Author Topic: Term Insurance - When Should You Self-Insure?  (Read 1750 times)

mr_orange

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Term Insurance - When Should You Self-Insure?
« on: November 21, 2015, 07:22:52 PM »
My wife and I bought term insurance policies about 10 or so years ago.  Our premiums aren't a giant expense, but they certainly are starting to feel like a waste.  We have three small kids at home that will turn 3, 3, and 6 in January of next year.  Our net worth is likely to top $1.2M by the end of the year and our term policies are $500k each if memory serves. 

At what point does it generally make sense to self-insure here?  My parents are both still alive and could take care of the kids if we were both killed at the same time.  We're working on a new will and will probably appoint my wife's sister and brother-in-law as the godparents for this scenario. 

Any thoughts or general guidance?  I'm inclined to drop the policy late next year after we sell a lot of our current real estate product which should net roughly $500k or so. 

seattlecyclone

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Re: Term Insurance - When Should You Self-Insure?
« Reply #1 on: November 21, 2015, 08:01:42 PM »
Life insurance is important to make sure that your family members are taken care of if you were to die and your income would disappear. If your assets (plus any social security survivor's benefits, employer-paid life insurance, etc.) are already sufficient to do that, then you don't need to buy life insurance. The exact numbers you need depend on how you define "taken care of," and how long the money would need to last for that purpose.

James

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Re: Term Insurance - When Should You Self-Insure?
« Reply #2 on: November 21, 2015, 08:10:31 PM »
Life insurance is important to make sure that your family members are taken care of if you were to die and your income would disappear. If your assets (plus any social security survivor's benefits, employer-paid life insurance, etc.) are already sufficient to do that, then you don't need to buy life insurance. The exact numbers you need depend on how you define "taken care of," and how long the money would need to last for that purpose.


I agree. An added thought is that if the benefits you are leaving are not fungible, can be accessed and used for needed expenses, then you may need the cash insurance provides. Say if you were mainly leaving property or a business the survivors might need cash to live so they don't need to sell the property/business to have the needed cash.


But in your situation it sounds like there is plenty of cash or investments that can easily be converted to cash, so they should be set. Personally I am close, but not quite there. I figure I will just stop paying term insurance at FI, though I could probably safely stop earlier...

fa

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Re: Term Insurance - When Should You Self-Insure?
« Reply #3 on: November 21, 2015, 08:17:23 PM »
You need to assess the financial needs in 3 scenarios:  1) you die and leave behind your family; 2) your spouse dies and leaves you behind with the kids and 3) both parents die and leave the kids behind.

The third scenario is the easiest (from a financial viewpoint):  you assets are plenty to cover the living expenses and possibly educational expenses such as college for both kids.  So no insurance needed for that scenario.

If either spouse dies, the other spouse has to be able to work, take care of the family and provide for the kids' living expenses including possibly collehe if you choose to fund that.  The cash requirement may be much higher.  There would likely be day care and other additional expenses you don't have now.  Make sure that the numbers work out for either one of the spouses dying.  If they do, drop the life insurance.  I did that 5 years ago for my wife and I and it has been a really good decision.  Remember that term life goes up in price a lot when you get older.

mr_orange

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Re: Term Insurance - When Should You Self-Insure?
« Reply #4 on: November 21, 2015, 08:28:51 PM »
My wife works right now and makes about $100k/year.  We pay for 2 of the 3 kids to go to Montessori School. 

That's a good point about me dying though and my wife taking care of the kids by herself while working.  Maybe the jettison point for the term policy could be when all three kids go to public school full time in a little less than 3 years.