Tired of Pricey Life Insurance Premiums? 4 Ways to Manage a Policy When You Retire – Kiplinger’s Personal Finance

You’re getting ready to retire, and you’re thinking about your expenses. One expense you’d like to forgo is the premium you pay for the life insurance policy you bought decades ago. The question is: Are your only two options to pay the premiums or cancel your coverage? The answer is no, you usually have other alternatives.

Start assessing your options by first determining whether your policy is a term insurance plan or some kind of permanent insurance with cash values.

Term insurance

Term life insurance is generally the cheapest coverage, but it works like rent. When you’re done “renting” the insurance, you leave with no equity. So, if you reach the end of the policy’s term — for example, 20 years — you lose your insurance coverage. You still may have some options, though. Some term policies let you renew your coverage. You can continue your insurance, just at a higher premium. Generally, the cost increase is so high it’s a deal killer. If you need the coverage, though, it may be worth it.

Term insurance policies often have conversion rights, meaning you can convert your term insurance policy into a permanent plan. The good news is this will continue your death protection for the rest of your life, but the bad news is you’ll be paying a much higher ongoing premium. While this may sound like a non-starter as you face retirement, it may be a good idea if your life expectancy has been shortened because of a medical condition. The conversion privilege also allows you to change your soon-to-expire term policy into a permanent policy without you having to show insurability – no physicals or bloodwork.

If your spouse or kids need death protection for when you’re gone, converting your term policy is worth thinking about. If you can’t afford the higher premiums, maybe they can pay for the coverage.

Cash value insurance

So-called permanent life insurance is analogous to owning vs. renting. You build up equity in your insurance in the form of cash values. The temptation in retirement is to cancel the policy and collect the policy’s remaining value. In many cases, though, this may be the least financially sound approach.

Let’s use an example. You’ve been paying $2,000 per year for a $250,000 whole life policy for twenty years. You’ve sunk $40,000 into the policy, but you also have $60,000 of cash value to show for your expense. If you surrender the policy, you’ll receive $60,000 from the insurance company, but the IRS will want a share — in the form of ordinary income tax, not capital gains — on the $20,000 gain over your $40,000 expense.

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Source: https://www.kiplinger.com/personal-finance/insurance/life-insurance/605229/tired-of-pricey-life-insurance-premiums-4-ways-to

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