When does term life insurance become unnecessary?
When does term life insurance become unnecessary?
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?
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Re: When does term life insurance become unnecessary?
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.
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.
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Re: When does term life insurance become unnecessary?
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.
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.
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Re: When does term life insurance become unnecessary?
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.
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Re: When does term life insurance become unnecessary?
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.
Re: When does term life insurance become unnecessary?
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.
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.
Re: When does term life insurance become unnecessary?
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.
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.
Re: When does term life insurance become unnecessary?
If you wouldn't retire now for financial reasons then you have some dependence on your paycheck that the insurance policy would offset.
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Re: When does term life insurance become unnecessary?
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.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.
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.
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Re: When does term life insurance become unnecessary?
Well-stated, Stinky.Stinky wrote: ↑Wed Jun 16, 2021 5:18 amAt 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.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.
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.
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.
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Re: When does term life insurance become unnecessary?
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.
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Re: When does term life insurance become unnecessary?
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.
Re: When does term life insurance become unnecessary?
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.
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Re: When does term life insurance become unnecessary?
I am not sure how you are estimating "value" to the policyholder.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.
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.
Re: When does term life insurance become unnecessary?
^This is the litmus test we used as well.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.
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Re: When does term life insurance become unnecessary?
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.
Make sure you undestand the survivor benefits of OADSDI. For me it was about the median income for my city.
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Re: When does term life insurance become unnecessary?
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!
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!
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Re: When does term life insurance become unnecessary?
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.
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Re: When does term life insurance become unnecessary?
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.
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.
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Re: When does term life insurance become unnecessary?
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.leeks wrote: ↑Wed Jun 16, 2021 7:09 amI am not sure how you are estimating "value" to the policyholder.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.
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.
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.
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Re: When does term life insurance become unnecessary?
When does term life insurance become unnecessary?
When no one is dependent on whatever income will be lost upon your death.
When no one is dependent on whatever income will be lost upon your death.
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Re: When does term life insurance become unnecessary?
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.
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.
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Re: When does term life insurance become unnecessary?
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.
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.