Questions about life insurance

[anonmustach3]

Hello,

From my bit of reading around here and other FIRE sites, many people don't generally seem to like life insurance, and if needed, recommend term policies. I have a policy that I've had since my parents got it for me back in the 90s (matures when I'm 96 or something) and right now I'm just finally looking at it to see if it makes sense to keep or cash out (and pay the income tax on it) but I don't know much about life insurance and haven't really be able to make a lot of sense about the different options.

With this policy I'm paying $222 / year and its death benefit amount is $43,500 and the cash out is $5,500. It claims the guaranteed credited interest rate is 4% but I'm not entirely sure what that is. Does that mean that's the interest it earns on the accumulated value (e.g. $5,500)? From the statements it looks like it earns about $18 in interest per month but there's an $8 fee/deduction per month as well. The latest note from them is also giving me the option to increase the death benefit by 60K without a health screening (don't care too much about that today since I'm in good health, at least I think so) -- although I'm sure my premiums will go up accordingly.

How do you go about evaluating life insurance and how this might compare to other policies or even if you need one?

Additional note: wife and I are in good health in our 30s with a 2 year old. Cash, retirement, and taxable investments are over 350K and we have just under $230K and 14.5 years left on our 2.875% mortgage. My income (and our only income) is about 140K per year and my employer provides a life insurance policy that doesn't cost me anything but that pays out 1 yr of salary if I were to die.

[Chris-93AUS]

As someone who works in financial planning generally speaking, Life Insurance should be used to clear debt in the event of death and maybe provide for a funeral.

i.e mortgage, credit cards, personal loans etc

If you have no debt, and can't foresee yourself taking on any in the near future then perhaps cashing it out may be reasonable.

$222 a year is pretty cheap and that 60k increase could be useful, but again, only if you intend to take on debt in the near future.

[nobody123]

There are dozens of websites for you to shop for term insurance from multiple companies.  I would think you can get better term coverage for what you're paying now.  Of course, you should still evaluate if you need any insurance above what your job provides given your assets.  Remember, in the US, Social Security gives a monthly survivor benefit to kids under 18 and a surviving parent who is caring for them.  I'd check your SS statement to see what that amount would be.  That amount, along with your spouse's income, might be good enough.

That being said, if you decide to get term insurance, make sure you get it approved and make the first payment before you cancel your existing policy.  I have had friends (plural) who have been denied term life insurance because of a serious health condition that was discovered by the insurance blood work.  If you think insurance is necessary, don't risk losing it.