What to Do When Your Term Life Insurance Expires

As you probably know, I'm a believer in buying term and investing the difference when it comes to life insurance. I know others disagree (mostly those who are in very special circumstances), but this is what I'm doing. My plan is to cover my earning ability/life for the next 15 years or so (that's what's left on my 20-year policy) and in the meantime build a nice net worth that will allow me to self-insure myself past that.

But there will be a point when my term insurance runs out. It will be the same for many of you. And what should you do at that point -- simply let it expire or get a new policy? Here's what Smart Money suggests to help you decide:

To make sense of these or similar situations, ask yourself one fundamental question: Will your death cause unmanageable financial hardship for the people you leave behind? Odds are you have more savings and fewer people relying on them today than earlier in life, so you may not need to hedge against death at all. "The traditional, old-fashioned reason to buy life insurance is to replace earnings," says Joseph Belth, editor of the Insurance Forum in Ellettsville, Ind. "By the time you are retired, you are supposed to have accumulated some reserves, and presumably, your children are independent."

This is where I hope to be. My kids will be grown and through college and my savings should be significant (especially after a couple more decades of saving and compounding), so I'm thinking I'll be fine. In fact, much of my planning will need to center on keeping my estate low enough and managing it correctly via estate planning not to get hit by a big tax bill when I pass on. That's a good problem to have, huh? ;-)

What about you? What are your plans regarding life insurance for the future?

Comments

[Traciatim]

I agree with this whole heartedly. There are very few situations that I can see where a whole life, or universal life policy make sense. Plus, if you plan properly you won't need life insurance when you're older. Especially if you pre-arrange all of your final expenses and have your estate in order for your end.

I have a very limited amount of insurance for my family, if either spouse dies it's enough to cover a couple years salary and pay off all outstanding debt, including the mortgage. I figure that will be enough to go back to school for a couple years, and with no payments on our house/student loans/car etc if the remaining spouse can't make it alone with no obligations, they have far more serious problems than thinking about insurance. When you owe no one there is very little you need to survive.

[Susan]

In my opinion, the only way to consider whole life is if it is employer subsidized and part of your benefits package.

[WhereDoesAllMyMoneyGo.com]

A few points:

1) You need to see what your coverage amount is - most likely it will have decreased as time goes on, as your savings have accumulated and you have paid down debts, you are closer to retirement and therefore less of a need for ongoing income replacement. In this case, if you coverage required is less you notify your insurance company and your premiums will be less than if you hadn't.

2) You can ask to re-qualify your medical assessment. If you are still of average health, even if you keep your coverage at the same level you will drop your premiums by around 50%. If something shows up - well... an ounce of prevention is worth a pound of cure.

I wrote a 12 part series on life insurance that explains what it is, how it came about and what you really need. There are also some posts on the re-qualifying for your medical assessment and how much it can save you (lots).

I won't post a link to the articles to avoid looking spammy, if you are interested, you'll find them. :) Thanks.

[Teri]

Agreed.

I think our term insurance expires around the time we hit 55 (30 year term). We also plan to retire around that age. So basically I don't really foresee having the need to worry about it at that point. I wouldn't be surprised if we drop it before then.

Right now my husband stays home with the kids and I have some additional coverage (term)through my professional association, which is rather cheap. IT helps with the extra insurance now, since he has not worked in a while, but we locked in a great rate on the bulk of our insurance in our 20s. It's plenty. As our income goes up so do our assets and downward goes our reliance on the insurance. So though we bought so young I don't really foresee having to change it. We were able to lock in more at a lower cost.

On the flip side my dh has a universal life policy from when he was a baby. His mother has tried to pass the premiums onto us (yes he's 30 and still pays premiums). I have asked her a number of times to cash out. The policy is $25k and the cash out is like $3k or something. I'd rather put it in the kids college fund or something. What a useless waste of thousands of dollars over the years. I think she has put so much in she hesitates to drop it, but if he lives another 50 years I know I can turn it into much more than $25k. That's the part she isn't getting. With inflation, the $25k amounts to a hill of beans.

[Compounding]

Well, the idea is to provide funds for those you are concerned in the event that you are gone. Hopefully, you have planned for some money for yourself in the event that you aren't gone. As the amount that you plan for yourself approaches, and hopefully exceeds, what you have in life insurance, the life insurance becomes less necessary.

[Rob]

If you really want to be a mesch, get enough term insurance to cover your funeral costs - roughly $25k

[Arlene]

We have already been there. We kept up our term policies while we were still working, kids home, etc. A year before my husband took early retirement at age 55, the renewal for his term policy looked pretty pricey. We reviewed what we had decided to do - not renew when we had enough investments, and the rates went up. Well, we do have a great investment portfolio, mortgage paid up, kids married. But it was still a little scary, even though we knew it was the right thing to do. Then the following year we let mine lapse also. Then last year, our credit union offered free life insurance for customers - you get $5,000 for free, and have to pay for anymore. So we did sign up for this, thinking why not take advantage of it? The sales person did call us however, sort of not believing that we did not want to sign up for more(which was of course the reason for the offer in the first place). But we stuck to our guns. If we had not received this as a freebie, however, we would not have bothered at all.

[WhereDoesAllMyMoneyGo.com]

Term insurance for funeral costs can be a bad idea if you live too long as there comes a time where term insurance premiums will actually equal the coverage amount. Luckily the insurance companies don't even allow you to purchase term after a certain age (usually around 80). Compounding - you should read my 12 part series on life insurance. It's a long winded series that basically says buy term, invest the rest until you no longer need insurance - even for the funeral.

[Evan]

Disclaimer - I am the Director of Financial Planning at a Wealth Managment Firm with a background in Economics and have a Law Degree. The Firm does fee based planning and as such we sometimes utilize life insurance and sometimes we don't...

I see these posts all over the PF Blog world and sometimes I respond with my 2 cents (which I will give you lol) and sometimes I don't. However, you were the first one to say something that really struck me, "In fact, much of my planning will need to center on keeping my estate low enough and managing it correctly via estate planning not to get hit by a big tax bill when I pass on." This is an extremely profound statement, if it is not followed up with, "but I will plan without a profesional (CPA, CFA or Esq)". Regardless of my admiration towards that extremely impressive statement, most people don't do the proper planning, and get stuck with a hefty tax bill. DUE IN CASH 9 MONTHS AFTER DEATH (there are provisions for small businesses).

The current federal estate tax is 45%! so for every dollar you earn over the $2,000,000 million mark your family owes 45 cents to the government. I will grant you the fact that most Americans do not have the $2,000,000 dollars but remember this number is coming back down to $1,000,000 in 2011 (hopefully not but right now it is) and 85% of your posts are geared towards accumulating that kind of wealth. Further, there are multiple states (19) that have a lower exemption amount - so someone that dies in NY with exactly $2,000,000 owes nothing to Uncle Sam but owes approximately $99K to his nephew New York State (if you want more info on this google: Decoupled States).

Further, there are additional uses for Life Insurance beyond the survivors - there are the aforementioned Estate Tax Issues, but there are also wealth building opportunities, charitable giving opportunties (get your name on a building at your fav. university for $300/mo with Universal Life), there are LARGE amount of leverage opportunities, which I'd be happy to go into but I think I am losing people's attention span.

Again, I am just posting to help move along the discussion, but don't lump all insurance together there are split dollar opportunities, deferred comp opportunities, whole life, universal life, etc. etc. etc. etc. However, this area of finance has been muddled by piss poor "salesmen" cloaking themselves as planners with no credentials, or attorneys with no financial background.

I am more than willing to work with this moderator or any other moderator to flush out a few of these issues.

I apologize for the long long comment, but again, but huge fan of the very notion of planning.

[FMF]

Evan --

Yes, it's true that almost any financial product will be useful under the right circumstances. In the vast majority of cases, though, cash-value insurance is not a great idea.

Still, it's an interesting subject. I'll email you so we can discuss it some more.

[Aaron]

Note - Like Evan above I am a professional in the financial service industry, I have studyed economics, I hold an MBA and multiple other licenses in the insurance and securities industry. I Love this FMF website as it encourages people to save more money - we have a savings epidemic and we all should utilize many of the strategies FMF puts forth. I am simply answering FMF question with what I am doing and some of the strategies I teach my clients

1) I believe in purchasing your Human Economic Life Value in Life Insurance. I disagree with the trends of purchasing only what your "think" your family "needs" - How do you know what your family will need or what your life will look like in five years - let alone 20 or 30. For those of you that question this - do some research on Solomon Huebner - the Father of Insurance education.

2)I own term insurance and permanent whole life insurance - that right - the insurance that magazines, financial institutions and radio talk shows say is evil. In fact, permanent life insurance is the centerpiece of my investment strategy. Permanent LI is not for everyone, you must have the cashflow to correctly fund and implement this strategy.

Reasons why I own PL insurance.

a) Death Benefit that increases - I won't need to worry about renewing my term or losing an asset in my families' life when my term insurance comes up - it is permanent - it will go to my family, church or charity when I leave this earth.
b) Disability protection - every dollar that goes to my permanent policy is protected from disability. Even if you own disability insurance -how many of you can say that if they became disabled their 401K, RothIRA, and 529s will continue to be funded- Waiver of premium protects every dollar I put into my policy in the event of disability.
c) Guarantees - Unlike the stock market, bonds, etc.. I have contractual guarantees in my policy - I don't need to lose sleep about the market swings and losing principal - in fact - since I own a policy from a mutual LI company I recieve dividends every year that are projected to give me a net return of 6% - with no 1099 tax - in my tax bracket that equals a 9+% taxable rate of return with no risk.
d) Creditor Protection - in my state, my cash value is 100% lawsuit protected - ***not all states have this protection
e)Liquidity - access to Cash Value - no penalties or taxes if cash is accessed correctly - you can't say that about government controlled retirment plans - in fact I can use my policy value to get in and out of the stock market at my control.
f) Asset Maximization - I have an asset (Death Benefit) that never goes away - it gives me infinite number of options to spend down my assets instead of merely living off the interest in retirement. You are correct to say that you won't "need" life insurance in retirement if your house is paid off, kids are gone, etc.. but for this reason alone you may "want" life insurance.
g) Flexibility - I can put more money in, stop putting money in, have the policy pay for itself - take cash free dividends, etc...
h) It works in all circumstances

Please - first buy as much term as the insurance company will give you HEL (usually 10-20 times your income) and protect your family, but remember term insurance is a cost - it is not a wealth building strategy! (studies have shown that only about 1% of term policies pay out). Please contact a qualified insurance "professional" to see what guaranteed products work in your circumstance (I'm personally not a fan of UL & VUL products - they don't work in all circumstances)

Take care