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.
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:
- 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.
- 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.
- 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.
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:
- Renewal the existing policy at a much higher rate, or
- 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.
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.
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.)
I stumbled on this website and think it is awesome
I retired last year and have lot of my savings in corporation
My rrsp is invested exempt security type investments
I also have quite bit of cash too
I need some holding hand to start investing my corporate cash
Any advice would be highly appreciated
Thanks for your readership Bipin. Your comment is VERY timely. I actually have a post coming up next week about investing in a corporation. Stay tuned!
That was interesting that renewals cost more than a new policy. I didn’t know that, but maybe not for all insurance policies? We had a policy that renewed every year and the cost only went up at 5 year marks for age, it was a university alumnae offering. Maybe we were over-paying?
Mark, my hubby and I only got life insurance when I was pregnant with our first child. We had the private policy along with ones from work, then eventually (after many years) we dropped the private one when the group policy from work was so much cheaper about 10 years ago. When the amount on my husband was increased on his work plan, a nurse did come out to the house for medical stuff. Nothing medical related was required for my insurance on the same plan.
Although we are still supporting one in university, our youngest has left home, so we thought about cancelling it all this year. But I am superstitious and think that as soon as we cancel one of us will get sick! But we don’t need life insurance now. Years back I used to figure out exactly how much I would need to support myself and the 3 kids.
If I was in your situation, I would choose to only have a small amount of life insurance. Maybe the amount of the mortgage plus another $100,000.
Same, a bit Barbara – re: superstitious. I think we’ll settle on a T10 for likely the cost of the mortgage and then I need to figure out the rest. Group life as Brian suggested or a small amount of UL policy. I think instead of the UL I would like to self-insure.
I wonder if in 10 years I could build up that necessary cash cushion? That would be ideal but the challenge is you never know what life might throw at you.
Thanks for sharing. Stay well!
Insurance is obviously a personal decision. And if it helps you sleep then it’s a worthwhile expense. When we were both working in our 30’s and 40’s with house debt and no kids there was no need to buy insurance. I had a policy from work that was 2x my salary and that was always more than our debt. We thought if one of us was left alone they would still have a job and assets to continue on with. Our house debt was gone by age 40 and retirement investments well under way. Then we had a kid in our mid 40’s (very unexpected) but still saw no need for buying life insurance. We always felt that we could cover whatever came along and didn’t need to pay premiums. To us it’s the same as MER’s on mutual funds, much better to invest in our hands. Now I’ve been retired over 2 years with no life insurance. Unexpected things can still happen, but over 45 years of work we never used or needed insurance or an emergency fund. But I have friends here also that feel very differently about this and are still paying high premiums while retired.
Ya, it is personal isn’t it?
“Now I’ve been retired over 2 years with no life insurance.” I’m not sure I’ll be able to do that unless I/we have a) no debt and b) a decent cash cushion.
That’s incredible you’ve never needed an emergency fund. I’ve used ours a few times including a bit of money earlier this year. Life happens. You must have some great luck 🙂 Kudos and keep it!
Only looked at this post about insurance because it came from you Mark – sparked curiosity – have no requirement for it but wanted to see what you had to say :).
I’m with Gruff403 having cancelled our term life once the mortgage was paid off. Our reason to carry term life was the same as yours – basically should one partner die, the other wouldn’t have financial worries/burdens in addition to bereavement. The biggest and only debt was the mortgage – when it was gone the term life had served its purpose. Never had employer’s insurance as we were both self-employed.
I wouldn’t use mortgage insurance as suggested by Gruff403 (sorry) simply because the potential benefit is the remaining mortgage principal amount (hopefully continuously declining) while the premiums remain constant – great deal for the bank not so much for you.
Personally if I was in your situation, as described, I’d stop the coverage – your outstanding mortgage is small enough to be carried by one salary and/or paid off from other assets if required, you have 1 years salary coverage from your employer(s) and small whole life policies. There also is a CPP death benefit , I think one time $2500, if you have contributed for 3+ years – small but still something.
Thanks for your comment.
Ya, struggling a bit with this decision because you never know in life but at the same time no point in paying for more coverage than we need.
I think the small T10 makes sense for sure, in the coming years and I’m fine to have something around $100K or so in coverage to bridge me for the coming decade; starting part-time work; etc.
The biggest challenge I see and I’ll need to chat with Brian about it before I actually make the decision is the group-life part and/or small UL part.
The group-life or UL part has merit in semi-retirement to cover any final expenses but I don’t want to be paying premiums in my 60s and 70s; so that’s the part I need to figure out.
Certainly having no debt eventually makes any T10 decision easy and it will drop off.
Again, appreciate your insights since it gives me a chance to think about things 🙂
Mark, I for one would be interested in what you decide to do – again its that curiousity thing 🙂
I will post it!
Like Brian’s advice. Insurance is great when one has debt and you want to ensure your spouse will not be saddled with it should something happen. But, too many people carry too much insurance or the wrong type. I think anything but Term is too expensive. As Brian suggest: as your debt goes down and your investment income grows, your Term coverage should drop.
Once I stopped working and we were debt free, I cancelled all our insurance, even when our investment income was not yet covering all our expenses. I’ve never calculated the savings but it got to be tens of thousands, if we had continued with it for 10 year or more.
I think that is where I am struggling a bit cannew, I would love to eventually self-insure and forget the term and other stuff but not quite in the financial position to do all that yet. T10 sounds like a good plan for sure – just need to think about the other stuff!
Thanks for your comment.
When I felt comfortable with my investment knowledge and the amount of my investments, I decided to self insure. With your knowledge and commitment, you and your wife are in a position to self insure. You have the assets and the pensions to see you through the tough times should they occur. And you know how to invest the premium savings to your benefit. Good luck with your decision.
Hey Jan, with decisions like this the answer is not always black and white. There is some grey area between having the maximum insurance and self-insuring. Maximum would be having enough insurance to replace his income until he retired while self-insuring would be having no insurance. I think Mark has landed somewhere in the middle with his decision.
Yes, so far I have. I think some group insurance may be good for me but I really have to think it through more and what’s good about my decisions is there is no pressure from Brian. Just some industry and case study advice which I appreciate.
Thanks Jan. The debt is really the wildcard here I think so if we can slay that dragon and pad some cash, I think it makes sense to self-insure as much as possible but not sure if I can get the cash levels up to ~ $50K or so in the coming years even though that is the goal.
What are your thoughts on a smaller amount of group-life? I liked Brian’s recommendation on that. So maybe a T10 for $100K and maybe a lesser amount of group-life and some cash without going the permanent UL policy part.
I understand term insurance while you still have a mortgage, but afterwards when it is paid off I wouldn’t worry about any insurance. By then you will have your buckets funded. If needed, the surviving spouse would be well set up to raise cash from your portfolios if needed. You will have a substantial portfolio to cushion whatever life surprises you with. Just my two cents (or is it a nickel now). Keep up the good work and thanks again for your emails.
Thanks Jan. I definitely think having T10 until the mortgage is dead makes sense. Likely $100K based on Brian’s recommendation. Where I am struggling is the UL or group-life; not sure there! Would like to self-insure to your point but ideally the “buckets” are in place as you say.
Kids are educated and all doing very well. House is paid off. We are healthy and serious about exerciser and eating well. Probability of catastrophe is low and likely not financially crippling. When we retired about 7 years ago we cancelled all insurance except house and automobiles. In Canada we are fortunate to have an excellent health care system which so far has covered any health related issues we have. Since retirement we’ve put between $15,000 and $20,000 into our pockets instead of insurer. With compounding, that’s worth about $25,000 to $30,000. So far, happy about our decision.
Hey Paul, sounds like you have a great plan. While we do have an excellent health care system, there are gaps that you may need to prepare for. For instance, the cost of long-term care is something that can quickly drain your retirement assets. Whether you need to receive in-home nursing care or have to move to a facility, the expenses can easily add up to thousands per month which could throw a wrench into your retirement and estate plans. This is an area that can be addressed with insurance.
That’s a fair chunk of change Paul and I think that’s part of the reason why I want to self-insure if I can, ideally. I can cover any final expenses and without any debt, not sure why I need too much life insurance since the financial impact of me “gone” would be much lower.
I appreciate your own life experience on this.
Great article. Life insurance is such a complex area so thanks for sharing this.
We cancelled our term insurance (20 years) when the cost would be 4X original premium. Just kept employer insurance in place.
I agree – do not renew. Upon leaving work, I had the option to take over the employer insurance premium of $25 per month for 2X former work salary so I did that. That is good until age 65 when it ends and the amount paid out would eliminate debt.
Mark it seems you have two concerns: cover debt and provide 1 year of salary for surviving spouse.
What would be the comparative cost of adding mortgage insurance? Might be worth a simple call since you can also add on disability and critical illness.
Personally with the large amount of assets you have I wouldn’t bother with any insurance to cover salary.
Hey Gruff, there’s more than one way to skin a cat. What works for Mark may not work for you. In his case, his assets are earmarked for retirement, so he feels more comfortable having a bit of insurance to cover income replacement.
Hum, mortgage insurance I don’t really like because of the underwriting process. I think it makes more sense to own life insurance since my payout doesn’t change either – mortgage benefits/life insurance benefits go down as my debt goes down. Doesn’t seem right 🙂
We’re not quite there with sizable assets but thanks for the kind words – hopefully we’ll get there in a few years once we have more time in our pensions, personal assets grow and we own the condo outright. That’s the plan.
I will likely not renew based on what Brian shared with me and after I looked at my policy cost to renew – those numbers were wild!
Maybe less term insurance and a smaller amount of just group-life is good. I will ask Brian about that since after all debt is gone maybe we just own enough for each us ($50K?) to take care of final expenses in the coming decades.
I agree that life insurance is better than mortgage insurance for the reason you mentioned. However if the goal is to cover the mortgage in the event something happens, I still think it is worth a phone call. If you only have a small mortgage of $120K and you plan to pay it off if 4-5 years what is the cost vs paying for life insurance for 10 years? My child has his mortgage $200K + covered for $20 per month (single life). What is the purpose of the coverage? You have mentioned mortgage, income replacement and final expenses. Brian has now also mentioned other reasons for insurance in the string. I think your first move is define the purpose of the insurance.
My thought. Perhaps look at 75 – 100K T? for each of you to cover almost everything. Great discussion on a complex topic.
Ya, I’ve considered that. T10 (another 10-year term) will cost us about: $85 per month (including the $100K group + $50 UL) and my wife an additional $65 per month. So, ~ $150 per month x 10 years = $18,000 for $250K coverage each.
I suspect if we only go with about $100K or so (each benefit) of T10 and just some group-life or other, it will be cheaper.
I would like to have coverage for 1) mortgage, 2) income replacement for spouse and 3) final expenses should something happen in the next 10 years.
Once the mortgage is gone 1) is a non-issue and 2) is largely decreased since our assets should be sufficient by then which leaves only 3) to worry about. Ideally I can self-insure for 3) in another 10 years but I’m not sure I can come up with $30K + my desired emergency fund or cash wedge on top of that.
If this blog goes viral then maybe I have a shot 🙂
In fact, it is not about the insurance, but a way to park your money in, tax-sheltered, compounding for the long term and being covered, being your own bank-instead of going to A bank, all at the same time.
Hey FD, term and whole life serve different purposes. Term is used for income replacement and paying off debt, while whole life is typically used to pay for final expenses, estate planning, charitable giving, tax-sheltered investment, and more. It’s not uncommon to see someone with both types of policies.
I see where you are coming from now, the tax-benefit of insurance.
I am considering getting rid of my term insurance (just renewed)and buy whole life paying insurance instead. It is more expensive, but it is a way to save money and borrow money from yourself. I am in the middle of this as we speak.
Interesting FD. I have my small whole life policy but my wife has none so thinking some whole life might be a good idea for any “final” expenses.
I certainly wouldn’t think more than $50K or so would be required but I really want to self-insure. Thoughts?