I have a whole life insurance policy with a $360,000 death benefit and cash value of $102,000. The policy costs $1,500 per year out of pocket and dividends pay the rest of the premium, so the cash value doesn't go up. Should I cash it in, pay off my mortgage and get term life insurance?
"As with many questions, especially in the absence of a comprehensive financial plan, the answer is it depends," said FPA member Amy Jo Lauber, CFP®, of Harold C. Brown & Co.
According to Lauber, determining whether to retain a life insurance policy takes into account:
- whether you still need the coverage,
- your cash flow,
- your insurability,
- your age,
- your estate liquidity needs,
- your taxable estate, and
- your income tax situation.
Given that, Lauber recommends that you hire a financial planning professional who is also licensed as a life insurance agent in your state to help you address your question more completely.
For his part, FPA member Neil G. Carousso, CFP®, CPA, of NGC Financial, noted that it's important to realize the differences between whole life and term life insurance. "They are two very different policies," he said. "Whole life gives you exactly that protection for the rest of your life. Term only protects for a specific period of time, for instance 10 or 20 years."
To answer the question, Carousso said you should approach it from the protection standpoint.
"We all know term insurance is cheaper but it doesn't necessarily protect you unless you know that your date of death is within the term," he said. "Term insurance does not have any cash value; it is pure insurance for a period of time. If you do not die during the term, it expires with no money back."
So, before deciding anything, Carousso said you should ask yourself the following question: "Do you need the insurance protection for the rest of your life? If not, your health is OK and you qualify for a new policy, it may be considered."