3 Questions to Answer to Determine If You Still Need Life Insurance
Are you still paying premiums for life insurance?
If so, are you sure you still need to?
That might seem like a funny question if you’ve carried life insurance for a long time. However, you may be paying for insurance you don’t need anymore, so it’s a question worth evaluating.
Managing Risk
One of the steps in our process is evaluating and helping our clients manage risk.
You can’t avoid all risks completely, nor can you insure yourself against any potential loss because you would go broke and become “insurance poor.”
The key to the game is to objectively evaluate and then “manage” risk.
When you were younger and raising a family, the financial risk your family faced if you were no longer here was much more real. If your paycheck wasn’t there for your family, what would they do?
However, if your family is now grown and out of the house (a life situation I now find myself in), do you still need to pay those premiums and keep that life insurance policy you’ve had for years?
This is an important question that is more emotional than rational for most people.
I’ve always found it interesting that those who have had life insurance for many years have a hard time terminating their coverage even after the analysis reveals they no longer need it.
It’s hard to let it go after paying for it for so long. Those life insurance agents did a great job!
How to Evaluate If You Still Need Your Life Insurance Policy
Keeping an existing life insurance policy or not is just a math question that you can evaluate by answering three “risk management” questions:
- “What’s the financial loss if I don’t have this insurance?”
- “What’s the probability that I will suffer this loss during a specified period of time?”
- “Am I willing to risk absorbing this entire loss myself, or should I pass on some or all of the risk to an insurance company by paying a premium?”
What is life insurance? It’s money that is delivered to your heirs upon your death.
The question is, do your spouse and family still need that additional money when you die (over and above everything you’ve saved and accumulated) to support and continue their lifestyle?
Let’s assume for a minute that you’ve taken the steps I outlined in my book, THE RELAXING RETIREMENT FORMULA, and you’ve gone through the all-important process of identifying precisely what it costs you and your spouse to live your ideal lifestyle.
You’ve prioritized what you want to have happen while you’re living and when you pass away.
You’ve tallied up all your income sources if you’re no longer working such as Social Security, pensions, and rental real estate (if you have any). And, you have a crystal-clear handle on where your money is and the total value of your Retirement Bucket of investments.
You’ve run your retirement forecasts into the future and the results are that you have more than enough money to support you and your spouse well past your joint life expectancy.
In other words, you no longer need to work to support yourself. You have enough in your Retirement Bucket of investments and you can afford to do what you want, when you want, where you want, and with whom you want because you’ve eliminated your dependence on a paycheck from work!
Answering Question #1
Going back to Question #1 above, what is the financial loss if you don’t have this insurance?
Take a moment to really think about this.
By definition, if you have enough money to support both of you while you’re living, shouldn’t there also be enough money to support only one of you if something happens to you?
If the answer is yes, then it’s likely you don’t need to pay for life insurance anymore!
Your spouse and family don’t need more “money” when you pass away (i.e. life insurance) because you already have enough.
It might be nice to have more money, but based on the priorities you’ve laid out in your Retirement Blueprint, there is no need for more money to satisfy those priorities.
There are (2) exceptions to this where you may still want to carry life insurance:
- If you have a monthly pension which ends when you pass away because you have chosen the single life pension option. Or,
- If you have purchased life insurance inside of an irrevocable life insurance trust to help provide liquidity and pay your inevitable estate taxes (or income taxes due if you have large IRA holdings).
The key point in all of this is to “know your numbers” cold. If you’ve done your homework and followed a process like I’ve outlined in THE RELAXING RETIREMENT FORMULA, and you know exactly where you stand financially, then it becomes a rational decision based on fact, not emotion.
Take the time to know your numbers, and objectively evaluate them so you don’t pay for something you don’t need anymore.
It’s highly unlikely that an insurance agent is going to tell you this because they continue to receive commissions for as long as you keep the insurance, so you have to do a little homework to keep yourself honest.
The bottom line is that if the risk of “financial” loss is no longer present, you don’t need to pay life insurance premiums anymore. You’re likely far better off spending those premium dollars to cover a more pressing financial risk like long-term care or personal liability from a lawsuit.
If you’ve already taken care of those, take another vacation every year, or go out to dinner more often to a restaurant you wouldn’t have gone to otherwise!
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Jack Phelps
Managing Partner / Financial Advisor