Term life insurance: Keep it or dump it?

Miscellaneous and Personal Stuff I Must Share
1

I’m asking for opinions from the learned members of the Dope.

For many years, we’ve carried term life insurance policies from AAA. We have no dependents. The payout from either is the same, and while substantial, hardly exorbitant. These policies are in effect to age 85, quite some distance away. We also have whole life policies with much lower premiums and payouts.

Since we turned 70 and are retired, the term insurance has become a real drag, with premiums of more than $5,000 per year. As a cancer survivor, I’m hesitant to drop them, so I’m inclined to hold on to them in the event my health goes south.

We both have wills, drawn up when we had nephews and nieces we wanted to provide for, but they are now adults and doing quite well (and in two cases, haven’t reached out to us in years), and we’re now not concerned about leaving them anything.

Some of you may have faced similar circumstances. We could a) drop them; or b) reduce them to lower payout amounts and thus lower the premiums; or c) keep things as they are. Our accountant would probably tell us to drop them, but that’s a big, scary step. We could certainly put that $5,000 per year to better use.

What say ye? Thanks for your input.

2

I know you said “substantial,” but it makes a difference what the specific number is. For a cancer survivor at age 70, the odds of you dying within the term period are very high (even a non-cancer person is likely to die before 85), but it makes a big difference if it’s a payout of $400,000 vs. $900,000.

The fact that you said the nephews and nieces (now grown adults) don’t really need financial help/support anymore, though, I think, is what should push things in the direction of “no, drop it.” As you point out, five thousand dollars a year is very hefty. If you had young kids/nephews/nieces who who would be financially vulnerable, that would be one thing, but you don’t.

3

I let all my life insurance policies lapse when the premiums started going up and my kids were adults.

My wife wouldn’t need the proceeds if something happened to me. If she did, I suppose I’d keep the policies in force.

4

On what volume? Is this a flat rate until age 85, or do the premiums increase annually? Oh, and check the fine print - if it’s a flat rate, does the volume decrease over time?

Once upon a time, I was an Actuary. Worked with group health and group life (which is term life, not whole or whatever).

Think of it this way. The rates they set (especially for term) are based on

  • What’s the payout (the volume)
  • X the chance of you dying
  • +expenses (commissions, cost to process premium, etc.)
  • +profit

I DON’T KNOW WHAT THE MORTALITY RATE IS FOR A 70-YEAR-OLD CANCER SURVIVOR. That being said, I played around with some reasonable numbers, and if the volume is less than $75,000, you might be getting a raw deal. If the volume is greater than $125,000, you’re probably getting a good deal. This is from an imaginary friend over the interwebs, so take it with as many grains of salt as you can.

One way of looking at it - what are you trying to accomplish? Sounds like you don’t need to leave moneys behind for survivors (nephews and nieces), but you probably want to cover funeral expenses and any end-of-life medical costs. That’s the tough one. Funeral expenses - if you didn’t pay premiums for three years, you could cover funeral expenses. I’m an Ugly American, and am assuming you are, too. So, you’re covered by Medicare. I couldn’t tell you what Medicare does or doesn’t cover or what your possible medical debts could be. If you’ve got other coverage from your previous employment or union or whatever, you’re probably golden on that - yes there will be expenses, but nothing that’s going to put a surviving partner out on the streets. No other insurance coverage? Gotta know a whole hellovalot more before I’m going to even guess.

My ultimate advice? Find a financial counselor to give you accurate advice. Free advice is worth every penny you paid for it.

5

Why do you have the life insurance? Typically it’s to cover a lose of income. You’re retired so I’d think you don’t need it in that area. Do you get a pension that would go away if you pass & could she afford to continue living wherever you live? Do you own outright/mortgage/rent?
If it’s to give a windfall to your nieces & nephews after you pass, then by all means keep on paying for it; however, if it’s one of those things that you ‘should’ do then drop it & invest that money on your own.

6

These statements should be ranked very high in your decision making process. If you need the $5k now, then you should probably drop the policy and use the money yourself. Although it’s very generous of you, there’s no sense in you making financial sacrifices in retirement so that your heirs can get a bigger inheritance. If you could use that money for things that give you happiness and increase your quality of life–like travel, entertainment, home upgrades, etc.–then using it on yourself is probably a better use for the money. If your heirs care about you, they probably would feel the same way. They probably would want you to enjoy your money rather than making sacrifices so that they get a bigger inheritance.

7

As a former financial advisor and life insurance salesman, my first question is: Why do you need insurance? Ignore the amount you’ve already spent on coverage to date - would you buy those same policies today if you were uninsured? If either of you dies, are you facing economic hardship?

In my humble opinion, term insurance is strictly for the working. It replaces either income or services that you rely on until you retire. I don’t see that need here.

8

I’d drop them if I had other policies. An extra $5K a year can be very helpful and better invested in something more liquid. Assuming children and spouse don’t depend on that potential payout should the worst happen then they’d probably prefer you weren’t worried about the extra cost to maintain that policy.

9

There are too many unknowns for any of us innertube acquaintances to provide you with any sort of informed advice.

Except this: See a financial advisor.

Good luck!

mmm

10

Don’t forget that Social Security is also a pension that has a weird and limited survivor benefit*. Many many retired couples need both SS checks to stay above water in their current living conditions. And on only one SS pension may not be able to survive financially at all.


To the OP @XOldiesJock:
IMO, and speaking as a financially savvy but not financial professional, who was a childless married guy who carried term life throughout his career …

Paying premiums to provide a bigger inheritance windfall is a fool’s game, and especially so once you’re old and the payout/premium ratio goes to hell. Doubly (triply) so if they’re a) not your own kids, b) doing well, and c) ignoring you.

If the surviving spouse will need the term life payout as a cash windfall to make up for the loss of the lesser SS payment for every month of their remaining life, and, as @Spiderman said, the loss of perhaps some or all of a conventional post-employment pension then you need the insurance. Subject to some straightforward calculations about how investing the premiums instead would fare if the second of you to die lived another 1 year, 2 years, 5 years, or all the way to age 85.


In my own case back in my 40s I had bought a so-called “20 year level term” policy where the premiums and payouts were the same when I was 42 and when I was 62. From a strict insurance POV I was overpaying in the early years and underpaying in the latter years. But it would have given my wife a replacement for all my expected future income had I died.

At age 62 when the 20 year term ran out the premiums increased and the coverage cut in half. It wasn’t strictly necessary but I kept that up for 2 more years. I was making enough by then that the premiums were not a strain to pay. So not the financially smartest thing to do. So actuarially wrong, but tolerably actuarially wrong. Like buying a few Powerball tickets.

Then at age 64 the premiums doubled and the coverage cut in half again and meantime my remaining work life was down to a few months and my net worth was such that the insurance payout would be a darn nice gift to my wife, but far from “make or break” for her. At that point I let it lapse. In the couple years since I have seen no indication I made a mistake in cancelling.

My IMO bottom line:
If I understand the OP’s circumstances correctly, they’re probably past the point where this insurance is a necessary expense. It’s definitely a shitty investment at this point as well. Which argues for cancelling it promptly.



* Summarizing mightily and assuming a fairly typical case … If one member of a married couple dies, the lesser of their two pensions stops and the survivor keeps receiving the greater. E.g. Hubby Joe gets $1,000/mo. Wife Mildred gets $500. So $1,500 total. Once either Joe or Mildred dies, the survivor gets $1,000 until their death.

11

If it’s a fixed annual premium of $5k and you took it out before you got cancer, you’re probably beating the odds in terms of cost of insurance vs. the probability of, uh, collecting. But, if the premium is increasing annually with your age, it may not be worth keeping.

On the other hand, I agree with others that term life is really there to protect your human capital, your earning potential. If you’re retired and withdrawing rather than earning, term life is probably not the right product for you.

Whoever sold you a term policy that lasted until you were 85 probably did you wrong, unless you were planning on working that long.

12

Assuming this is a fixed annual premium of $5000 and the payout is something like $100k on a 20 year term issued at age 65 (which I think is in the actuarial ballpark) and you’re currently three years in, you’ve paid $15,000 for insurance cover you don’t seem to need. Seems like you should walk away from it.

If in the other hand you’re 13 years into a 30 year level term issued at age 55 with a $250k payout (I’m not an actuary nor even an insurance professional, so I could be way off), it’s a whole different equation.

You’d want to think long and hard about whether your quality of life at $5000 more in disposable income would be better than the potential that your spouse might be a LOT more comfortable financially should you pass away sooner rather than later.

13

It sounds like your spouse has enough to last as long as necessary if you drop over tomorrow, so I’d say get rid of the insurance. I only had term from work, which was very cheap, to cover loss of income. How are your savings? We have enough that any reasonable amount of term insurance wouldn’t make much of a difference. Is the social security payment your spouse would get enough to cover living expenses when combined with income on your savings?
My wife has a small amount of whole life, long since paid off, and I have a death benefit on an annuity which I haven’t yet touched. That wouldn’t make much of a difference either.
Why don’t you do a cash flow analysis for your spouse with and without the insurance payout. That might tell you if the potential gain is worth the relatively large current payment. Forget the nephews - if they get something, fine, if not, fine. Unless you are really close to them, and it doesn’t sound like you are, there is no reason to be squeezed to give them something they might not need.