The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: maryofdoom on March 06, 2013, 11:50:30 AM
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Hi friends,
I asked about this topic previously, and didn't get any replies, but I've done some more research, and also, can phrase it as more of a philosophical query. Do I really need life insurance?
My husband has a life insurance policy that his parents made him take out when he started working. It's a whole-life policy with a Type B death benefit. It costs us $60/month, and has a cash value of about $5,500, with a base death benefit of $80,000. I am pretty tired of having to fork over $60/month when there are other things out there that he could be investing in, like his Roth IRA or a regular taxable investment account.
Should we cash out this policy and put the money somewhere else?
Here is what's making me think that cashing out is a good idea:
- We have no children at the moment and will not have any in the future. (He practically raised his little brother and I'm the oldest of four; we are done with child-rearing)
- Our house is about two, maybe two and a half years from being paid off.
- We have no consumer debt.
- I work for a university, while he works for a local engineering firm doing property right-of-ways and half the IT work in the office. Our jobs are about as stable as jobs can get.
- I have supplemental life insurance through my job to the tune of two times my annual salary.
- We are the beneficiaries of one another's retirement accounts and all that kind of stuff.
It's my understanding that life insurance is set up to replace your salary and support your family if you were to die. Unless there's some angle to it that I am missing.
Given what I've laid out for you here, should we keep this life insurance policy and continue to pay into it, or should we cash it out, put the money in his Roth IRA, and continue to contribute the $60/month toward that?
Any advice is most welcome. I'm also planning on asking our accountant when we go to get our taxes done on Monday.
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Can you maintain a lifestyle you would be happy with if he were gone?
Based on what you said I believe the answer to that is yes therefore I don't believe you would need any life insurance.
Also if the answer is no you should probably look into term and not whole. $60 a month seems crazy expensive to me. I have 10year term at 150 a year. (full disclosure I was 26 when this was taken out)
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I say ditch the whole life policy. Term life insurance will get you more bang for the buck.
The question is do you need life insurance at all? Let me ask you: if your husband were to die today, how would that affect you financially?
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TheDude, thanks for your input. I'm sure I would be fine if something were to happen to him. We also have good support networks between the two of us - his family is here and would be immediately helpful, while my family is far away, but would be financially helpful. (I know it's not smart to rely on people to bail you out, but my parents have helped me out in crises before, and would probably do so again, should a crisis occur.)
I have a whole life policy of my own that was taken out when I was six months old. It costs me $108.50 per year, which I am comfortable with.
I just want to make sure we're doing the right thing here, is all.
John (I read your post after I typed my earlier reply): if my husband were to die today, I would be understandably devastated; but as far as our finances go, I'd be able to pay all the bills with my own salary. Some re-balancing would be required, obviously, but our mortgage payment is so low, I wouldn't lose my house. And with no children to educate and only myself and the dog to feed, I'm sure we'd be fine, financially speaking.
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I agree. From a frugal / mustachian perspective, life insurance should simply protect the family in the event of the death of a primary earner. It is generally not a good investment vehicle, although some insurance salespersons will try to sell it to you as an investment.
If you're not FI yet, you probably should consider life insurance. TheDude is right however - buy term life insurance. It has no cash value at maturity, so the money you put in is "gone" - but you put much less money in, because you're not buying an investment, you're buying... well, insurance!
So, if I were in your shoes, I would examine:
- What situation will the surviving spouse be in after death? Will he/she be able to make it on their own? In your case, with no dependents, the need for insurance is less, as presumably the surviving spouse will be able to work? What do your values tell you about your responsibility for providing that additional income?
- How much time you have until your family is FI
- How much insurance (payout) you need to bridge the gap between now and FI
In either case, whether you buy term insurance or decide you don't need it, I would cash out the current policy you have and the $60 monthly payment - invest it somewhere else.
I myself have a larger term-life policy, because: I have 2 small children, my wife does not earn nearly enough to support our family at our current spending levels, and we are years from FI. I do, however, rethink the need for the policy periodically as we make our mustachian journey. I think at some point we will reduce or cancel it, just not yet.
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Use it up: That is a very interesting way to think about it! It sounds like the insurance you have is right for you in your situation.
I am the primary breadwinner in the household. That's why I bought the additional policy through my workplace. In fact, the husband could quit his job today and we'd be fine. I don't think I would have a huge need to replace his salary.
What happened with this policy is, his mom made him get it when he started working. She also has a custodial IRA for him that he really needs to get control of. I'm not sure how familiar his mom is with modern investment vehicles, especially Roth IRAs and Vanguard index funds.
It's sounding more and more like cashing it out and putting it into his Roth IRA is the right way to go.
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Sounds like your husband does not need to buy life insurance. Some people still like to get a cheap term life insurance policy with just enough coverage to pay off the mortgage. They feel better knowing that their spouse won't struggle with keeping the family home if they were to pass away. But that's a personal choice.
As for the whole life policy, I think it is a great idea to cash it in and put the money in a roth. But read the policy carefully and make sure you understand the surrender charges.
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Hi friends,
I asked about this topic previously, and didn't get any replies, but I've done some more research, and also, can phrase it as more of a philosophical query. Do I really need life insurance?
My husband has a life insurance policy that his parents made him take out when he started working...
(I added those italics...)
Hm, there may be a generational issue here:)
My FIL tried to get my (now 48yo) single, never-married, no kids, no mortgage (she rents), owns car outright SIL to buy life insurance for *years*. Her current job comes with a 'supplementary' policy as a perk, that finally satisfied FIL. No amount of 'what does she need life insurance for' had an impact on his concern, no matter what angle we tried. FIL is a lovely man, but his view of the utility of life insurance *might* not be MMM like!! In his view, all responsible adults have life insurance...