Although you can cancel your life insurance policy at any time, getting coverage again isn’t easy. Before you cancel, be sure you’re making a good decision.
If you’re thinking about cancelling your coverage, here are some things to be aware of:
A growing asset
Life insurance is a valuable financial asset that often increases in value every year. If your coverage is permanent, the value will rise annually because the payout is getting closer. With temporary insurance (term insurance), this isn’t the case. Your coverage could expire without a claim being paid. In that situation you’ve paid to receive nothing back except peace of mind.
Your needs change over time. Maybe you originally bought insurance when you had a young family and a mortgage. Once your children are independent and the mortgage is paid off, your insurance needs have changed.
You might now want to start looking at estate preservation. That means leaving more of your estate for your beneficiaries and charitable causes. The alternative is having a portion of your estate going to the government, which is what could happen without proper tax planning.
Joint last to die
You’ll likely find that if you bought life insurance from a large insurer, you have the option to convert temporary insurance to permanent insurance until an age like 65 or 70. You might also have the option to change from single life coverage to joint last to die (JLTD). If you have a spouse, that’s ideal for estate planning. That’s because tax is due at the time of the death of the surviving spouse.
Cash surrender value
If you cancel your life insurance, you get the cash surrender value of your policy. With term insurance or term to 100, you get $0. With whole life insurance and universal life insurance, the amount can be substantial. These products may have decreasing surrender penalties in the early years. You may get a much larger payout by waiting a year or two before cancelling.
Your contract could be worth more than the surrender value. The real value is the actuarial fair market value. With a life settlement, you sell your coverage to an investor in exchange for a price based on it, provided this is legal where you live (it’s currently prohibited in Ontario but allowed in several provinces, including Quebec). The buyer pays the premiums and receives the death benefit.
The bottom line
When you cancel your life insurance, someone loses. Could that be you or your beneficiaries? Do you know the value of what you’re giving up? It’s something to keep in mind before you cancelling your coverage.
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