, and quite a few ways you can do it better if you no longer need life insurance.
#1: You May Still Actually Need Life Insurance
Life insurance is largely in place to protect loved ones against the effects of debt, income loss, and devastating final affairs following a death. And while debt and the reliability of an income tend to go away once we retire, our need to cover final affairs hasn’t.
And to you, this is largely a factor of “Have you Saved Enough?” vs, “Can you Pay For Your Lifestyle?”. Personal savings can go a long way in providing for final affairs, however they do have three serious shortcomings if you’re saving money for a funeral:
- Life Insurance is still paid tax-free. Your savings, pass down, can be taxed. So you’re losing some of those savings;
- You may not be able to save enough in the amount of time you have (or may not have);
- Even if you do save up enough, you may be taking out of your quality of life because you need to save more, and you need to save it faster.
You still may not need life insurance if other circumstances are working in your favor. However, you still shouldn’t let a policy lapse because…
#2: Many Plans offer Paid-Up Insurance
A feature common under many whole life insurance plans is the option for paid-up life insurance. What that means is essentially when you stop paying premiums on your policy, you still retain a portion of coverage (dependent on how much you paid) that remains in force for the rest of your life.
So how can this be an issue if this feature explicitly allows you to let your policy lapse? Hand in hand with letting a policy lapse is letting a policy go forgotten. This can become a considerable issue for your family if, after your death, they can’t even find a policy in your name or – worse yet – didn’t even know it existed.
So rather than forget about your policy, choose to let it lapse in a way that lets you keep records, keep up to date with your insurer, and maintain your policy for future generations. If you let a policy lapse, you should let it lapse in a way that’s still useful.
#3: A Lot of Plans Can Pay Out A Cash Value
One thing that doesn’t make a lot of sense is that people let their policies lapse because of a misplaced feeling that they’re paid into something for no foreseeable returns. And while term life insurance is something you pay into until it expires, whole life insurance is paid into until you die. It’s hard to argue with the sunk-cost fallacy when you’re paid in a policy that much.
However many permanent life insurance policies have a feature built into it that addresses this very problem. With the exception of Term to Age 100 plans, almost all whole life insurance plans offer a cash value, aka. Cash surrender value.
How this cash value works is largely dependent on the plan, from letting you borrow from the policy to letting you “control” your insurance premiums, but the vast majority offer a cash settlement if you surrender your policy.
If you must let your policy lapse, do so in a way that lets you claim this value. If you let your policy lapse without collecting the cash value – you could be out of luck.
#4: Once You Stop, It’s Hard to Restart
If you’ve owned a life insurance policy for a number of years, you’re paying the rate that you were paying when you started. Now consider everything, not just age, that’s changed since that point.
If you’ve had a health issue arise in recent years, that will affect your premiums. If you’re not working, that may affect your eligibility for certain plans. If someone in your family has died due to a previously undiagnosed congenital issue, that will come up in your application.
Overall, starting life insurance after you’ve already stopped becomes hugely difficult, meaning that choosing to let your policy lapse is a decision that you cannot make lightly. If you still have doubt as to whether you still need life insurance, or you’re looking to restart: we can help you find the right solution.
Stopping a policy shouldn’t just be a matter of cost or convenience, but rather a logical conclusion when you ask yourself the following questions:
- Do I still need to cover costs in my life so my family doesn’t have to?
- Do I benefit from stopping payments?
- Is my plan accommodating my needs at my current age?
- In the future – will I still need protection?