Does continuing to pay premiums on life insurance policies make sense when retired or facing retirement? With children grown and other pressures for income, the premium payment is a target for budgeting.
Is this wise? Like so many other question the answer is “It Depends!”
· First, is the insurance a “Term” policy (with no cash value build up)? Or is it a “Permanent” policy with a cash surrender value?
· Even if former needs for insurance no longer exist, are there still needs (perhaps to care for a surviving spouse or other dependent) where keeping the death benefit is important?
· There may be value in the life insurance where, even if you do not want to continue to pay premiums, other ways of reducing that also preserve values you paid for all these years.
Even a simple Term Policy may have useful “conversion” features. They may be valuable enough to justify continuing the premiums.
A permanent policy continues to build its cash surrender value if premiums continue. While policy expenses reduce the cash buildup, the overall growth rates might still be worthwhile; especially if the policy is one of long-standing.
Stopping premiums allows the policy to lapse. That means the insurance company keeps everything you put into the policy up to that time; and does not have to pay a death benefit. That is a major windfall of the type that many insurance companies often enjoy. You and your family get nothing. And, if you have any existing policy loans, there might be “phantom” taxable income to pay tax on that you did not expect.
A better way is to do some proper planning.
Even though grown children may no longer depend on you, the death benefit may be important to a surviving spouse. Will they have enough income when you no longer bring one in; from work, from social security, from a pension? You may have other dependents whose needs you should also consider.
There are some benefits about keeping your policy that affect a good answer.
Tax-free retirement income might be available with life insurance cash surrender values. Any retiree will like that. Stopping the premiums saves future outlays, but potentially at the expense of a valuable income source when people need it most. Many times this income source could last the rest of the retiree’s life; and that of a spouse. Added to social security, a more comfortable retirement can happen.
Life settlement, selling the policy to a third-party, can raise cash, and stop your premium payments. But the new owner gets the death benefit. That makes no sense unless the price paid for the policy is more than the cash the policy makes available to the insured. Also, it seems the market for “Life Settlement” transactions has limited use. It is mainly for policyholders close to the end of life from advanced age or illness. So, likely Life Settlement does not offer a “checklist” item for exiting a policy contract.
What to Do?
Have your policy evaluated by a qualified life insurance professional. Find people with good reputations no matter what their profession. But, make sure they are expert in what you are asking them about. Not every financial person understands the internal workings of life insurance contracts and value buildup.
Can you reduce or end premiums and still keep policy values? Yes. For example, the retiree might use the cash surrender value to convert to a reduced paid up whole life policy. While this creates a lesser death benefit for the family; the values you build up are not wasted and your premiums stop too.
Newer policies offer values the retiree may want. For example, some life insurance contracts offer benefits to pay for Long-Term care needs. An excellent company offers the following, assuming the retiree is insurable. Do a tax free exchange of an existing policy (like a real estate like kind exchange) into a single premium policy. It is liquid, pays 3% a year, provides a decent death benefit; and use of one of the better long-term care policies in the industry.
There are many more examples.
Retirees may rightly want to save the cash by discontinuing premium payments on a long held policy. The retiree first should consider ways to protect the values built up over the years. Plus, there may be reasons continuing the policy and keeping the death benefit is still important after all.