When does term life insurance become unnecessary?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
etfan
Posts: 526
Joined: Sun May 16, 2021 4:22 pm

When does term life insurance become unnecessary?

Post by etfan »

Is there any reason to maintain a term life insurance policy if you later have an amount of money that equals or exceeds the death benefit of the policy, and you can simply name the policy beneficiaries as your heirs?
Triple digit golfer
Posts: 10433
Joined: Mon May 18, 2009 5:57 pm

Re: When does term life insurance become unnecessary?

Post by Triple digit golfer »

Exceeding the benefit seems irrelevant.

If you have enough to where you will not need to rely on the insured's income, then I suppose there is no longer a need.
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: When does term life insurance become unnecessary?

Post by nisiprius »

Estimate how much the people who depend on you need.

Estimate how much they would have if you were to die now without the life insurance.

Estimate how much of a death benefit is needed to fill the gap.

If they would have enough without any life insurance, then you don't need any life insurance.

For us, we reached that point when the children were grown up, through college, and had jobs, the mortgage was paid off, and we had saved up perhaps two-thirds of our retirement "number."

We actually dropped our life insurance in chunks. We had an SBLI policy, a TIAA-CREF policy, and a separate TIAA-CREF cost-of-living policy. As our need for life insurance fell, we dropped one policy after another. I think it was SBLI first, then the TIAA-CREF cost-of-living rider, and finally the TIAA-CREF basic policy.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
frugalecon
Posts: 671
Joined: Fri Dec 05, 2014 11:39 am

Re: When does term life insurance become unnecessary?

Post by frugalecon »

When there are sufficient assets/death benefits in your estate such that you dependents could continue living a standard of living that you find acceptable should you die. I have kept my policy too long, but I plan to let it lapse this year. I was close last year, but with COVID around I thought that it was possibly better than actuarially fair. But because my spouse doesn’t really need it, that is probably irrelevant.
Trader Joe
Posts: 2697
Joined: Fri Apr 25, 2014 6:38 pm

Re: When does term life insurance become unnecessary?

Post by Trader Joe »

etfan wrote: Tue Jun 15, 2021 8:22 pm Is there any reason to maintain a term life insurance policy if you later have an amount of money that equals or exceeds the death benefit of the policy, and you can simply name the policy beneficiaries as your heirs?
I kept my term life insurance policy until I reached a pre-determined level of net worth. I then cancelled my term life insurance early.
Topic Author
etfan
Posts: 526
Joined: Sun May 16, 2021 4:22 pm

Re: When does term life insurance become unnecessary?

Post by etfan »

Even if your current assets make it unnecessary, the "potential" value of the policy is too good to cancel it. Obviously the value is zero once it's expires, so it's hard to put that into numbers. But if your policy is worth, say, $100,000 and you already have that money, then you think: But why not leave $200,000 to your family?

The other hard part to think about is the cost-to-value ratio. It's extremely cheap, relatively speaking. So the thought process is: What else can one do with the money one saves by cancelling the policy, that could have a higher return? Nothing comes close.
User avatar
leeks
Posts: 1466
Joined: Thu Apr 07, 2011 4:33 pm
Location: virginia

Re: When does term life insurance become unnecessary?

Post by leeks »

Our term policies will last until our kids are adults. If we have more kids, we will get more coverage. Unless there is an unusual situation such as disability, we will not seek more life insurance after those expire.

But why would we cancel early? Our combined premiums for $1 million each are about $1300/year.

It is so cheap that it is easily worth keeping until end of the term no matter what happens to net worth by then. If net worth is in millions, the premiums become an even less consequential expense.
7eight9
Posts: 2406
Joined: Fri May 17, 2019 7:11 pm

Re: When does term life insurance become unnecessary?

Post by 7eight9 »

If you wouldn't retire now for financial reasons then you have some dependence on your paycheck that the insurance policy would offset.
I guess it all could be much worse. | They could be warming up my hearse.
User avatar
Stinky
Posts: 14152
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: When does term life insurance become unnecessary?

Post by Stinky »

etfan wrote: Tue Jun 15, 2021 11:39 pm Even if your current assets make it unnecessary, the "potential" value of the policy is too good to cancel it. Obviously the value is zero once it's expires, so it's hard to put that into numbers. But if your policy is worth, say, $100,000 and you already have that money, then you think: But why not leave $200,000 to your family?

The other hard part to think about is the cost-to-value ratio. It's extremely cheap, relatively speaking. So the thought process is: What else can one do with the money one saves by cancelling the policy, that could have a higher return? Nothing comes close.
At almost all points in a term life insurance policy, the “value” of the death benefit is less than the premiums. That just makes good common sense - life insurance companies need to make money, and they need to pay expenses and commissions, so of course the death benefit must be less than the “value”’of the death benefit to an individual.

On average, death benefits are roughly 50% of term life premiums. The rest is consumed by expenses, taxes, and insurer profits.

Does that mean you shouldn’t buy term life? The answer is NO. Term life insurance is a unique product, paying a large benefit after the untimely death of the insured. No other product pays out a benefit like that so affordably.

The reason that term life is so inexpensive is that the risk of premature death is so low for those who are in prime earnings years and can pass underwriting tests. But even on those folks, insurers charge premiums that are higher than the actual death benefits, so that they can cover expenses and profits.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
User avatar
dogagility
Posts: 3237
Joined: Fri Feb 24, 2017 5:41 am

Re: When does term life insurance become unnecessary?

Post by dogagility »

Stinky wrote: Wed Jun 16, 2021 5:18 am
etfan wrote: Tue Jun 15, 2021 11:39 pm Even if your current assets make it unnecessary, the "potential" value of the policy is too good to cancel it. Obviously the value is zero once it's expires, so it's hard to put that into numbers. But if your policy is worth, say, $100,000 and you already have that money, then you think: But why not leave $200,000 to your family?

The other hard part to think about is the cost-to-value ratio. It's extremely cheap, relatively speaking. So the thought process is: What else can one do with the money one saves by cancelling the policy, that could have a higher return? Nothing comes close.
At almost all points in a term life insurance policy, the “value” of the death benefit is less than the premiums. That just makes good common sense - life insurance companies need to make money, and they need to pay expenses and commissions, so of course the death benefit must be less than the “value”’of the death benefit to an individual.

On average, death benefits are roughly 50% of term life premiums. The rest is consumed by expenses, taxes, and insurer profits.

Does that mean you shouldn’t buy term life? The answer is NO. Term life insurance is a unique product, paying a large benefit after the untimely death of the insured. No other product pays out a benefit like that so affordably.

The reason that term life is so inexpensive is that the risk of premature death is so low for those who are in prime earnings years and can pass underwriting tests. But even on those folks, insurers charge premiums that are higher than the actual death benefits, so that they can cover expenses and profits.
Well-stated, Stinky.

If the insured has a terminal illness or is otherwise more than likely to die prior to the policy expiring, keeping the policy makes good financial sense.

For the typical policyholder, keeping a policy after it is no longer needed for its intended purpose doesn't make financial sense.
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
User avatar
augryphon
Posts: 304
Joined: Wed Mar 02, 2016 10:35 am

Re: When does term life insurance become unnecessary?

Post by augryphon »

etfan wrote: Tue Jun 15, 2021 8:22 pm Is there any reason to maintain a term life insurance policy if you later have an amount of money that equals or exceeds the death benefit of the policy, and you can simply name the policy beneficiaries as your heirs?
People view this very differently, often very emotionally, and may have their own reasons to keep insurance in effect. My term insurance was purchased to expire at age 58 when my kids education was complete and when DW and I expected to have our retirement funded. When the term ended I had met those original goals, and after consulting my financial advisor, I chose not to replace it.
CloudNine33
Posts: 127
Joined: Sat Dec 07, 2013 4:21 pm

Re: When does term life insurance become unnecessary?

Post by CloudNine33 »

We cancelled our term policies not long ago at age 50 because our net worth and investment portfolio are large enough that we could retire now very comfortably and therefore if one of us croaks the other will be just fine (financially). No health issues, all four of our parents still healthy retired folks and just no reason to keep paying for term life.
ExPatKiwi
Posts: 71
Joined: Tue Dec 24, 2019 7:21 am

Re: When does term life insurance become unnecessary?

Post by ExPatKiwi »

Timely question as I just cancelled our policy at age 55 that DW and I had for over 25 years. The premiums readjusted every 3 years and were starting to ratchet up steeply as we got older. The insurance served it's purpose providing coverage for all our debt (mortgage, car etc.) when younger and with kids still at home.
Counting down to retirement.
User avatar
leeks
Posts: 1466
Joined: Thu Apr 07, 2011 4:33 pm
Location: virginia

Re: When does term life insurance become unnecessary?

Post by leeks »

Stinky wrote: Wed Jun 16, 2021 5:18 am
At almost all points in a term life insurance policy, the “value” of the death benefit is less than the premiums. That just makes good common sense - life insurance companies need to make money, and they need to pay expenses and commissions, so of course the death benefit must be less than the “value”’of the death benefit to an individual.

On average, death benefits are roughly 50% of term life premiums. The rest is consumed by expenses, taxes, and insurer profits.

Does that mean you shouldn’t buy term life? The answer is NO. Term life insurance is a unique product, paying a large benefit after the untimely death of the insured. No other product pays out a benefit like that so affordably.

The reason that term life is so inexpensive is that the risk of premature death is so low for those who are in prime earnings years and can pass underwriting tests. But even on those folks, insurers charge premiums that are higher than the actual death benefits, so that they can cover expenses and profits.
I am not sure how you are estimating "value" to the policyholder.

We will pay $1300/year x 20 years = $26K total premiums for my husband and I to have $1 million each.

Even if we have say $2 million by 10 years into the policy, we will still have children dependent on us and still be earning income. Knowing another $1 million would be available to a widow parent if one of us passed (or $2 million if a third party is stuck raising our kids) will still have value to us exceeding the minimal premium. Yes the survivors could get by on less, but not much downside to them having more.

We stated our value ahead of time by choosing 20 year policies because we did not feel we need coverage when children are adults. I can't imagine any reason to cancel early.
MikeG62
Posts: 5065
Joined: Tue Nov 15, 2016 2:20 pm
Location: New Jersey

Re: When does term life insurance become unnecessary?

Post by MikeG62 »

HeadHunter wrote: Wed Jun 16, 2021 6:47 am We cancelled our term policies not long ago at age 50 because our net worth and investment portfolio are large enough that we could retire now very comfortably and therefore if one of us croaks the other will be just fine (financially). No health issues, all four of our parents still healthy retired folks and just no reason to keep paying for term life.
^This is the litmus test we used as well.
Real Knowledge Comes Only From Experience
User avatar
mhc
Posts: 5257
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: When does term life insurance become unnecessary?

Post by mhc »

Insurance should fill the gap. Once I realized the size of the survivor benefit of Social Security, I realized there was no need to have life insurance. SS would cover most of the living expenses until the kids were out of the house. Our nest egg was sufficient to cover the remainder.

Make sure you undestand the survivor benefits of OADSDI. For me it was about the median income for my city.
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
User avatar
StevieG72
Posts: 2214
Joined: Wed Feb 05, 2014 8:00 pm

Re: When does term life insurance become unnecessary?

Post by StevieG72 »

When your assets cover your needs for estate planning.

I have reached that milestone but continue to pay for a term policy because it is cheap, and it keeps me alive. As soon as I cancel the policy, I am a goner for sure!
Fools think their own way is right, but the wise listen to others.
User avatar
ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: When does term life insurance become unnecessary?

Post by ruralavalon »

etfan wrote: Tue Jun 15, 2021 8:22 pm Is there any reason to maintain a term life insurance policy if you later have an amount of money that equals or exceeds the death benefit of the policy, and you can simply name the policy beneficiaries as your heirs?
When your employment income ends is the time to consider dropping life insurance.

Even then consider that there are reduced Social Security benefits for survivors, and whether your survivors will still need the benefits from your life insurance.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
JupiterJones
Posts: 3623
Joined: Tue Aug 24, 2010 3:25 pm
Location: Nashville, TN

Re: When does term life insurance become unnecessary?

Post by JupiterJones »

Just flip the question around: If you don't currently have any life insurance, when does term life insurance become necessary?

Answer: When the loss of income from your death would cause a financial situation among your survivors that you'd want to avoid. If this is not the case, you don't need to buy life insurance, no matter what the salesperson says.

Therefore if you already have term life insurance, but things have changed to where now the survivors will get along fine (financially at least) without you around, then you no longer need the insurance.
"Stay on target! Stay on target!"
User avatar
Stinky
Posts: 14152
Joined: Mon Jun 12, 2017 11:38 am
Location: Sweet Home Alabama

Re: When does term life insurance become unnecessary?

Post by Stinky »

leeks wrote: Wed Jun 16, 2021 7:09 am
Stinky wrote: Wed Jun 16, 2021 5:18 am
At almost all points in a term life insurance policy, the “value” of the death benefit is less than the premiums. That just makes good common sense - life insurance companies need to make money, and they need to pay expenses and commissions, so of course the death benefit must be less than the “value”’of the death benefit to an individual.

On average, death benefits are roughly 50% of term life premiums. The rest is consumed by expenses, taxes, and insurer profits.

Does that mean you shouldn’t buy term life? The answer is NO. Term life insurance is a unique product, paying a large benefit after the untimely death of the insured. No other product pays out a benefit like that so affordably.

The reason that term life is so inexpensive is that the risk of premature death is so low for those who are in prime earnings years and can pass underwriting tests. But even on those folks, insurers charge premiums that are higher than the actual death benefits, so that they can cover expenses and profits.
I am not sure how you are estimating "value" to the policyholder.

We will pay $1300/year x 20 years = $26K total premiums for my husband and I to have $1 million each.

Even if we have say $2 million by 10 years into the policy, we will still have children dependent on us and still be earning income. Knowing another $1 million would be available to a widow parent if one of us passed (or $2 million if a third party is stuck raising our kids) will still have value to us exceeding the minimal premium. Yes the survivors could get by on less, but not much downside to them having more.

We stated our value ahead of time by choosing 20 year policies because we did not feel we need coverage when children are adults. I can't imagine any reason to cancel early.
When I talk about the value of the death benefit, I am comparing the amount of premiums that a person pays to the "expected" average death benefits that a person might receive.

In your case, you say that you're paying $26k over 20 years for a $1 million policy. If my estimate of a 50% "loss ratio" is correct, then the insurance company will pay out about $13k of death benefits from your premiums. The rest of your premium goes to expenses, taxes, and profits.

You will most likely receive $0 in death benefits from your policy, because you will live for the whole 20 years. However, there is an extremely small chance that your heirs will receive that $1 million payout.

On average, a group of many thousands of people like you will receive $13k. Most will receive $0, a few will receive $1 million. The average will be $13k per person. But no single person will receive $13k, as the only possible outcomes are $0 and $1 million.

By no means do I mean to discourage anyone, ever, from buying term life insurance. I owned term life for many years, my children who have dependents have it, and I "talk it up" to anyone who asks me about it. It's one of the most magical products that there is. For a relatively small premium, the breadwinner of a young family can guarantee that his family will have enough money to survive and prosper if he/she dies prematurely.

But life insurance has a cost. The insurer expects to pay out less in death claims than it earns in premiums. Yes, it's a pretty dry, "actuarial", answer.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
User avatar
bertilak
Posts: 10725
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: When does term life insurance become unnecessary?

Post by bertilak »

When does term life insurance become unnecessary?

When no one is dependent on whatever income will be lost upon your death.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
solarcub
Posts: 253
Joined: Sat Feb 08, 2020 9:09 pm

Re: When does term life insurance become unnecessary?

Post by solarcub »

My wife and I each have 20-year term life insurance, expiring in about 5 years. We probably don't need it anymore, but the premiums never go up. Now that we are in our 50's, those premiums are probably a pretty good deal, since these are the years, out of the 20-year term, when we are most likely to die. Basically, every year you keep the insurance is a better deal for you and a worse deal for the insurance company.

If your premiums increase, that's completely different. Ours will jump dramatically at the end of that 20 years, and we will not keep the policy then.

Also, if you don't have life insurance yet, then it goes back to the question of who will suffer (financially) if you die, and what, if anything, do you need to do to alleviate that.
mrsgoldilocks
Posts: 60
Joined: Mon Jun 07, 2021 9:15 pm

Re: When does term life insurance become unnecessary?

Post by mrsgoldilocks »

When no one is actually relying on your support, or what you have in your "estate" is enough to support the person to the time he/she can be independent, then, you can drop your term life.

My husband and I got our 20 years term life when my son was born to mitigate the risk that if one or both of us pass away, our family will have a safety net until my son graduates college.
Post Reply