Do I Cancel My Whole Life Insurance to Pay Off the House?
Michael says his elderly parents have $120,000 in cash value from a whole life insurance policy. He would like them to pay off their $130,000 mortgage by cashing in this policy. Is this a good plan?
QUESTION: Michael in San Antonio says his elderly parents have $120,000 in cash value from a whole life insurance policy. He would like them to pay off their $130,000 mortgage by cashing in this policy. They have $150,000 in other retirement savings. Is this a good plan? Dave says it is but warns they won’t be able to get more life insurance if they do.
ANSWER: Obviously they won’t be able to get any more insurance if they drop this policy and pay off the mortgage—which, by the way, I really love that idea. But the question you all have to really be comfortable with is if Mom will be all right if Dad dies with the house paid off and no insurance?
It sounds like the answer is yes, but you have to say that out loud because you can’t go back and undo this. You have one shot at this. They don’t write insurance on 80-year-olds.
The same is true the opposite way, where we ask if Dad is all right if Mom dies. The answer there is yes—that’s not even a question because he’s got a lot more money.
Here is what we’re saying if we drop this policy, and this is a horrible example. You need to know how their health is, because if something happened to one of them five months from now, you’ll be saying you wish you hadn’t done this. That sounds callous and unfeeling to ask that health question, but you need to because if one of them is on their deathbed, you don’t do this deal.
But they sound like they’re in pretty good shape for their ages. If that’s the case, I’m probably doing this deal. I’d cancel this policy and pay off the mortgage. I love the thought of them sitting there without a mortgage at all.
But remember that you don’t want them to wake up in the middle of the night and freak out because they don’t have life insurance. You want them to realize that they have a paid-for house and $150,000 in the bank and half of the husband’s income if he passes and she’s got Social Security if he passes. They can make it on that, and they have to realize that’s why they did this. Remember, once it’s gone, it’s gone.
You need to analyze that further than just a radio call with someone like me. But that’s how you make that decision, and based on that, I’d be very likely to drop that garbage and pay off my house.
Also, don’t let their tax accountant look at it any way other than that. I don’t want him to say that this is an investment and all that because it’s not; it’s a horrid investment.