Tags: Report-Franklin-NMX-Prosperity

Franklin Prosperity Report: Should You Let Your Life Insurance Lapse?

By    |   Thursday, 06 Feb 2014 04:29 PM

The primary purpose of life insurance is to protect against the risk of the loss of a breadwinner. In effect, you’re replacing the income you would otherwise provide for your family. But as time marches on, there may be some instances where it’s OK to stop making payments and let your life insurance lapse.

“The short answer is that you can lapse a policy when the need for insurance has ceased,” says Kevin Gahagan, a certified financial planner and principal at Mosaic Financial Partners in San Francisco.

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However, there is an important exception: if the policy is written for cash value. “A cash value policy can be surrendered or sold so that policyholder gets value for the premiums that have accumulated over time,” he explains.

For all other types of policies, need is the major factor. Because the goal of life insurance is to fund funeral services as well as take care of loved ones, you need to plan for the annual income you believe will provide the standard of living you desire for your survivors. That income can come from many sources in addition to life insurance, including Social Security benefits, pension plans, and stocks.

Here’s the back-of-the-napkin math you should do to calculate whether you need a life insurance policy to provide part or all of that income:

1. Determine income need. Tally up all your anticipated monthly financial outlays, including mortgage, car loans, credit card debt, college costs, personal loans, and other obligations. Multiply this number by 12 — that’s how much income your spouse or partner needs to earn annually to maintain his or her current standard of living.

2. Establish expected income. This is the annual income your partner can expect to receive between any salaries, interest and dividends, real estate investments, Social Security, and other sources. And don’t forget to factor in funeral costs because your loved one would need to have cash on hand to pay for services.

3. Crunch the numbers. Subtract the income need from the expected income. If the answer is in black, you might be able to let your insurance lapse. However, if there’s any shortfall or doubt, Gahagan says life insurance is necessary.

It’s wise to assess your life insurance needs annually, Gahagan says, as well as after any major life event like the loss of a job, divorce, or major move. “Those can greatly impact the amount of life insurance needed.”

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The primary purpose of life insurance is to protect against the risk ofthe loss of a breadwinner. In effect, you're replacing the income youwould otherwise provide for your family. But as time marches on, theremay be some instances where it's OK to stop making payments and...
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2014-29-06
Thursday, 06 Feb 2014 04:29 PM
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