Assessing life insurance – when does it no longer make sense to keep it?
By Tiffany Havinga, Director and Financial Planning Specialist at Chartered Wealth Solutions
Life insurance provides essential financial protection for your loved ones, ensuring they are taken care of in the event of your passing. However, as your financial situation evolves, you may begin to question whether you still need it. With children achieving financial independence, debts settled and retirement plans in place, many policyholders wonder if continuing to pay premiums is the best use of their money. Before making this decision, it is crucial to weigh all the factors carefully.
Why did you take out life insurance in the first place?
The first step in deciding whether to cancel life insurance is to reflect on why you took it out initially. Life cover is typically purchased to provide financial security for dependants, settle debts or to meet obligations like a home loan. Some individuals take out life insurance to cover a shortfall in their estate, ensuring that costs and taxes are not greater than their liquid assets. Many homeowners are also required by their banks to have life cover when taking out a bond. (Don’t forget to remove the cession of a policy to any third parties once a debt has been repaid.)
Group life cover
Employer-provided group life cover is often overlooked, as premiums are deducted before salaries are received. Before cancelling personal coverage, review any existing group life benefits to ensure you are adequately covered.
The size of the premium relative to the life cover benefit
In many instances, your life cover premium escalates while the cover itself remains the same, meaning the cover amount does not keep up with inflation. Remember to consider if the cost of the benefit is in line with the value it offers over time.
Are there other benefits linked to the policy?
Life cover is rarely sold on its own; it is often bundled with benefits such as income protection, capital disability or dreaded disease coverage. These additional benefits provide financial support if you become disabled and are unable to earn an income, or if you are diagnosed with a serious illness like cancer or suffer a heart attack. Before cancelling your policy, be sure to check whether these benefits are included.
Life insurance and retirement
Many believe that if you have enough savings for retirement, life insurance becomes redundant. If you have accumulated sufficient wealth to sustain your retirement and have no outstanding financial responsibilities, life insurance may no longer be necessary. However, it can be difficult to accept that past premiums were a necessary expense for security at the time but did not contribute to wealth accumulation.
When does the need for life insurance decrease?
In theory, once your children are financially independent, your mortgage is paid and you are debt-free, life insurance may seem unnecessary. But is it really that simple? Many people struggle with the idea of cancelling a policy after paying premiums for years, worrying that doing so would waste premiums already invested.
The cost of retaining life cover vs investing elsewhere
A critical factor to consider is the cost of keeping your life insurance versus redirecting those funds into a diversified investment. Would you prefer to continue paying premiums for a benefit that only takes effect after your death? Or would you rather invest in assets that you can access in your lifetime while still providing for your heirs?
Can your children pay the premiums?
Some individuals offer their children the option to take over their life insurance premiums, seeing it as a long-term financial strategy that guarantees a set payout on their passing. This approach can ensure that children receive a financial benefit while keeping the policy active for future security.
Reframing life insurance
It may help to think of life insurance as you would short-term policies like car or home insurance. You don’t expect to claim on your car insurance unless you have an accident, but it provides invaluable support when the unexpected happens. Similarly, life insurance serves its purpose at a critical time – providing financial protection in case of an untimely death.
Speak to a financial adviser before cancelling
Cancelling life insurance is a significant decision that should be carefully considered in relation to your financial situation and future needs. While it may no longer be necessary in some cases, consulting a financial adviser can help ensure you make the best choice for your unique circumstances. For more information, visit www.charteredwealth.co.za.