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Should You Terminate Your Life Insurance Policy?

Last modified: 15 Jun 2014

Life insurance is usually for life but that doesn’t mean you have to commit to it forever. Many things could have happened since you bought the policy that could have changed your circumstances. For example, your children could have grown up and may not be so financially dependent on you.

A separation or a divorce could have occurred and you may not have as tied down. Because of the harsh economic climate, you may no longer be able to afford to your premiums. Or you simply don’t want the policy because you have accumulated enough assets and income streams to meet your financial obligations. Reasons are all personal but the crux is, you can terminate your life insurance policy. The question is, is it worth it and what do you get in return?

Life settlement

In the past, one of the most popular ways of terminating a life insurance policy was to simply sell it back to the insurance company. This was done by retirees over the age of 65. The insurance company would become the owner of the policy and be responsible for paying the premiums.

If the seller passed away, the insurance company would be the beneficiary and receive the benefit amount. In return, the seller could receive up to 15% of the original cover amount which is a significant sum and handy during retirement, when you may have no other source of income.

In Australia, however, life settlement is no longer allowed. You can’t simply sell your life insurance for cash but there are alternative options you may explore.

Alternatives to life settlement Superannuation roll-over

If you are currently getting your life insurance through your super fund you can switch to an insurance plan with a life insurance company, and still be funded by your superannuation. This is called a Superannuation Roll-Over. When you opt to roll-over, the funds from your superannuation will be transferred to a life insurance company’s superannuation life insurance cover plan.

The life insurance plan under the life insurance company will usually offer more benefits such as increased coverage, higher limits on sum insured and more types of cover options. In general, life insurance company plans provide you with options to link to life policy covers such as Total and Permanent Disability cover and trauma insurance. You will also have the flexibility to nominate larger amounts of cover and have access to a wider range of features and benefits that your original super insurance did not offer.

Doing a super roll-over may have tax repercussions you might want to talk to your insurance agent about. But if you’re thinking of changing or enhancing your current policy this might be a good alternative to explore.

Altering your policy

If you’re not happy with certain things in your policy, you don’t have to terminate it. These days, policies can be quite flexible and you can alter your premiums and benefits along the way. If the premiums are giving you a hard time, you don’t have to give up your policy. You could review your coverage and opt for a policy with lower coverage. If your children are all grown up and have left home, this is might be a prudent choice. Your coverage is less but your premiums, and thus your expenses, will be less too.

Another way to save on premiums is to check what additional features your policy comes with. If you no longer need them you could reduce your premiums and go for a no-frills package that could save you money right away. Sometimes adjusting your policy may stem from a lifestyle change. If you have made any changes to your lifestyle such as quitting smoking, make sure you revise your policy so that you can enjoy a lower premium. Ex-smokers can be charged lower premiums if they have stopped smoking for more than 12 months.

Terminate and buy another policy

With so many policies out there you may want to terminate and buy another policy which is more value-for-money. But before you buy a new policy, make sure you don’t terminate your existing policy prematurely.

Having no protection in between policies is risky and leaves you unprotected during that interim period. It is best to make sure you have the other policy in hand before you relinquish you existing policy.

It is also advisable to consult an insurance agent before you buy a new policy. This is a good time to re-evaluate your circumstances and weigh out your budget and financial obligations. You may also want to undertake a medical check-up to see the status of your health and how that may impact the undertaking of a new policy.

Terminate policy completely

Of course, you also have the option of terminating your policy completely. Perhaps you have come into a windfall of cash. You may have paid up all your mortgages and loans. You may have wisely invested over the years and set up regular streams of income that will cover all your financial obligations.

For any of these or for other reasons, you may feel you are financially sorted and no longer need the protection of life insurance, not to mention the cost that comes with it. But many people, even the wealthier ones, have some life insurance if only to cover the cost of funeral expenses and such so that these expenses are not passed on to their dependents.

On the other hand if you are thinking of terminating for the purpose of acquiring some cash, it might be a good idea to speak to your insurance consultant first. Liquidating your policy for cash may seem like a good idea during harsh times but there are many factors at play. One of the most important is to consider the reason you took out the policy on the first place. Will your dependents still need this protection after you are gone? Is cancelling the policy really the solution? If you are in need of cash there may be various other alternatives to get it.



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