I’m 51, married and pay $200 a month for a $1.5 million term life insurance policy. When should I cancel it?
“I also have $500,000 in term life insurance from my employer.” (Photo subject is a model.) – Getty Images/iStockphoto
At what stage should I reduce or stop paying for my term life insurance? I am a 51-year-old married man and pay about $200 per month for a $1.5 million policy offered by a private professional group. I also have $500,000 in term life insurance from my employer. I am five years from financial independence. Many thanks.
Married & Solvent
Don’t miss: ‘Today is my 61st birthday’: I have my ex-spouse’s Social Security benefits. Should I retire at 65 and travel?
You’re basically paying roughly the cost of a monthly cell-phone bill for a tax-free $1.5 million death benefit. – MarketWatch illustration
Your policy is excellent value if you still have meaningful years remaining in this guaranteed level-premium term.
For example, if you have five years left on a 10- or 20-year level term, paying $200 a month for $1.5 million in coverage is cost-effective protection while your spouse remains financially dependent. The good news: Life insurance proceeds are generally not considered taxable income for federal income-tax purposes under IRS rules (though the death benefit can be subject to estate tax if your total estate exceeds the federal exemption). Exact rates vary by health, location, and insurer, but group policies like yours often lock in lower rates. If it’s shorter than 10 years, reassess sooner.
You’re basically paying the cost of a typical household utility bill for a tax-free $1.5 million death benefit. That’s about 0.16% of the coverage amount annually — inexpensive for someone in their early 50s with meaningful financial obligations. Based on those numbers, and assuming your premiums remain constant for the rest of the term, it makes sense to continue the policy. For a 50-year-old male in good health, a 20-year $1 million term policy roughly averages at $234 a month. On that basis, $1.5 million of coverage would be about $351 a month — meaning your $200 premium is more than 40% lower, likely due to group-rate discounts. (A caveat: Premium averages obviously vary by source.)
Term life policies typically run between 10 and 30 years and pay out only if you die during that period. If you outlive the term, you may be able to extend coverage, but the premiums will rise sharply because the policy converts to annually renewable rates. Whole life, in contrast, carries fixed premiums and includes a cash-value component, so for that reason it comes at a much higher cost. Some policies allow a “no-exam” renewal or conversion without health changes, but premiums still rise.
The sunk-cost fallacy tempts people to pay escalating premiums because they’ve paid for so long. Insurers know this, and since mortality risk rises with age, they price post-term coverage aggressively to push policyholders either to stop payments or pay substantially more. With that in mind, your actual cost depends a lot on your health, smoking status, and other underwriting factors. The aforementioned “average” numbers may not reflect what you would pay in a new policy today.
Ultimately, the decision to continue depends on how many years remain in your level-premium term; your spouse’s financial dependence and whether your death would leave her in dire straits, and your overall financial picture — assets, liabilities, retirement readiness, and whether your employer’s group policy is portable or subject to change. It also depends on whether your policy can be converted to a permanent policy or extended post-term and, if so, at what cost.
A term life policy is designed to financially protect your dependents if you die before you become financially independent. Once you have enough assets to cover your wife’s needs, you have less need for life insurance. If the term life premium increases to, say, $400 when your level term expires, you will need to again weigh up whether your death would cause your wife material hardship (in paying off the mortgage and covering future living expenses) without this policy.
A word of caution: Everything changes once the guaranteed term ends. Consider the experience of this reader in his 80s who maintained a $250,000 term policy long after his level-premium period expired. His initial premium was $200 a month; after the term ended, it ballooned to more than $2,000 a month — typical for annually renewable coverage at that age. By the time he questioned the policy, he had paid over $220,000 in premiums, far more than the face value he originally sought to protect.
This is a common scenario and a reminder that term coverage is not designed to be kept indefinitely. At the moment, you’re in fine fettle with a total of $2 million coverage. The takeaway for you: You stop paying for term life insurance when you are financially independent, your death would not put your wife under terrible financial pressure and/or when the term expires or premiums rise significantly, whichever comes first. Remember, the term life gravy train doesn’t last forever.
Don’t miss: ‘I fear a significant decline in the S&P 500’: Do I sell my tech stocks before it’s too late?
Previous columns by Quentin Fottrell:
My husband, 73, is giving me a life estate in his home, yet leaving his son a $200K Porsche. Is this cause for divorce?
I have a $10K expense. Do I withdraw money from my investments or my high-yield savings account?
I’m 83 and will have $500K if I sell my house. My estranged wife wants me to join her in Colombia. Do I go?
