It’s a common belief that everyone needs life insurance, but if you reach a stage in life when no one else is counting on your income to provide for their needs, your money might be better spent elsewhere.
“Life insurance premiums can be a waste of hard-earned cash if you’re not trying to mitigate a specific risk,” says Brandon D. LaValley, a financial advisor based in Colorado. “Not everybody needs life insurance.”
The main purpose of life insurance is to provide for your dependents if you die unexpectedly. This is especially important for people with young children or spouses who would struggle to make ends meet on their own income. In such cases, if you die, the life insurance takes the place of your income.
While life insurance is a useful financial tool, it isn’t right for everyone, LaValley says. Once you become financially successful, your savings, investments, and home equity may be adequate to provide for your family without the need for a life policy. Setting aside funds to care for your dependents if you die is called “self-insuring.”
“If you’re in a position to self-insure, you may not need to be paying those insurance premiums,” LaValley says.
Life Insurance for Retirees
The need to maintain a life insurance policy typically diminishes as you age. Many retirees find themselves in a position where they can drop their coverage, LaValley adds.
As time passes, home mortgages get paid off and children grow up to become financially independent. At the same time, life insurance prices typically rise, since the risk of dying increases with age. This price increase can be avoided if you buy a permanent life insurance policy, which is designed to keep your payments level over time.
When you become a senior citizen, it makes sense to weigh the costs of having life insurance against the benefits it provides. When you’re 40 and plan to support a household for the next 20 to 30 years, you probably need life insurance, says Mike Davis, an investment advisor based in Tennessee. “However, if you’re retired and financially secure, making increasingly expensive life insurance payments does not always make good financial sense.”
Seniors sometimes use life insurance to create a legacy for a child, a grandchild, or a charity. However, if you don’t have a large cushion of cash to support yourself in your old age, the money you spend on insurance may do more good if it is saved or invested.
Reviewing Your Finances
It’s important that you don’t drop your life insurance before you have carefully reviewed your finances, says life insurance provider Matt Schmidt.
“Many people think they have adequate assets, but until you review all the angles, don’t change a thing with your insurance portfolio,” Schmidt says.
If you drop your coverage and decide to buy a new policy at some future date, “the costs would more than likely be a lot more expensive,” he adds. If there have been significant changes to your health, you may not even qualify for life insurance, Schmidt explains.
Four Important Questions
Here are four questions to consider before you drop your life insurance coverage:
1. Do you have children who have yet to complete their education? College costs continue to climb. Be sure your children would have the means to complete their schooling if the income stream you provide were suddenly cut off.
2. Could your spouse or a domestic partner support themselves if you died? Many spouses are capable of supporting themselves. However, if they’re disabled or unable to earn adequate income, life insurance benefits can be their lifeline.
3. Could your family pay your mortgage payments and other debts if you died? If not, your family could be forced to uproot themselves and sell their home.
4. Are your life insurance needs likely to change? LaValley says it’s important to reassess your life insurance needs whenever you experience a major life event, such as taking on a new mortgage, getting married, having children, divorcing, or changing jobs.
Life Insurance Choices: Term Life vs Whole Life
If you decide that you do need a life insurance policy, you must choose between term life, which covers you for a set time period, and permanent or whole life, which provides coverage as long as you live, if you keep up your payments. Term policies typically are much less expensive, but permanent life builds cash value over time.
Because many of the “big ticket” items we buy life insurance to protect are temporary, term life insurance often is the most appropriate choice, says Jordan M. Jacobs, an investment advisor based in Illinois.
“The mortgage we protect will eventually be paid off,” he says. “The children’s college tuition will eventually be paid. Therefore we ought to cover temporary needs with temporary (term) insurance.”
If you decide to surrender, or “cash out”, a cash-value permanent life policy, you’ll need to consider the possible tax ramifications, says Natalie Cooper, an independent insurance agent in Ohio. If you drop a term life policy, there are no such considerations.
What happens if you do not pay your life insurance premiums? “Term insurance has no value and no long-term financial commitment beyond the next premium payment due,” she says. “If you want it to end, just stop paying for it.”