Discontinuing Disability and Life Insurance

[ferco]

At what point in ER can one feel reasonably "safe" in discontinuing disability and term life insurance policies. I figure if you've reached "retirement" and have an adequate funds for funeral expenses in your portfolio what's the purpose in continuing to pay these two premiums.

 

[traineeinvestor]

I will discontinue life insurance as soon as I retire - by definition if I have enough to support myself and my family while I am alive there will be enough to support my family without me (lower costs). At that point the premium is 100% wasted money. This works for me because (i) there will be no or very little estate duty to pay and (ii) there are no social security or pension type benefits that will be cut off on my death.

Disability insurance is provided by my employer and I will lose coverage as soon as I cease to work. Whether we replace it will depend on how much it costs at the time of retirement.

 

[brewer12345]

Disability is easy. If you no longer need to work for money, cancel. It is disability INCOME insurance, after all.

Life ins is a bit trickier. You may still need LI if you croaking would end a stream of payments your survivors depend upon, or if you need LI for estate planning purposes. If neither of these apply, I would cancel.

 

[billin]

Once you don't need them, why pay the premiums? I haven't ever carried either insurance on myself as I didn't get married until I was 30 and at that time the numbers were very iffy.....

 

[jimnjana]

We plan on keeping term until the mortgages are paid off. At that point then it would not be needed.

 

[jebmke]

I'm not even sure a disability policy will pay out if you are no longer working. As noted above, it is for loss of income. No income, no loss. You'd have to check the language in the policy.

As for life insurance. I canceled ours when our assets were sufficient to provide adequate income/cash flow for my spouse. Our house is paid for and we have no other debts.

 

[JOHNNIE36]

I agree with all the answers given. Also, don't forget to look at your automobile insurance policy. You can eliminate "loss of wages" premiums.
I always look at how much would DW get per month or annually when I pass away and would that be enough to sustain her and allow her to live in the life style in which we are living. I wouldn't want her to have to move because she can't afford the taxes or upkeep on the house. Since we have no debt, I try to stress the importance of that position. At my age I couldn't afford the term insurance premiums to supplement any loss of income.

I called Social Security and was told that when I die, her SS amount goes away and is replaced by my Social Security which is more than double hers. She also would get 75% of my pension. Those funds plus income off CD's would give her enough to maintain our current lifestyle.

 

[TromboneAl]

Cancel them the moment you are financially independent (retired or not). If you're not working, then if you die, your spouse's expenses will go down.

 

[73ss454]

I held onto my disability coverage for about 6 months and then let it go. Still have my LI policy though.

Wish I still had the disability ins. as I'm back working PT but I don't think I really need it.

 

[walkinwood]

as others have suggested, study the impact of pension and SS payouts when either spouse passes away before canceling your term-life.

ESPlanner lets you model survivor-ship and I hear they have a free online version now, so give that a try.

 

[meierlde]

Also consider that if your auto policy says to work or school, if you change to no to work or school driving you can save some money because, you are not exposed to the commuter traffic.

 

[Moscyn]

I may missing something here. I am FI and retiring next month. I have reviewed my 2 life insurance policies and have decided to continue with them. One of them is already "earning" money for me in that the cash value and dividend is above the amount paid to date and the dividend earned each year is more than the premium paid each year. So, I decided to continue with this and review it again in 5 years time. The other will be able paid up at age 60 (I have still 10 more years to go). I have major disease Benefit (i.e. critical illness claim) as a Rider on this policy. So, I will want to continue with this policy until I am very much older. I have no dependents. Reading the thread above, I am now asking myself whether I have missed something in my decision.

 

[Gumby]

I think people have been talking about stopping a term life policy, not a whole life policy like you apparently have.

 

[brewer12345]

I may missing something here. I am FI and retiring next month. I have reviewed my 2 life insurance policies and have decided to continue with them. One of them is already "earning" money for me in that the cash value and dividend is above the amount paid to date and the dividend earned each year is more than the premium paid each year. So, I decided to continue with this and review it again in 5 years time. The other will be able paid up at age 60 (I have still 10 more years to go). I have major disease Benefit (i.e. critical illness claim) as a Rider on this policy. So, I will want to continue with this policy until I am very much older. I have no dependents. Reading the thread above, I am now asking myself whether I have missed something in my decision.

So you have no dependents and you still wantto maintain and pay into life insurance policies that have cash value you could put into a different type of contract with much lower expenses? OK, whatever turns your crank.

 

[dgoldenz]

Keep in mind that the average person stays in a home for about 7 years before moving. If you think there is any chance you would move into a new/bigger house at some point, I wouldn't be so quick to dump the life insurance.

I sell life insurance and I can tell you that things often don't play out the way you intended. Seen it time and time again where people have unforeseen expenses and spend down much of their retirement money. How many people who planned on retiring at a certain age lost their jobs in the recession and were forced to spend down their savings since there was no income?

If you are not close to being 100% financially independent for the rest of your life without working (i.e. all debts paid and a large cushion for retirement $$ draw-down), keep the insurance in force for a period of time that is a little longer than you are expecting. In a worst case scenario with the insurance, you spent a little extra money by keeping it in force. In a worst case scenario without the insurance, you might find yourself in a pickle later on if your health changes and you find the need to buy more coverage. That would cost you A LOT more in the long run.

What you may want to consider at some point is a long term care policy, but I'm sure that suggestion could turn into a 5-page post on its own...

 

[brewer12345]

Wow, keep trying to pump up those trail commissions...

 

[Nords]

I have no reason to insure what my spouse & kid don't need. I canceled all of my life insurance the day I started drawing a pension. We have enough assets and she'll eventually have her own pension, so we signed away each other's survivor benefits.

We have homeowner's, landlord's, and umbrella liability insurance. We have vehicle liability insurance but we don't even carry collision/comprehensive insurance.

At the suggestion of a lawyer who'd seen an unfortunate incident, we carry UIM/UM car insurance just in case our kid is disabled for life by a UIM/UM driver. When she's off our policy then we'll revert to just liability.

I don't carry dental insurance either.

 

[dgoldenz]

Wow, keep trying to pump up those trail commissions...

Most companies don't pay trail commissions on term insurance and the ones that do are like 2% and only for the first few policy years. The companies that DO pay trail commissions give you less in year one than other companies that don't pay trails.

So unless you're talking about a policy with a $100,000 annual premium, 2% isn't going to buy more than a lunch since the average premium is about $1000. If you're talking year 15 of a 20 year term policy here, there is no trail commission. Give it a rest with the "all insurance agents are only out for themselves" attitude.

 

[dgoldenz]

I have no reason to insure what my spouse & kid don't need. I canceled all of my life insurance the day I started drawing a pension. We have enough assets and she'll eventually have her own pension, so we signed away each other's survivor benefits.

We have homeowner's, landlord's, and umbrella liability insurance. We have vehicle liability insurance but we don't even carry collision/comprehensive insurance.

At the suggestion of a lawyer who'd seen an unfortunate incident, we carry UIM/UM car insurance just in case our kid is disabled for life by a UIM/UM driver. When she's off our policy then we'll revert to just liability.

I don't carry dental insurance either.

Dental insurance is not insurance, it's a pre-payment plan, but it sounds like you know that already.

I would guesstimate that 30% of our clients buying new life insurance policies over age 60 have a pension. There are many reasons people still need LI after beginning to draw a pension. Here's another one - divorce and/or re-marriage. This is by far the biggest kink in everyone's life plans and can really, really screw up not only your retirement, but if you get re-married, now you've got two people dependent on your income (ex-wife always pushes for life insurance to be required in the divorce settlement) and new wife does not have your survivorship benefit. So new wife wants a big LI policy in case your pension goes bye-bye.

In any case, I always suggest that people in reasonably good health purchase at least a small insurance policy to cover final expenses ($25-100k depending on age). You have a 100% certainty of dying at some point. Are you better off paying for a funeral 100% out of your own pocket or paying for it little by little each year? As an example, $25k guaranteed forever on a 55 year old male in generally good health (preferred rates) would only be $436/year. Even by age 85 you've only spent $13k on the insurance and the benefits are tax-free.

 

[Gumby]

To get back to the OP's question, I would guess that the decision to cancel a paid up whole life policy depends largely on the relative performance (net of mortality charges) of the policy versus an alternative investment of the money. As Brewer hints at, the alternative will likely be better (especially if you don't need the "insurance" component).

 

[ziggy29]

If you're not working, then if you die, your spouse's expenses will go down.

There are few more moving parts here. Maybe expenses will go down, but taxes will be higher due to filing single instead of MFJ. That change in filing status can also increase the amount of SS that is taxable. And finally, speaking of SS, if both spouses were receiving a SS check then the surviving spouse will lose the smaller of the two.

My mom's finances definitely tightened when my dad passed away for these reasons. Her expenses were lower, but not nearly so much lower that losing her SS check and seeing her income taxes nearly double because of single filing status didn't far more than offset the lower expenses.

 

[brewer12345]

Most companies don't pay trail commissions on term insurance and the ones that do are like 2% and only for the first few policy years. The companies that DO pay trail commissions give you less in year one than other companies that don't pay trails.

So unless you're talking about a policy with a $100,000 annual premium, 2% isn't going to buy more than a lunch since the average premium is about $1000. If you're talking year 15 of a 20 year term policy here, there is no trail commission. Give it a rest with the "all insurance agents are only out for themselves" attitude.

And what are the trail commissions on UL and whole life, pray tell?

Some insurance agents treat their clients as if they had a fiduciary duty them. The rest (most of them) know very well which side their bread is buttered on.

 

[dgoldenz]

And what are the trail commissions on UL and whole life, pray tell?

Some insurance agents treat their clients as if they had a fiduciary duty them. The rest (most of them) know very well which side their bread is buttered on.

Again, if you're talking year 10+ on a policy, there is no trail commission left. Maybe on some whole life products there is a minimal trail commission, but I don't sell much whole life. Mostly UL for people who want to guarantee the death benefit forever. Most people just won't write the check needed to buy a whole life policy.

Years 2-7 on UL are usually around 2-3% of the annual premium, years 8-10 might be 1%. You seem to think agents are getting 25% trail commissions every year or something. Whole life would be more like 5-10%/year on years 2-10, but you also get much less in the first year, usually 50-70% of the annual premium versus 80-110% with term and UL.

If you are an independent agent and don't act in the best interest of your clients, you won't be in business very long.

 

[Nords]

In any case, I always suggest that people in reasonably good health purchase at least a small insurance policy to cover final expenses ($25-100k depending on age). You have a 100% certainty of dying at some point. Are you better off paying for a funeral 100% out of your own pocket or paying for it little by little each year? As an example, $25k guaranteed forever on a 55 year old male in generally good health (preferred rates) would only be $436/year. Even by age 85 you've only spent $13k on the insurance and the benefits are tax-free.

$25K??! You gotta be kidding me. I'll be dead, not turned into a memorial with an endowment.

The point of not paying insurance premiums is to allow the savings to be invested/compounded to self-insure. I doubt I'd use up all my veteran's benefits on my death expenses, anyway, especially if spouse gets away with her plans for dying at home followed by body donation. If not then it'll cremation. Or maybe composting.

I think insurance to pay for funerals is not fiduciary. Even prepaid burial seems like fear marketing.

 

[dgoldenz]

$25K??! You gotta be kidding me. I'll be dead, not turned into a memorial with an endowment.

The point of not paying insurance premiums is to allow the savings to be invested/compounded to self-insure. I doubt I'd use up all my veteran's benefits on my death expenses, anyway, especially if spouse gets away with her plans for dying at home followed by body donation. If not then it'll cremation. Or maybe composting.

I think insurance to pay for funerals is not fiduciary. Even prepaid burial seems like fear marketing.

You have something with a 100% certainty of happening at some point. For anyone that plans on having a funeral, it will have to be paid for one way or another. You can pay for it with 100% of your own money, or pay for it with somebody else's money. $20-25k will probably be the going rate for a basic funeral in 20-30 years. If it's less than that, you left your family with some extra money.

Take the example of a 55 year old. If you actually saved $460/year for 30 years and earned 6% interest every year, you would have about $36k, or about the after-tax equivalent of $25k in life insurance. If you died any time between ages 55-85, you would have been better off with the life insurance. Can you guarantee a 6% return every year for 30 years? Maybe you'd get 8%. Maybe you wouldn't. However, you can guarantee the death benefit at a fixed cost. Everyone can make their own decision on which option they think is a better idea, but you shouldn't just dismiss it as nothing. It's not like we're talking huge sums of money here...believe me, I'm not making a living selling people $25k life insurance policies.