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Should a Retiree Continue to Pay Their Life Insurance Premium?

A general principle in financial planning is that if nobody would be financially in trouble if you were to die tomorrow, you don’t need life insurance. The most common example of this principle is that an unmarried person with no children probably does not need life insurance.

A less discussed but still very common application of this principle is that, after you have retired (or reached financial independence), you probably do not need life insurance anymore. (I say “probably” because one noteworthy exception is that if you have a pension/annuity with a small (or no) survivor benefit, you might still need life insurance to support your spouse after your death.)

But once nobody other than you is dependent upon your income, you no longer need life insurance.

But that doesn’t necessarily mean you should let an existing life insurance policy lapse.

If your own retirement security would be meaningfully improved by no longer paying the premium, then you should probably let it lapse. Why put your own well-being at risk, simply to pay for a policy that’s no longer needed?

But if your own retirement security is not really at risk at all (i.e., your assets and other sources of income, relative to your desired level of spending, are such that you’re extremely unlikely to run out of money during retirement), it often makes sense to keep paying the premiums.

In general, if you reach a point where your own retirement security isn’t at risk, then the impacts of the various financial decisions you make will primarily be felt by your heirs rather than yourself. The metric of interest is no longer “probability of portfolio depletion” (or other similar metrics) but rather “after-tax expected bequest” (or other giving/bequest-related metrics).

And when measured in that way, continuing to pay the premium on an unneeded life insurance policy can still look pretty good, in many cases.

Let’s Look at an Example

Bob is a 50 year old male who has never smoked. He’s in good health. Based on a quote from term4sale.com, Bob could buy a $1 million 15-year level premium term policy for a premium of $1,175 per year.

If we use the most recent (2017) CSO non-smoker super preferred mortality table, Bob has just a 0.18% chance of dying this year. This tells us that the probability-weighted payout for the policy this year (i.e., the “expected value”) is $1,000,000 x 0.0018 = $1,800. Right from the start, that’s more than the $1,175 annual premium.

Granted, Bob’s chance of dying in a given year is probably not exactly the same as the probability shown in any given mortality table. But we’re already looking at a table that reflects longer than average life expectancies. And with an $1,800 expected value for this year and a $1,175 annual premium, Bob’s chance of dying would have to be much lower (about 35% lower) than that shown in the table in order for the policy to be a “bad” deal.

And the policy only becomes a better deal each year, because the premium stays the same while Bob’s chance of dying grows as he ages.

For instance, let’s imagine that by age 60, Bob is financially independent and no longer needs the insurance. His premium will still be $1,175 each year for the last 5 years of the policy, if he chooses to pay it. If we again use the same mortality table:

  • Bob’s chance of dying between age 60 and 61 is ~0.36%. (Expected value of $3,610.)
  • From age 61 to 62 it’s ~0.40%. (Expected value of $4,010.)
  • From 62 to 63 it’s ~0.45%. (Expected value of $4,470.)
  • From 63-64 it’s ~0.50%. (Expected value of $4,980.)
  • And in the last year of the policy, from 64-64, it’s ~0.55%. (Expected value of $5,540.)

Those values are way above the $1,175 annual premium.

If paying the $1,175 premium would put Bob’s financial well-being at risk in any way, he should let the policy lapse. But if 1) he can comfortably afford to pay the premium and 2) he has even a modest degree of bequest motive, he should keep paying that premium.

A level premium term policy that you have already held for some years is kind of like a lottery ticket in that it offers a high probability of no payout, with a low probability of a high payout — but the critical difference is that in this case the odds are often weighted in your favor. The expected value each year can be quite a bit more than the premium being paid, whereas with a lottery ticket the expected value is generally considerably less than the cost of the ticket.

Another point in favor of continuing to pay the premium is that the death benefit is not taxable as income to the beneficiary. And, if estate taxes are a concern at all, if the policy is owned by an irrevocable trust, it may be excluded from your gross estate as well.

What Comes After Financial Independence?

Among people who read personal finance books, many save a high percentage of their income through most of their careers. One thing that eventually happens for some such people is that they reach a point at which they realize they have not only saved "enough," they have saved "more than enough." Their desired standard of living in retirement is well secured, and it’s likely that a major part of the portfolio is eventually going to be left to loved ones and/or charity. And that realization raises a whole list of new questions and concerns.

This book’s goal is to help you answer those questions.

More than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need

Topics Covered in the Book:
  • Impactful charitable giving
  • Talking with your kids or other heirs
  • Qualified charitable distributions
  • Deduction bunching
  • Donor-advised funds
  • Trusts
  • Click here to see the full list.
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