Should I renew my term life insurance policy?

Should I renew my term life insurance policy?

This is one question I need to answer rather soon – should I renew my term life insurance policy?

Maybe you’ve answered this question for yourself or you’ll need to answer this question for your family soon because you have term life insurance expiring as well.

I’m not going to write at length about why you should have term life insurance. There are lots of reasons to consider it. Rather, I will simply share my point of view…

Let’s dive in.

Then

Almost ten years ago now, my wife and I purchased a healthy amount of term life insurance. We got insurance benefits of $500,000 each on top of what small life insurance benefits our employer would provide.

While that seems like a lot of life insurance, let me provide some context.

We obtained this amount of life insurance back in our mid-30s for a few key reasons:

1. We had a sizeable amount of (mortgage) debt at that time. Should anything have happened to one of us, we didn’t want the other surviving spouse to be saddled with debt. This amount would have paid off our debt free and clear, and then some.
2. Once that debt was paid off, this benefit coverage would leave the surviving spouse with over $200,000 in pocket. This amount would cover income replacement loss for a couple of years and provide time, if needed, to take any leave from work should the surviving spouse choose to do so.
3. It was a good sum of benefits coverage for a nominal cost. After we “passed” the medical, we were (and still are) only paying $48 per month for some pretty healthy coverage. I figured it was a good deal at the time.

Now

With our term insurance policy expiring in another six (6) months I figured it was time to investigate my options.

I see our key options as follows:

1. Renewal the existing policy at a much higher rate, or
2. Buy a new term policy for the next 10 years to get us through our final mortgage debt cycle.

I’m sure there are other options on the table to consider, so I enlisted some help from a financial friend I’ve known for a while Brian So.

Brian owns and is the proud founder of Brian So Insurance. Brian addresses his client needs (no affiliation) just like it reads from his mission statement: he believes in providing an in-depth look into your life insurance needs to determine the best product fit.

That just makes sense to me.

So, when I recently had a bunch of questions about what to do, I called Brian. Here is the essence of our discussion and how it helped me frame our decision going forward about renewing my existing term life insurance policy (or not).

Brian, thanks for the time again. Good to chat. So, you know my dilemma based on our previous conversations. Initial thoughts?

Great to talk and help you out Mark. It all starts with what you need and determining the best products to fulfill that needs. Let’s recap what you told me about your debt and expectations at the time of term life renewal in another few months.

This is what I have on file for you:

• You and your wife are now in your mid-40s, married, no kids.
• You are non-smokers, in good health, with no underlying medical conditions.
• You expect to have ~ $120K mortgage debt (or much less) when/rather if you renew.
• You expect to have no other consumer debt.
• You intend to pay off your mortgage in the next 4-5 years.

I know you don’t want to share any net worth details on your site Mark but I think it’s important your readers understand the context of why you feel you need what you need. 

(Mark, fair Brian.)

There are your assets you told me about:

• You (almost own!) one (1) condo as your principal residence. See mortgage liability above. 
• You own one (1) car paid for since 2016.
• You have x2 maxed out Tax Free Savings Accounts (TFSA)s and you will soon have, at the time of this post probably, both of your Registered Retirement Savings Plans (RRSPs) maxed out as well.
• You own a defined benefit pension plan from work, almost 19 years paid in.
• Your wife owns a defined contribution pension plan form work, also about 19 years paid in.

When it comes to existing life insurance you shared the following:

• You told me Mark you have one “Opportunity Life Premiums to 25 Participating” (Whole Life Policy) that was purchased by your parents for you when you were a child. They paid their premiums until age 18 and then that policy became a paid up policy worth $5,000 of basic coverage.  Additional coverage was purchased via “dividends”; which added another $11,900 as of September 2019. Your total benefits from this policy are now about $16,900. 
• You told me assuming your employment continues with your employer, you have a life insurance benefit worth about ~1 years’ worth of salary for each of you.
• Finally, you shared that you have a term-life policy expiring later this year worth $500K as a death benefit for each of you. For this total benefit of $1 M, you’ve been paying about $48 per month or $576 for the last ~ 9+ years.  You are both non-smokers and needed to complete a medical for the insurance. This policy is convertible and renewable as well.

Do I have this right?

Yes, you do Brian!

OK Mark, tell me what you think you need and why…

Mark – Well, I believe I need to consider the following as part of my needs analysis:

• Work – while I am very thankful for your basic life insurance coverage from work; including the long term disability coverage as part of our benefits package, I don’t want to assume this coverage will always be there and/or will stay the same. Things change. So, I would like to consider owning some form of term insurance beyond any workplace coverage.
• Debt – given we are not yet debt-free (but working on it Brian!) I would like some coverage should something occur in the coming years for each of us. Of course we want nothing to ever happen but I can’t be sure. I think we need to consider not only debt obligations but also the permanent income loss as well. I figure a year is a minimum.
• The desire to self-insure – I’ve learned from many early and other retirees Brian that they advise to self-insure to the extent possible. I’ve always seen insurance as a risk mitigation tactic – meaning – you only insure and should pay premiums for things that would render you in a catastrophic loss should something occur. This is why insuring your cell phone or other gadgets makes no sense to me. These are not catastrophic losses (although they might be annoying). Losing a spouse and any income in your asset accumulation years or while you’re paying off a fat mortgage is.

Brian – Well put Mark.

Let’s see how I can help our future discussions later this year to firm things up. In the meantime this is what I’d recommend.

Brian’s Recommendations

Recommendation 1 – Consider not renewing first of all. Let the policy go and write a letter of direction you want to cancel the existing policy. I can help you with the wording to be clear and avoid any concerns.

Why shouldn’t you renew Mark?

The premiums to renew will be much higher than getting a new policy. If you look at your policy you’ll find the math in the fine print somewhere. It’s almost always more expensive to renew than to get a new policy. I suggest clients typically avoid renewals because the rates that are set by the insurance company are extremely high to account for the fact that only people who have developed poor health and medical conditions will renew. Healthy people like you and your wife can take out a new policy for much cheaper.

(Mark – I found the math. Boy, that’s a bundle….) Coverage year 11-20 (the next 10 years I assume?) = $2,182 + riders $1,625 = total of $3,807 per year for $1M total coverage. Is that true?

Mark, there you go and sounds about right. You’ve been paying just $48 per month or $576 per year for the last ~ 9+ years. You can do better. For example, instead of renewing it for $3,807 for $1M of total coverage, you can buy a new ten year term policy for much, much less.

Recommendation 2 – I don’t think you need more than $250,000 of coverage each for the next 10 years including your workplace coverage. 

Why do I say that for you?

Let’s work with $250,000 for benefits as the very top end of your personal coverage.

I say this amount for your top-end coverage per person because I know you want to scale down your work, work part-time, and your mortgage will be paid off halfway through the term within the next 5 years. This amount therefore covers your mortgage while you have it, income replacement for 1 year, and final expenses.

Now, within the $250,000 benefits coverage what you might want to consider is some form of $100,000 term-10 (T10), $100,000 group life, and $50,000 universal life (UL) (a type of permanent life insurance) converted from your current T10. Or, you could buy the UL and T10 as a brand new single policy. It really doesn’t matter but I can walk you through the pros and cons of each when we talk next and start to finalize. Essentially the conversion privilege is mainly for people who have developed medical conditions and don’t qualify for a new one. That’s really not your case today.

So, in thinking about the new package for you, after the 10 years, while you stop paying for the term portion you do keep group life coverage until you retire for income replacement. Also, you continue to pay for the UL policy after you retire until you pass away to cover final expenses. I understand you intend to self-insure but I always include this option to consider for any final expenses. This has a key benefit for while you are alive: you can spend your money more freely in retirement without having to worry about keeping some larger fund for final expenses.

I figure the cost for this package will be about $85 per month for the first 10 years (including your T10), then slightly less per month thereafter when T10 is gone.

Based on the numbers I’m seeing today, for your wife, it will be slightly less: about $75 per month for the first 10 years and closer to $60 per month thereafter after the T10 is gone.

Mark, you should also know that underwriting methods have improved significantly over the past few years, meaning you don’t need to go through a medical exam to buy this policy. Many companies allow people up to age 50 to buy $1M of coverage without undergoing a medical exam.

Again, the options are yours but I would certainly encourage you not to renew. We can talk more about details over the summer.

Ultimately it’s your decision with your wife and I can help you make an informed one.

Mark, thanks Brian.

Readers, I believe I’ll land somewhere on the continuum of owing another $100K-$250K T10 policy benefit for us. This would be a total benefit coverage of $200K-$500K but definitely not a penny more.

Also, I don’t really like the idea of $50,000 universal life (UL) (a type of permanent life insurance) component since I’m “on the hook” for that premium for the coming decades even after I retire.

I think I would be better off having a larger emergency fund; leaving that cash wedge for what it’s intended for.

I have more decisions to make for sure but Brian’s insights have definitely helped. No doubt I’ll have Brian back on the site when I make some final decisions.

You can find other insights from Brian on my site here – what to consider when workplace benefits are disappearing.

What to consider when workplace benefits are disappearing

Brian So is a life insurance agent based in beautiful Vancouver, British Columbia. He runs Brian So Insurance (no affiliation) and is committed to helping his clients find the best coverage for their needs. He takes a holistic approach to insurance, implementing life, disability, critical illness, healthcare and long-term care insurance into his clients’ risk management plan to provide comprehensive coverage for their families. (Link to Brian’s site.)