Knowing When to Stop Term Life Insurance: Strategies for Financial Gain

Knowing when to stop term life insurance coverage is just as financially savvy as knowing when to start it. Most people choose term insurance because they have a specific risk they want to cover. These risks are often reflected in a specific term length, such as a 30-year term for a mortgage. This specific need could also be raising children to adulthood, or covering a spouse until retirement age, etc.

Sometimes, the reasons for the term insurance disappear or a financial situation changes, and the premiums get tricky to handle. We’ll cover when it makes sense to discontinue your term insurance and propose some other options you may not have thought of.

Quick Takeaways

• Term life insurance is a good idea for covering specific risks with endpoints, like raising children to adulthood or mortgages. 
• Term policies can also be a good option for final expenses
• Check with a financial professional if you’re considering switching types of life insurance
• Rather than waiting until the end of the term or allowing policy lapses, you may be able to sell your original policy for cash if you have a conversion rider

The Importance of Knowing When to Stop Term Life Insurance

Term life insurance typically has a set expiration date. It could be a 5-year term (sometimes even as short as 1-year), it could be a 30-year term, or anywhere in between. At that expiration point, the policy and your coverage cease.

The temporary nature of this policy does two things:

1. It allows insurance coverage to offer life insurance at a significantly reduced cost (sometimes as much as 1/10th of a whole life policy)
2. It makes covering temporary needs more logical, such as getting a child through college, paying off a mortgage, buffering a spouse’s retirement ability against an early death, etc.

The primary reason for discontinuing term life insurance is that the financial obligation has lessened or eased entirely. For instance, your kid got a bunch of scholarships to their dream school, or you paid off your mortgage early, etc.

Sometimes, life circumstances change. Maybe you’re in a financially stronger position now and want to consider using indexed universal life insurance as a tax-free retirement income tool rather than just protection against bad luck. Other times, the term policy was not set up as a level term (you pay the same each year), and instead, you find yourself with higher premiums every time you have a birthday.

Taking a moment to confirm that the reason you got life insurance in the first place is either no longer a financial responsibility or that you have a better solution for it. Here are a few more options to consider before pulling the plug.

Determine If Your Dependents Will Have Financial Security Without the Death Benefit 

The first step is to math out what would happen if your family didn’t have the death benefit and something unexpected happened. Would your spouse still be able to retire on schedule? Would your mortgage get paid? Will there be enough money to raise your children until they’re financially able to take care of themselves? Anyone relying on your financial support benefits from your life insurance, just in case.

Take a moment to consider or list your dependents’ income sources, savings (or financial habits), and any other assets. If they can support themselves, you may no longer need your life insurance.

Changes In Your Health Status 

The healthier you are, the less you pay in life insurance premiums. This includes things like smoking or hitting your perfect BMI.

If you’ve gotten healthier since you last purchased life insurance, it might be time to switch to a better policy. But before diving in, talk with an agent about what your current health looks like through the life insurance company’s lens. You can also sometimes work with your current life insurance company and see if they can reconsider you as a nonsmoker, for example.

However, if you’re looking to change your policy and have collected a few health issues, be prepared to pay more. Since these numbers vary so widely by insurer and policy type, make sure to discuss your plans with your agent or call us at (858) 703-6178.

Consider Your Life Stage 

As you progress through life’s varying stages, your insurance needs will change. Many people have a lot of financial responsibilities when they’re in their 20s and 30s, but they have few assets. However, once you reach your mid-50s, you may have fewer financial obligations (kids leave the house, the mortgage is close to paid) with more assets. The coverage you need may have decreased depending on the strategy you’re going for.

Reviewing Your Current Policy 

Once you have an idea of your current needs and goals and how to achieve them, it’s time to review your old policy to determine your options.

You can either read through your entire contract yourself. (This may not be exciting unless you enjoy reading legalese.) You can also review it with your agent, who should be able to explain your life insurance options.

For example, your policy could have features that:

• Let you convert it to a permanent policy
• Have a return of premium feature (meaning you’ll get some cash if you hold out to the end)
• Other riders that give you living benefits (more common in newer policies as a way to offset long-term care needs)

It can be easier to adjust your current policy to your new needs than to start over or cancel it and lose all of the premiums you’ve paid thus far. Hint: If your policy has already lapsed, here’s some information on how to revive it.

What If You Could Sell Your Policy for Cash? 

One option that not many people consider regarding when to stop term life insurance is that if the policy provisions allow for it, they could sell their policy for cash.

Click to read How To Sell Your Term Policy For Cash.

If you read through your policy and you do have a conversion option, then selling your term policy instead of losing all of the cash you’ve paid for it so far is an option. You’ll need to use the term conversion rider option to turn it into a permanent insurance policy. (Our life settlement team can help you do this.)

What happens in a life settlement is your life settlement broker will put your life insurance policy on a marketplace where an investor will buy it and take over premium payments. You get the cash. The buyer becomes the policy owner, pays the premiums on the new coverage for your entire life, and then gets the death benefit when you pass away (hopefully a long, long time from now.)

Click to read What To Do With A Life Insurance Policy You Don’t Need.

This option can be especially helpful for raising some money if you’re looking to get rid of a term policy to free up the monthly premium dollars for other financial needs. Plus, your credit score and any outstanding debts don’t matter!

Next Steps 

If selling your life insurance for cash rather than stopping the premiums and getting nothing sounds like a worthwhile option, give our team a call at (858) 703-6178. Or, fill out the form on this page to find out how much your life insurance policy could be worth. We’ve helped many folks in all sorts of circumstances sell their policies, whether to get out of a tough financial situation or because they no longer needed the policy.