Does It Make Sense to Drop Life Insurance?
Life insurance is a contract between you and a life insurance company that pays a death benefit to a third party, called a beneficiary. The beneficiary receives this money when you die. Whether you keep a life insurance policy or allow it to lapse depends on your goals. Make sure you understand whether or not it makes sense to drop your life insurance policy.
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Types
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There are two types of life insurance you can buy. Term life insurance is a type of life insurance that provides low-cost death benefit protection. Permanent life insurance provides death benefit protection for your entire life but at a higher premium cost. Permanent life insurance also may offer a cash value savings component that acts like a savings account you can use during your lifetime.
Significance
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When you drop your life insurance policy, make sure that you understand the significance of your decision. Like insurance provides death benefit protection that ensures that your family will not have to pay for your financial obligations when you die. If you don't have life insurance when you die, your family will need to pay for your debts out of pocket.
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Benefits
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The benefit of canceling your life insurance is that you don't have to continue making premium payments. The money you save could be put towards other investments. If you don't think you'll need life insurance, because you don't have any or many debts, then you won't be wasting money on unneeded insurance.
Warnings
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If you own a cash value life insurance policy, you may have to pay taxes on your cash values. If your cash values exceed the total amount of premiums you pay into the policy, then you have a gain in the policy. This gain is subject to income tax. Once you cancel the policy, the tax is due in the tax year that you canceled your policy.
Considerations
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Consider whether you need your policy. Even if you don't have any debts now, or your debts are decreasing, consider whether you will have debts in the future that need insuring. If you expect to take out future loans or accumulate future financial liabilities, a life insurance policy may be beneficial and even necessary in some cases.
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