Life insurance policies, often bought and then renewed on the basis of emotion, can become a fantastic waste of money.
But cancelling life insurance gets tricky.
Why Life Insurance Makes Sense
Let me start out by stipulating that life insurance makes total sense for lots of people.
My own story? I bought my policy, a cheap $1,000,000 of term life insurance, decades ago. My wife had stopped working to raise our two daughters. I continued working as a writer and CPA. Our little family depended on my income.
Buying that $1,000,000 of life insurance made good sense, therefore. Essentially, the life insurance replaced enough years of my earnings that my wife wouldn’t need to rush back into a career if I died.
I then basically forgot about the policy, keeping it in force for roughly the next 30 years.
In a few weeks, however, I turn 60. And reflecting that milestone, the premium jumps substantially this next year. I’m looking at close to a $5,000 annual payment. Ouch.
According, the rumination about cancelling life insurance.
I’ll tell you at the end of the blog post what I’ve decided to do. But let me share with you the factors I considered and which you may want to consider if you’re faced with a similar choice.
Do People Depend on My Earnings?
For example, here’s the first thing I considered: Do people still depend on my earnings?
In other words, if I die, does the absence of my earnings create a hardship for someone else. Like my kids. Or my surviving spouse. Or someone else I’m financially responsible for.
By the way, I don’t think we ask whether someone would live at higher spending level with a “extra” million dollars. That question would always be answered yes.
What I think we consider is whether anybody for whom you’re or I’m responsible truly depends on us working.
My conclusion? I don’t think anybody does.
My kids? All grown and taking care of themselves.
My spouse? Well, we’ve been common-sensed about saving for retirement. (It’s like a law that accountants must do this.) She’ll be fine with the IRA and 401(k) balances we’ve stashed away over the decades. She’s also a few months away from qualifying for retirement benefits.
Will Heirs or Estate Confront Liquidity Issues?
But I don’t think people depending on my or your earnings is the only factor we want to ponder.
For example, another issue? Will your or my estate confront liquidity issues.
In other words, will our passing either trigger expenses (like estate tax) or accelerate payments (like a loan guarantee) that burden heirs?
Consider for example the prospect of estate taxes…
Now most people don’t need to worry about federal estate taxes. In 2019, an estate faces federal estate taxes only when the estate’s value exceeds $11,400,000. Few folks need to worry about that.
But some states levy taxes at lower levels. Washington state, for example, hits estates just over $2 million with hefty estate taxes that run 10 percent to 20 percent.
Note: In Washington State, special provisions ease the estate tax burden in the case of some illiquid assets like farms and small businesses. But I think the provisions don’t really work in every situation.
And then the issue about whether someone’s passing accelerates expenses…
In recent years in my own situation, I was the primary guarantor of some commercial real estate lease obligations. Especially at the start of the lease terms, I was alert to the risk that my death might pressure my estate to quickly pay down that business debt.
In any case, we want to consider these issues. Liquidity concerns may impact your or my need for life insurance. Even if we’re financially independent.
By the way, in my own case, those contingent liabilities have shrunk over time. I don’t need to worry about them any more.
Are There Contractual Commitments Related to Cancelling Life Insurance?
A quick, final, related point: Do you or I have a contractual commitment to insure our lives?
For example, do you or do I need to maintain key man life insurance as part of a business partnership or some investment venture?
Maybe a related point: If a business owner’s untimely death would cause catastrophic problems, will life insurance mitigate a business risk the firm wants to avoid? And if that’s the case, should the business itself start buying key man life insurance?
In my case, I didn’t have any thing like this playing into my decision. But quite honestly? I’ve seen client situations where key man life insurance makes all the difference to a business, the surviving owners and the firm’s employees.
Tip: If a business depends on a principal, the firm would typically pay for the life insurance policy. Note that key man life insurance policy premiums don’t count as tax deductions.
My Own Decision about Cancelling Life Insurance
In case you’re interested? After thinking about these issues and conferring with my wife, I cancelled my life insurance.
Term life insurance isn’t usually a product older, financially independent folks need.
And continuing to insure against risks that don’t matter much makes zero sense.
One last note: No, I shouldn’t have purchased whole-life or cash-value insurance to “keep” insurance in the future. The point really is, I just don’t need life insurance anymore…