“What to Do with Your Term Life Insurance?”

Term life insurance is purchased by the billions every year to solve a myriad of potential problems.  Perhaps the most-often reason is to provide financial protection for the family should the primary income earner die prematurely.

A case in point… Many years ago, as part of a routine financial planning survivorship analysis, we recommended a physician purchase $3 million of life insurance.  Many years later he passed away due to cancer and it’s the life insurance proceeds, along with his other investment assets that paid the college expenses and wedding expenses for his children as well as the monthly income needed for his wife for the rest of her life.

Term life insurance is an important tool in the financial planning toolbox.  As a financial advisor, one of the most-often asked questions I’m asked about life insurance is, “Do I still need my life insurance?”  My answer is as varied as the people who ask the question.  It wasn’t so long ago that life insurance was needed to pay death taxes for a lot of families but when Congress increased the death tax exemption to $5 million per person, suddenly that reason disappeared for all but the top 1% of families in America.  Now, the primary reason for owning life insurance is to provide financial protection for a surviving family should a primary earner die prematurely.

If the reason you are purchasing life insurance is to protect your family should you die prematurely, term insurance is typically your best choice since it lasts for a specific period of time, typically ten, fifteen, twenty or thirty years.  This makes it easy to match up a life insurance policy for, say, a twenty-year period when you are raising a family.  Once the kids have graduated and are on their own, the insurance is no longer needed.  Or you use a thirty-year term policy to give you time to save for retirement through your 401k plan and personal investment plan.

When we are deciding whether to keep or drop a life insurance policy, we generally look at three factors:

  1. Is the ‘need’ still there? If the kids are grown and on their own; if you’ve saved enough money for retirement; if you no longer have dependents; the insurance may have fully served its purpose and can be dropped.
  2. Future liquidity required? The $5 million death tax exemption per person has now risen to $5,490,000 due to cost-of-living increases.  For a married couple, that means your estate can be nearly $11 million before you’ll owe death taxes.  Clearly this is not an issue for most families but it does need to be reviewed being sure to include the proceeds of any life insurance plus possible inheritances.
  3. How’s your health? Let’s assume for a moment that the answer to numbers one and two above suggest that the insurance could be dropped.  We also want to check the health of the person insured.  We have a number of clients who no longer need their life insurance but whose health has deteriorated to the point that they have become totally uninsurable.  In other words, they purchased the life insurance when they were in excellent health (and therefore got excellent rates) and now couldn’t buy it at all.  Crudely put…the life insurance has become a good investment.

Recommendation:  If you have term life insurance and are asking yourself the question, “Should I keep my policy?”, have your financial advisor review your policy and your facts to help you determine the best course of action.