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My wife and I revisit this question annually now. Our boys are grown, but our oldest will need continued financial support all his life.
Our intent is to phase out our term insurance over 5 years or so, as the current amounts would allow the survivor to pay off the remaining mortgage and replace salary to age 60, at which point we expect to have plenty for retirement.
We also expect to shortly take out a 2nd to die policy for which our oldest will be the beneficiary. It will fund a trust uniquely for him when the last of us passes.
One factor that could come into play is whether the policy has a “Chronic Illness” benefit that could enable you to accelerate a portion of the death benefit to pay for Long Term Care expenses in old age. That could be a reason to keep the life policy when the “income protection need” has been met.
We dropped mine when the kids graduated college. We still have some for hubby, but will drop when he retires in a few years. It is affordable, since we got through his professional organization. He also has some through work that is company paid.
When you have no dependents, have no debts that might create cash flow challenges for heirs, and are confident that anyone left in your household can manage without your contribution to household expenses.
I paid for term life when I had a mortgage, so my brother would not have to stretch his budget to pay the mortgage until the house sold. Two of my cousins share a household and carry small term life policies; their goal is to cover expenses during a transition period so the survivor can adjust budget, find a new roommate, or downsize.
A couple where one spouse has the unpaid work of full time childcare or elder care usually needs life insurance on the non working spouse. Paying for care is an expense that couple pays by having one spouse stay home, foregoing opportunities to earn income. Calculate the contribution to household expenses as the cost of paid care and obtain term life.
It’s okay to drop when the protection is no longer needed – for example, when net worth has grown sufficiently that a non-working spouse and children wouldn’t need the insurance, or when children have grown and are out of the house, or when a working spouse has their own income that’s sufficient to cover themselves and other survivors.
That said, while it may be okay to drop in these situations, it may not be the best path. I have life insurance I no longer need but have chosen to keep. Why? My term policy ends in the next couple of years, making the cost to retain it a minimal one for the benefit provided. My whole life has a cash value provision that for now is accruing value faster than any other no risk investment (this will likely change as interest rates rise). So while I’d have no qualms about dropping both in terms of protecting the beneficiaries, these are reasons to retain the policies, at least for now.
The basic answer is to buy a 20 year term policy whenever you have a child to protect them in case you die early. That is what I did during my high-arning years. Later when I got my insurance license I overfunded a whole life policy and use it as my cash reserve fund. The death benefit can be my inheritance if I spend down my other investment accounts. I also view it as a Roth-like account since it is tax-free.Congress’ eventual removal of the perfect protection Roth accounts currently hold sems inevitable.It is also a hedge against my “life-only ” annuities and pensions.
The traditional answer to this question is once your dependents no longer rely on it, that is, when your other assets could support them should you pass away. However, from a behavioral standpoint, I find it difficult to let go of my term life policy, even though my family would probably be fine without it. The policy is relatively inexpensive for one. Also, the last several years of the policy are technically the most valuable from the standpoint of the insured, since that is when the insured individual is more likely to die. With a level premium, you “overpay” when you are young and “underpay” when you are older. Again, we see how personal finance is part math and part behavioral.
I’m at the stage where I need to make this decision.
To Andrew’s point I have sufficient assets that no one will financially suffer if I die. Besides a sizable term policy, I have a 60+ year old small whole life policy that my father bought for me. The dividend still does not cover the premium. I read once that with whole life, the true amount of insurance outstanding is not the face value. It is really the face value less the current cash value because you could collect on the cash value anytime. With that thought in mind, my small policy is smaller still: the actual insurance component is 40% of the face value. But, of course the premium is still the same.
I had a hefty term life policy during my working years when our kids were growing up. Now that they’re grown and independent, our savings are sufficient, and the premiums for a life policy at my age are astronomical, I no longer have a policy.
The question I always remember when considering life insurance is: Who will financially suffer if you die? If the answer is no one, you probably don’t need a policy—unless it’s for some sort of tax benefit, as Mike mentions.
I’ve never had life insurance since I have no dependents. I suppose once your kids are out of college and you have ample savings, life insurance becomes less of a need. But then, as your wealth really builds, life insurance can offer some tax benefits. Still, I think of insurance as just that–insurance–not a tax tool.