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When priorities change, do you still need life insurance?

by Joseph Arroyo | Contributor
October 27, 2020

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As we move through life’s seasons, our needs and priorities change. The plans we make and the tools we use to accomplish them change, too. Life insurance is a tool that’s commonly used to protect against loss. However, as you move through life and enter retirement, this protective tool may no longer be needed. In this guide, we’ll review when it might be a good idea to “cash in” your life insurance coverage.

Why is life insurance important?

Graphic of family discussing life insurance

Life insurance is usually all about protection and reducing risk. For most people, what’s being protected is a family’s finances should a breadwinner die early. In this case, life insurance proceeds are used for some or all of these purposes:

  • Replacing income
  • Pay off major debts
  • Provide financial comfort during an emotionally difficult time

Using life insurance for protection is the easiest, most cost-effective way to safeguard against the early death of a breadwinner. Life insurance is also frequently used as a part of estate planning to fund things like college educations and real estate down payment money for your heirs.

For business owners in a partnership or other closely held business, life insurance can provide protection against the loss of a key owner or manager. The life insurance proceeds in this case would allow the business to continue paying expenses and survive the death of an owner.

In all of these cases, though, there can come a time when the protection is no longer needed. When this happens, it may be a good idea to stop paying the premiums for this insurance coverage. You can also use some of the accumulated cash value of your permanent insurance policy to supply other needs.

What are situations when you may no longer need life insurance?

The simple answer is when you no longer need the protection. Or, to be a little more technical, you should consider eliminating your life insurance coverage when it no longer makes sense to pay for the protection.

Specifically related to some of our earlier examples, you should consider reducing or eliminating your life insurance coverage when these are true:

  • You no longer have an income from a job.
  • You have few, or no, debts.
  • You're single or widowed.
  • Your kids are “well-launched” and will not need any kind of support after you pass away.
  • Your estate no longer needs the death benefit from life insurance to accomplish any of your estate planning goals.
  • You no longer own a business, or your business will survive if/when you pass away.

When it comes to your children, you want to know that they’re on a path to success. When you die, their level of living won’t be impacted. For the most part, this means that they are succeeding in career and family life.

In short, if your children won’t be financially impacted by your death, and they don’t need the proceeds from life insurance, then you can consider cashing in your life insurance coverage.

In the same way, if your accumulated savings are sufficient to accomplish all the needs of your estate plan, you should consider re-purposing your life insurance coverage. This means that any assets you intend to pass to your children or grandchildren are paid off. Or, that your retirement and investment savings are sufficient to settle any outstanding debts at your death. Also, be sure that any charitable giving that’s a part of your estate plan can be satisfied without the death benefit proceeds from life insurance.

What should you do with unneeded insurance?

If you’ve identified one or more life insurance policies that are no longer needed, then you should make a plan to change up your coverage. You may well be able to eliminate your life insurance coverage altogether. You can free up significant amounts of money in two ways:

  • No longer paying life insurance premiums
  • Borrowing from, cashing-in or otherwise surrendering your policy

The premiums on a permanent life insurance policy like whole life can be substantial. If you stop paying them, you’ll free up some money in your budget. These kinds of policies also accumulate cash value over time, so if you’ve had the policy for many decades, you could have substantial cash value saved up in the contract.

With permanent life insurance, you can borrow some of the cash values on a tax-advantaged basis. You can pay the loan back over time, but if you don’t pay it off, any death benefit payable is reduced by the amount owed. For this reason, many people never pay the loans back, accepting the reduced death benefit in exchange to the cash infusion. You can use these borrowed funds for any purpose.

You also have the option of completely surrendering your policy and receiving all of the accumulated value in a lump sum. You’ll want to work with your financial professional for this to manage the tax implications and avoid paying any kind of surrender charge.

Use insurance cash or freed-up premiums for living expenses

You should consider using the proceeds from your policy loan or surrender to help with living expenses or needs. This can range from long-term care insurance to dental and medical expenses. The actual mechanics of this can vary, including:

  • Purchasing a new long-term care (LTC) policy
  • Paying premiums on an existing LTC policy
  • Saving the money to help pay deductibles, co-payments and co-insurance under your Medicare or retiree health insurance
  • Paying for overdue or expensive dental work like implants or root canals

Use insurance cash or freed-up premiums for your retirement lifestyle

If you don’t need your freed-up life insurance money (both cash values, and premium payments) you can use these funds to help you live the kind of lifestyle you desire in retirement. For many people, traveling is a high priority in retirement.

Also related to your lifestyle, you can make any needed upgrades to your house to make it appropriate for “aging in place.” As you age you can expect to experience at least some decline in your physical abilities. To avoid having to move into a health care facility, you may want to make upgrades to your house with an eye to:

  • Increasing mobility (think lifts, wheelchair accessibility, etc.)
  • Increasing safety (showers/baths)
  • Remodeling or adding a room to accommodate a live-in family member or caretaker

Besides these, you could use your life insurance money to pursue other dreams like buying a boat, kayaks or other recreational equipment. The point would be to use some of the extra money you freed-up from old life insurance policies to accomplish some of your lifestyle goals in retirement.

In terms of your final expenses, another option might be to fund an irrevocable funeral trust, which protects a limited amount of cash assets from creditors and Medicaid spend down concerns.

Check with a financial professional first

Before surrendering, borrowing or otherwise changing your life insurance coverage, you’ll want to make a careful analysis to ensure you can forgo the coverage. You should run this decision by a financial professional. They can run various calculations for you to show you the potential consequences of eliminating some or all of your life insurance coverage.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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