Considering whether to maintain term life insurance when financial need has lessened

[frugalecon]

Sixteen years ago, I signed up for a $500k twenty year term life insurance policy with AIG. I am part of a two-income household (DINKs), and I earn between 60 and 65% of household income. The time has rolled around to pay the $370 yearly premium, and I am weighing whether it makes sense. At this point my spouse would already be well-provided for if I predeceased, with sufficient pension and SS income to more than cover basic expenses, plus about $2.2 million in other assets and a house that is nearly paid off. Obviously this was not the situation 16 years ago when I signed up for the policy.

It feels a bit like a waste of money to maintain the insurance, but at this point it is a bit better than an actuarially fair bet according to the Social Security actuarial life table (at least on average, though I am overall in excellent health according to my most recent physical).

For anyone who has been in a similar situation, are there compelling arguments either way that I should consider? Thanks for any insight.

[sailaway]

As DINKs we never even signed up for insurance beyond what the jobs offered. We certainly won't be considering it now that we are FI.

[catlady]

Same as the poster above, DINKs and we only have free employer provided life insurance.

[willthrill81]

Apart from fairly rare situations, you only buy or keep life insurance if someone is financially dependent on the individual whose life is being insured. Since you have no financially dependent children and your spouse is no longer financially dependent on you, that means you have no need for life insurance.

[7eight9]

It feels a bit like a waste of money to maintain the insurance, but at this point it is a bit better than an actuarially fair bet according to the Social Security actuarial life table (at least on average, though I am overall in excellent health according to my most recent physical).

You can wager $370 for the next several years on a bet where the payoff is better than the true odds (as quoted by the Social Security Administration). Personally I like to make bets like that. Of course to win you have to die which is kind of no bueno. I would kind of be tempted to keep the policy if only because it isn't all that often that you can make a bet with a positive EV.

[willthrill81]

It feels a bit like a waste of money to maintain the insurance, but at this point it is a bit better than an actuarially fair bet according to the Social Security actuarial life table (at least on average, though I am overall in excellent health according to my most recent physical).

You can wager $370 for the next several years on a bet where the payoff is better than the true odds (as quoted by the Social Security Administration).

The OP's life expectancy is very likely well above that used by the SSA, which only takes age and gender into account. The OP's net worth is far above that of most Americans, and that alone is associated with a significantly longer than median life expectancy.

[000]

I prefer not to bet against myself, and I put my trust in something other than an insurance company.

[Grt2bOutdoors]

Keep it unless your spouse says to get rid of it. Sometimes these types of expenditures are more than just dollars, they are about sense. No poster on this forum should/could ever take the place of personal beliefs/feelings of your significant other. Have you asked your spouse yet? What are you waiting for?

[bhsince87]

When we reached a certain level of financial security, life insurance was the first thing to go. You are past that point, IMO.

Disability insurance was next to drop.

[Normchad]

When we reached a certain level of financial security, life insurance was the first thing to go. You are past that point, IMO.

Disability insurance was next to drop.

Keep paying. It’s cheap.

And if you should pass, your wife will have more options or less financial stresses during a very difficult time.....

I’m in the same boat, except my premium is a lot higher. I’ve got 9 years left on a 30 year term, and am very close to being FI. I’ve decided to keep paying anyway. The payout wouldn’t help me, obviously. By the same token, the premiums don’t hurt me either.

[Stinky]

It feels a bit like a waste of money to maintain the insurance.....

You’ve answered your own question.

Drop the insurance, since the need for it no longer exists.

[kelvan80]

Have you asked your spouse whether they want to continue paying the premium?

[ScubaHogg]

At this point my spouse would already be well-provided for if I predeceased, with sufficient pension and SS income to more than cover basic expenses, plus about $2.2 million in other assets and a house that is nearly paid off.

Here’s the question. Does your spouse feel like they would have enough if you passed tomorrow? Would they be worried about running out of money and perhaps fall prey to some unscrupulous financial salesperson who promised to alleviate that fear? Pretty routinely we see widows or children come on here and post about not quite having enough after the primary breadwinner dies. IMHO Bogleheads as a lot are missing the forest for the trees by penny pinching on cheap term insurance that can make all the difference to your loved ones.

I say you should probably have term insurance that is roughly equivalent to the present value of your future income (maybe minus expenses literally tied to your person but PLUS extra expenses if you passed, like lawn care as a possibility).

If you don’t keep at least that much life insurance, ask yourself why you are still bothering to go to work and don’t retire today?

[ScubaHogg]

I prefer not to bet against myself

Ha ha. This is assuming you have some control over when you go.

[Old Sage(brush)]

If keeping it would make you exercise less, eat less fruits and vegetables, and go to McDonalds for a Big Mac every day, I would get rid of it.

[frugalecon]

If keeping it would make you exercise less, eat less fruits and vegetables, and go to McDonalds for a Big Mac every day, I would get rid of it.

Thanks to everyone for the advice/suggestions. And lest you worry, Old Safe(brush), I started my day with a 3.5 mile hike before breakfast, which was some fresh mixed berries and a homemade wholewheat buttermilk biscuit with a bit of good cheddar cheese. I will have a nice salad with homegrown lettuce, cucumber and tomatoes for lunch. Probably a quinoa bowl for dinner, after a late afternoon after work bike ride.

[Chip]

If you didn't have insurance and you could buy that same policy right now for the same price, would you?

You may be experiencing the endowment effect.

[stan1]

Keep paying. It’s cheap.

This was our assessment as well. We provide financial assistance to an aging parent. We changed the beneficiary to her.

[frugalecon]

If you didn't have insurance and you could buy that same policy right now for the same price, would you?

You may be experiencing the endowment effect.

These sorts of decisions could also bring up the sunk cost fallacy!

[Chip]

These sorts of decisions could also bring up the sunk cost fallacy!

Excellent point.

[Old Sage(brush)]

OP: sounds like you can safely factor all the advice here and either decision would be reasonable. For the record, when I got to this point I decided to save the dollars. Still living, good decision.

[bberris]

If you didn't have insurance and you could buy that same policy right now for the same price, would you?

You may be experiencing the endowment effect.

The point is, he can't buy such an attractively priced policy now. Level premiums require that the policy has a low expected payoff initially. At the end of the term, the premiums give you a large expected payoff as your risk of dying increases each year. I think my policy was 3x expected value in the final year. I previously referred to level-premium term as "whole-life lite". There is a sort of cash value built up in the early part of term (though you can't get it).

Early cancellations of level premium must be a major profit source for insurance companies.

[bberris]

If you didn't have insurance and you could buy that same policy right now for the same price, would you?

You may be experiencing the endowment effect.

These sorts of decisions could also bring up the sunk cost fallacy!

The sunk cost is real, not a fallacy.

[sailaway]

If you didn't have insurance and you could buy that same policy right now for the same price, would you?

You may be experiencing the endowment effect.

These sorts of decisions could also bring up the sunk cost fallacy!

The sunk cost is real, not a fallacy.

It is a fallacy to think it should influence your decision making going forward when it has already been spent no matter what your next decision is.

[Meg77]

If you didn't already have this policy in place, would you go shopping for life insurance and pay $370 for a new policy?

I assume not.

Save your money. Fellow DINK here; we dropped life insurance 4 years into our policy after a few raises made us both comfortable we could manage the budget (including a smaller but decent savings rate) on our own.

[gtg970g]

The point is, he can't buy such an attractively priced policy now. Level premiums require that the policy has a low expected payoff initially. At the end of the term, the premiums give you a large expected payoff as your risk of dying increases each year. I think my policy was 3x expected value in the final year. I previously referred to level-premium term as "whole-life lite". There is a sort of cash value built up in the early part of term (though you can't get it).

Early cancellations of level premium must be a major profit source for insurance companies.

If cash value is building on a policy the insurance company is required by law to provide access to it. I believe you are thinking of reserves which build through the life of a policy (typically) which are held as a liability by the insurance company. Lapsing a policy with reserves would release the reserves and could be financially beneficial for the insurance company.

[MrsBDG]

How old are you? Would your spouse have enough available funds if they were below FRA and could not yet access SS/pension?

[ScubaHogg]

How old are you? Would your spouse have enough available funds if they were below FRA and could not yet access SS/pension?

This is the right question. Does the OP’s spouse feel they have enough net worth today for the rest of their life. If not, keep the term.

I’ll ask again, if the OP is dropping the term, why still go to work? Retire today. If you are still working, you clearly want your family to make more money. In that case keep term that’s this cheap.

[Chip]

If you didn't have insurance and you could buy that same policy right now for the same price, would you?

You may be experiencing the endowment effect.

The point is, he can't buy such an attractively priced policy now. Level premiums require that the policy has a low expected payoff initially. At the end of the term, the premiums give you a large expected payoff as your risk of dying increases each year. I think my policy was 3x expected value in the final year. I previously referred to level-premium term as "whole-life lite". There is a sort of cash value built up in the early part of term (though you can't get it).

Actually that isn't the point. Your post exhibits both the endowment effect and the sunk cost fallacy. The OP doesn't have a time machine; that time has passed and those dollars have been spent. So the question NOW is should he pay $370 a year for four years for the chance of a 500k payout. What he did the last 16 years should have no influence on that decision. The reason for the "new policy" thought experiment I suggested is to attempt to get the endowment effect out of the thought process.

[JoeRetire]

For anyone who has been in a similar situation, are there compelling arguments either way that I should consider?

Only purchase insurance to cover a potential need. Without the need now, it's wasted money.

[MikeG62]

I did not renew my term life insurance policy when I turned 50 (premium increased considerably in that year). Like you, we did not need the income protection. Truth be told I could have cancelled it years earlier, but the premium was very low and it's just not something I focused on (having had life insurance ever since I began working out of college - it was kind of on autopilot).

I'd say let it go as it seems you no longer need it.

[cshell2]

I keep mine because I just know the day after I cancel I'll find out I have some terminal illness with 2 months to live. I figure $200/year is cheap to insure that I live to waste the money another year.

[afan]

Viewed as an investment, life insurance is sold when the insurer believes the expected value of the stream of premium payments is greater than the expected value of the death benefit paid.

For many people, that continues to be the case for term insurance up to the point that they drop it.
For some people, their health declines to the point that their life expectancy is short compared to the premiums to be paid. For such people, it can be a good deal to keep the policy, even if it is no longer needed.
As an extreme example, someone who is dying and unlikely to make it out of the hospital alive should renew their term policy, even if their family no longer needs the coverage.

The challenge comes when death is not imminent, simply more likely than the premium would imply. It is a matter of guessing whether one's health is really worse than the insurer would assume.

This depends much more on the health of a particular individual than it does on mortality tables. If you are reasonably sure that your health is much worse than average for someone of your age, then it could be worth keeping the policy.

This bet gets better as you get older. A 30 year old with much worse health than average may still have decades of life ahead of them. An 80 year in much worse than average health should keep a low cost term policy if they already have one.

People often find that they are better off keeping a term policy through work if all they have to pay is tax on the premium. The employer pays the insurance company and reports the premium as taxable income. Essentially, the employee gets the policy at a deep discount. At that price, the expected payoff is higher than the cost. So people keep it.

Going out and buying a new policy, particularly for older people in poor health, would be many times more expensive and would not be a good use of money.

[feh]

It feels a bit like a waste of money to maintain the insurance, but at this point it is a bit better than an actuarially fair bet according to the Social Security actuarial life table (at least on average, though I am overall in excellent health according to my most recent physical).

You can wager $370 for the next several years on a bet where the payoff is better than the true odds (as quoted by the Social Security Administration). Personally I like to make bets like that. Of course to win you have to die which is kind of no bueno. I would kind of be tempted to keep the policy if only because it isn't all that often that you can make a bet with a positive EV.

+1

We are in a similar situation to the OP and plan to pay until the 20 year term ends.

[bberris]

If you didn't have insurance and you could buy that same policy right now for the same price, would you?

You may be experiencing the endowment effect.

The point is, he can't buy such an attractively priced policy now. Level premiums require that the policy has a low expected payoff initially. At the end of the term, the premiums give you a large expected payoff as your risk of dying increases each year. I think my policy was 3x expected value in the final year. I previously referred to level-premium term as "whole-life lite". There is a sort of cash value built up in the early part of term (though you can't get it).

Actually that isn't the point. Your post exhibits both the endowment effect and the sunk cost fallacy. The OP doesn't have a time machine; that time has passed and those dollars have been spent. So the question NOW is should he pay $370 a year for four years for the chance of a 500k payout. What he did the last 16 years should have no influence on that decision. The reason for the "new policy" thought experiment I suggested is to attempt to get the endowment effect out of the thought process.

What he did previously is overpay for life insurance. Now he gets to underpay because that is how insurance companies keep premiums level while the risk of death increases. I (putting myself in OPs place) am not being influenced by the fact that I previously paid for something and lost the money. The level premium contract joined in the past allows him to get the good deal now. Viewed purely as a bet, keeping the policy has a positive expectation (financially).

Let's take out the endowment effect. If he could buy a new life policy with a positive expected payoff, he would be wise to do it, whether he had spent money on it in the past or not. And whether his dependents needed the money or not.

[Chip]

What he did previously is overpay for life insurance. Now he gets to underpay because that is how insurance companies keep premiums level while the risk of death increases. I (putting myself in OPs place) am not being influenced by the fact that I previously paid for something and lost the money. The level premium contract joined in the past allows him to get the good deal now. Viewed purely as a bet, keeping the policy has a positive expectation (financially).

Let's take out the endowment effect. If he could buy a new life policy with a positive expected payoff, he would be wise to do it, whether he had spent money on it in the past or not. And whether his dependents needed the money or not.

We don't know that it has a positive expectation for the OP. He has stated that it is actuarially fair based on the social security tables, but he also says that he is in excellent health. It may or may not have a positive expectation.

[Stinky]

What he did previously is overpay for life insurance. Now he gets to underpay because that is how insurance companies keep premiums level while the risk of death increases. I (putting myself in OPs place) am not being influenced by the fact that I previously paid for something and lost the money. The level premium contract joined in the past allows him to get the good deal now. Viewed purely as a bet, keeping the policy has a positive expectation (financially).

Let's take out the endowment effect. If he could buy a new life policy with a positive expected payoff, he would be wise to do it, whether he had spent money on it in the past or not. And whether his dependents needed the money or not.

We don't know that it has a positive expectation for the OP. He has stated that it is actuarially fair based on the social security tables, but he also says that he is in excellent health. It may or may not have a positive expectation.

On the “positive expectation” comment, one needs to also take into account that the insurance company expects to make a profit. All insurance has a negative expectation to the buyer, and a positive expectation to the insurer.

About all that one can say with certainty is that OPs expectation for policy years 17-20 is more positive (or less negative) than any prior stretch of four consecutive policy years. And that’s because the mortality rate increases year over year, while the premium paid does not.