When should you cancel a life insurance policy, if at all?

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Submitted by Coronita on February 6, 2017 - 3:55am

So I have a termed life insurance policy that is $750/year. I originally bought it to protect my family against the unexpected early termination of my life.

Since I don't plan on passing away before the term expires, I think this policy is useless. Just kidding, I know we can't predict that.

But I guess I'm wondering, is there a golden rule of when you no longer need a catastrophic life insurance policy? For example, in my case the policy was there to cover a mortgage if something were to have happened before. I'm wondering if I need this extra protection..Or is trying to save $750/year being penny wise, pound foolish?
Anyone decide they no longer need a life insurance policy and just canceled it?

Submitted by no_such_reality on February 6, 2017 - 8:08am.

It depends, financially, if one of California's distracted drivers manages to kill you on your way to work today does your family need the money?

Note, need, not nice to have.

If kids won't need an additional care giver, less need.

If the kids won't need additional capital for college costs, less need.

If the spouse won't need to pay the mortgage or other bills, less need.

If you and your spouse goes, is the money need to cover estate costs?

Just my thoughts.

Submitted by outtamojo on February 6, 2017 - 9:32am.

I always thought of it as breathing room so family could take their time deciding what to do with assets after I was gone.

Submitted by an on February 6, 2017 - 10:05am.

I wouldn't cancel my Term Life Insurance. That's the whole point of insurance, if shit hits the fan, you don't have to worry. The point of life insurance is for your family to not have to worry about money if something happens to you. I rather that I never collect on my life insurance, like all other insurance. I feel it's chump change for a peace of mind, kind of like other insurance, especially umbrella insurance. I would cut going out to fancy dinner once a month before I cut my life insurance.

Submitted by Coronita on February 6, 2017 - 10:13am.

Ok, good points...... I use to be one that felt don't skimp on insurance. But the assumption was that insurance was there to fill a gap. And maybe I was just thinking that there was no longer a gap that needed to be filled. Perhaps I'm overlooking things...

Submitted by bibsoconner on February 6, 2017 - 10:19am.

Aw, a macabre mental exercise for Monday morning. Rather than ask for "gut feelings", perhaps it would be better to hit the actuary tables and a statistics book. I'd help but my statistics course is a distant memory. Too bad we don't know some Statistics whiz... like perhaps a guy that has a blog about housing statistics :)

Anyhow, I'd be curious about the correct approach, but shouldn't you be thinking in terms of "Expected Value". For example if you're 40 and the policy is for 30 years with a 1 million payout and the chances of death in that time are 10% wouldn't the expected value be 100K? Then the question would be how much is it going to cost at $750 year. It's certainly not just $22,500 as you could have been doing other things with the money. I realize there are a whole slew of complications (future value of 1 million comes to mind). By the way, all my figures are made up. I have no idea of your age, policy amount or the probability of death.

Perhaps another much lazier (I like lazy!) idea is this. Approach several insurance agents. Tell them that you have a policy that has another X years to go and pays out Y dollars. Ask them if they'd cut you a policy that could beat the current yearly payment. If the answer is "Heck no", perhaps you have a good deal? I mention this because I recall that term life insurance is a good deal towards the end of the policy. The idea being that $750 a year for a 20 year old is a rip off but is a good deal for a 49 year old. Both because the the 49 year old is more likely to pop off and because $750 isn't worth what it was at the beginning of the policy.

Well, with those cheery thoughts out of the way, I wish you a happy week!
Cheers

Submitted by an on February 6, 2017 - 10:21am.

You're right. That's how I viewed insurance as well. However, I'm now looking at it as it as a way to fill the gap for the life I want my family to have vs the bare minimum life. Since the cost is so low, I'm will to cut out other areas of my life for that peace of mind (kinda like leaving a legacy in a way). $700-1k/year isn't going to really change the way I live.

Submitted by no_such_reality on February 6, 2017 - 12:27pm.

He did say pay off the mortgages, which makes me wonder on the amount.

Statistically, if flu is 45ish, he has a 0.3% chance of dying (not including modifications for his prior medical conditions). If he's 40ish it's 0.2%.

Reversing the expected value, that indicates a policy needed in the $250K-$350K range.

So if he's 45ish with 5 years or so to go on the policy and it's north of $250K, technically he's gambling with the odds in his favor.

Or think of it as an opportunity cost, expected value of $750/yr, not leveraged in a typical stock market return is worth right around the low $5K range over the next five years.

So think of it as gambling on a penny stock, it has a 98.5% chance to go to zero and a 1.5% chance to pay off the value of the policy and it costs $3750.

It's a fairly small amount, so if this is a TL from your early and healthy 30s and is a $500K policy, kind of a no brainer to keep the policy until the term expires provided the $750 isn't an issue.

Submitted by moneymaker on February 6, 2017 - 12:50pm.

I have a similar policy originally bought for the same reason. Though I do think all insurance is essentially a bet against yourself, I will keep mine as it does statistically increase in value as the chance of dying increases with age. The only way I would stop mine would be in case of financial hardship. If you are more than halfway through the term then you are better off keeping it in my opinion. P.S.- getting term life after 50 becomes very expensive for say a 20 year policy.

Submitted by WarChestSM on February 6, 2017 - 4:31pm.

Yes, there is a golden rule.

You don't need any life insurance if you are completely financially independent. If your family can live off of a safe withdrawal rate from your existing assets and doesn't need your income at all then you should stop paying for life insurance regardless of your feelings, playing the odds, expected value, etc.

Insurance is for things you can't afford the loss on. Once you can afford the hit, cancel the insurance.

Submitted by Coronita on February 6, 2017 - 5:40pm.

So some things I left out....

1. The life insurance was for $500k. It's portable policy independent of my employer. The purpose was originally to cover a $500k mortgage on a primary home that existed 12 years ago. There's no longer a mortgage balance on that.

2. The policy is a 20 year term, finishing in 2025.

3. Employer provides a $300k life insurance policy: but that is NOT portable. I probably will stay working for another 2-3 years, maybe longer if I'm employable and feel like working.

I still think I agree with AN on keeping it. I have a habit of cheapening out on things at points I shouldn't be, and deep down I think insurance isn't one such area to go cheap.

Submitted by svelte on February 6, 2017 - 7:27pm.

It's probably not your decision, flu. It's your wife's. She would be the one using it, not you.

About a decade ago I considered ditching my policy too. I mentioned it to my wife. She said that we could - but that would change the direction of our life as she would change to being risk adverse...new cars, new home purchases, etc would not occur. She would have to protect herself by making less risky decisions.

So we kept the policy.

And didn't you have a major health issue a few years back? To me, that's reason enough to keep the policy.

Submitted by harvey on February 7, 2017 - 12:11am.

Tell your wife that it's ok if she finds a sugar daddy shortly after your passing.

Take her to dinner with the premiums you would have spent.

Submitted by Ribbles on February 7, 2017 - 7:50am.

I think of it as gambling, too. Because I've never had good luck at the casino, I'm guessing I'll lose the bet and live. If I don't, my family will be financially secure. Win-win... sort of. We're actually considering doubling our coverage for the remainder of the term.

Submitted by Balboa_Again on February 7, 2017 - 10:25am.

I'm trying to take out a supplemental policy through work now that we have a mortgage. The carrier is Anthem. I've been asthmatic my whole life -- so I've managed to survive 36 years with it. They still want me to fill out a supplemental form about my asthma history.

This is the same company that, a year before the ACA, declined to let me buy insurance because of ... asthma. If, given the chance, they will reject people with such a manageable and ultimately low-cost condition, I feel terrible for all the people who have much more challenging medical histories.

Submitted by poorgradstudent on February 9, 2017 - 11:09am.

The rule of thumb I've heard is if your kids are in college, you probably don't need a big life insurance policy.

Obviously it depends on your wife and how much money she'd need to be comfortable if you passed away. But based on what I know about your finances, I get the vibe if you died tomorrow she wouldn't exactly be destitute.

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