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However, it’s probably not the best choice in the log run. In addition, a portion of each premium goes toward your policy's cash value, which accumulates over time. Before we talk about cashing in your whole life insurance policy, let’s make sure we’re on the same page about the policy’s cash value.Most whole life policies come with two different portions. One is the death benefit. About 4 percent of whole life policies per year lapse, according to a study of 47 million policies issued by 20 insurers over more than two decades, by … Whole life insurance accumulates cash value. If those you love don’t need protection, then you don’t need life insurance. If your case is that you've found a cheaper whole life policy, drop the old policy as soon as the new policy becomes effective. You access this money by taking a loan from your policy. That meant that if you died without life insurance, the only option to pay for your kids’ education was student loans, and your wife’s retirement would have suffered a tremendous setback, too. I currently have $500,000 worth of life insurance, but once the kids moved out and I fully funded my retirement income strategy, the half-million amount seems excessive. The death of a young parent (or any loved one for that matter) is not a blip on the financial radar. Find your state and learn more! People regularly cancel or change their life insurance coverage, but there are more factors to consider when canceling a whole life insurance policy than when canceling a term policy. However, since they are tied to a Whole Life insurance policy, these dividends are technically considered to be a refund of overpaid premiums by the mutual insurance company. Life Insurance by State. This means that it accrues a cash value in a separate account to the death benefit. If you're horrible at money management but can swing your premiums for the long haul, then a whole life policy could serve as a means of forced savings, since you'll eventually have the option to tap your policy's cash value. An Investopedia 100 advisor, Kim D. H. Butler, is an industry veteran and recognized authority on whole life insurance.She has been on the forefront of alerting consumers to the inherent problems with universal life insurance—before it was headline news in the Wall Street Journal and New York Times!Kim has also written two recognized books on the topic: Live Your Life Insurance and … The life insurance is a pittance because we both have the ultra-preferred rates $550/year total each for $1.4M total each. And that's solid advice. That means if you dump your policy at the 12-year-mark, you're out of luck. Rather than canceling your whole lie insurance policy if the going gets tough, you have several options to reduce payments or stop paying altogether, and still keep everything you love. That is one of the myths of cash-value life insurance — that it is an investment. If your policy is still in the allowable conversion period, you’ll be able to simply switch a portion of your coverage to a permanent plan without the need for medically re-qualifying. Some of the factors that go into determining the value of your life policy include: Face value – The amount of death benefit that the policy will pay is always a substantial factor in determining the value of a life policy. Whole life insurance inherently has the flexibility to stick with you while accommodating your life changes. Have a question about money for Pete the Planner? There seems to be a … If you make $40,000 a year, you should have $400,000 to $500,000 in term life insurance. As mentioned above, whole life insurance can be a means of forcing yourself to accumulate some savings, and there's something to be said for having lifelong coverage. Depending on your current quality of health, that might not be great. Once you have decided you are going to cancel it, there is no point in waiting a few more years until it breaks even or gives you a certain return you will feel good about. You likely don’t need to keep paying for a $500,000 term policy in perpetuity. And while tapping retirement funds early to cover other financial needs generally isn't an ideal choice, you do have some flexibility when it comes to those accounts. It costs about one twentieth of what whole life costs. But it could make sense to secure a more modest amount of permanent coverage, if a long and drawn-out final chapter could compromise your wife’s financial security. Can I Cash In A Whole Life Insurance Policy? In some cases, if your health has changed significantly, you may be asked to pay more premium for your smaller permanent policy than your bigger term policy. — Michael from Houston. The latter is the amount of money your beneficiaries will be entitled to upon your passing, and it's an entirely separate part of the equation. If you turn around and invest that sum steadily in stocks, you should have little trouble generating an average annual 7% return -- that's actually a few percentage points below the stock market's average. Whole life insurance works out best when you hold it until death. Proponents of whole life insurance -- particularly, those who sell it -- will tell you it's a good purchase because it's not just insurance: It's an investment. In her somewhat limited spare time, she enjoys playing in nature, watching hockey, and curling up with a good book. Peter Dunn is an author, speaker and radio host, and he has a free podcast: "Million Dollar Plan." But aside from that one saving grace, whole life insurance is generally not your best bet if your financial goals are to secure affordable life insurance and to invest your money for growth. More:Pete the Planner: Don't be fooled by false financial adviser claims about who makes money, More:College graduates: Here's how to set yourself up for a life of financial success on Day 1, More:Pete the Planner: Health is a factor when doing the math on Social Security enrollment. For example, if you purchased the plan to cover a 30 year mortgage and paid it off early and have no further need for the protection you should drop it. This is money you can use while you are still alive. It’s important to think through the reasons why a person needs life insurance. Her goal is to make financial topics interesting (because they often aren't) and she believes that a healthy dose of sarcasm never hurt anyone. Grab some permanent coverage and be glad that you’ve been there to celebrate your family’s monumental moments. When they're younger, your children are relying on your income, and your spouse likely is as well. As its name may suggest, whole life insurance is life insurance intended to stay with you your whole life. Your body has gotten older. If you’re confident you don’t need to continue your current coverage at it’s current face amount, and some of the other strategic reasons to maintain significant life insurance coverage don't resonate with you, consider converting your $500,000 term policy into a smaller permanent policy. Q. Even if you were to invest your $2,500 annual savings more conservatively, at a 3% average annual return, you'd be sitting on about $119,000. We don’t really know how our last chapter will be written. You can withdraw IRA funds to buy a home, for example, and you can borrow from your 401(k) if you must. By the time you're in your mid-60s or older, you're probably headed for retirement, or retired already. Canceling your whole life, is definitely and option. They manufacture all sorts of reasons why life insurance isn’t right for them and (all too commonly) ignore the obligation altogether. Looking at your situation, I think you’re potentially in a position to reduce the amount of coverage you have, but you still need some coverage. That’s where your question gets a bit hairy. However, it’s possible you won’t be able to convert and keep your old health rating, which means you’ll need to medically qualify for the new amount of coverage. But not all life insurance is created equal, and if you're in the market for a policy, it pays to consider term life insurance rather than whole life. Market data powered by FactSet and Web Financial Group. However, the prospective return characteristics of life insurance policies are different when accounting for the death benefit. And if you pass away, leaving a spouse behind, he or she can collect Social Security survivors benefits which, spread out over time, might easily mimic the death benefit your life insurance would pay out. But most important is this: Life insurance is at core intended to replace the financial support you provide to your loved ones in the event that you aren't there to do it yourself. Most people need it but don’t want it. Pete the Planner: Don't be fooled by false financial adviser claims about who makes money, College graduates: Here's how to set yourself up for a life of financial success on Day 1, Pete the Planner: Health is a factor when doing the math on Social Security enrollment, Your California Privacy Rights/Privacy Policy. The easy answer to drop your term life insurance is when you goal for that plan is met. Whole life insurance is much more expensive than term life insurance – often four times as expensive for the same death benefit – because the premiums are going toward: the accumulating cash value, fees and charges (more on this later), and the death benefit (i.e., the life insurance). This is what makes universal life insurance policies so much more expensive than term policies. However, whole life policies are substantially more expensive than term policies, and the rate of returns on the investment portion of those premiums is often low. Now, we are at the point where we could drop the life insurance and reduce the disability. If You're Going To Cancel Whole Life Insurance, Do It Now. It barely costs anything. I’ve been there to help pick up the pieces for those with life insurance and for those without life insurance. We don’t know if it will be long and drawn out, short and quick, expensive or cheap. So yes, a whole life insurance policy can be cashed in. It's that cash value that gives whole life insurance its appeal. It’s term insurance, and it's about to increase in price. Email him at AskPete@petetheplanner.com. Should I keep it, just in case? Dear Pete: I’m 57 years old, my kids are grown and out of the house, and I don’t really feel like I need all the life insurance I once carried. Though the latter can be a reasonable choice for some people, for most, signing up for whole life insurance is a move you're more likely to regret. This is a set amount that you get upon death, or, in some cases, you can get in case of a terminal diagnosis.The second portion of this policy is the cash value. First, understand that for any given death benefit, your monthly premium for a whole life policy will be much, much higher than for a term life policy. Don’t be so excited to get rid of life insurance that you ignore some level of need you may still have. My wife and I have had a 20-year pay life insurance plan with London Life for several years. For example, a policy with a face amount of $1 million will be much more valuable than one with a face amount of $100,000. However, the disability insurance is a sizable investment each year. If that happens, you may have no choice but to drop your coverage, leaving your loved ones vulnerable. Dave's ANSWER: You should close it once you have term life insurance in place. You'll often hear that if you have people in your life who depend on you financially, or who stand to suffer financially in the event of your untimely passing, then having a life insurance policy is a must. Term life insurance, as the name implies, covers you for a specific period of time -- its term. The most common type of life insurance that gets dropped is term insurance. Most of the time the primary concern is the loss of income. But if you sign up for a 30-year term policy in your mid-30s or later and you're still alive and kicking by the time your policy expires, at that point, you'll be eligible for Social Security and penalty-free IRA or 401(k) withdrawals. During that time, you pay your premiums (monthly, quarterly, or annually, depending on the policy you have), and in exchange, your heirs are guaranteed a predetermined death benefit should you pass away. Let's start by laying out the key differences between a term life and a whole life policy. Your choices are a 30-year term life policy with an annual premium of $500 versus a whole life policy with an annual premium of $3,000 for the same death benefit. For example, say you're a 40-year-old man looking for coverage so as not to leave your wife and kids in the lurch in the event you pass away unexpectedly. I’ve already addressed survivor needs and goal completion. If you retire and don’t have issues paying bills or making ends meet you likely don’t need life insurance. Darlene’s instincts are correct. The bottom line is this: If you have the means to pay hefty whole life premiums over time, you have the means to put those same funds into tax-advantaged retirement plans and invest them the way you want to. Life insurance is meant to help your family accomplish your financial goals, whether you’re there or not. One nice feature about life insurance loans is that you do not need to pay them back. Keep that up, and you'll have just over $236,000 in 30 years. It’s just my wife and me now, and we have plenty of money set aside for retirement. If the term is met and the rates increased drastically you may want to drop it and apply for another policy if your health is still good. And as long as you'd invested that money in an IRA or 401(k), you'd get the same tax-deferred growth that a whole life policy promises. © 2020 USA TODAY, a division of Gannett Satellite Information Network, LLC. Option 1: Cancel Whole Life Insurance. That greatly increases the odds that you won't be able to afford your premiums at some point down the line. Whole life dividends are therefore considered a tax-free return of premium up to the extent of … "Often [whole life insurance policies] are dropped when people fail to see the 'gains' materialize that they thought would come out of them. Term life is a "pure" life insurance policy: You pay monthly premiums over a … Sure, that's a possibility. Life insurance is intended for is the financial loss or hardships that someone might experience should your life end. That’s a good thing. All of these strategies have varying degrees of complications, but it’s the end-of-life expenses that somehow always get overlooked. 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