When to Cancel or Retain Term Life Insurance as You Near Financial Independence

The journey toward financial independence is a profound milestone, marked by the transition from earning to preserve wealth to earning to generate it. Yet, as individuals approach this threshold, a critical question arises: should they cancel or retain term life insurance? This decision hinges on a delicate balance between risk mitigation-protecting against unforeseen financial shocks-and opportunity cost-the value of alternative uses for the premiums paid.

The Case for Risk Mitigation

Life insurance, particularly term life, is designed to address the risk of income loss for dependents. According to the 2025 Insurance Barometer Study by LIMRA and Life Happens, 42% of American adults lack sufficient life insurance coverage, creating a $51 billion protection gap. This underscores the persistent need for policies that safeguard families against economic instability. For middle-class households, the ACLI Financial Resilience Index reveals a nuanced picture: while 52% of such households feel confident covering a $5,000 emergency expense, disparities persist, particularly among rural and multi-child households. Term life insurance remains a cost-effective tool for bridging these gaps, especially when dependents rely on the policyholder's income.

Consider the case of a 51-year-old individual with a $1.5 million term policy, paying $200 monthly. If their spouse remains financially dependent, maintaining this coverage is prudent, as the policy's cost-effectiveness aligns with its protective purpose. However, once financial independence is achieved-marked by sufficient savings to cover retirement or by dependents becoming self-sufficient-the rationale for retention weakens.

The Opportunity Cost Dilemma

The opportunity cost of retaining term life insurance grows sharper as financial independence nears. For instance, a policyholder with $250 monthly premiums could redirect these funds to investments, potentially yielding higher returns. A LIMRA study highlights that 37% of Gen Z and 46% of Millennials cite cost as a barrier to life insurance, often overestimating premiums by 10–12 times. When armed with accurate information and tools like budgeting apps, younger adults are more inclined to view insurance as part of a broader risk-mitigation strategy. For those nearing financial independence, however, the calculus shifts: the same premium might represent a drag on liquidity or a missed opportunity to accelerate wealth growth.

Quantitative analyses of cancellation rates, though limited, suggest that mass lapse events in life insurance are rare and context-dependent. Yet, individual decisions are often guided by personal circumstances. If a policyholder outlives their term policy, renewal becomes prohibitively expensive due to age-related risk factors. Thus, timing is critical: canceling when dependents no longer require income replacement or when savings suffice to cover potential liabilities avoids locking in escalating costs.

Balancing the Trade-Offs

The decision to cancel or retain term life insurance requires evaluating three key factors:
1. Financial Independence Status: If savings exceed retirement needs or dependents are self-sufficient, the need for coverage diminishes.
2. Dependents' Needs: A spouse or children reliant on the policyholder's income may still justify retention.
3. Health and Longevity: Poor health or early retirement might necessitate continued coverage to bridge income gaps.

Dr. Jim Dahle of The White Coat Investor advises that financially independent individuals should cancel whole life policies and redirect premiums to tax-advantaged investments like HSAs or Roth IRAs. For term policies, the same logic applies: if the coverage no longer serves a clear purpose, cancellation is rational. However, converting to permanent insurance-though costly-may offer a middle ground for those seeking lifelong protection without re-underwriting.

Conclusion

The interplay between risk mitigation and opportunity cost is not a binary choice but a dynamic calculus. As financial independence nears, the protective value of term life insurance often wanes, while the potential returns from reallocating premiums grow. Yet, prudence demands a tailored approach: for some, a modest policy may still serve as a safety net; for others, cancellation is a logical step toward optimizing capital. In an era of economic uncertainty, the key lies in aligning insurance decisions with evolving financial realities.