When To Cancel Term Life Insurance

I have been thinking about this lately as I recently turned 40,  kids are getting older, assets continue to grow and we are putting a decent dent towards our debt balance.

We each have a 2 year old $1m 20 year term policy,  plus 1x year salary from my employer, an automatic benefit.  I am pretty confident that if we both died today,  our life insurance coverage, $64.5k combined balance in 529s, $615k+ in liquid assets and our home value ($290kish), minus our total debt ($105.5k) would cover our passing, taxes, home, kids, dog and caregiver expenses until they became independent adults.

I love that we sleep well at night with such coverage. That said, at $1,236.6 per year for both of us, these cost a decent chunk of money especially over 20 years!  How long do I need these for?!

I am pretty sure we don’t yet have enough money to go without insurance but, it is a good time to start putting a more robust plan of action to determine when that magic day may be.

Next year, we will begin a yearly assessment to decide if we keep or cut. Here is a list of the guiding  (but open to adaptation as needed) criteria I have compiled so far:

What do we want life insurance for?

  • Cover gap for pre and post retirement expenses for a surviving spouse.
  • Cover gap for loss of income towards our dog (assuming 15 year lifespan) and children’s expenses, before they become independent if one spouse dies.
  • Cover for dog, child expenses, and their caregiver until kids are independent (here we will assume age 26) in the event that we are both gone.

One parent dies scenario

We anticipate both lower expenses and adjusted retirement goals. While there is the money addition from one policy, we also need to consider taxes and the loss of one income over time (or potentially two at least temporarily, depending on the emotional state of the surviving spouse  – even writing this is making me want to cry!).

We would cancel the second insurance if assets could cover in full:

  • Passing costs for surviving spouse (should be low since we want to be put in a recycled bottle that turns into a plant, but I digress… that is an entirely new post…).
  • Dog costs assuming 15 year total lifespan, but not replacement costs.
  • Legal fees for custody or estate transfer for kids and caregiver, should second spouse die.
  • Taxes from inheritance for kids and new care provider.
  • Mortgage balance, property taxes and home insurance until youngest child turns 21 (adjust age as they  grow and we get a better feel for where they are going).
  • Balance for any other outstanding debt.
  • College savings funded to 100% of 4 year public American university (room, books, board, etc) for each child or whatever is left of their college attendance if in progress.
  • Assets to provide for basic living expenses for kids and provider until they each reach age 21, adjusted for inflation.
  • Assets to provide for travel, entertainment and extracurricular activities until each reaches 21, to a similar level that they enjoy today, adjusted for inflation.
  • Fun asset money for kids as a good bye gift when they each turn 16 (enough for a beat up car each with insurance for a few years or something similar of their choosing).
  • Non-employee sponsored health insurance costs for kids through age 26, should that be needed if second spouse dies or is no longer working.
  • Adjusted FIRE goals for surviving spouse (70% of couple FIRE goals).
  • Long term care and health insurance for surviving spouse.

Parents are both alive, but with substantial savings

We will consider cutting our insurance if our assets cover the expenses from above scenario, with the following adjustments:

  • Passing costs for both parents vs one
  • Adjusted figures for two people for taxes on more accounts, FIRE, health and long term care for both spouses.
  • Adjust for age of kids and future needs.

Next steps

This year, we will begin putting actual numbers on the above line items for scenario planning so that starting in 2019 we can figure out how far off we are from ditching our insurance. Should keep me geekily entertained for a while!

I hope that as the very worse case scenario, we have to keep the insurance through the end of the 20 year term (18 to go) vs having to get even more life insurance for longer at a higher cost!

How about you, how do you assess insurance needs and when to quit it?

 

 

 

 

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3 thoughts on “When To Cancel Term Life Insurance”

  1. I’m similar but different in that husband and I each have US250k critical illness insurance. Work covers about Us350k life insurance each. The insurance can almost fully cover the mortgage of each of our house which generate us3-4K rentals each. That can be treated as the future income stream for the surviving family.

    With a 3yo girl, that is on the low side. So instead of ceasing, I’m actually considering buying a small term life insurance which costs way less than critical illness. Especially in case I do use up the insurance due to illness, my family would have nothing left.

    Considerations you mentioned are very good fo my calculation purpose.

    Searately, Medical is currently covered by work. Do you have medical insurance too if you go the FiRe route?

    Liked by 1 person

    1. Thank you so much for sharing your situation! Not the funnest thing to think about, but very important.

      Regarding medical – we do have it via my job right now with great coverage. I am also maxing our HSA and I have an RHSA as a work benefit (retirement health savings account). That said, I know private insurance is $$$ and what keeps most people from earlier retirement to avoid those costs. We are planning on living a nomadic lifestyle so we will probably self insure in certain countries and/or have travel insurance. This area still will need to be determined and better thought out as our kids’ needs will play into that decision as well as where we are in our lives and health as we get a little older or we lose our job insurance.

      Long term care insurance is the other piece of the puzzle we will have to consider, but not thinking about it quite yet. Will probably start planning for that when I turn 50 or so. I have a good decade to go :).

      With that, we really need to get our act together asap in notarizing our will and last testament, especially as our state, I learned, has some interesting laws around who gets what when you pass (not necessarily your spouse and kids!) including custody of the kids (I have anxiety thinking they would up in the state’s hands) if there is no formal plan. That is slightly terrifying and most definitely on the as soon as possible to do list!

      For right now, I am happy we currently have enough coverage, but we really need to finish that will and custodian info for our kids. In parallel, we will start doing more analysis with detailed numbers on the plan above, which I will share openly. Hopefully the framework will help someone else with a guide for making a similar decision adjusted for their personal circumstances.

      Like

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