When Don’t You Need Life Insurance?

June 8, 2023

If you buy term life insurance, you are only covered for a certain period of time – does that mean you may reach a point where you no longer need life insurance?

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So, we’ve talked about why we need life insurance. We’ve talked about the different types, how much we need, and we’ve sort of already admitted that we love term insurance. If you ask for our bias, we really like term insurance, which suggests that there is insurance coverage in place for a period of time and then it goes away. Well, the fact that it goes away might suggest that there’s a period of time where we don’t need life insurance. So, we want to talk about when are the times that you actually don’t need life insurance? When are the stages in life where that’s not something? I’ll go first, right? We’ve already said that you have an insurable need on your life when there are other people that depend on you. Well, for most of us, when we are young, when we’re starting out in our careers, we don’t have a spouse, we don’t have debts, we don’t have any kids. There aren’t people depending on us. So, I would argue that early on in your life, early on in your adult life, you probably don’t need to go out and buy life insurance.

When you’re thinking about your financial order of operations and whether to put money into your Roth IRA or buy life insurance, I would argue that for young people with no obligations and no one depending on them, that Roth IRA is probably going to be more valuable than going out and getting a life insurance policy in place.

Well, without a doubt, I definitely think that this is one of those things that’s driven by when someone is counting on you and you’re worried about unfulfilled obligations being funded. I mean, that’s the biggest thing. As soon as I got married and we took on debt, I was like, “Wow, there’s a risk because I don’t want to leave my wife with this mortgage.” And then the next is once we had started having children, I was like, “Man, whoa, we just bumped up the need much more.” And then I’ll even say it because, you know, my family history on medical stuff is not perfect. So, as I got into my 30s and I was still very healthy, I started extending out instead of looking at 20-year term, I started thinking about 30-year term because insurability is something that you should take into account. Because, especially when you’re going down the term path, you’re not guaranteed that when you’re in your 40s or 50s, you’re going to be in perfect health to keep extending out. But without a doubt, I do think you’ll get to a point, and I’m right here right now. Sure, because, you know it, I started buying policies when I was in my 20s, and here I am, somehow right around that big 5-0, and these policies that I bought back with 20-year terms have started going away. And unfortunately, it’s worked like a dream. In the background over those two decades, I was building up my own personal assets, my own financial foundation. And now, I am letting policies go away. And we actually have a chart because this is the way it works with our clients too, just like we showed you. There’s that declining need, the total capital needs, the unfulfilled financial promises we’re trying to replace. They will be going down as you have the counterweight of your own assets building up in the background. And it’s kind of nice when you do cross those intersection points that you have enough to self-insure yourself. And once you get to that point, you have a decision to make. You can either cancel the policy, stop paying for it, allow it to go away, or, in this illustration we have on the screen, you can see that the portfolio assets crawl across the capital need right around the age of 50. Well, there’s still a life insurance term policy in place. It looks like it goes out until about 51. We would argue that in this scenario, this client could either cancel the policy or, more likely, since they bought the policy likely 20 years ago, it’s super inexpensive, they could continue to pay it out until the term. You get to make that choice once you’re self-insured because you want to have the insurance in place, not because you have to. It’s like most things in your financial life. When you build up to a certain level of financial security, you get to make decisions based on preference, not just necessity.

I’m glad you drew attention to that because it is something I always try to talk to clients about. Just because you’ve now reached the financial independence threshold doesn’t mean you should simply cancel those life insurance policies. There’s a good chance there’s actually some value. Remember, with term policies, you set them up 20 or even 30 years ago when you couldn’t underwrite where you are now because you’re older. So, more than likely, you’re paying a lot less annually than the actual cost of the insurance. So, to just throw away this policy, be careful with that. It’s definitely one of those “measure twice, cut once” moments. Look at your financial life. If the premium payment is a small amount for a large coverage, it might be something that you just let run in the background until it reaches the point where the renewal period has significantly increased the annual cost of insurance to an astronomically high level. That’s when you actually let it go. But while it’s in this lower, flat premium period, it might make sense to let it run its course. But, you know, this is once again one of those heavy-lifting moments where maybe that’s where you take the relationship to the next level. Because it is a heavy, heavy decision to make sure you’re not having a blind spot or skipping a step and you get away from a policy prematurely or do something wrong.

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