I’ve saved $1M in my 401(k) and hope to retire in 5 years. Will my wife be financially protected if I cancel my life insurance?

As the primary breadwinner in his household, Bob wants to ensure that his wife, 55, will have enough money to live comfortably if he were to pass away before she does. His wife is the primary beneficiary on his 401(k).

Currently, Bob is paying about $150 a month on his life insurance policy. However, if his wife inherits his 401(k), he wonders if she would still need the insurance payout. They don’t have any kids, so he’s not sure if he should keep making those monthly premium payments.

To cancel or not to cancel

Life insurance is often recommended if someone financially depends on you, such as spouses, children or aging parents. But if you have enough money saved up for retirement, you may wonder if you should reduce or cancel your coverage.

Before doing so, consider your total budget — now and in retirement. Do you still have mortgage payments? How much are your household expenses? And how much debt do you have?

If you still have a hefty mortgage or other debt, such as credit card debt, personal loans, car loans or student loans, you’ll want to ensure your loved ones have enough money to cover those expenses if you were to suddenly pass away. However, even without those liabilities, it may still be worth keeping your insurance.

While Bob has $1 million in his 401(k), would his wife have enough to live comfortably if he were to pass away tomorrow?

She’s 55, so she could live another 40 years. While she would receive some Social Security benefits in retirement, the couple has to consider whether that, combined with 401(k) withdrawals, would be enough to cover expenses and leave enough to live off.

As a spousal beneficiary, Bob’s wife could take a portion of the 401(k) as a lump sum. While this withdrawal would be penalty-free, it’s taxed as regular income, which could result in a hefty bill. She could also roll the inherited 401(k) over into her own 401(k) or IRA, if she has one.

If Bob continues to make payments on his life insurance policy, then his wife would receive a death benefit upon his death. This payment is often tax-free, except for any interest earned, and can either be distributed as a lump sum or over a period of time.

The money could be used to replace lost income. Moreover, it could help Bob’s wife cover immediate expenses, such as debt payments and funeral costs, before having to navigate the complexities of an inherited 401(k) during an emotionally devastating time. If the policyholder has kids, the money could also be used to pay for their education.

So, if $150 is not a major monthly expense for Bob, he may want to consider keeping the policy. But it also depends on the type of life insurance he has.

Understanding different types of life insurance

Term life insurance covers you for a specified period of time (typically 10, 20 or 30 years) and expires once that period is over. It’s usually the most affordable option; it’s also a predictable expense, since premiums remain the same throughout the term.

This might be an option for someone who wants to ensure their children are financially supported until they graduate from college.

There’s also permanent life insurance (including whole life insurance), which provides coverage until you die — so long as you keep paying your premiums. Permanent life insurance builds cash value over time, which could be useful to policyholders while they’re still alive.

With whole life insurance, for example, you may be able to withdraw cash from your policy in the form of a loan. You’ll be charged interest, but you may get a better rate than a traditional loan.

This could potentially help with large expenses such as unexpected medical bills. If you don’t pay off the loan before you pass away, the loan and accrued interest are deducted from the death benefit.

The type of insurance coverage you have may influence your decision whether to cancel or not. It’s advisable to reach out to your insurance agent or financial advisor to help you make the best decision for your circumstances.

For example, with a permanent policy, you may have the option to sell the policy rather than cancel it, in which case you’d receive a cash payout. The payout amount depends, among other factors, on your age, life expectancy and death benefit amount.

It’s also possible to purchase a combination of life and long-term care insurance, which will provide both a death benefit and coverage for long-term care costs.