When To Consider Leaving Your Universal Life Insurance Policy

A question recently asked on Quora:

“I bought a universal life insurance policy at age 37. I’m now age 68 and retired. The policy has a death benefit of $50,000 and I’m paying $1000 per year premiums. My wife and I have enough wealth that she won’t need the death benefit. Should I continue paying the premiums?”

The simple answer is no. You do not need to continue to pay the premiums.

Life insurance is bought when the beneficiary needs the insurance value to maintain their standard of living once the insured has past away. They might need the money to pay off a mortgage or send children to college. If all of these obligations are already taken care of and your assets are sufficient for your wife to keep her standard of living, then you no longer need life insurance.

How Much Is My Universal Life Insurance Policy Worth Now?

Before you take any action or inactions regarding your policy, we recommend that you examine your policy closely. You may discover that you are no longer insured for $50,000 as you were when you bought the policy. If you have a universal life policy and it has a cash surrender value then you are only insured for the difference between the cash value and the $50,000 face amount.

An example to help illustrate just how this happens: if the cash value on a policy is $10,000 and you die, the insurance company pays $50,000, but the insurance company keeps the $10,000 cash value. This means that the difference is the actual insurance amount of only $40,000.

When you bought the policy and you were younger, the cash value was zero and the face amount was $50,000. Had you died then, the company would have paid the full $50,000 to the beneficiary.

So why did the real insurance amount go down?

This is how an insurance company lowers their risk. As you age and are closer to dying, the insurance company lowers their risk by keeping the cash value.

You have some options with regard to terminating the current policy. The first option is to surrender the policy. When you surrender the policy the cash value of $10,000 will be paid to you, and if you died the next day you would have no insurance. Therefore, the insurance amount you gave up was the $40,000 difference between the cash value that you received and the face amount of the policy.

Another alternative is to take out the cash value today, via a loan, and stop any future payments on the policy. If the policy does not lapse for non-payment of premium and you die, then the insurance company will pay the $50,000 minus the loan you have taken. In this scenario, the amount payable to the beneficiary will be lower, but you had the cash value in hand. The two amounts – the insurance and the cash value loan — together will approximately equal the face value of $50,000 minus any loan interest.

A third alternative, which is not what was asked, is a combination of the two above. You can do nothing. Stop payments on the premiums and let the insurance company continue the policy for the face amount until the entire cash value has been used. They deduct the premium each month until the cash value is zero. At that time, the policy will lapse. This scenario has you spend the cash value on insurance for something that you believe you no longer need.

 

This article should not be considered as insurance advice. You should consult a licensed and reputable insurance broker who is familiar with your particular needs before purchasing insurance.