Author Topic: How long to keep term life insurance?  (Read 3381 times)

techwiz

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How long to keep term life insurance?
« on: April 22, 2016, 12:14:03 PM »
Back in 2000 my wife and I bought our home. At the time the mortgage broker was pushing mortgage insurance. After looking into the details and costs we decided to buy term life insurance instead of mortgage insurance.  For the same cost of mortgage insurance of $200,000 we got 500,000 life insurance each. The payment back then was $35 month.

This still makes a lot of sense and I would recommend it to anyone buying their first home for value of their insurance dollars.

However, now that my house is paid off I have started my FIRE plan and growing my stache I was planning on getting rid of the monthly cost of life insurance. Over the years this rate has been increasing and is now closer to $100 per month now. Before doing anything I wanted to ask for input from the community.

Here were some of my brain storming ideas:

-It is a comfort factor for both me and my wife.... Is it worth $100 a month... No...maybe
-Just under $100 per month for coverage of $500,000 turns to $1,000,000 if death is accidental is still a great deal and I would not likely get it again. We did have to go through a full medical back when we first got it don't want to go through that again.   
-We currently have additional coverage through work (but if we FIRE early maybe I would want to keep this insurance since I would not be able to get this type again for the price???)
-Don't really need the insurance since it is really just bonus money or grief relief money, the monthly fee could be used to grow my stache.

I am leaning towards canceling it ,but I might be living a dangerous life. I cleaned my own gutters on the second story roof on the weekend.  Also while biking home from work yesterday the guy on the bike in front of me got hit by a BMW turning left in front of him....(maybe I should keep it)

I welcome your comments.


 
« Last Edit: April 22, 2016, 12:30:53 PM by techwiz »

AlwaysLearningToSave

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Re: How long to keep Term ?
« Reply #1 on: April 22, 2016, 12:23:32 PM »
We need more information to be helpful. 

1)  Who would benefit from the life insurance?  If one of you dies?  If both of you die? 
2)  Why would they need the life insurance proceeds? 
3)  How much money is needed to meet the need identified in #2?
4)  Can you cover the amount specified in #3 with the assets you own (factoring in risk of final expenses reducing your assets)? 
5)  How long will the need identified in #2 exist?   

The premium cost does not matter if you don't need life insurance.  Conversely, if you need life insurance, it may be worth the higher premium.  Answering these questions will probably lead you to your answer.   

Also keep in mind that-- unless you are uninsurable-- there is probably a middle ground where you let this policy lapse and pick up a smaller policy to replace it.  You may even be able to reduce the death benefit on your current policy, thereby avoiding the need for a physical, but you would need to contact your insurer to find out if that is possible. 
« Last Edit: April 22, 2016, 12:25:07 PM by AlwaysLearningToSave »

dandarc

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Re: How long to keep Term ?
« Reply #2 on: April 22, 2016, 12:24:36 PM »
Once you have enough to support both of you for the rest of your lives, then by definition you don't need life insurance.  So no later than the day you hit your FI number.

As far as the interim, it depends on what you are comfortable with.  Paid off house doesn't, by itself, negate any possible need for life insurance, but paid off house + $500K in investments might for you or might not.  If you have kids, that tends to push you towards the "need life insurance" side of the equation, but surely there is a level of assets where even with several children, everyone will be just fine financially if you die.

As an example, I'm currently a couple of years into a 10-year level term policy.  I don't anticipate keeping any life insurance beyond the 10 years because even if we're not 100% FI, we'll be close enough to it.

BFGirl

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Re: How long to keep Term ?
« Reply #3 on: April 22, 2016, 12:26:45 PM »
I discontinued my term policy a couple of years ago.  I mainly purchased it so that there would be some money to support my kids if necessary, that my ex would not have control over.

I have some insurance through work, my home is paid for, and my kids would now inherit enough to keep them going until they could get on their feet (they are 21 and 18).

If you have younger children or plan to have children, you may want to keep it so that you can make sure there are funds for their support if you and your wife happen to pass.

AlwaysLearningToSave

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Re: How long to keep Term ?
« Reply #4 on: April 22, 2016, 12:29:38 PM »
If you have kids be sure to take into account the value of household work the two of you can do. 

When I bought term insurance, my wife was a stay at home mom.  I had originally thought that since she wasn't bringing in income, there was no need to get life insurance on her life.  I was grateful when someone pointed out that if she died, I would suddenly incur childcare costs and would not be able to be as frugal due to limited time.  Thus we chose to buy a smaller term policy on her life. 

Everyone's situation is different, so you have to analyze your needs for yourself. 

mxt0133

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Re: How long to keep Term ?
« Reply #5 on: April 22, 2016, 12:41:32 PM »
If you have kids be sure to take into account the value of household work the two of you can do. 

When I bought term insurance, my wife was a stay at home mom.  I had originally thought that since she wasn't bringing in income, there was no need to get life insurance on her life.  I was grateful when someone pointed out that if she died, I would suddenly incur childcare costs and would not be able to be as frugal due to limited time.  Thus we chose to buy a smaller term policy on her life. 

Everyone's situation is different, so you have to analyze your needs for yourself.

Don't forget about Social Security survivor benefits.  If you spouse has earned enough credits the child and the spouse taking care of said child is entitle to benefits until the child turns 18 or 19 if they are in college.

Look into what those would be in SSA.gov.  For example if I died today, each of my children would be entitled to $2100 a month until they turned 18 and my spouse who will be caring for my children would also be entitled to $2100 a month.  There is a maximum family benefit of $4,900 regardless of how many kids I have.

So depending on the OP's circumstances he might or might not need the policies.  However with a paid off house and a working spouse, in most cases continuing to keep the policy is synonymous to buying a lottery ticket that will pay out if either of them died.

Villanelle

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Re: How long to keep term life insurance?
« Reply #6 on: April 22, 2016, 12:43:03 PM »
We need more info.  Children and their ages?  Comparison of your spouse's salary vs. yours?  If there is no real need to replace your income and no childcare needs to consider beyond what SS will cover, certainly you can, at the very least, reduce it.  You mentioned "grief" money.  If that is money to allow the surviving spouse to take some time off work to grieve and process and reorganize, you could certainly cut your insurance down. $50k or even $25k, covers some time away from work and some modest funeral costs.The work policy may cover that, however, and while that does go away when you are FIRE, once you are FIREd, what do you really need the money for?  The survivor has the stache to live on, and expenses shouldn't go up for any real reason.

techwiz

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Re: How long to keep term life insurance?
« Reply #7 on: April 22, 2016, 12:58:07 PM »
We have two kids 10 and 13. The term life insurance is no longer needed and is really just unnecessary extra coverage at this point. It was put in place instead of mortgage insurance 16 years ago we just never cancelled it. It really stuck out as an expense I could cut when was calculating my FIRE plan. 

I think mxt0133 has really nailed it is like a lottery ticket ,but likely better odds maybe that's why we kept it so long. I really should have dropped it once the house was paid off. 

forummm

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Re: How long to keep term life insurance?
« Reply #8 on: April 22, 2016, 01:09:35 PM »
We aren't FI yet, but we don't have life insurance. We cancelled after we got a pretty decent amount of money saved. If one of us died, the kid would be fine financially with a decent savings and the remaining parent still employable. If both of us died the kid would have much more money than would be needed to get him to age 18. Figure out how much money you think your kid(s) would need to get them to 18 and if you have more money than that you don't need insurance. Your kid won't need to pay off your $500k mortgage. He'll go live with some relative or whomever you designate. Something reasonable like $10k or $20k or whatever per year will more than pay for whatever their additional expenses would be to take care of him.

RelaxedGal

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Re: How long to keep term life insurance?
« Reply #9 on: April 22, 2016, 01:10:22 PM »
Back in 2000 my wife and I bought our home. At the time the mortgage broker was pushing mortgage insurance. After looking into the details and costs we decided to buy term life insurance instead of mortgage insurance.  For the same cost of mortgage insurance of $200,000 we got 500,000 life insurance each. The payment back then was $35 month.

[...]
Over the years this rate has been increasing and is now closer to $100 per month now.
After evaluating your needs per AlwaysLearningToSave's post, if you do decide it's worthwhile to have life insurance consider a guaranteed term rate rather than yearly renewable term.  As we get older, rates go up.  If you're healthy and willing to go through another paramedical exam you might save a bit.  Plug in some numbers at an aggregator or an insurance company's quote engine to get a ballpark.

As a 36 year old female in great health I was able to get $500,000 of insurance, 20 year term, for $240/year from SBLI.

You may be closer to FI (shorter term = cheaper) or older than me or in poorer health (pricier) but I wanted to toss it out there for comparison.

AlwaysLearningToSave's suggestion to reduce the death benefit with your current insurer is also a good idea - they have an incentive to keep a current customer so they don't have to do the legwork to bring in a new one.

forummm

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Re: How long to keep term life insurance?
« Reply #10 on: April 22, 2016, 01:12:49 PM »
However with a paid off house and a working spouse, in most cases continuing to keep the policy is synonymous to buying a lottery ticket that will pay out if either of them died.

Sounds like a $%*( @#*$ lottery. Wouldn't want to "win" that one.

If a spouse died, it might actually be good to still have a job for awhile to help keep life more regular and not have you be stuck at home without something to distract you. So the money wouldn't be that useful.

VaCPA

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Re: How long to keep term life insurance?
« Reply #11 on: April 22, 2016, 01:48:12 PM »
I view our insurance as income replacement, if myself or my wife kicks it, because right now we're dependent on each others income. I specifically bought 30 yr term because I wanted a fairly cheap policy to protect us through our working years and then go away, after which we wouldn't need insurance anymore because we would've saved enough to live on. So, the question you have to ask yourself is if you died tomorrow do you have enough saved for your wife and family to comfortably live off or would they need the insurance proceeds?

techwiz

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Re: How long to keep term life insurance?
« Reply #12 on: April 22, 2016, 01:58:47 PM »
However with a paid off house and a working spouse, in most cases continuing to keep the policy is synonymous to buying a lottery ticket that will pay out if either of them died.

Sounds like a $%*( @#*$ lottery. Wouldn't want to "win" that one.

If a spouse died, it might actually be good to still have a job for awhile to help keep life more regular and not have you be stuck at home without something to distract you. So the money wouldn't be that useful.


I agree it is the lottery no one wants to win. Since it's is no longer required and likely has not been required for a number of years now it will be one less expense bringing FI that much closer. 

I should have read this post from 2011 in 2011...
http://http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/

« Last Edit: April 25, 2016, 07:37:07 AM by techwiz »

MsPeacock

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Re: How long to keep term life insurance?
« Reply #13 on: April 22, 2016, 06:43:26 PM »
Per my divorce agreement I have to carry life insurance until the kids are 18 (same with the ex) for the kids as beneficiaries. The youngest is 9 - so I have a ways to go. It is about $70 per month (fixed cost, for 30 years if I keep the policy) for a 500k policy. Currently my thinking is that once they hit 18, assuming my net worth is great enough to see them through college and a little nest egg (like 50k) I will cancel the policy. I'm pretty much there now in terms of funds, so I am just waiting for the clock to run down.

The policy was originally purchased 5 years prior to the divorce w/ the plan to have enough to pay off the house, pay one year's salary for the spouse (I wasn't working at the time - not necessarily to take a year off, but to pay for live-in childcare or whatever), and fully fund college.

My policy was expensive because my father died at 36, it would have been closer to $35 per month otherwise. $100 per month sounds very high unless there are other factors.

No harm in calling around to see if you can find a better rate.

techwiz

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Re: How long to keep term life insurance?
« Reply #14 on: April 25, 2016, 07:45:12 AM »
The real numbers are $42.20 per month for my coverage $500,000 doubled if death caused by accident. My spouse's coverage was the same for $39.00 plus another $6.50 tax for a total of $87.70.

I called and they told me they required cancellation in writing (they emailed me the form) and will stop the insurance the following month once they receive the cancellation letter.