by Gary Foreman

Are you paying for life insurance you no longer need? What should you do with it? We speak with a CFP who explains your options and how to choose the best one for your situation.

Your kids are all grown and you’re heading for retirement. So, why are you still paying for life insurance that you probably don’t need anymore? That’s a good question! What should you do with life insurance policies that you no longer need?

To help us understand what options are available, we contacted Dan Moisand. Mr. Moisand is a Certified Financial Planner™ and a principal at Moisand Fitzgerald Tamayo, LLC.

Q: There’s a temptation for retirees to drop life insurance policies. Yet, you recommend doing some homework before taking any action. Why is that?

Mr. Moisand: Most life insurance for working-age people is bought to replace employment income that would be lost when one dies. When one retires, that need ends, so it makes perfect sense to reevaluate the amount of coverage, and often, people decide they need less. 

An insurance policy is a contract. The terms of the contract provide options and some of those options make the policy a more valuable asset than the owner realizes.

Q: Figuring out how much tax might be due looks complicated. Is that something that the insurance company can help with, or should the insured contact a qualified financial advisor?

Mr. Moisand: Both. Sometimes, dumping or changing a policy results in a taxable event. The insurance company is supposed to keep track of all those factors. They will report taxable income.

It is wise to consult a qualified advisor before executing an insurance transaction so you know the tax ramifications and double-check what the insurance company intends to report.

Related: 7 Questions To Ask a Potential Financial Advisor

Q: How can a consumer know which life insurance benefits are taxable? And, at what rate they’re taxed?

Mr. Moisand: This can get very complex, particularly if there are dividends or loans involved, but as a general principle and a ballpark estimate, if you receive a check for more than what you have paid to the insurance company, that excess is taxed as ordinary income. It is added to all your other income and taxed at the same rate it would be if you had been paid an additional salary.

Q: If you can’t afford to keep paying premiums, are there other options besides cashing in the policy?

Mr. Moisand: Yes. Depending on the policy, you may be able to have the cash value keep the policy in force for some time. You may be able to reduce the death benefit and the premium that goes with it. Some policies allow you to reduce premiums as you wish. You could execute a 1035 exchange to another policy or an annuity. These and other choices all have pros and cons.

Q: What is a 1035 exchange and how does it work?

Mr. Moisand: It is the insurance version of a rollover. 1035 refers to a section of the tax code. It allows you to transfer cash value from one life insurance policy to another without incurring the taxes that would result if you cashed out one policy and bought a new one. You can also exchange from a life policy to an annuity contract.

Q: What’s the most common mistake that people make when deciding what to do with an old life insurance policy?

Mr. Moisand: They just take the cash surrender value without understanding the taxes and without considering their other options. Instead of just focusing on minimizing the expense of premiums, they should consider it an asset to be maximized.

• Your Changing Insurance Needs as You Approach Retirement
• Should Retirees Consider a Life Settlement?
• What You Need To Know About Long Term Care Insurance Before You Retire
• How To Leave a Legacy With Your Life Insurance
• How Much Do I Need in Savings and Investments to Be Self-Insured?

Reviewed February 2024

About the Expert

Dan Moisand is a Certified Financial Planner™ and a principal in Moisand Fitzgerald Tamayo, LLC. Mr. Moisand is regarded by many as one of America’s top financial advisors. He works from offices in Melbourne and Orlando, Florida. He is a happily married father of two great kids.

Retirees and those approaching retirement will have a hard time finding a firm better equipped to serve them and their families than Moisand Fitzgerald Tamayo and Dan is part of why that is the case. He producesa weekly Q&A as a “Retirementor” for MarketWatch, a personal finance site of the Wall Street Journal. He is a frequent source to a variety of publications and media and has appeared in Smart Money, NY Times, Wall Street Journal, Forbes, and USA Today among others.

Dan received his Bachelor of Science in Finance from Florida State University and has over 25 years of experience. Visit here for more on Daniel Moisand.

About the Author

Gary Foreman is the former owner and editor of the After50Finances.com website and newsletter. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.