When to Cancel Life Insurance for Seniors

Ask MoneySense

My husband is about to turn 60 and we have to decide whether to keep our life insurance plan or let it lapse.

We no longer have a mortgage, and we are arranging our own funerals so our children won’t have to worry about those costs.

I’ve been retired for over a year and he plans to retire at 62.

Our question: Do we still need life insurance, or can we safely cancel it?

—Teresa

Should you cancel life insurance?

I rarely want to tell someone to cancel an insurance policy outright — what if the unexpected happens tomorrow? Ultimately it’s a personal decision. To help you decide, I’ll review why people buy life insurance, outline the main types of coverage, and suggest the questions to ask so you can match your current needs to the protection you have.

Why people buy life insurance

People generally buy life insurance to protect those they leave behind. The two primary financial needs life insurance addresses are income replacement and debt settlement. Income replacement helps maintain a survivor’s standard of living if a breadwinner dies prematurely. Debt settlement covers outstanding obligations: a mortgage, unpaid loans, or anticipated future costs such as children’s post-secondary education or taxes.

When assessing whether you still need a policy, consider both your current debts and future obligations, plus the income gap that would result if one spouse died. Also factor in government benefits and pensions that may reduce income needs but don’t necessarily eliminate the shortfall.

How much life insurance would you need?

A straightforward way to estimate the insurance needed for income replacement is to divide the required annual income by a reasonable safe investment return. For example, if you need $50,000 per year and you expect a conservative 5% return on invested proceeds, you would calculate $50,000 ÷ 0.05 = $1,000,000. From that amount you could subtract assets you already have.

Keep in mind that inflation erodes purchasing power over time, and government benefits such as the Canada Pension Plan (CPP) and Old Age Security (OAS) may reduce but not always eliminate the income gap. As expenses often fall as people age, you may not need full income replacement for every year of retirement, but you should model realistic scenarios before cancelling coverage.

Does life insurance cover debt?

Yes. Once you determine how much you need to replace income, add any outstanding debts to that figure. For example, if you had a $750,000 mortgage and expected $250,000 in future education costs, you would add those amounts to your income-replacement need to arrive at a target death benefit. Reviewing current and anticipated resources and how living expenses would change if your partner died will help you decide whether to reduce, maintain, or increase coverage.

What kind of life insurance do you need?

After you know how much coverage you need, decide which type of policy makes the most sense. The two main categories are term insurance and permanent insurance.

Term life insurance is generally the most efficient way to replace income and pay off debts because it provides high coverage at a lower cost for a defined period. Permanent policies (such as whole life or universal life) combine a death benefit with a cash value component and are typically chosen by people who want lifelong coverage and a policy that can benefit heirs or specific causes.

If you need a large amount of coverage but can only afford a much smaller permanent policy, buy the term policy to cover the shortfall. Your survivors will care more about the payout than the type of policy it came from.

What happens if you cancel a life insurance policy?

Cancelling can make sense when the original reasons for buying the policy no longer apply. But before you cancel, consider this: if your husband didn’t come home tonight, would you be financially secure? Would pension income continue or be reduced? Survivor benefits can change household income significantly. For example, one OAS payment might stop; if your husband already takes the maximum CPP, a survivor CPP payment could be small or nonexistent; pension-splitting advantages would end and your taxes may increase as a single filer.

You might spend less as a widow, but not necessarily as much as you expect. A partner’s premature death is a low-probability event, yet it can cause catastrophic financial disruption. That is often the reason couples buy life insurance in the first place. If your policy is term insurance, the main trade-off is whether you still need the income replacement and debt protection the term policy provides.

Permanent policies introduce other considerations: surrender charges, taxation of cash values, and possible options to keep or access the policy’s value. If you have an older permanent policy that remains affordable, you may prefer to keep it or explore ways to use its cash value rather than surrender it. Speak with a licensed advisor before cancelling a permanent policy to understand tax implications and alternatives.

As you age and accumulate assets, the need for income-replacement insurance typically declines. One important caveat: if either spouse has a shortened life expectancy, keeping coverage or converting term to permanent may make sense so that protection remains in force for life.