If you’ve taken the advice of most financial professionals, you own a term life insurance policy and you insure your life for 10 to 15 times your annual income. Great! But since “term” insurance is good for only a certain “term” (anywhere from one to 30 years), is there a time you should consider dropping it altogether? Does the “term” ever end?
When to drop your term life insurance
If your kids are grown, your home is paid for, you’re out of debt, and you’re on a solid investment program, you probably don’t need to sink cash into your term insurance anymore. You are “self insured.”
Once the policy has served it’s purpose (lowering your family’s risk of losing your income), you can put those funds into your investment portfolio.
Term life insurance is simple
For the most part, term life insurance is relatively simple, doesn’t have complicated formulas for the “investment” portion of the premium, and is easily converted to a whole life policy in the future. For many people, term is the only way they can afford the coverage they want.
The cost difference between term and whole life
In my personal experience, the annual cost of a term policy is about one tenth the cost of the whole life policy for the same amount of coverage (I don’t use tobacco). For example, to get the $1.5 million in coverage I currently have, my monthly payment would escalate from $78 to $750. That’s a big difference. A difference that goes into my savings account each month!
Reasons to KEEP your term life insurance
Some people keep their term policy much longer than necessary, but others have good reasons:
- To endow a charity
- To leave a gift to grandchildren
- To cover funeral or other final expenses (including medical)
- To continue coverage at reduced cost
The whole point of term insurance is the “what-if” factor. But if you’ve properly provided for your future and if you can let go of that “what-if” fear, you’ll place yourself in a very good financial position by investing those funds into your well diversified portfolio.
If you’re curious just how much coverage you could get, head over to NetQuote and check out their life insurance section, answer a few very simple questions, and find out how much you could be depositing into your savings account versus a whole life policy.
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This is great advice Ron! I hope to be at that place in another 5-10 years where I can think of myself as self-insured.
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