When to phase out term life insurance?

[DrJDoe]

I feel that this topic has been discussed already - please feel free to direct me to relevant threads!

I am still trying to figure out how much (if any) additional term life insurance I really need.

Most of the formulas I see take into account age, income, debt, and number of children but don't really seem to address net worth, savings rate, or existing retirement savings (which could all contribute to a person's ability to self-insure).

I am 46 years old, married with no children. I am the primary breadwinner. My goal is to FIRE in 5 years or so. My current debt is around $130K (mainly low interest mortgage and student loans) which will be paid off during that time period. My net worth is around $1.45M which includes the value of primary residence of $250K with most of the rest in tax-advantaged retirement accounts. My current salary (gross) is $212,000 - but almost 1/2 of that goes to loan paydown, retirement savings, taxes and insurance that are not expenses that would carry forward after my death/retirement. I currently have 1X salary group policy through work and purchased a supplemental $200K policy under the group rate in addition. This is more than enough to pay off existing debt and leaves hubby with a paid off $250K house and a $1.5M-ish nest egg. This is over 25x the median net compensation in the US!

I have already funded our nieces and nephews 529 plans for college. We have LTCI policies in place in case of needing expensive care due to accident or illness (I am looking at when it makes sense to self-insure for this as well). Our parents all FIRE'd years ago and will not need assistance from us (in all likelihood they will leave us with some comfortable inheritances despite our encouragement to spend it on themselves!)

So, really, I am just trying to see where additional term life insurance would fit into this equation...

Doc

 

[RunningBum]

Many of us had term life through our jobs, and when we FIREd the insurance ended with the job, and most do not get it elsewhere. After all, if you're no longer working, you don't have any income to replace, unless you've been counting on a pension with no survivor benefits.

You painted a pretty good picture of where he'd be without you if you died with your current insurance. $1.5M and no doubt sounds really good to me! What would the point be of having more insurance?

 

[DrJDoe]

Thank you for your validation!

I like playing with all of the free aggregators and financial analyzers out there - I am test-driving Savology and they recommended an additional 800K+ in term insurance (plus some for hubs) but didn't seem to take into account the amount we had already saved for retirement (FIRE).

Term life is cheaper than Disability (which I already dropped in favor of LTCI - which I also am analyzing) so I was wondering where others put their drop-point.

I figure if he can't live out his life on $1.5 million with no debt, then it is his next wife's problem!!!

Many of us had term life through our jobs, and when we FIREd the insurance ended with the job, and most do not get it elsewhere. After all, if you're no longer working, you don't have any income to replace, unless you've been counting on a pension with no survivor benefits.

You painted a pretty good picture of where he'd be without you if you died with your current insurance. $1.5M and no doubt sounds really good to me! What would the point be of having more insurance?

 

[pb4uski]

Yeah, with your resources you don't need life insurance any more. In addition, he would have SS benefits.... so he'll be fine unless he's a big spender, in which case he'll have to learn to live with less or find another high earner wife!

 

[street]

I see life insurance as a different tool in the tool box then most. I have paid up policies and they can be there for my spouse to use and to supplement her spending if I pass.

I also look at it as a gift to a child when we pass away. Life insurance are tax free to beneficiary.

I acquired one after a parents death and was a huge a very nice gift from them. Do I need one no but when I die it is there for a survivor to use as they wish.

 

[Sunset]

OP - It's not needed anymore.
People will try to sell you more insurance until you die.
It's worthwhile for now to carry on with the work supplied (cheap) insurance, especially the LTCI , in case work drives you to have a stroke/heart attack.

You didn't mention if your Hubby worked. ?
Regardless, he could struggle along with SS and your savings if you passed tonight.

 

[FlaGator]

If DH is close to your age, you probably still need it.

With most of your NW in tax deferred accounts, he’ll need something to bridge to 59.5.

SS plus the retirement account looks like it would be good once he can access them without penalty.

 

[Telly]

My situation was a bit different than the OP's, but the decision was simple. I had no cost-to-me life insurance through work, but that of course stopped when working stopped. I also had term life for years through a professional organization, that I paid for. For that insurance, the premiums were priced in 5-year brackets. Was pretty cheap till I reached 50. And at age 55 it was going to take a big jump upwards. Our last child graduated college (BS degree, the staying on 2 more semesters for an MS was on him) months before I would turn 55. As our net worth had increased and our financial responsibilities had decreased, and term insurance cost would take a big step up, it was time to quit. The insurance had served its purpose.

 

[pb4uski]

If DH is close to your age, you probably still need it.

With most of your NW in tax deferred accounts, he’ll need something to bridge to 59.5.

SS plus the retirement account looks like it would be good once he can access them without penalty.

Good point to think through whether the surviving spouse has penalty free access to tax-deferred accounts, but he could always do a 72t/SEPP plan to gain penalty free access.

 

[donheff]

We had enough life insurance that, if one of us died, the other could quit work and keep living the life we were accustomed to. When we achieved the degree of FI that we could assure that we dropped the insurance and ER'd.

 

[RetireAge50]

We bought a 20 year term policy 19 years ago. We no longer need it but keep it around for some extra cash for my wife. At $25.75/mo for $500k at my age probably still a good deal.

 

[Montecfo]

I cancelled most of our term life insurance when we achieved FI. Also cancelled my disability policy.

I still hold one term life policy as a lottery ticket since I have had some health issues. That one will be evaluated year to year.

 

[Amethyst]

We dumped term life when our investable net worth went over the amount for which we'd been insuring. Just didn't seem to make sense at that point. No matter who died, the heir(s) would have enough to live on.

 

[OldShooter]

I don't remember exactly when we dropped ours. Maybe 30 years ago when we reached the point where either of us could comfortably proceed without the other's salary. I think that's the right end point unless there are big pensions that must be replaced.

I have never subscribed to the lottery ticket approach as I have always had straight term , not level premium term. In the latter case, the policy owner has basically prepaid his/her later-in-life premiums, so one might argue that walking away from that is an issue worth considering. It's sunk cost, of course, but it does mean that future premiums will be actuarial bargains -- tilting the lottery in the insured's favor.

 

[DrJDoe]

Excellent point made about his age and the fact that most of the money is in retirement accounts. He is just a little older than me, 48, and does not work for pay. (He could work if needed, but his main job is to take care of me and the house, while I take care of the $.) So, SS would be a way off.

A portion of the retirement money in our Roth IRAs should be accessible (I converted our Trad IRAs back in 2010 when the income cap for conversions was lifted and you could spread the tax due over 2 years. I have been doing Backdoor Roth Conversions for several years). My understanding is that you can withdraw contributions penalty free if you are under 59 1/2 as long as the Roth is at least 5 years old.

That being said, most of the rest of the savings is in a Traditional 403b at work (my employer allowed us to lump sum roll our, recently discontinued, pension benefits into our 403b several years ago). Current contributions are going into the Roth 403b arm (which they just opened up in February this year) - but I need to look into the withdrawal rules for the 403b as they are different than for IRAs.

Over the next few years the taxable accounts should grow as that money is no longer needed as debt is paid off - but that doesn't help him if I drop dead tomorrow. The big unknown in all of this is health insurance coverage which I currently get through work (which is a question even outside of this Term-life conversation) - curious to see what happens with the ACA over the next few years.

I thank all of you who have responded with such excellent points and thoughtful consideration!

(edit)
PS. If any of you are wondering - I did have a 20 year $1M level term life policy that ended a year or so ago - we weren't actually naked all this time!

 

[Amethyst]

Telly, I completely forgot the big premium jump from 49 to 50. I think that's what really made me think, "Whaaa? Do we really need this, or can I put that premium in an index fund?"

I also had term life for years through a professional organization, that I paid for. For that insurance, the premiums were priced in 5-year brackets. Was pretty cheap till I reached 50. And at age 55 it was going to take a big jump upwards. .

 

[FireFool]

One of the things to consider when you have life insurance through work is that you need to be employed by your company to maintain that life insurance policy. I never really considered this until an employee of mine's husband had cancer which ultimately became terminal. They were financially stable and on path to retire early in the very near term. Despite the debilitating effect of his treatments he continued to work so he could leave a financial "legacy" for his family. Despite his cancer being as advanced as it was it took a while before he got to the point where the diagnosis was grim enough to meet the insurance company's criteria to allow him to quit and still have his coverage - basically he was knocking at death's door. With their kids grown and being financially stable they really didn't need this money, but he felt he needed to continue working since he was paying for this benefit all along and knew he would die. Had he not had this coverage through work he could have quit and my employee taken a leave so they could have had a better last year together. After seeing this situation unfold I could never recommend anyone getting their life insurance through work.

As to your question regarding dropping life my own attitude back when I had coverage was that I wanted my spouse to miss me a bit, and not to have a better life than when I was alive. We both worked and perhaps she would have had to work a few years longer had I died, but she still would have been very financially stable. It sounds like if you were to die before you retiree perhaps your spouse might need to find a job to continue living like you are currently, but there really wouldn't be any financial insecurity for him. My employee worked longer than she would otherwise have had her husband lived, but work helped fill a loneliness for her.

 

[Dtail]

Gave up term life and disability insurance when I RE'd.

 

[phil1ben]

17 years ago (when my kids were 7 and 10) I bought a level premium 3MM term life policy that continued for 20 years. Retired 4 years ago. Although my spouse will not need the death benefit, I decided to continue paying the annual premiums ($3,500 per year) until the policy matures. Hopefully the insurance company wins the bet.

 

[Mulligan]

I retired early 10 years ago, largely a pensioner. I had to get term life in early 50s a few years back to cover an upcoming 10 year window for GF. We plan on getting her out early living on my pension and income and letting her SS and smaller 401ks ride indefinitely. If I croaked right after she retired it would suddenly be a very tight retirement for her.
I couldnt wait any longer for the 20 year term to gap those upcoming years or it would have got too expensive, or I possibly could become uninsurable.
Side note..If you ever want a through free physical apply for a substantial life insurance policy. They check you out way better than a Doc office physical I promise!

 

[teetee]

I think therw can be more than one decision and method but the goal of term life insurance is always the same. You get covered for a period of time and your beneficiary gets the payout in case you die during this period. If no one on your beneficiary list depends on you than there is no reason to get the additional life insurance using your own money.

I have no kids but I do have 300k 10yr term life with my mother as beneficiary. She is not depending one financially but she is retiring with not much saved up so with this life insurance and other of my net worth she will be able to survive or get cheated on if I am gone.

 

[The Cosmic Avenger]

We had enough life insurance that, if one of us died, the other could quit work and keep living the life we were accustomed to. When we achieved the degree of FI that we could assure that we dropped the insurance and ER'd.

That's what we wanted -- especially with a school-aged child, but now that they're in college, we still would want to be able to stop working for a few years or maybe retire early if one of us passed away tomorrow, and be able to increase our spending (on things like prepared meals and home services, while we're recovering from the loss). But we'll probably drop it completely soon, as we're pretty much FI, we're just trying to ensure we can maintain or increase our spending in retirement.

 

[Green Papaya]

My situation was a bit different than the OP's, but the decision was simple. I had no cost-to-me life insurance through work, but that of course stopped when working stopped. I also had term life for years through a professional organization, that I paid for. For that insurance, the premiums were priced in 5-year brackets. Was pretty cheap till I reached 50. And at age 55 it was going to take a big jump upwards. Our last child graduated college (BS degree, the staying on 2 more semesters for an MS was on him) months before I would turn 55. As our net worth had increased and our financial responsibilities had decreased, and term insurance cost would take a big step up, it was time to quit. The insurance had served its purpose.

+1
For all the above reasons, we stopped a large term life policy one year before FIRE, stopped work-provided term life when I retired, and stopped a smaller term life when it was scheduled for a big jump.

 

[brett]

I phased out term insurance as my children got older and became independent and as our assets grew to the point where my spouse's financial position would be secure without insurance proceeds.

I have never purchased or needed any other type of life insurance. I did consider whole life at one point but found that I could buy much more term insurance for the years when I really needed it.