Dropping life insurance coverage may seem risky, but there are times when it makes good financial sense.
The main purpose of life insurance is to support dependents when you die. If others no longer rely on your income, the money you spend on premiums could be put to better use — perhaps spent on day-to-day living expenses or saved for retirement.
If you keep a policy that you no longer need, you’re wasting money.
Following are circumstances in which you might be better off without life insurance.
1. You’ve found a better deal
The life insurance industry is competitive, so it pays to comparison shop. Sites like Policygenius offer one-stop shopping.
To protect your dependents, don’t cancel your old policy until you’re certain that the new one has taken effect.
Also, check the financial strength of any insurer you do business with. The Insurance Information Institute’s website explains how to contact financial rating agencies and what you should know about their ratings of insurance companies. A less-expensive policy won’t be a good deal if there’s no payout when you die.
2. It’s time to cash out your whole life policy
There are two types of life insurance, term and whole life.
Term life insurance lasts for a fixed period, but it is cheaper.
Whole life insurance provides coverage for your entire life but is more expensive. It also includes a savings component that grows over time. You can borrow against, or cash in, that savings.
If you are approaching retirement and have a whole life insurance policy that you purchased when you were younger, your best financial bet may be to cash it in.
First, however, find out about any surrender penalty or policy terms that may apply and consider the effect on your income taxes. Money Talks News founder Stacy Johnson details this process in “Should I Drop My Life Insurance Policy?”
3. You’ve gone through a divorce
When people cut marital ties, they often need to make new financial plans. If you purchased a life insurance policy to provide security for a spouse, there may be no reason to keep it once the marriage is dissolved.
If you decide to keep your life policy after a divorce and remarriage, consider making beneficiary changes to make sure the right spouse can collect upon your death.
4. You need long-term care insurance
At some point, you may decide that the money you’re spending on life insurance would be better spent on a long-term care insurance policy.
This type of policy helps pay for nursing homes, assisted-living facilities or home health care if you need help with daily tasks, such as eating and dressing. These expenses typically aren’t covered by health insurance.
If you plan to buy a long-term care insurance policy, consider doing so before you develop age-related health problems that could increase the cost of the policy.
If you need help deciding whether you need long-term care coverage, consider seeking advice from a fee-only financial planner who won’t steer you toward an insurance company that he or she works with.
5. Your children are grown
Typically, people have the greatest need for life insurance from their 20s or 30s through their 50s or 60s — when financial demands often are the greatest. In addition to raising children, people in this age range often are paying off mortgages and setting aside money for their children’s college educations.
If a family’s main wage earner dies at this stage of life without life insurance, the home can be lost and any plans to send children to college may be canceled or postponed.
However, as people age into their 50s and beyond, children grow up, and associated financial pressures tend to diminish or even disappear.
6. You’re self-insured
Some people are so financially secure that they don’t need a life insurance policy.
If you’re able to set aside enough money to provide for your dependents after your death, you have no need for a life insurance policy. This is called self-insuring.
Before you decide to self-insure, make sure you truly have enough money in reserve to pay for your dependents’ needs.
If you have children, you’ll need to set aside enough money to support them until they complete their educations and become financially self-sufficient. If you have a spouse, he or she will need enough money to maintain a home and lifestyle after you’re gone.
7. You need a smaller policy
The amount of life insurance coverage you need can diminish over time. If your children are grown and your mortgage is paid off, perhaps you only need a small payout to cover final expenses when you die.
If you’re considering dropping a life insurance policy for a smaller one, use a free online life insurance calculator to help you determine the amount of coverage you need.