Over half of Americans own life insurance. Of those, 68% point to replacing lost wages as their primary motivation for purchasing a policy. As these insurance-carrying Americans begin to retire after age 65, wage replacement may no longer be a priority. This leaves older policyholders with a choice: Is it worth keeping their life insurance in place, or should they consider canceling the insurance they have?
Understand some reasons to consider buying or keeping your life insurance after retirement, when it may make sense to cancel your life insurance, and some points to consider before making the call to cancel.
Why Should You Buy or Keep Your Life Insurance After Retiring?
Before retirement, life insurance is viewed as a source of income replacement. If you were to die unexpectedly, the value of your life insurance policy helps provide a steady source of income for your family while they figure out their next steps.
As a result, some policyholders consider giving up their coverage post-retirement, when their beneficiaries are grown and financially independent. Instead of using life insurance to provide for their family, those 65 and older can rely on investments and other savings. For those without existing life insurance coverage, the cost of buying a new policy may be a deterrent since the price of coverage increases proportionally with age as your mortality risk increases.
However, there are several reasons it may be worth keeping your current policy or purchasing a new one even after retirement.
Build cash value with your permanent policy for living benefits
If you have a permanent policy with a cash value component, you may be able to access living benefits. In effect, cash value in a permanent policy is like a savings account. Premiums you pay are split between your eventual death benefit, any policy fees or charges, and the policy’s cash value. Like a savings account, this cash value accumulates interest over time, and policyholders can borrow against the cash value as needed.
For example, if you have a policy with a $30,000 death benefit and $6,000 in cash value, you may be able to withdraw some or all of that value or take out a loan against the value. In the case of withdrawals, your insurer may allow a set number of withdrawals per year or withdrawals up to a set amount. You can also terminate your permanent policy and access your cash value, but you may pay penalties for this cancellation as outlined in your policyholder’s agreement.
If you borrow against the cash value, interest may be charged on the amount borrowed, and if the loan is not repaid in full before the policyholder’s death, the outstanding amount may be deducted from any remaining cash value. In practice, this means that if you borrow your total cash value of $6,000 but do not pay it back, the death benefit remains at $30,000 but the insurance company will only pay $24,000 to your beneficiaries. The remaining balance comes out of your cash value to make up for the outstanding loan.
Help your family settle your outstanding debts
Almost half of the total debt in 2020 was held by older Americans. In some cases, this is debt accrued over time for necessary expenses, such as home repairs or healthcare costs. For others, it’s money spent helping family members deal with financial challenges. Regardless of the reason for the debt, the outcome is the same: Outstanding debt that older Americans risk leaving behind for their families to settle. Life insurance policies can help offset this debt in several ways.
The first is through the cash value. Policyholders may be able to withdraw some or all of the accrued cash value to pay off debts before they die. Depending on the policy, it may also be possible to access an accelerated death benefit. This benefit is applicable if policyholders have a terminal illness and can show they have 12 months or less to live, and allows access to the full death benefit payout in advance. Finally, families can make use of the death benefit after policyholders have passed to pay down outstanding debts, whether these debts were owned by the policyholder or incurred by other family members.
Assist with your burial and funeral costs
The average cost of a funeral with a viewing and burial was $7,848 in 2021, and this cost can easily climb higher if your family chooses to hold an end-of-life celebration or other gathering in honor of your life.
Keeping or buying life insurance after you turn 65 provides a monetary death benefit that helps offset burial, funeral, and other costs. Given the stress associated with the passing of a loved one, from emotional stress to the challenges of putting a family member’s affairs in order, death benefits help remove additional financial stress and let family members focus on honoring the memory of their loved one.
Provide financial support to your loved ones
The benefits offered by a life insurance policy can also help you provide financial support to loved ones who may need assistance. For example, if you have children who are unable to work due to illness or injury or a spouse who is also retired, your cash value withdrawals and/or the full amount of your death benefit may be used to provide ongoing financial support.
Consider a family that has an adult child with special needs still living at home. From caregivers to medications to assistive technologies, the costs of caring for this family member may be substantial. Since they cannot earn an income, the passing of a parent could create a problematic financial situation. Here, death benefits can help support loved ones until more permanent solutions are found.
Provide financial support to your favorite charities
It’s also possible to support your favorite charities by donating your life insurance policy. The process is straightforward: Name the charity as your beneficiary, and the death benefit goes to the organization when you die.
Choosing to donate death benefits this way offers a monetary advantage since the amount of your benefit is larger than your premiums. In practice, this means that while you could donate $50,000 directly to the charity of your choice, putting that same $50,000 into a life insurance policy and naming the charity as the beneficiary means they could receive double or triple that amount depending on your policy details. You may also choose to name several charities and split your death benefit between them.
When to Cancel Your Life Insurance
There are also situations where you may want to consider canceling your life insurance. For example, if you have substantial savings, retirement income, and investments, and your family has a solid financial plan, paying life insurance premiums may not be worth the cost. In addition, if no one depends on you for financial support and you have enough savings put away for eventual burial expenses, you may not need life insurance after your retirement.
How to Cancel Your Term Life Insurance
If you want to cancel your term life insurance policy, contact your insurance company to notify them of your intent and then stop paying your premiums. Because these policies are only in force for a specific term — such as 10, 20, or 30 years — they do not offer an investment or cash value component. It’s worth noting that you may not get back any premiums you’ve paid into the policy unless you specifically had a return-of-premium rider.
How to Cancel Your Permanent Life Insurance
You can also cancel permanent life insurance. First, contact your insurance provider and let them know you want to cancel. Since these policies come with an investment component, you may receive a check from your provider for the balance of your current investment. The amount of this check depends on how long you have been paying into the policy and how much you owe in fees or penalties for canceling your policy.
Things to Consider Before Canceling Your Life Insurance Policy
If you’re thinking about canceling your life insurance policy after you turn 65 or are wondering if you should purchase a new policy after retiring, there are several things worth considering.
Your insurance options will be limited as you age
The older you get, the more your insurance options are limited. For example, while term life insurance policies may be available to Americans between 60 and 70 years old, those over 70 may not be able to access this type of insurance given their higher risk of dying early in the term.
Other options for insurance as you age include permanent policies, which cover you until death but come with premiums based on your age and risk. You may also consider final expense life insurance. This type of insurance is a lifelong policy with lower premiums since it’s designed specifically to cover funeral costs.
Your insurance options will get more expensive as you age
Insurance companies use risk to inform policy options and costs. The older you get, the higher your risk of dying in the near future. For your insurer, this means a higher risk that you make relatively few premium payments before they have to pay your full death benefit.
As a result, the total cost of your life insurance increases as you age. Depending on your current health and financial situation, the point may come where you’re priced out of the life insurance market.
You may lose significant cash value from your permanent life insurance policy
If you choose to cancel your permanent life insurance policy, you may lose significant cash value. While your policy includes an investment component that generates interest over time, early cancellation fees and administrative costs may lower the amount that you receive. Additionally, while death benefits are not taxable, the cash you receive from canceling your permanent life insurance policy is taxable as income.