When should you stop buying life insurance?

Many of us do not need life insurance any more than we do home insurance or auto insurance.

If you no longer own a home, it makes no sense to keep the homeowner’s insurance policy. If you no longer drive, you can do without auto insurance. 

The same logic applies to life insurance. If all the financial obligations that your life insurance policy covers have passed, then coverage may not be necessary.

Keep reading to find out when you need life insurance and when you do not. 

Who needs life insurance?

When should I buy life insurance? This is a question that many people ask.

If someone is financially dependent on you or will inherit your debts, it is a good idea to consider getting life insurance. The amount of coverage you need is based by your financial liabilities and personal circumstances. Someone with young children and a large mortgage debt would need more protection than someone who only wants to cover their final expenses.

Life insurance can be a valuable financial tool for the majority of people. If you fall into any of the following categories, you should consider getting coverage:

You are single with debts that others will inherit

Buying life insurance after graduating from college may not appear to be a priority. However, if you have a private student loan that has been co-signed by a parent, not having it could be a mistake.

All federal student loans are forgiven when the borrower passes away, but a private student loan that is co-signed by someone might not. If something bad happens to you, your co-signer may be required to repay the loan. Taking out a life insurance policy and naming the co-signer as the beneficiary ensures that your death has no financial impact on others.

In this case, term life insurance is a good option because it provides coverage for only as long as you need it and is very affordable. The premium rate for young and healthy applicants could be as low as a cup of coffee per day!

You are a new parents or parent of minors

You need life insurance whether you are expecting your first child or are a proud parent of a young child. If something were to happen to you, the payout would keep your family afloat and help pay for large expenses down the road, such as college tuition.

Term life insurance is generally a better choice for parents because it is pure insurance and much less expensive. Consider a plan with a 20- or 30-year term to provide protection while your children are most reliant on your income. Parents with a special-needs child, however, may need permanent life insurance. Although it is more expensive, it ensures that your beneficiary receives the death benefit.

You are a couples without kids

Life insurance is a no-brainer for parents: if you pass away unexpectedly, the proceeds would support your dependents in your absence.

But what about childless couples? Do they both require life insurance? They do on occasion.

If you and your spouse both work and your financial planning is based on your combined income, you should both have life insurance. Otherwise, the untimely death of one partner may force the other to make drastic – and uncomfortable – lifestyle changes.

You want to leave a financial legacy

Life insurance is more than an income replacement tool. It can also help you pass on money to a closed relative or a charity after your death. A permanent life insurance plan is a better option than term life here because the payout is guaranteed, provided you pay the premiums.   

Business partners and owners

When you run a business, your family is not only one who depends on you. Your business partners and employees also depend on you financially. Life insurance can help you secure your family’s future and ensure smooth transition of the business after your death. In some instances, you may also need life insurance to qualify for a business loan. 

You have a large or complex estate

For someone with a large or complex estate, life insurance is an essential estate planning tool. It can help to offset estate tax, probate costs, and unpaid debts, all of which can reduce the amount of inheritance you want to leave behind. By purchasing a life insurance policy, you can ensure that all or a portion of your estate is distributed to your heirs.

Life insurance can also assist you in dividing the estate in an equitable and fair manner (estate equalization). When all assets are not divisible, it can be difficult to distribute an estate equitably. Assume you own a $8 million company in which only one of your two children is actively involved. You can pass the family business to that child and bequeath the other child an equivalent value from your life insurance policy.

Who does not need life insurance?

If you are single and do not have any debt that others will inherit, you do not need life insurance. You also do not need life insurance if your children are financially independent, mortgage is paid off, and retirement is funded. 

At what age do you no longer need life insurance?

You can safely let your life insurance lapse once you outlive your need for life insurance. Let's say you purchased life insurance two decades back to provide your family with a safety net against life’s what-ifs.

Now that your children are self-sufficient adults and you have accumulated enough income streams and funds to independently take care of yourself, cancelling your life insurance may be a good decision.  

What happens when your life insurance policy lapses?

The life insurance coverage ends when your policy expires. If you pass away afterwards, the insurance company is not obliged to pay a death benefit. 

If you have a term life insurance plan and you cancel it, you will not receive any money. That is because these policies do not accumulate cash value. 

When you cancel a permanent policy with cash value, you will receive the net cash value. It is equivalent to your total cash value minus any surrender fees and outstanding loans. 

A single missed payment, on the other hand, will not automatically void your life insurance contract. All policies include a grace period during which the policyholder can pay the premium and reinstate the policy.

Typically, the grace period is 30 days, but since COVID-19, many insurers have increased it to 60 or even 90 days. If you pay the premium before the end of the period, your coverage will continue. If you pass during this time without paying, the insurer will issue cash benefit, minus the amount you owe.

If you do not pay within the grace period, your coverage will lapse. If you later realize you still require life insurance, you can request that the policy be reinstated.

Most life insurers allow policyholders to reinstate a lapsed policy within two or three years. But it is better to submit your application as quickly as possible. If you apply within a month of the lapse, you will not have to submit proof of good health. After that, you will have to answer health-related questions or even take a medical exam to show that you are not too risky to insure.  

When you reinstate a policy, your premium rate may go up. However, the increase is due to your current health, not just your age. That is why reinstating a lapsed policy is usually cheaper than buying a new one. You will have to pay the missed premiums with interest, though. 

What are the consequences of not having life insurance?

People buy life insurance to secure the financial future of those who depend on them. So the consequences of not having life insurance cover will be borne by your dependents. Without it, your family may struggle financially after you are gone. 

Can you get your money back if you cancel your life insurance policy?

Whether or not you will get your money back upon canceling a policy depends on when you do it. If you cancel a term policy within 30 days, the insurance provider is required by law to refund the entire premium amount paid by you. After 30 days, some providers may still issue a refund, but you will likely not receive the full amount.

Conclusion

Life insurance needs are not set in stone. They will change over time, as your life changes. And you may well come to a point where you no longer need life insurance. Knowing when to cancel coverage is just as important as knowing when to buy life insurance. Otherwise, you could be paying hundreds of dollars a year for something you have little use for. Generally speaking, if you have no dependents or debts that can get passed on to others, you can safely let your life insurance policy lapse. 

Not sure if right now is the right time for canceling life insurance? Then let us help you. Drop us a line or schedule a call to have our advisor you.