First, consider the pitfalls & your other options
When you bought life insurance, you set up yourself and your loved ones with financial protection. Not only does it provide your beneficiaries with a payout upon your death that can replace your income and help pay expenses, but it also may be a source of tax-deferred savings for you.
These are benefits that often sit silently in the background until the moment you need them. So, if you're thinking about canceling life insurance, you may want to consider all that you might be losing without it.
Let's look closer at some of the common pitfalls of canceling life insurance—such as future coverage issues and missing out on potential investment growth—as well as some other actions besides canceling to think about.
The bottom line:
Why maintaining life insurance is important
There are two key advantages to having continuous coverage with your life insurance: ongoing financial security for your loved ones and maintaining lower premiums and insurability.
With a life insurance contract in force, your dependents have financial support they can count on if something happens to you. It's money they can use to cover your funeral costs, offset mortgage payments, and continue building the future you planned with them, such as paying for college. Canceling your life insurance creates a gap where the people who depend on you no longer have this kind of financial safety net.
The other upside to keeping your existing life insurance is that you've already proved your insurability. If you cancel your life insurance and decide later that you want it again, you'll have to reapply and go through medical underwriting again. That may not seem like a big deal, but the older you get, the more likely you are to develop health problems. Insurers' approval and rate calculation factor in that your risk of death goes up with age. So if you are approved, your premium likely will be higher than what you have now.
Reasons besides coverage to keep your life insurance
Life insurance can do more than provide protection for your loved ones. It can be a source of tax-deferred savings for you.
Keep these advantages in mind:
- Your cash balance may grow at a fixed rate, a market rate of interest, or you can invest it to earn returns that are linked to the market.
- Because it is tax-deferred, you won't have to pay taxes on your growth until you withdraw the money.
- Additionally, you may be able to
borrow from your cash balance without paying any taxes at all.
If you cancel your life insurance, your cash-value balance will be distributed to you, but only after any surrender charges and other penalties detailed in your contract are deducted. Any growth in the cash value will be included in your taxable income for the year in which you cancel your policy. In addition to losing the tax-deferral advantages, you'll miss out on your cash value's potential investment growth.
3 alternatives to canceling your life insurance
If you have coverage that you think you don't need and are wondering if you should cancel your life insurance, realize that you have options that don't involve walking away from what you've put into it. You may be able to preserve the insurance benefits you want while lowering your premium.
1. Reduce your coverage
Decreasing the amount of your life insurance death benefit is a straightforward way to get a lower premium while keeping some of your coverage in force. You may incur a one-time charge to decrease your death benefit, depending on the contract. The advantage of this is you still have some coverage. However, if you decide you need more coverage in the future, you will have to undergo underwriting to determine approval and rating of a new contract. Also, if you have a cash-value component, it will remain in place and stay tax-deferred.
2. Reduce your premiums
Some types of life insurance already have the flexibility of adjustable premiums built in, such as
3. Convert or exchange your contract
If you have term coverage, you may be able to
- Retain your coverage for life
- Build a savings balance with cash value
- Secure a premium rate that will last
If you already have permanent insurance, you can look into exchanging it for another type that better fits your needs. For example, you may have a whole life contract but need the flexibility of a universal life policy. Replacing a permanent life policy with a different type of permanent policy may be eligible for a
Getting expert life insurance advice can make a difference
Canceling a life insurance contract, reducing your death benefit, reducing your premiums, or converting your policy are all decisions that can have lasting effects for both you and your family. If you know the full extent of your options, you're better equipped to select the one that best fits your needs.
A qualified financial advisor not only knows all the ins and outs of the various types of life insurance contracts, but also can assess your individual circumstances and goals to give you personalized guidance. Without help, it can be difficult to know
It's a good idea to talk through all your options for reducing your premiums and converting or exchanging your life insurance contract. A