At what point does a life insurance policy not make sense?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
schrute
Posts: 246
Joined: Wed Nov 05, 2014 2:27 pm

At what point does a life insurance policy not make sense?

Post by schrute » Sun Nov 11, 2018 6:58 pm

I've read that you should have $1M 20 year life insurance policy. At what point does it not make sense to have a life insurance policy? If your net worth is >$1M (not that mine is), does it not make sense?

What about an AD&D (Accidental death and dismemberment insurance)? I don't have a risky job, but I guess you never know.

User avatar
vineviz
Posts: 2310
Joined: Tue May 15, 2018 1:55 pm

Re: At what point does a life insurance policy not make sense?

Post by vineviz » Sun Nov 11, 2018 7:04 pm

schrute wrote:
Sun Nov 11, 2018 6:58 pm
I've read that you should have $1M 20 year life insurance policy. At what point does it not make sense to have a life insurance policy? If your net worth is >$1M (not that mine is), does it not make sense?

What about an AD&D (Accidental death and dismemberment insurance)? I don't have a risky job, but I guess you never know.
Life insurance is not a function of your net worth so much as it is a function of how dependent other people are on you being alive (i.e. to provide care to children/elders and/or earn money at a job).

If no one is depending on you being alive, then you don't need any life insurance. If you do need life insurance, you probably need to estimate how much money it would take to make the people who depend on you "safe enough".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ResearchMed
Posts: 7653
Joined: Fri Dec 26, 2008 11:25 pm

Re: At what point does a life insurance policy not make sense?

Post by ResearchMed » Sun Nov 11, 2018 7:13 pm

schrute wrote:
Sun Nov 11, 2018 6:58 pm
I've read that you should have $1M 20 year life insurance policy. At what point does it not make sense to have a life insurance policy? If your net worth is >$1M (not that mine is), does it not make sense?

What about an AD&D (Accidental death and dismemberment insurance)? I don't have a risky job, but I guess you never know.
The amount of life insurance needed depends upon what the needs would be of those left behind.
If you are earning mid-6 figures, and have a young family, then $1 million won't do it, even allowing time for scaling down.
Likewise, if you are earning mid-5 figures, and have only one dependent college student still dependent, and a spouse who works, then your needs might be quite different.
But *both* of those depend also upon the total assets one has.

One suggestion is to get something like a 20 year term policy, plus a 10 year term policy, as the financial needs are far less, say, 15 years in than they were maybe 2 years in, etc.

Don't forget DISABILITY insurance. It needn't be an "accident"... This can be a far greater need, as you'd still have the same dependents, but also possible care for yourself.

RM
This signature is a placebo. You are in the control group.

delamer
Posts: 6403
Joined: Tue Feb 08, 2011 6:13 pm

Re: At what point does a life insurance policy not make sense?

Post by delamer » Sun Nov 11, 2018 7:23 pm

As others have said, the amount and duration of your life insurance should be determined by the expenses of those that are financially dependent on your income. A $1 million dollar policy could be way too much or way too little, or just right.

We dropped our life insurance once were FI.

I don’t see the point of AD&D. Why would your family need more money if your death is caused by an accident rather than an illness (for instance)? And if you are disabled, then your disability insurance will cover it.

Miriam2
Posts: 2345
Joined: Fri Nov 14, 2014 11:51 am

Re: At what point does a life insurance policy not make sense?

Post by Miriam2 » Sun Nov 11, 2018 10:09 pm

schrute wrote: What about an AD&D (Accidental death and dismemberment insurance)? I don't have a risky job, but I guess you never know.
Forum member and insurance expert BruDude says buying an AD&D (Accidental Death & Dismemberment Insurance) policy is like buying a life insurance policy that only covers you on Mondays and pays nothing if you die on any other day of the week . . . (that's why AD&D policies are so inexpensive, people almost never qualify for the death benefit).
BruDude wrote: The odds of someone your age dying from an accident are slim to none. It sounds like the policy would also terminate at age 70, so you'd only have it for a few years. I doubt you would buy a life insurance policy that only covers you on Mondays and pays nothing if you die on any other day of the week. Same thing...
Nisiprius called accidental death policies a "gimmick":
nisiprius wrote: . . . accidental death and dismemberment is a gimmick. Enjoy it if it's free, but don't count it mentally as a benefit. It's not life insurance. It might be "worth" I dunno, ten bucks a year, something like that.
:D

harvestbook
Posts: 522
Joined: Sat Mar 18, 2017 7:12 pm

Re: At what point does a life insurance policy not make sense?

Post by harvestbook » Mon Nov 12, 2018 10:33 am

We don't have life insurance because we have no debt, reasonable investments, college funded, passive income streams, and neither wife, my child, or I would have their lives materially affected by a loss.
I'm not smart enough to know, and I can't afford to guess.

User avatar
Tamarind
Posts: 1181
Joined: Mon Nov 02, 2015 2:38 pm

Re: At what point does a life insurance policy not make sense?

Post by Tamarind » Mon Nov 12, 2018 10:45 am

I don't have individual life insurance YET because my wife and I have no children. DW works and my employer-provided group life policy would be sufficient to pay off the mortgage which is our only large obligation. I plan to get term life policies for both of us if/when we decide to have a child.

I got an individual LTD policy this year after we got married, so that in the event of me being disabled the financial disruption to our lives would be reduced. My wife did not get one because (in no particular order) she is skeptical about their value, she currently makes less than I do, and her work would be considered risky by disability underwriters.

User avatar
Watty
Posts: 14592
Joined: Wed Oct 10, 2007 3:55 pm

Re: At what point does a life insurance policy not make sense?

Post by Watty » Mon Nov 12, 2018 10:57 am

schrute wrote:
Sun Nov 11, 2018 6:58 pm
I've read that you should have $1M 20 year life insurance policy. At what point does it not make sense to have a life insurance policy? If your net worth is >$1M (not that mine is), does it not make sense?
One upper limit is if you could easily retire today then you may not need life insurance.

That is a pretty high bar since your spouse might still be able to work and could get by OK with less.

When looking at your numbers in addition to your normal expenses also take into account that the surviving spouse could also lose out on years of your retirement account contributions.

User avatar
PrettyCoolWorkshop
Posts: 140
Joined: Tue Aug 11, 2015 8:44 pm

Re: At what point does a life insurance policy not make sense?

Post by PrettyCoolWorkshop » Mon Nov 12, 2018 11:01 am

I think that the answer to this question has many subjective variables. For example, to what extend do your dependents depend on you? Imagine the cases of:

case 1: You are the sole breadwinner, with take home pay of $70,000.You have accumulated investments of $200,000. Your family's cost of living is $60,000. You die, leaving a high school-educated widow with 5 children in the ages of 2 years to 8 years old.

case 2: You are the sole breadwinner, with take home pay of $100,000. You have accumulated investments of $800,000. Your family's cost of living is $70,000. You die, leaving a college-educated widow with 2 children of the ages 12 and 14.

I would argue that case 2 is one that does not require life insurance. The surviving spouse is likely to be financially able to get the ship afloat easily, at least until the kids are out of high school and can probably still pay for the kids' college, even though the family is not yet FI.
Be greedy and fearful. All the time.

22twain
Posts: 1604
Joined: Thu May 10, 2012 5:42 pm

Re: At what point does a life insurance policy not make sense?

Post by 22twain » Mon Nov 12, 2018 11:49 am

While we were working, my wife and I had similar incomes, enough to cover housing and living costs, and save a generous amount. No kids. Either of us could have covered his/her living expenses if the other one died, and would have inherited the other's savings.

Now we're both retired, although she still teaches part time for non-monetary reasons. Plenty of assets relative to the cost of living in this area.

So we've never had life insurance.
My investing princiPLEs do not include absolutely preserving princiPAL.

bogglizer
Posts: 193
Joined: Tue Aug 16, 2016 8:56 pm

Re: At what point does a life insurance policy not make sense?

Post by bogglizer » Mon Nov 12, 2018 12:22 pm

AD&D almost is never paid out, since accidents are so rare. On the other hand, it is usually pretty cheap for the same reason. If you have a job or hobby that is likely to lose you a limb, then it definitely makes sense.

EnjoyIt
Posts: 1594
Joined: Sun Dec 29, 2013 8:06 pm

Re: At what point does a life insurance policy not make sense?

Post by EnjoyIt » Mon Nov 12, 2018 12:35 pm

everything everyone said above plus

Life insurance is a math problem. Here is how I calculate it. I am a believer in a 4% withdrawal rate as being relatively safe for retirement if one can make adjustments and use that belief in my math. Feel free to use your own rate if you plan differently.

((yearly expenses - Social security death benefit for survivors) x 25) - (investable assets) = insurance needs

Example:
You have 300K invested
you spend $75k/yr
SS will give you $2k/month death benefit to surviving spouse and child =24k/yr

(($75k - 24k) x 25) - 300k = $975k life insurance need

As you can see the more wealth you have and the lower your expenses the less insurance you need which is why some recommend having a 10 year and 20 year policy which you can drop one as needed.

fourwheelcycle
Posts: 483
Joined: Sun May 25, 2014 5:55 pm

Re: At what point does a life insurance policy not make sense?

Post by fourwheelcycle » Mon Nov 12, 2018 9:36 pm

My wife and I had very stable jobs with good health insurance and short and long term disability insurance. We did not have our two children until our mid-thirties. By that time we had a good start on our savings and 2X salary term insurance through our employers. As a result, we never felt we needed to buy any additional life insurance. As our children got older we backed off on our employer-based term and only continued with the 1X term provided by our employers after our early fifties.

AlphaLess
Posts: 1059
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky

Re: At what point does a life insurance policy not make sense?

Post by AlphaLess » Mon Nov 12, 2018 9:45 pm

I use term life insurance, obtained at VERY FAVORABLE terms as AD&D insurance (in addition to covering all other legal ways of dying).
"You can get more with a kind word and a gun than with just a kind word." George Washington

User avatar
Watty
Posts: 14592
Joined: Wed Oct 10, 2007 3:55 pm

Re: At what point does a life insurance policy not make sense?

Post by Watty » Mon Nov 12, 2018 10:55 pm

One more thought, before you cancel it you might want to get a physical to find out if you have any major health problems that you don't know about.

User avatar
grabiner
Advisory Board
Posts: 23110
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: At what point does a life insurance policy not make sense?

Post by grabiner » Mon Nov 12, 2018 11:02 pm

schrute wrote:
Sun Nov 11, 2018 6:58 pm
What about an AD&D (Accidental death and dismemberment insurance)? I don't have a risky job, but I guess you never know.
AD&D policies don't make sense. Insurance has a negative expected value (otherwise, insurance companies wouldn't sell it); the reason you buy it is to protect against losses you cannot easily handle. You have the same need for life insurance whether you die in an accident or of cancer, and for disability insurance whether you are disabled in an accident or by a stroke.
Wiki David Grabiner

User avatar
leeks
Posts: 272
Joined: Thu Apr 07, 2011 4:33 pm
Location: new york

Re: At what point does a life insurance policy not make sense?

Post by leeks » Mon Nov 12, 2018 11:04 pm

Term life insurance can be so cheap (my $1 million policy is about $500/year) that there may be no need to overthink it. It seems nearly anyone with minor children should have it. We got it just before our first child was born, and upgraded to larger policies after the second.

We will certainly keep it for the 20-year term (and for a longer term if we have more kids). Yes, my husband and two kids could easily survive financially without me (I am currently the stay-at-home-parent) as long as my husband was able to keep working in his field. But I would want him to have all the options, extended time off (maybe he would stay home with the kids some if they were still little), quit/switch jobs/go part-time, relocate, hire the best child care (which probably would mean hiring a relative and paying relocation costs), etc. An extra million certainly wouldn't hurt and seems well worth the ~10K in premiums over the 20-year term.

Post Reply