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Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 8:33 am
by toocold
Current situation: Late 40s. Recently stopped working -- I guess I could call it early retired. With a combination of our rental properties, pre-tax and post-tax retirement funds, investments in non-retirement funds, and deferred compensation, our family is set to have way more than enough to live on (less than a 2% withdraw rate).

I purchased a 20 year term life insurance of $1.5M when I was 35, when the need was there. It's $600/year in premiums. I am thinking that life insurance is no longer needed, as DW will have more than enough if I were to pass.

Part of me wants to lapse it when it comes for renewal, the other part of me wants to keep it because $600/year is a real good deal for someone in the late 40s for $1.5M coverage. As a reference and to keep the math simple, I looked up that a 50 year old man has a 3% chance of dying within 5 years, so the expected value of $1.5m coverage is $45k. With total premium payments of $3k, I'm thinking you can't get these odds in vegas. I also have no major health conditions, so perhaps that 3% is a little lower (cross my fingers).

Should I keep it or let it lapse? Any other considerations?

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 8:43 am
by IowaFarmBoy
What does DW think? We made a similar analysis a year ago. I wanted to drop. DW wanted to keep for her peace of mind. We compromised and dropped the amount from $600k to $250K (lowest available on our policy) and cut our premium about in half.

Where did you get that 3% number? When I did the calculation, I don't think used a mortality rate that high. I really don't think 3% of the guys I have know have died between 50-55. There are some life expectancy calculator from the Society of Actuaries that let you enter in things like your current health, type of work, etc and give a more individualized estimate.

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 8:48 am
by toocold
IowaFarmBoy wrote: Tue Sep 15, 2020 8:43 am What does DW think? We made a similar analysis a year ago. I wanted to drop. DW wanted to keep for her peace of mind. We compromised and dropped the amount from $600k to $250K (lowest available on our policy) and cut our premium about in half.

Where did you get that 3% number? When I did the calculation, I don't think used a mortality rate that high. I really don't think 3% of the guys I have know have died between 50-55. There are some life expectancy calculator from the Society of Actuaries that let you enter in things like your current health, type of work, etc and give a more individualized estimate.
DW likely doesn't know that I have life insurance, but it's good advice to talk with her.

Here's the site: https://www.finder.com/life-insurance/odds-of-dying

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 2:11 pm
by Stinky
Something is screwy with the mortality numbers. They show a male age 35 has a 6.83% chance of dying in 20 years. So the expected death benefits per year when your policy was issued are $1.5 million X .0683 / 20, or just over $5,000.

But you’re paying only $600 per year. And I guarantee that your insurance company didn’t price your policy to lose money. Their mortality cost per year is roughly 50% of premiums, or $300 per year.

So something is screwy here.

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 2:34 pm
by ef11
For $50 a month, I'd keep it for peace of mind. Let it expire at age 55 if no longer needed.

One thing to note, if health concerns do arise before you reach age 55, the policy is likely convertible to permanent which could be a smart move if you have new health concerns.

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 2:36 pm
by ef11
Stinky wrote: Tue Sep 15, 2020 2:11 pm Something is screwy with the mortality numbers. They show a male age 35 has a 6.83% chance of dying in 20 years. So the expected death benefits per year when your policy was issued are $1.5 million X .0683 / 20, or just over $5,000.

But you’re paying only $600 per year. And I guarantee that your insurance company didn’t price your policy to lose money. Their mortality cost per year is roughly 50% of premiums, or $300 per year.

So something is screwy here.
Agreed. I see a table from Midland National that shows probability of a 35 year old male surviving for 20 years at 97.6%

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 2:41 pm
by Normchad
I’d keep it. I’m keeping mine, and I’m in a similar position. Probably don’t need it, probably won’t die while it’s in effect. But I might......

I like you pr analysis......

I guess it’s macabre, but if I croak, some people will be sad. Hopefully, they’ll also think “At least I won the lottery today, so now I’m a bit less sad”.

It’s cheap.

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 2:44 pm
by sport
toocold wrote: Tue Sep 15, 2020 8:48 am DW likely doesn't know that I have life insurance, but it's good advice to talk with her.
If you want her to get the money if you die, she had better know about the policy (unless someone else knows and cares). The insurance co. will not pay unless someone files a claim.

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 5:00 pm
by toocold
sport wrote: Tue Sep 15, 2020 2:44 pm
toocold wrote: Tue Sep 15, 2020 8:48 am DW likely doesn't know that I have life insurance, but it's good advice to talk with her.
If you want her to get the money if you die, she had better know about the policy (unless someone else knows and cares). The insurance co. will not pay unless someone files a claim.
Agreed. As you can imagine, I'm the person who has the spreadsheets and I update her on a quarterly basis. She knows where all our documents are and there are instructions on what to do if I pass, which includes life insurance. The good thing is that she's been dealing with our properties since the start, and I think that part of the portfolio is the most complex.
Stinky wrote: Tue Sep 15, 2020 2:11 pm So something is screwy here.
You are correct. Your post got me thinking so I looked up my policy. It's a 15 year policy for 1.25M starting at age 38. The question is the same, but the details are skewed. A 48 year old male has a 2.5% of passing within 5 years, with expected value of 31k with remaining payment of 3235 (647 per year).
Normchad wrote: Tue Sep 15, 2020 2:41 pm I’d keep it. I’m keeping mine, and I’m in a similar position. Probably don’t need it, probably won’t die while it’s in effect. But I might......It’s cheap.
After doing this research and calculations, I came to the same conclusion. This post was cathartic. :happy

Re: Whether to lapse term life insurance

Posted: Tue Sep 15, 2020 10:33 pm
by Ben Mathew
You don't really need the insurance. But, with level term premiums, you've already prepaid for much of it because the premiums are higher than actuarially fair early on and lower than actuarially fair towards the end. You've held the policy for the expensive years, might as well hang on to it for the cheap years.

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 6:36 am
by StevieG72
Wowee wow! I have a $500k term police that costs me $600 a year.

I do not need the policy, but consider it inexpensive. In addition, canceling a policy in the middle of a pandemic does not seem wise!

I would definitely keep a 1.5 million policy for $600 yearly!

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 7:13 am
by Rudedog
I'd keep it, $ 600 per year is low cost for that much coverage. When you get to 60 or 70 you may want to take another look at it. Many don't really "need" life insurance, but I've seen the state of stress and uncertainty when husband dies, it seemed to give wife a bit of comfort knowing there was a big life insurance check coming. In any case I have decided to keep all my life insurance for the next year or two due to the possible effects if I contract covid virus.

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 8:40 am
by MikeG62
I'm going to go against the grain here. Yes, it's a good value - no denying that. However, the overarching principal of life insurance is income replacement of the insured. If income does not need to be replaced, then there is no need to purchase the insurance. I'd seriously consider cancelling the policy and saving the $600 per year.

FWIW, I did not new renew my life insurance policy upon turning 50 as the cost increase was substantial in that year and we did not need the coverage. Could/should have let it lapse many years earlier, but it was cheap and frankly I did not give it much thought.

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 10:05 am
by TrollToll
I think others have covered a lot of important points - peace of mind, need of insurance, etc.

But I can share a bit of info about mortality rates and give my $0.02.

The 2017 CSO mortality tables are the max amount of what insurers can charge. These are a bit higher than would be expected.

https://www.soa.org/resources/experienc ... so-tables/

I generally use the "2017 Loaded CSO Smoker-Distinct Tables". You can look at more specific tables with risk class if you want.

These tables are per 1000 (not percent, or per 100), so all values need to be divided by 1000. You read the table as issue age (45) on the left, then duration (6 for a 50 year old, because duration 1 starts at issue) on the top. This gives the following mortality rates:

50: 0.11%
51: 0.13%
52: 0.15%
53: 0.17%
54: 0.19%

The chance of dying over these 5 years is found by multiplying (1-0.11%) by (1-0.13%), (1-0.15%), etc, then taking 1 less that number. This comes to a chance of dying in these 5 years of 0.75% (not 3%). This happens to be the same as if you just summed all the mortality rates, but that doesn't work as well with higher mortality percents and is technically an incorrect calculation. Also this is estimate conservatively high, but reasonably close. This applies to male non-smokers, so is obviously a broad answer for a specific person, but gives and idea where the insurers are coming from.

From an odds point of view, I don't think you'll come out ahead by holding onto the policy. As someone else noted, term policies overpay in early years, then underpay in later years. You have been overpaying for 5 years and are closer to the underpaying part of the policy. But you also need to cover insurer expenses, so you might be overpaying for 15 years and underpaying for 5 years realistically. Vegas always wins and insurers always win. If you were 15 years in, I would definitely change my mind about this.

But as others have said, peace of mind and relative cost - "emotional concerns" - may be more important than your actual odds of getting value out of this contract. Also, an early death would be tough emotionally and an insurance payout certainly wouldn't hurt in that trying time, even if your spouse is financially fine without.

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 10:58 am
by sport
I had a similar situation. I had a 20-year term policy I bought when I was 45. At age 62, I retired and there were 3 years left before the rate made a huge jump. I decided that since we had enough money for me to retire, we did not need the insurance. So, I let it lapse, even though it was cheap insurance.

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 11:12 am
by Valuethinker
toocold wrote: Tue Sep 15, 2020 8:33 am Current situation: Late 40s. Recently stopped working -- I guess I could call it early retired. With a combination of our rental properties, pre-tax and post-tax retirement funds, investments in non-retirement funds, and deferred compensation, our family is set to have way more than enough to live on (less than a 2% withdraw rate).

I purchased a 20 year term life insurance of $1.5M when I was 35, when the need was there. It's $600/year in premiums. I am thinking that life insurance is no longer needed, as DW will have more than enough if I were to pass.

Part of me wants to lapse it when it comes for renewal, the other part of me wants to keep it because $600/year is a real good deal for someone in the late 40s for $1.5M coverage. As a reference and to keep the math simple, I looked up that a 50 year old man has a 3% chance of dying within 5 years, so the expected value of $1.5m coverage is $45k. With total premium payments of $3k, I'm thinking you can't get these odds in vegas. I also have no major health conditions, so perhaps that 3% is a little lower (cross my fingers).

Should I keep it or let it lapse? Any other considerations?
I would not lapse the policy. It's very cheap.

You can always adjust your estate plan with that money going to 2-3 charities if you feel your spouse & children will not need it.

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 3:42 pm
by cheese_breath
toocold wrote: Tue Sep 15, 2020 8:33 am... It's $600/year in premiums. I am thinking that life insurance is no longer needed, as DW will have more than enough if I were to pass.

Part of me wants to lapse it when it comes for renewal, the other part of me wants to keep it because $600/year is a real good deal ...
Paying $600 every year for something you say you don't need doesn't seem like a real good deal to me.

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 4:18 pm
by toocold
TrollToll wrote: Wed Sep 16, 2020 10:05 am I think others have covered a lot of important points - peace of mind, need of insurance, etc.

But I can share a bit of info about mortality rates and give my $0.02.

The 2017 CSO mortality tables are the max amount of what insurers can charge. These are a bit higher than would be expected.

https://www.soa.org/resources/experienc ... so-tables/

I generally use the "2017 Loaded CSO Smoker-Distinct Tables". You can look at more specific tables with risk class if you want.

These tables are per 1000 (not percent, or per 100), so all values need to be divided by 1000. You read the table as issue age (45) on the left, then duration (6 for a 50 year old, because duration 1 starts at issue) on the top. This gives the following mortality rates:

50: 0.11%
51: 0.13%
52: 0.15%
53: 0.17%
54: 0.19%

The chance of dying over these 5 years is found by multiplying (1-0.11%) by (1-0.13%), (1-0.15%), etc, then taking 1 less that number. This comes to a chance of dying in these 5 years of 0.75% (not 3%). This happens to be the same as if you just summed all the mortality rates, but that doesn't work as well with higher mortality percents and is technically an incorrect calculation. Also this is estimate conservatively high, but reasonably close. This applies to male non-smokers, so is obviously a broad answer for a specific person, but gives and idea where the insurers are coming from.

From an odds point of view, I don't think you'll come out ahead by holding onto the policy. As someone else noted, term policies overpay in early years, then underpay in later years. You have been overpaying for 5 years and are closer to the underpaying part of the policy. But you also need to cover insurer expenses, so you might be overpaying for 15 years and underpaying for 5 years realistically. Vegas always wins and insurers always win. If you were 15 years in, I would definitely change my mind about this.

But as others have said, peace of mind and relative cost - "emotional concerns" - may be more important than your actual odds of getting value out of this contract. Also, an early death would be tough emotionally and an insurance payout certainly wouldn't hurt in that trying time, even if your spouse is financially fine without.
This is why I love this forum :beer

Re: Whether to lapse term life insurance

Posted: Wed Sep 16, 2020 4:25 pm
by Stinky
TrollToll wrote: Wed Sep 16, 2020 10:05 am I think others have covered a lot of important points - peace of mind, need of insurance, etc.

But I can share a bit of info about mortality rates and give my $0.02.

The 2017 CSO mortality tables are the max amount of what insurers can charge. These are a bit higher than would be expected.

https://www.soa.org/resources/experienc ... so-tables/

I generally use the "2017 Loaded CSO Smoker-Distinct Tables". You can look at more specific tables with risk class if you want.

These tables are per 1000 (not percent, or per 100), so all values need to be divided by 1000. You read the table as issue age (45) on the left, then duration (6 for a 50 year old, because duration 1 starts at issue) on the top. This gives the following mortality rates:

50: 0.11%
51: 0.13%
52: 0.15%
53: 0.17%
54: 0.19%

The chance of dying over these 5 years is found by multiplying (1-0.11%) by (1-0.13%), (1-0.15%), etc, then taking 1 less that number. This comes to a chance of dying in these 5 years of 0.75% (not 3%). This happens to be the same as if you just summed all the mortality rates, but that doesn't work as well with higher mortality percents and is technically an incorrect calculation. Also this is estimate conservatively high, but reasonably close. This applies to male non-smokers, so is obviously a broad answer for a specific person, but gives and idea where the insurers are coming from.

From an odds point of view, I don't think you'll come out ahead by holding onto the policy. As someone else noted, term policies overpay in early years, then underpay in later years. You have been overpaying for 5 years and are closer to the underpaying part of the policy. But you also need to cover insurer expenses, so you might be overpaying for 15 years and underpaying for 5 years realistically. Vegas always wins and insurers always win. If you were 15 years in, I would definitely change my mind about this.

But as others have said, peace of mind and relative cost - "emotional concerns" - may be more important than your actual odds of getting value out of this contract. Also, an early death would be tough emotionally and an insurance payout certainly wouldn't hurt in that trying time, even if your spouse is financially fine without.
Solid actuarial analysis!

Re: Whether to lapse term life insurance

Posted: Thu Sep 17, 2020 12:09 pm
by Small Savanna
At the very least, get a complete physical before dropping it.

Re: Whether to lapse term life insurance

Posted: Thu Sep 17, 2020 12:13 pm
by Normchad
cheese_breath wrote: Wed Sep 16, 2020 3:42 pm
toocold wrote: Tue Sep 15, 2020 8:33 am... It's $600/year in premiums. I am thinking that life insurance is no longer needed, as DW will have more than enough if I were to pass.

Part of me wants to lapse it when it comes for renewal, the other part of me wants to keep it because $600/year is a real good deal ...
Paying $600 every year for something you say you don't need doesn't seem like a real good deal to me.
None of *us* needs life insurance at all. It's for the survivors. Maybe ask the survivors if they'd like to save the $600 now......

Better yet, just give them the bill and let them decide if they want to pay it.....

Re: Whether to lapse term life insurance

Posted: Thu Sep 17, 2020 12:20 pm
by willthrill81
If you don't need the insurance, then drop it and save that premium.