At What Net Worth Should You Cancel Your Life Insurance?

Transcript

Okay, this next question, get this, is from Brian Hansen. He says, “Money Guy team, can you help broadly speaking define when you no longer need life insurance from a net worth perspective?” I do think this is an interesting question because I think, like when you’re young, you don’t even think like that, right? Like, “Oh, this is the goal, like to actually have enough financial freedom to not need some of these things.” So, like, is that the right way to think about it? And when does that actually happen?

I love when my life insurance, if somebody who’s selling permanent insurance, they always say, “You don’t want to do term life insurance because let me tell you the percentage of people who actually get to use this money for their loved ones.” And it’s like an abysmally low number. You might even know that from your time working. I don’t. It’s a low, super low. Correct me if I’m wrong. They use that as a marketing thing. Anybody who’s out there, you’re probably chuckling. Yeah, I’ve heard that. I actually think that’s a great stat in the fact that it shows that people understood the proper use for insurance. You have a need where maybe you’re working and you’re worried about what if you’re not here as long as you think you’re going to be here because not every day is promised to us. And you need to make sure your beneficiaries, your loved ones, can replace your income. They can pay off the mortgage, maybe they fund some of their goals like education.

But a lot of you financial mutants are going to find on this journey that if you are very deliberate with being a builder of wealth, you’ll get to a point where you’re now focusing on entering financial independence. You still have this term life insurance policy, but you could pay for all that stuff. I had a client, and they’re gonna watch this, and I’m like, “Oh gosh, I hope I don’t screw this up because Carter’s on vacation,” and when we have this client meeting, he’s gonna be like, “Because I know this client, he’s very smart. He’s going to bring up this answer,” because um, he just sent this this week. They are really close, him and his spouse, to retiring in the next few months, and they just paid their life insurance premium, and he wrote me, he’s like, “Man, I have so much buyer’s remorsefulness. This is a disaster. Please tell me we can just quit making the payment.”

What we’re going to do in the meeting is that, yes, maybe you should just not renew it next year, but it’s also one of those things where I think you have to evaluate how much time is left on this term, where you are. Because remember, term is one of those insurance type setups where even term insurance, you overpay when you’re young and underpay when you’re old. It still gives you one level term. It just doesn’t have a lot of the cost and administration and other things that whole life and cash value investments have. But it is still structured in a way that they have to overcharge you while you’re young, undercharge you while you’re old. So just to say, “Hey, I’m done with it,” you have to be careful about that because it might be so affordable that there’s actually a slight, weird arbitrage thing where you keep the insurance in place just in case. Because the cost of the insurance compared to the benefit or protection you’re getting is just too beneficial, too powerful. That’s why I think about it every time. I can’t… I’m trying to think of which cable channel I’m watching, but I feel like, and I don’t want to give these guys any air, it’s free airtime, but there’s always these guys, “Do you have life insurance that you no longer need? Check out this…” And then I’ll tell you here because there might be big value, and you don’t want to walk away from it. So it is one of those things where if you do have insurance and no longer need it, it’s “measure twice, cut once.” Don’t just shut it down. Give yourself an opportunity to really evaluate it.

The only thing that I would throw on top of that, Brian, is that you asked, “Is there a net worth perspective when do you cut it off?” A net worth perspective. I would argue that the time to get rid of life insurance is not net worth dependent, it is circumstance dependent. That’s what I mean by that. If the goal of life insurance is to replace your income or satisfy some need, if you are not here to do that any longer once people are depending on you, so if you’re like a 23, 22, 23-year-old single person, no one’s depending on you, you have no debt, you haven’t reached a substantial net worth place, but you might not actually need life insurance.

Flip that to the other side. Let’s say that you’re someone who is retired and you have adult children that are on their own, and you have a healthy portfolio and your pension income and social security income. Social security income is providing for your well-being. You might not need life insurance anymore. It’s not like, “Okay, once I get to a million dollars, I can get rid of it,” or “Once I get to 5 million.” While that may be the case in your circumstances, it can be dependent. We have case studies with clients we work with who have a million-dollar portfolios and no longer need life insurance, and we have clients who have 10 million-dollar portfolios and still very much have a need for life insurance. So it is more circumstance dependent than net worth dependent. You need to understand why you have it in place and when the need for it changes later on in life.

Yeah, and my second bite of the apple because I got to think about things a little bit, what I’m trying to say is you will reach the end of the term if you bought a 20-year term or 30-year term. There’s a period you need to compare that term to when now you think the need is gone. And for this client, I haven’t gone and pulled the actual details, but I’ll just make up if it’s two years in the future that the 20-year policy resets to now. Instead of it being subsidized like I said, where you’re overcharged when you’re younger, undercharged when you’re older, now you’re actually every year paying the actual cost of insurance. That’ll probably be our “get off the train” point because we’re already self-insured at that point.