That life insurance policy you've had for decades: keep paying, cancel, or convert?

Many retirees still hold life insurance from their working years — usually term life cover bought in their 30s or 40s when the children were young and the mortgage was large, often through their super fund. By retirement the original reasons have usually changed: the children are grown and self-supporting, the mortgage is paid off or much reduced, super has accumulated and will provide for a surviving spouse, and the premium has typically climbed sharply under age-stepped pricing as the policyholder has aged. The decision then becomes whether to keep paying, cancel, or — for older whole-of-life and endowment policies — convert to a paid-up form. Each path has tax, estate and Centrelink implications, and the right answer depends on the policy type, the family situation, and the cost-benefit of continuing the cover.

A common error is simple inertia — continuing to pay on a policy whose original purpose has gone, with the premium climbing year on year, until it's eventually cancelled in frustration or lapses unpaid. An honest review at or shortly after retirement is much cleaner. This article walks through the decision framework for the different policy types, what to check, and when to keep, cancel or convert — including the sometimes valuable considerations for the older-style policies still sitting in filing cabinets. It is general information only, not personal advice.

Why might the original reasons no longer apply?

Life insurance is typically bought in working years to protect a non-working spouse or young children's income, to cover a large mortgage a survivor couldn't service alone, to fund a business buy-sell agreement, to provide cash to settle an estate, or simply as default cover automatically provided through super. By retirement most of those conditions have changed — children are adult, the mortgage is usually cleared, super has built up, and a surviving spouse's security typically comes from combined super, the home and the Age Pension, often making a separate policy redundant. Meanwhile the premium has often risen steeply, because age-stepped cover (the most common kind) is recalculated at each renewal and rises as the chance of a claim grows with age (MoneySmart). The result is that many retirees pay substantial premiums for cover that no longer serves a current purpose.

Why is term life usually a binary decision in retirement?

Term cover pays a sum insured if the policyholder dies within the term, with no cash value if it lapses or is cancelled, so the choice is simply to keep paying or cancel — there's no surrender value to weigh. The premium structure matters here: age-stepped premiums rise each year and can be large past 70, while a level (now called variable) premium locks in a higher initial rate that rises more slowly because it isn't recalculated on age (MoneySmart). For a retiree holding age-stepped term cover with no current need, cancelling can save a meaningful sum each year, a real and compounding benefit. The trap is the sunk-cost reflex — "I've paid premiums for 30 years, I can't just cancel." The 30 years of premiums are gone either way; the only number that matters is the future premium, and at older ages it's often substantial.

Why are whole-of-life and endowment policies more nuanced?

These older-style policies, common from the 1960s through the 1990s but rarely sold today, build a cash surrender value over time alongside a sum insured payable on death or sometimes at a set maturity age. At retirement there are three choices. Continuing to pay keeps the sum insured (and cash value) growing with bonuses, which suits a modest premium and a policy with favourable bonus features. Surrendering takes the current cash value and ends the policy — usually the lowest-value option, since the surrender value is typically less than the eventual death benefit, but the cash is accessible now. Converting to paid-up stops the premiums and continues the policy with a reduced sum insured, roughly proportional to what's already been paid, at no further cost. Crucially, older policies sometimes carry features the modern market doesn't offer — guaranteed bonus structures, low locked-in premiums, favourable participating benefits — so it's worth getting the insurer's projection of the paid-up sum insured against the surrender value (and, where the premium is small, the value of simply continuing) before doing anything. Don't surrender a 30-year-old policy without first checking what you actually have.

When does keeping the cover make sense?

Keeping the cover is justified where genuine dependants still rely on the policyholder's income — a younger spouse not yet retired, or an adult child with disability — or where substantial debt remains, such as a mortgage, business loan or geared investment property the family would struggle with on death. It also makes sense where a business buy-sell agreement is still active, where the estate holds substantial illiquid assets (a business, property) that will need cash to wind up, where a level premium was locked in at modest cost so continuing is cheap, or where the policy is being deliberately maintained to fund a specific planned bequest such as a charity or grandchildren's education.

When does cancelling make sense?

Cancelling is the right call where the dependants are gone — children adult and self-supporting, a spouse with independent super who would be financially fine — where the debt is resolved, and where super, the home, the Age Pension and the estate would amply provide for a survivor without the policy. It also makes sense where the premium has become uneconomic relative to the sum insured, and where the estate is mostly liquid and needs no insurance-funded cash to settle. A rough guide some advisers use is that once the annual premium climbs to a few per cent of the sum insured, continuing rarely makes economic sense for cover that isn't needed — though that's a heuristic, not a rule.

What are the tax, Centrelink and beneficiary considerations?

The treatment differs sharply inside and outside super. A life insurance payout made directly to a nominated beneficiary outside super is generally not assessable for income tax. Inside super, the payout follows the super death-benefit rules: tax-free to dependants under super law (a spouse or financial dependants), but with the taxable component to a non-dependant — typically an adult child — taxed at 15% plus the 2% Medicare levy on the taxed element, an effective 17% (ATO). For Centrelink, the surrender value of a whole-of-life or endowment policy is an assessable asset for the Age Pension assets test, while a term policy has no surrender value and doesn't appear (Services Australia). Beneficiary nominations always need checking — a policy from the 1980s may still list a now-former spouse or a child since deceased, a common find when reviewing old paperwork — and the proceeds go to whoever is nominated on the policy, not whoever is named in the will, unless the policy nominates the estate. For super-held cover, the review should also confirm the binding death benefit nomination, and it's worth comparing what you hold inside super against any cover outside it (MoneySmart).

What does the practical workflow look like?

The review runs in a few steps. First, find the documentation — many people have forgotten what they hold, so check the filing cabinet, super statements and old insurer correspondence. Then, for each policy, note the type, sum insured, current annual premium, premium structure, ownership, beneficiary nomination, any cash surrender value, and any paid-up option. Next, assess the genuine current need against dependants, debt, business obligations, estate liquidity and any specific bequest. Then make a deliberate decision for each policy — cancel, continue or convert — and action it, getting written confirmation of any cancellation, keeping direct debits in place for continuing cover, confirming any paid-up conversion in writing, and updating beneficiary nominations. Finally, file the paperwork so the family can find it when needed.

What do worked examples look like?

These two cases show the review in practice. They are illustrative only, not personal advice, and specific policy terms need checking with the insurer.

Sigrid, 73, widowed last year and with no children, holds an age-stepped term policy with a $400,000 sum insured whose premium has climbed from $180 a year when she bought it at 45 to about $3,800 a year now. The original purpose — providing for her late husband if she died first — has obviously gone. On these facts the policy is straightforward to cancel: she has no current dependants, no outstanding debt (she owns her home outright with modest super and savings), no business obligations, no estate-liquidity problem, and no specific bequest that depends on the proceeds, so the purpose has fully evaporated. The premium has reached nearly 1% of the sum insured, on cover that isn't needed at all. On these facts it is generally rational to first confirm there's no overlooked need (a niece she meant to benefit, say), check the beneficiary nomination (likely still her late husband and needing updating regardless), then write to the insurer to cancel, get written confirmation, and redirect the $3,800 a year — to super contributions if she's eligible, to spending, to giving, or simply to better cash flow. The sunk-cost worry ("I've paid for 28 years, I can't just stop") reframes cleanly: the 28 years are gone either way; what matters is the $3,800 a year going forward.

Cornelius, 76, a retired teacher, holds a 1986 whole-of-life policy from a friendly society — sum insured $80,000, current cash surrender value about $35,000, premium $40 a month ($480 a year) — with his wife alive and well and both children adult, and he's wondering whether it's worth keeping. On these facts the policy is more interesting than its headline figures suggest. Old participating whole-of-life policies sometimes carry bonus structures that have quietly added to the sum insured over the decades, so the original $80,000 may now be considerably higher, and at under 0.5% of the sum insured the $480 premium is modest. On these facts it is generally rational not to surrender without investigation: get the insurer's full statement — current sum insured with bonuses, surrender value, the paid-up option, and a continuing-premium projection — and compare the three paths. Continuing pays $40 a month for life with the death benefit growing and ultimately paying a generally tax-free amount to his family; paid-up stops the premium and keeps a reduced sum insured at no cost; surrender takes the cash now and ends the cover. For a modest-premium 1986 policy, continuing is often the right call, with paid-up the sensible fallback if he wants to stop paying, and surrender rarely best unless the $35,000 is needed for something specific. The lesson is that this kind of old paperwork surprisingly often turns out to have real value once properly examined.

For retirees reviewing existing life insurance, the work is to inventory every policy (term, whole-of-life, endowment and super-held cover — often more than the client remembers), identify each policy's type and key features, assess the current need honestly, make a deliberate keep, cancel or convert decision for each (binary for term cover, three-way for whole-of-life and endowment), check and update beneficiary nominations, coordinate with the estate plan (the binding nomination on super-held cover, the will for personally held cover), and document and action the decisions. The corrective headline is that cancelling cover you no longer need isn't "wasting" the premiums you've paid — those are gone either way, and the real question is whether to keep paying for cover that no longer serves a purpose. Equally, an old whole-of-life policy in the filing cabinet may be worth more than it looks, so don't surrender it without checking. Product features vary by insurer and era, so verify the specifics with the insurer before relying on them — but the shape of the review is durable.

Sources

• MoneySmart — Life cover
• MoneySmart — Insurance through super
• Services Australia — Asset types (Age Pension)
• ATO — Paying superannuation death benefits