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It's Your Money  

Pros and cons of keeping or cancelling life insurance

Dealing with life insurance

As Canadian seniors approach or enter their retirement years, many find themselves reassessing their financial portfolios, including the necessity of maintaining life insurance policies.

The decision to cancel a life insurance policy is a significant one and should not be taken lightly. Further complicating the problem is the advice they may receive from the insurance company or agent may be biased-linked and not necessarily in their best interests.

To help you make an informed decision if you’re considering cancelling your policy, here are some things that you should consider:

Pros of cancelling life insurance

1. Cost savings—One of the primary benefits of cancelling a life insurance policy is the immediate reduction in premium payments. For seniors on a fixed income, this can free up funds for other essential expenses or enjoyable activities during retirement.

2. No longer need coverage—Seniors may consider cancelling their life insurance policies if their dependents are financially independent, and they have accumulated enough assets to cover funeral expenses and outstanding debts. In such cases, the need for life insurance as a safety net diminishes.

3. Simplification of finances—Managing multiple financial products can be overwhelming. Cancelling a life insurance policy can simplify financial matters, making it easier for seniors to keep track of their assets and expenses.

Cons of cancelling life insurance

1. Loss of financial security—The most significant drawback of cancelling a life insurance policy is the loss of financial security for loved ones. If dependents still rely on the senior's income or assistance, the absence of a life insurance payout can leave them financially vulnerable in the event of their passing.

2. Funeral and other immediate expenses—While some seniors may have saved for funeral expenses, the immediate availability of funds might be uncertain. Life insurance provides a lump sum that can cover funeral and other urgent costs, ensuring a dignified farewell without placing a burden on surviving family members.

3. Future health concerns—As seniors age, the likelihood of developing health issues increases. Cancelling a life insurance policy may make it challenging to secure coverage later, especially if new health conditions emerge. Maintaining coverage ensures that any potential health concerns are already factored into the policy.

4. Losing out on policy value—A life insurance policy that has been in force for many years often holds an incredible amount of value and cancelling it and taking the smaller cash payout may cause you and your beneficiaries to lose much of this value. If you have the means to continue paying for the policy, doing so could leave your beneficiaries with far more after-tax dollars than cancelling it for the small and partially taxable payout now.

Considerations before cancelling life insurance

1. Terms of the policy—You need to fully understand the terms of the policy you own and know if the premiums will increase further over time or if you may be able to stop paying and have the growth of the policy value cover the costs on it’s own.

2. Dependents' financial situation—Seniors should assess the financial independence of their dependents. If there are still individuals relying on the senior's income or support, maintaining life insurance may be crucial to safeguard their financial well-being.

3. Outstanding debts—Evaluate any outstanding debts, financial obligations, and funeral or other final expenses. If significant liabilities exist, keeping a life insurance policy can ensure that these debts are settled without burdening surviving family members.

4. Capital gains on death—If you own a family vacation property or business and your passing will trigger significant taxes on the gains of that asset, consider if the insurance policy’s proceeds will cover some or all of those taxes owing and allow for a smoother transition to your family members planning to keep that asset in their names.

5. Health status—Reflect on current health conditions and the potential for future health issues. If there's uncertainty about insurability later in life, holding onto the existing policy may be a prudent decision.

6. Future projected value of the policy—If you’re considering cancelling a policy and taking the cash payout, determine how much you will keep after paying the taxes on this amount. Then run a calculation to see how much that amount would grow to in a number of years (estimating life expectancy) using a reasonable rate of return. Then compare that growth amount to what the tax-free benefit amount would be if the policy paid out upon your death.

Cancelling a life insurance policy is a decision that requires careful consideration by Canadian seniors. While the prospect of cost savings and simplified finances is enticing, the potential loss of financial security for dependents and unforeseen future expenses must be weighed carefully. Before making a final decision, seniors should assess their financial situation carefully and consider the pros and cons listed above.

The choice to cancel or retain a life insurance policy should align with the broader financial goals and responsibilities of each individual, ensuring a secure and comfortable retirement for all parties involved.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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