You need to explain a little more about what the policy is that your father has.
Some life insurance policies build up a fund as well as providing the insurance so if you stop, then you get some money back. Some purely act as insurance so if you stop, then you get nothing back (these are typically cheaper because of this).
You say the fund is "now worth nothing" so a little confused as to which type of life insurance policy you have. If it's one that has a fund then it should be worth something (though it will be a LOT less than the money put in as you have benefited from having Life Insurance for all these years which costs something).
Typically Life Insurance policies are meant to give a pay off in case the worst happens. As wbbs says the hope is you never will have to use them. They are not really intended as a savings vehicle for retirement as you seem to want to use them as. As Brendan says, they are typically poor value when used for this. So while it may pain your dad to have "thrown away" all that money over the year, that is what he paid for. Simialrly to home or car insurance, just cause you didn't claim doesn't mean it was wasted.
Basically as you get older, you should have less need of Life Insurance as you have less financial impressibilities (hopefully your mortgage is paid off and your children become financially independent) and your pension kicks in for your retirement fund. So at this point in their lives it doesn't make sense for older people to have Life Insurance. Not to mention that it gets more expensive as the risk of claiming is obviously higher the older you get.
There are, however, several other points to consider:
You say your mum has no pension but does your dad's pension have a widow's pension included? Many do so your mum may still get some of your dad's pension even if your dad does die (typically 50% of your dad's pension).
If you are paying for a dual life policy, that means your dad will get a pay out when if your mother dies first. Is this payout needed or is it only needed if your dad dies first? A Single life policy would usually be cheaper.
While the Life Insurance policy is expensive (and may get more expensive), since they have kept it on until now, it may be worth keeping it. It depends on how much it is, and how healthy your parents are (and so how likely it is they will claim on it). True, it's probably not the best value product on the market, but then again they may not be eligible for any other life insurance policy now depending on their age. At the very least they will need to pass a new medical test if they want to move to another, better value life insurance policy/provider, so they may be refused cover or only offered cover at a more expensive premium to offset any health risks raised in the medical.