If you have no cash value on the first policy then it makes no sense to pay on it when you have an even larger policy current. I'd drop the one policy and concentrate on the 401K or find something else to dump the $250 per month on that might be a little easier to manage unless your 40K didn't take a major hit.

I don't know your whole financial picture, but Whole life insureace usually isn't a very good investment vehicle, especially in an inflationary enviroment. If we were going into major deflation i would say stick with the Whole Life Insurance, but we are definitly going the other way. If you need life insurace i would suggest looking into a Term Life Policy and then adding the rest of your funds to your 401k or a Roth IRA depending on your tax braket.

I am 30 and have a 20 year 500k term life policy that i pay $32 a month for. I put about $500 a month into my 401K, and add money to my Roth IRA when possible. At least take a look at the interest rate you can earn in your whole life policy and see how it would compare to some decent Bond funds in a 401k. Municipal bonds are are probably a little more risky then i might suggest, but are earning ~6% at the moment.

Yes, it makes perfect sense to let that policy lapse. Once you have maxed your 401K, I would suggest that since you would have been obligated to pay $250 a month for that policy, to budget that money now, for your own private mutual fund. Google ' dividend reinvestment plans' and research individual companies. Many plans only require $100 to enroll. Invest in five, ten or how many you desire. You can invest in them, no broker involvement, so fees are low.

If you have more questions, ask here. I am certain the wise people here can help .