If you have life insurance there may be times when you are tempted to cancel your policy and save money by no longer having that monthly bill. In some cases, the reason to cancel may indeed be sound, however, this decision should be very well thought out as the repercussions could be felt for years.
First, if you have a family and you are the primary breadwinner, there are almost no scenarios where this is a good decision, just to get that out of the way. Families need protecting and a life policy is usually the best way, and least expensive way to cover future needs should something happen to you.
On the other hand, an older person whose children are all grown may feel there is no longer any reason to keep the policy and pay the premiums, especially since they are likely getting more expensive. It might seem like common sense to stop paying the premiums. However, many people are not aware you can sell your policy and get cash for it, depending on a variety of factors. The insurance company may buy the policy back, but at a price much lower than selling it on the open market via specialized firms that focus on this area. If you are thinking about cancelling your policy, speak to your financial advisor or an insurance agent that specializes in purchasing insurance policies. Depending on your policy, this could be a six-figure sum of money you are otherwise giving up.
Another scenario where people think cancelling their policy is fine is when someone has a change in their life. For example, the true story of “Chris” as we will call him shows the hidden danger in cancelling a policy for the wrong reason. Chris was married, but got divorced within a few years and was single again. There were no children as a result of the marriage. He cancelled his life policy as he thought since he had no dependents why spend the money? Several years later he got a cancer diagnosis, then two years after that got married again and had a child. When he went to get a new life policy, the cost went from $114 per month to $885 per month because of the past instance of cancer. Had he simply kept his policy, it could not have been cancelled by the carrier for the life of the contract and he would have saved over $8,000 per year. This was a very costly mistake by Chris and will cost him many thousands of dollars per year for the rest of his life.
It does pay to periodically review fixed expenses such as insurance contracts, and cut where one can. However, there can be serious unintended consequences with such a decision and having a second set of eyes evaluate this and help perform “what-if” projections can offer substantive dividends.
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