Sometimes my clients ask me if canceling their life insurance would be a smart move. It is a difficult question because life insurance not only serves to protect your family and loved ones after you are gone, but it also serves as a good investment for yourself.
Unfortunately, there is no simple yes-or-no answer to this question, and I can never make a recommendation without a proper understanding and diagnosis of their financial situation. Every piece of financial guidance I provide my clients only comes after we conduct a thorough conversation and I have an in-depth understanding of that client’s particular financial needs.
When addressing life insurance, I typically run through some of the following points with my client to ensure they make the right choice for their financial well-being. If you are wondering if your monthly premium is still worth it, consider the following questions before you pull the plug.
Will Your Estate Require Liquidity?
Even for the wealthiest among us, there is still a need for some liquidity in the estate. This is because there will be taxes on capital gains and there also may be administrative fees and funeral costs. Life insurance is a great way to provide financial stability and cash on hand for families who have lost a loved one and now have to handle the estate.
Do You Want To Leave An Inheritance Or Legacy?
Charitable-minded individuals may want to donate to an organization of their choosing after their death, and life insurance can benefit a charity as well as provide a tax deduction to the estate.
Another thing to consider is the inheritance your adult children may receive. Your premiums may be a bit of a nuisance for you now, but consider how much it could change your adult children’s lives if they received the benefit from the life insurance policy.
Do You Have Outstanding Loans Or Debts?
If you were to die today, would your spouse be left with any lingering debts, mortgages, or loans that would need to be paid off by the estate? It would be unfortunate to leave your family in a financial hole because of outstanding debts because you prematurely canceled your life insurance policy.
Your Wealth Strategy In Times Of Financial Stress
We realize that when reviewing your wealth strategy, you may be tempted to cancel your life insurance policy, especially in times of financial stress. Perhaps your income situation has shifted and your premium payments don’t seem to make sense. In fact, the most common reason people want to cancel their insurance is due to affordability reasons.
But before you do, consider different ways to use your life insurance as a critical component of your wealth management strategy. Perhaps there is a way to maintain the policy so you don’t leave your family in a complicated financial position if you should die suddenly. Or perhaps there is a way to utilize your policy to help you through such a critical time. We advise our clients who are considering canceling their whole life policies to think of the following factors before making any decisions.
Life Insurance Is An Investment
With cash value life insurance plans such as universal life insurance, the funds in your cash-value account will earn interest at a competitive rate. This means that you could earn more than what you would with a CD or savings account. (1) This is a great way to supplement retirement in a tax-advantageous way.
Tax-Advantaged Or Tax-Free
While your premiums are not tax-deductible, your investment can grow exponentially tax-free or tax-deferred. After your death, your beneficiaries will likely not have to pay any federal income taxes on the death benefit. (2)
A portion of every premium you pay goes toward a savings component of the policy called the cash value. (3) This means that cash value insurance policies can be a source of emergency funds for you if something goes awry with your wealth strategy. You also may be able to take out a loan against the policy to get your wealth strategy back on track.
The cash-value portion of the policy is a really helpful tool. And in instances where a client has lost a portion of their income, it could be advisable to utilize this tool to regain some footing in your wealth management strategy. Of course, this is based on a client’s unique circumstances.
John Halterman, best-selling author and nationally published blogger has been featured as a financial guest expert on the TV shows of self-help gurus Brian Tracy and Jack Canfield, author of Chicken Soup for the Soul. He has appeared on ABC, FOX, BRAVO, NBC, CBS, and A&E. John is the expert host of the weekly WDTV News 5 segment, “Solutions 4 Financial Independence.”
As an authority on wealth management, he has been invited by hundreds of institutions such as universities, federal agencies, professional associations, and large energy and utility corporations to be a guest speaker and educational event host. Event topics include maximizing your retirement, managing down market investment risk, how to reduce your tax burden, and transferring your family wealth in the most tax advantageous way.
John is the founder and owner of Beacon Wealth Management, specializing in helping entrepreneurs, professional practitioners, and retirees overcome the 4 major challenges facing successful families. He is a warm communicator with a passion for helping people transform their financial futures. John understands the multifaceted set of financial worries people face as they become more successful and enter the retirement red zone. He empathizes personally with each client and delivers a collaborative client experience that empowers people to reach their life goals.
With more than two decades of experience, John’s professional credentials include:
- Certified Wealth Strategist (CWS)
- Accredited Investment Fiduciary® (AIF®)
- Certified Estate Planner™ (CEP®)
- Chartered Federal Employee Benefits Consultant℠ (ChFEBC℠)
- Professional Plan Consultant® (PPC®)
- Registered Financial Consultant (RFC)
- Past member of Ed Slott’s Master Elite IRA Study Group
A native of Weston, West Virginia, John served in the United States Air Force prior to becoming a Wealth Advisor. Today, he resides with his family in Bridgeport, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-loving man, he enjoys giving back to his community, coaching youth sports, landscaping and architectural design, WV Athletics, and is an outdoor and racquetball playing enthusiast.
(1) https://www.valuepenguin.com/life-insurance/universal-life-insurance (2) https://www.investopedia.com/articles/personal-finance/082114/6-ways-capture-cash-value-life-insurance.asp (3) https://www.investopedia.com/articles/personal-finance/082114/how-cash-value-builds-life-insurance-policy.asp