When is it safe to drop term life insurance? There are factors to weigh before making call

Dear Pete: I’m 57 years old, my kids are grown and out of the house, and I don’t really feel like I need all the life insurance I once carried. I currently have $500,000 worth of life insurance, but once the kids moved out and I fully funded my retirement income strategy, the half-million amount seems excessive. It’s just my wife and me now, and we have plenty of money set aside for retirement. Should I keep it, just in case? It’s term insurance, and it’s about to increase in price. — Michael from Houston

Dunn: You wouldn’t be the first person excited about not needing life insurance. Most people need it but don’t want it. They manufacture all sorts of reasons why life insurance isn’t right for them and (all too commonly) ignore the obligation altogether. 

Looking at your situation, I think you’re potentially in a position to reduce the amount of coverage you have, but you still need some coverage.

Life insurance is meant to help your family accomplish your financial goals, whether you’re there or not. When you were younger, with a growing family, you didn’t have the assets you do now. That meant that if you died without life insurance, the only option to pay for your kids’ education was student loans, and your wife’s retirement would have suffered a tremendous setback, too. Not to mention the web of complexities you would have left for a widow trying to raise young children after arguably the worst and most emotional time of her young life. 

The death of a young parent (or any loved one for that matter) is not a blip on the financial radar. I’ve been there to help pick up the pieces for those with life insurance and for those without life insurance. Both situations are awful, but the ones with life insurance at least allow the survivors to breathe.

It’s important to think through the reasons why a person needs life insurance. I’ve already addressed survivor needs and goal completion. But there is also covering debts, tax planning strategy, charitable giving, wealth transfer and those uncomfortable-to-discuss end-of-life and funeral expenses. All of these strategies have varying degrees of complications, but it’s the end-of-life expenses that somehow always get overlooked.  

We don’t really know how our last chapter will be written. We don’t know if it will be long and drawn out, short and quick, expensive or cheap. That’s where your question gets a bit hairy. You likely don’t need to keep paying for a $500,000 term policy in perpetuity. But it could make sense to secure a more modest amount of permanent coverage, if a long and drawn-out final chapter could compromise your wife’s financial security. 

If you’re confident you don’t need to continue your current coverage at it’s current face amount, and some of the other strategic reasons to maintain significant life insurance coverage don’t resonate with you, consider converting your $500,000 term policy into a smaller permanent policy. If your policy is still in the allowable conversion period, you’ll be able to simply switch a portion of your coverage to a permanent plan without the need for medically re-qualifying.

This is important.  Your body has gotten older. You might be less healthy than you were when you purchased the term policy years ago. By converting your policy, you’ll be able to convert at your old health rating. That’s a good thing. 

However, it’s possible you won’t be able to convert and keep your old health rating, which means you’ll need to medically qualify for the new amount of coverage. Depending on your current quality of health, that might not be great. In some cases, if your health has changed significantly, you may be asked to pay more premium for your smaller permanent policy than your bigger term policy. Certainly a frustrating outcome, but it’s not frustrating enough to ignore the realities of your permanent life insurance need. 

Don’t be so excited to get rid of life insurance that you ignore some level of need you may still have. Grab some permanent coverage and be glad that you’ve been there to celebrate your family’s monumental moments.

Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.