Mr. Chen, 60, purchased a 20-year Term life insurance policy 15 years ago. He is now considering letting the policy lapse because he believes his financial obligations have decreased significantly. His advisor, David, reviewed Mr. Chen's situation and discovered that Mr. Chen would like to leave a substantial legacy to his grandchildren. What should David advise Mr. Chen about letting his current term policy lapse?

Question: Mr. Chen, 60, purchased a 20-year Term life insurance policy 15 years ago. He is now considering letting the policy lapse because he believes his financial obligations have decreased significantly. His advisor, David, reviewed Mr. Chen's situation and discovered that Mr. Chen would like to leave a substantial legacy to his grandchildren. What should David advise Mr. Chen about letting his current term policy lapse?

Answer options: ✅ Lapsing the policy means losing the coverage, and if he later decides he needs insurance for a legacy, he will have to purchase a new policy at a much higher age and potentially higher health risk, as per the principle that lapsed policies cease to provide coverage.

• Lapsing the policy will allow him to invest the premium amount elsewhere, potentially yielding higher returns than the policy's death benefit.
• His current policy may have a cash surrender value he could access, making lapsing financially beneficial.
• He should consider converting his existing term policy to a permanent plan without evidence of insurability to secure future legacy planning, as this option is lost upon lapse.

Correct answer: Lapsing the policy means losing the coverage, and if he later decides he needs insurance for a legacy, he will have to purchase a new policy at a much higher age and potentially higher health risk, as per the principle that lapsed policies cease to provide coverage.

Explanation: Lapsing a term policy results in the cessation of coverage. If Mr. Chen intends to provide a legacy, he would need to apply for new insurance, facing higher premiums due to his older age and potential health changes, demonstrating the consequences of policy lapse.