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Find out if surrendering your life insurance policy is the right move by considering needs, wants, and costs.
Key points
- Consider your financial needs for income replacement and estate liquidity.
- Think about your financial wants, such as goal funding and legacy gifting.
- Understand the full picture when it comes to the cost of your policy.
There are many good reasons to rethink your life insurance policy. Maybe you’ve gone through a lifestyle change. Maybe you no longer have dependents. Maybe the premiums are just too high. Just over half of all Americans have a life insurance policy, and if you’re one of them, you should answer these three questions when deciding whether to stay insured.
Key Points:
- Consider your financial needs for income replacement and estate liquidity.
- Think about your financial wants, such as goal funding and legacy gifting.
- Understand the full picture when it comes to the cost of your policy.
What is your need for life insurance?
As a tool, life insurance can help to bridge a monetary gap in some financial plans. Certain financial situations demand additional cash in the event of an untimely death, such as income replacement for dependents and estate liquidity needs. It’s important to note that temporary needs may be better served by term life insurance, while whole life insurance may be better for permanent needs.
One of the scariest financial realities of an early death is the care of those we leave behind. When considering the need for life insurance, think about those in your life who are dependent on your financial resources. Are there minor children or aging adults who are counting on your financial support? If so, the loss of that support could be a devastating blow that may be softened by a life insurance death benefit.
As any estate executor will tell you, distributing the assets of a decedent is not easy or cheap. In the case of estate planning, a life insurance policy can be especially beneficial for those with few liquid assets. When real property or business ownership make up a large part of one’s estate, it can be difficult to extract administrative fees associated with property distribution. But property and business owners aren’t the only ones who can benefit from a life insurance policy. Those wishing to avoid burdening their heirs with estate-related costs may consider having a large enough death benefit to cover the administrative fees of asset disposition.
What is your want for life insurance?
Another way to view life insurance is through the lens of achieving certain wants, such as goal funding or legacy gifting. The leverage a life insurance policy provides can help the insured leave a lasting impact after they’ve departed.
One opportunity with life insurance is goal funding, where the decedent assigns their death benefit with the intent of reaching a certain financial goal. A common example is funding a college education for a minor child, where the funding gap toward a post-secondary degree can be filled with a death benefit. In this way, the insured can ensure that goals they would have completed in life are still achieved in the event of a premature death.
Legacy gifting is another possible use of life insurance. The insured may assign their death benefit to a foundation or organization of their choice, leaving a legacy in line with their wishes. Often, policyholders will directly name charitable, governmental, or religious organizations as their beneficiaries.
How much does your coverage cost?
For life insurance, the price of coverage is known as the premium. And that premium tends to be lower for term versus whole life insurance policies.
As a rule of thumb, term insurance is pure insurance, without the ability to accumulate cash value. This cash value component of a whole life policy can make things complicated — and expensive. Whole life premiums are typically higher because they include the purchase of permanent life insurance, the funding of a cash value account, and administrative fees. And for those within the first 15 years of a whole life insurance policy, watch out! Surrender charges can significantly reduce the cash value of a surrendered policy.
When in doubt, bring in a professional
A life insurance policy can be an invaluable tool in the right financial plan. But how do you know if this coverage is right for you? One way to find out is by talking to a professional.
Unfortunately, many “professionals” are life insurance salespeople in disguise. Ask these questions to see if your professional is working for you or for a commission:
- What are your credentials? Try to work with a CFP® professional. These certificants are held to a fiduciary standard and a standard of care above others in the industry.
- Is your company fee-only or fee-based? Fee-only advisors are paid directly by their clients for financial services, while fee-based advisors may sell commission-earning products.
- How are you paid? Whether an advisor is paid a salary based on assets under management, or based on commissions earned, can tell you a lot about whose best interest they’re working in.
Thinking about the financial circumstances of your death can be an incredibly difficult thing to do. But with the help of a qualified advisor, and by considering your needs, wants, and the costs of insurance, you can be certain you are adequately insured should the worst come to pass.