Good Decision/Bad Decision: Ditching Life Insurance
Good Decision/Bad Decision
Today’s subject will hopefully be part of a regular series of Monday posts. As you recall, I recently started Gratitude Wednesdays. This series will focus on my past decisions to shed light on some financial and emotional wins and losses. My hope is to discover what I did right, and help others avoid my mistakes. Whether epic fail or triumphant victory, these were my decisions. The topic for today is ditching life insurance.
As I talked about on the first ever post on this blog, it felt quite ironic cancelling my life insurance since my father’s policy had funded all of my education. Yet, I also couldn’t justify paying for a policy that had fallen below my net worth.
Isn’t the point behind insurance to protect you from uncontrollable risk? After reaching financial independence, isn’t that protection unnecessary?
Good Decision
When calculating our goal for financial independence, almost everyone uses some version of the safe withdrawal rate theory. If you imagine an SWR of 4%, then for each million you have saved, you will be able to spend $40,000 a year in retirement. So clearly, the less you spend every year, the less needed to retire. This makes perfect sense.
There are two ways to get to financial independence faster. Save (make) more or spend less. No matter how much you earn, cutting unnecessary costs from your budget is downright prudent. The cost of a term life insurance premium is one of these budget items that becomes questionable as your net worth rises higher and higher. If you spend $41,000 a year instead of $40,000, you need an extra 25K of retirement savings to support the annual $1000 fees.
When I finally became aware of the financial independence movement and learned how to accurately calculate my net worth, I came to a funny conclusion. My life insurance policy would pay about half of my current net worth. Since I was already economically self-sufficient, did my family really need this windfall if something happened to me? We already have enough, wouldn’t family costs go down with one less mouth to feed?
As morbid as that sounds, I was paying to insure for a sense of safety that was already there.
I could be my own insurance agency!
Ditching life insurance makes the most sense.
Bad Decision
While it is true that I have enough in the bank to insure myself already, sometimes it’s ok for such decisions to be made on more emotional and less logical grounds. Of course my family would be fine either way, but after a devastating loss like this, wouldn’t it be nice to have a little extra cushion around so that my loved ones wouldn’t have to worry?
My wife would know that not only would she never have to work again if she didn’t want to, but that my kids would also have a nice financial framework to begin their adult lives.
Ditching life insurance sounds a little silly when you think of the paltry premiums that I pay. For an extra grand a year, my family gets the safety and comfort of knowing that they will never have to worry about money if something untoward happens.
In Summary
After much thought, I couldn’t justify paying premiums for another year. Although emotionally the idea of having insurance is satisfying, reality suggests that in the tragic event that something happened to me, my family would be just fine economically.
Although I haven’t jettisoned my disability and long-term care insurance yet, I certainly am thinking about it.
The beauty of financial independence is having options. If ditching life insurance makes me feel unprotected, even illogically, then there is no reason not to purchase it.
In this case, I felt my policies usefulness had run its course.
So I cancelled it.
How about you? Do you still have life insurance? Will you get rid of it after you reach financial independence? Is there a place for it even after reaching FI?
I would absolutely have done the same in your situation. I still have a simple policy of twice my salary that comes free with my job, and that’s all I need
Yah…having a policy through work is an added bonus of staying a least partially in the system.
I look forward to the days when this is a conversation to be had!!!
Given my woes with not being able to obtain personal disability insurance (have a good group policy), I really look forward to having enough that it wouldn’t matter anyway.
It’s a tough decision to be made, but sure seems like you made the right choice.
TPP
I think in the early years, disability insurance is important. Group is better than nothing.
Thanks for stopping by Smart Money. I agree, there needs to be at least some liquidity to self insure.
I think personally I am going to keep insurance until I end up retiring early. I think if something happened to me before then my daughter would be able to get a large cash infusion and then don’t have to worry about selling assets to make initial ends meet (potentially bad timing if market crash etc). After I do retire I don’t think I would maintain it even though the term would be carried out til 65. I’m curious what your feelings are on long term care. I’m 47 so too early to consider I think. But what I read about it seems like a dicey proposition (premiums high no guarantee company u r insured under will be around when u need it etc)
I plunked down 75K and bought long term care insurance for my wife and I. Now that I am more financially savvy, I would have self insured!
The reality is if you die 40 years from now investing premiums can come out ahead. If you die tomorrow your covered from assets. Insurance should be for risk mitigation not investment. In this case it’s not mitigating a real risk.
Yep. That’s why I ditched it!
We ditched even earlier in our journey. In 2001, we were both working but paid the last payment on our home. We had about 400K in IRAs, definitely not FI yet but on our way. The decision to cancel was simple — we didn’t need the other person to pay our house payment, and the other bills were covered by just one of our salaries. So we canceled. Yeah, it felt a little scary, but I think this type of decision helped in the general category of “don’t need it, don’t buy it”, an attitude that carried us to early retirement.
Wow. You guys were brave!
Insurance is to cover for something you can’t afford to happen. Once you are financially secure, reached financial independence, then life, disability and long term care insurance are no longer needed. If you have the money to quit working now, you are covered. Long term care only pays for a maximum of $200,000 – $300,000. You have that covered. You don’t need to work anymore so disability is covered. Don’t waste money insuring things you no longer need insured. I have none of those anymore. It saved me $4,000 a year to drop them when I repurposed from general surgeon to writer/coach.
Dr. Cory S. Fawcett
Prescription for Financial Success
Yep, well said!
I’d do the same if I were you. Unfortunately, I’m not there yet. Plus a lot of my net worth is illiquid and embedded in the equity of my home. They could sell the house if I pass, but that would entail a major lifestyle change. My inexpensive term life insurance will allow them to live the current lifestyle without too much disruption.
I bet in a few years you will be faced with the same decision.
I agree with some of the commenters above. Having a good nest egg helps, but sometimes it’s difficult if you have illiquid assets like real estate.
Couldn’t agree more – I cancelled my life and disability policies last week. They’re important early on but once you get to a certain point they are just padding. This post is timely validation that I didn’t make a stupid mistake! Thanks.
Wow! Congrats. That’s a milestone!
Life insurance is like compound interest in reverse. As compound interest proceeds, “insurance need” recedes. My life insurance has been gone so long I can’t even remember it’s presence in my life. I put the money in BRK.B. That’s my method of owning life insurance, since the insurer is the one making the money.
Hmmm. BRK.B seems to be a common theme in your writing.
I never had my own life insurance policy (outside of employer offered insurance). Just when I started thinking about getting it was when I got diagnosed with CML, so it immediately became harder in my mind. Once we learned about financial independence and realized we were there, I stopped worrying about not being able to get a life insurance policy. I immediately canceled my supplemental work policy and the two policies DGal’s parents had set up for her. It’s nice not spending that money and I live much easier not worrying about whether I should get a life insurance policy. I do wonder about a long term care policy, especially given the way health care costs will continue to increase.
–DGuy
Hopefully if you are FI, you have enough to insure for LTC Insurance also!
Recall the saying: “BRK.B haz bin berry berry gud to me”
in a compounded sort of way. It gives me boffo return without FANG risk.
If I were in your shoes, I would cancel too. I’m still early in my career and in my wealth accumulation phase. I have term life insurance that is a 10 year policy that will end when I’m 44 years old. By that time, I expect to have a net worth that is quite a bit more than the insurance. When I’m 44, I’ll have to make a decision of renewing my policy. If all goes right, I probably won’t.
I have a few years on you. When your my age…you won’t need it.