When You Don't Need Term Life Insurance (And How to Save Money if You Do Need It)

A reader asked SmartMoney when he should cancel his term life insurance and here's how they responded:

If you're in good health and the insurance isn't covering a specific financial need, dump it. "You buy insurance against the economic consequences of premature death," says Bob Hunter, insurance director for the Consumer Federation of America. No dire consequences? No need for term life insurance. Unlike whole life insurance policies, which carry an investment component and are designed to be held for perpetuity, term life insurance is a temporary product. So take that money and invest it — or use it to go out and live a little.

That's my plan. Right now, I'm insured for a huge chunk because my family is depending on my income for future needs and my assets aren't enough to cover those needs. But as time goes on, their dependence on my income will decrease (the kids will grow up and get through college) and my assets will grow to the point that it will cover living expenses for my wife and me. At that point, we're "self-insured" and will be able to cancel our term policy.

That said, if there are those of you who have people depending on your income but you don't have life insurance (or if you have some but would like to save money), now is a great time to buy. The details:

Thanks to everything from increased competition to lower mortality rates, insurers have been quietly lowering prices for so-called term life policies at an unprecedented rate. For many thirtysomethings, an annual premium as low as $500 can now lock in $1 million in coverage for the next two decades. Even folks in their 40s and 50s can still get good rates if they're in good health.

Here's the catch, though: Don't expect your typical insurance agent to go out of his way to trumpet the prices to newcomers or remind current policyholders to check for the new discounts. According to the Insurance Information Institute, the number of term life policies sold has inched up just 4.5 percent in the past 10 years. Commissions are so low "it's uneconomical for agents to even make the calls for term life," explains David Woods, president of the LIFE Foundation, an education organization funded by the insurance industry.

We had a few times where we had term insurance, found cheaper options and secured it, then canceled the original policy (note: DO NOT cancel the old policy until the new one is in place.) Each time, we lowered the cost of our insurance a good amount. I would try to do this again, but since my last quote I've aged a few years (something sure to go against me) and my mom has had cancer twice -- an item that will likely drop me out of the highest preferred level I'm now in. So I'm holding tight for now, but some of you out there may want to re-bid your life insurance and see if you can save yourself some money.

Comments

[CFO Dad]

My father bought a small whole life insurance policy on me when I was just a baby, and it has grown to a small but significant (to me) asset. Getting a whole life insurance policy for children now also often guarantees them the right to purchase MORE in the future, regardless of their health eligibility in the future. Kinda like buying insurance against the chance you won't be able to buy it in the future.

[CFO Dad]

My father bought a small whole life insurance policy on me when I was just a baby, and it has grown to a small but significant (to me) asset. Getting a whole life insurance policy for children now also often guarantees them the right to purchase MORE in the future, regardless of their health eligibility in the future. Kinda like buying insurance against the chance you won't be able to buy it in the future.

[Paul Havemann]

The article doesn't say anything about renegotiating the premiums on your existing policy, so I assume the idea is to get a new, cheaper policy and then cancel the old one. But I wonder if you could renegotiate a term life policy? It's possible to renegotiate your mortgage, under certain circumstances...

But as you point out, whether you'd save any money depends upon how long you've had your old policy.

[Livingalmostlarge]

I haven't got any life insurance and neither does DH. Can't convince him until we're pregnant that we need it. Apparently we're "self-insured." I stop bothering arguing, although other people have told me he's right since we have a mortgage, his new student loan, and that's it. And we have cash in the bank for me to live quite a while.

[Tim Bain]

This is in response to Paul's comment regarding renegotiating premiums on an existing term life policy. We have found that most (if not all) life insurance companies have moved toward replacing existing term policies with new ones, rather than simply reducing the premiums on existing policies . This goes for changes to an existing policy's benefits as well (e.g. increased/decreased coverage amount, length of term, etc.).

For these reasons, we always provide new quotes from several insurance companies to customers looking to make policy changes or reduce premiums. Keep in mind that your existing insurance company will require you to go through the underwriting process again for a new policy (new application and new paramedical exam). So it is typically in your best interest to check quotes from other companies, since you will have to go through the same process either way. You may find a better deal with another company. Also, company underwriting guidelines change all the time. For example, some companies no longer penalize applicants for family history of cancer.

One final note, even though you may have aged a few years since your current policy was taken out, you may be surprised at how low rates are today. It's definitely worth a look.

[Life insurance in Canada]

I don´t really think, that babys need a life insurance, because they have no income. If something happen to them, it is a tragedy, but family doesn´t suffer financial because of it. In my opinion there are better ways, how to invest money, then life insurance. You also don´t need life insurance, if you are single an footloose.

I can only agree with the autor, don´t cancel your old policy until you have a new one. I know people, who cancelled their policies hoping to get a better conditions and then were forced to buy a police, that was more expensive than the first one.