Life Insurance in Early Retirement… Cancel or Keep It?

Life Insurance in Early Retirement… Cancel or Keep It?I just paid the $335 annual premium again for the term life insurance policy we have in place on Lisa… same as I do every June. Then every January we pay the $673 annual premium on the term life insurance policy on my head.

We’ve paid $1,008 out of our pockets every year since 2010. That’s over $10,000 spent on something we haven’t gotten anything out of at all. Our 20-year policies expire in the year 2030 so that’s another 10 years of life insurance premiums we’ll be paying.

However, we’ve been early retired since the end of 2018. We’re financially independent and loving it. And the whole point of financial independence is that you have enough money to cover all your expenses for the rest of your life.

So that leads to the question “why do we still have our life insurance policies in place?” Should we let ’em lapse or keep ’em?

That’s what we’ll talk about today.

 

The point of term life insurance policies

Time for the disclaimer – I’m not a financial advisor and everyone’s situation is unique. Talk to a professional before making any financial decisions you don’t fully understand. What you’re reading is my opinion.

Here’s something you probably already know – if someone in your life is depending on you for your income or financial support, there should be a life insurance policy on you. That person depending on you is generally going to be your spouse or a child.

If you die and your spouse isn’t going to be able to make the mortgage payment, that’s a really big problem. They need life insurance on you.

If you have a child, you almost always need life insurance in place on your head. Even if you die and someone else takes on the responsibility of raising that child, that’s a big financial weight they’re also picking up. And if there’s the possibility of college in that child’s life, that’s another reason to consider life insurance.

Even if you don’t have dependents, it still might be something to consider if you don’t have enough money set aside to cover your funeral expenses.

Oh, and please don’t buy a policy on your child – that doesn’t make sense. If God forbid your child dies, they’re not taking any income away from you, which is the entire point of life insurance.

Ok, now that we have that out of the way, let’s talk about what type of life insurance to get. Without a doubt, term life insurance is the smart buy. It’s cheap, easy, and does what it’s supposed to do. Yes, yes, there are options like whole, universal, variable, and a ton of other types.

The problem is that you’re looking at much higher premiums and fees with these policies. And a lot of times, they’re almost purposely meant to be complex and confusing. They’re the perfect instrument to make the insurance salesperson a lot more money. They’re rarely in your best interest, but it’s what the salespeople push because they make next to nothing on term life insurance.

Your goal with life insurance is only to ensure that your loved ones will be able to continue to cover the big expenses if you die – the mortgage or maybe something like college tuition. That’s it.

Quit trying to make insurance a way to invest. You’ll come out much further ahead in the long run by taking all that money you’re saving in premiums and putting it low-cost, broad-based index funds. Insurance is insurance and investing is investing – keep ’em separate. Got it?

So now we know that term life is the way to go… but for how long?

Think about what I said – the insurance is there to ensure your loved ones can cover the big bills like mortgage payments or college costs if an income is suddenly lost. If you have 28 years left on your mortgage, get a 30-year term policy. If you only have a few years of payments left, but your child is starting college in 12 years, maybe you want a 20-year term.

The real goal is that the insurance will get your loved ones over that hump in life. After that, it becomes less of a big deal.

Then you have to think about the next part of the decision… how much should you get?

Investopedia says:

Most insurance companies say a reasonable amount for life insurance is six to 10 times the amount of annual salary.

Policygenius says 10-15 times your income is the way to go. NerdWallet’s got a few rules of thumb to determine the right amount you need.

In other words, everyone’s situation is different so you’ll want to figure out what will work best for your loved ones.

In our case, I shot high. I went with 20 times my income on the policy on my life. We also purchased a policy on my wife with and went with 20 times her income.

Even so, the combined total of our premiums is barely over $1,000 each year. I consider that to be extremely reasonable for what they offer should they ever need to be used.

The policies have made me feel much more at ease over the years. If Lisa or I (or both of us) would pass away, the survivors would have been covered.

 

You shouldn’t need life insurance in early retirement

But now we’re financially independent. By virtue of the definition of financial independence, we have enough money to cover our expenses for the rest of our lives.

I was fortunate to able to leave my job at the end of 2018. I know that if one or both of us dies, the survivors wouldn’t be left high and dry… no insurance needed.

We’ve planned accordingly and shouldn’t have to worry about not having money for mortgage payments or anything like that. That is unless lifestyle inflation somehow creeps into our lives. And even then, we’ll probably find some additional income sources popping into our lives over the years.

So then why in the world have we not let our life insurance policies lapse?

 

Why haven’t we let our policies lapse yet?

I honestly don’t know the answer to this.

Maybe I’m still nervous. Financial independence is still pretty new to me – what if I didn’t calculate everything right and end up dying? I did have multiple financial advisors give the thumbs up on my plan, but still… what if? It would be nice to know that Lisa and Faith would be more than covered.

Perhaps it’s because it’s like a cheap investment. If one of us passes, even though we don’t need the money, it would be one nice windfall. For instance, we only contribute a small amount to Faith’s 529 plan every month. If the insurance was ever needed, there’d be no question she’d be able to come out of school without loans.

So are these policies a security blanket in disguise? I don’t know.

But life insurance shouldn’t be about winning the morbid lottery. When we retired, I told Lisa that I wanted to keep the policies in place for an extra year or two just until I got comfortable letting them lapse.

Then there’s the thought of myself falling prey to sunk cost fallacy – the idea that’s the money’s gone but I still feel the need to get something out of it. Should I just cut my losses and know that the $10,000 spent so far served its role in protecting us should it have been needed in the past decade? Absolutely.

But does it still bother me a little that we’ve spent $10,000 and didn’t get anything tangible out of it? Of course!

It’s stupid, right? Us being alive and not ever needing to use the policy is worth so much more than the $10,000 spent. But there’s still that lingering feeling that if I let the policies lapse, one of us will kick the bucket right after.

It’s not a rational thing – it’s kind of like if you’re sitting on some cash that you want to put in the stock market, but sit on the sidelines. You’re waiting until the prices drop, so you just wait and wait as the market keeps rising.

Or if you keep losing money at the casino and think, “If I can just play a little longer, I’ll make up for it.”

As soon as we let our emotions into the picture, that’s when our financial decisions start to go off track.

The last thing that I can think of is that the premiums are fixed. It’s kind of like a fixed rate on a mortgage – the payment seems steep at first, but as the years go by, it feels like less of a burden due to inflation.

These premiums aren’t that steep any more – really, they’re pretty cheap. But if I do let the policies lapse, it’s over. If we wanted new life insurance down the line for some reason, the premiums will be higher. In fact, they’ll be much higher because we’re no spring chickens anymore.

I don’t envision us wanting new policies, but you never know what life will throw at you over the years.

 

Should we keep the policies or let ’em go?

Right now, it’s just like spending $1,000 in lottery tickets every year. The difference is that we don’t really need the money and if it paid out, it would mean one of died to get it. Sure, it’d be nice to go crazy and live on a cruise ship for a year or something, but what fun is that if one of us is dead?!

In the meantime, that’s an extra thousand we could be saving and using for fun every year or investing in the stock market. If we took $1,000 and put it into the market every year, it could grow to almost $18,000 at an 8% interest rate. Sure, no guarantees, but it still gives you an idea of how we could actually make some good money by hanging onto those premiums every year.

I think that as we get a little more comfortable in our big-boy financial independence pants, we’ll probably let the life insurance policies lapse. Since I just paid the $335 premium on the policy for Lisa, our next $673 premium for my policy isn’t due until January. I’d imagine the payment we just made will be the last one we pay, but we’ll see how courageous I am once the due date shows up in January.

 

What do you think? If you’re in early retirement, is there any need to hang onto your life insurance policies?

 

Thanks for reading!!

— Jim

22 thoughts on “Life Insurance in Early Retirement… Cancel or Keep It?”

  1. Good Morning Jim, I agree with your idea of dropping term life once you quit trading time for money. I plan on doing the same but I agree it’s difficult. What if you tied it to an external event or something with a big purpose? Example: COVID vaccine found or charity A gets the first years premium. Term life is a rationally smart decision up to a point. Now, we have to convince ourselves to change our rational. Best of luck on your travel back to the US.

    1. It should be an easy decision to do but I just haven’t been able to pull the trigger yet. Like you said, convincing ourselves to change out rational is the hurdle. Thanks for the well wishes… though it sounds like the trip is going to get pushed back yet again.

  2. Hey Jim,

    My thought would be that if I’m able to self-insurance, I would drop my insurance policy at the drop of a hat. Plus, the fact, I just hate dealing with insurance companies in general.

    DG Capital

  3. I plan to drop our term life insurance like a hot rock as soon as we reach FI! But I think it’s easier said than done. Let’s see what I actually do when we get there!

    For us, the premiums are only $455 CAD per year—so not much. And we only bought a ten-year term which will end in 6 years. So our decision to cancel (or not) will kind of be made for us, since renewing will likely be costly.

    It’s good to read through another FI enthusiast’s thoughts on this issue. 👍

    1. Wow, that’s a much more palatable pill to swallow, Chrissy (looks like ~$335 USD). Not sure how apples to apples compare between the two countries, but I’m sure your policy being a 10-year makes a difference. I kind of wish that we were in the position of having the policy term end sooner than later, too… makes the decision-making a little easier! 😉

  4. I think we can all agree, the whole point of reaching FI is to enjoy your life and live the way you want. If keeping the life insurance a bit longer helps you sleep at night, it sounds like the right decision for you. As you said, you can change your mind and cancel it when you’re ready.

  5. We kept term life on me and long term care insurance on both of us. We don’t need any of that, we have more investments than we need but it makes my spouse feel better to have the insurance, and her feelings are worth the cost to me.

    1. Great to hear the perspective from another retiree! You bring up another option I didn’t think too much about either – just keeping one of the policies. That’s something we might have to think about, too. That’s great that you can remove anxiety on your spouse’s side by keeping things in place… money really is power, isn’t it?

  6. Life insurance…always an interesting conundrum!

    You make some excellent points Jim, especially about keeping it in place to protect Lisa and Faith. The real question is “How much is the peace of mind worth to you”? With all the uncertainties in the world, such as the pandemic, it seems like a reasonable price.

    Then again, reinvesting those premiums also makes sense. Best of luck in your decision.

  7. I hope I’m not confusing you with someone else but I have vague recollections that part of the reason you are FI is the move to Panama’s lower COL. I would probably keep the insurance until you can comfortably manage a US COL plus a bit of a cushion since it is likely the survivors would want to be closer to family.

    1. That’s very insightful, Caro. Right now, if we moved back to the US, we should be able to cover all our expenses but it would be a lot tighter. And you’re absolutely right – if I was the first to go, I’m sure Lisa and Faith would head back to Ohio in a heartbeat.

  8. I have a $250,000 policy and pay about $300/year. That’s not too expensive and I’m not ready to cancel it. It will help my son with education in case something happens to me.
    Maybe you can look for a smaller/cheaper policy. It doesn’t need to pay out millions.

  9. I actually have bothe term and universal life policies. They are through a military organization and were actually decent deals. Surrender charges were nil and they’ve paid better than 5% on cash value. Mine is paid up in a year. I exchanged wife’s cash value into fully paid policy ( gave up 4% guaranty but stopped 6 years of premiums). We could cash out with partially taxed event, but they also provide some tax free long term care coverage if we are terminal. Biggest reason for mine, though, is to cover the reduced pension if I passed early. The term, I let lapse. BTW, your sunk cost will be twice as high when your term expires…

    1. Smart move on having something in place like this to cover a pension deficit if you would die early. No one knows what the future holds so it’s good to have a solid plan in place. I like hearing from you here though so I hope you make it for the long haul! 😉

  10. Here is another option you can research since you mentioned hating the fact if you lapse it, you’ll have gained absolutely nothing for all of those premiums paid in:

    Can I Sell my term life insurance policy [for cash]?

    As a matter of fact, yes, you can sell your term life insurance policy for cash. The concept of doing this is called a “ viatical settlement ” (or “life settlement”). This involves selling your term policy for an amount that is lower than its death benefit but still higher than the cash surrender value.

  11. Thanks for the article. One thought: You should be able to reduce the value of your insurance with a corresponding reduction in premium without having to start a new term. Instead of cancelling outright, consider reducing the policy value each year. You’ll still have the security blanket – it’ll just be a little smaller every year. And when it is a smaller value, it would be easier to cancel without worry.

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