Aside from trying to cut back on everyday expenditures like dining out and our expensive Starbucks habit, we also started combing through our fixed expenses to try and find ways to save money. We have already dropped our all-inclusive, and ridiculously expensive, cable television service in favor of a low cost streaming service and an HD antenna. This move saves us about $150 a month, and just as important, it saves use from having to see 200 worthless channels on our guide.
During this review of our fixed monthly expenses a question came up. Do we really need to have life insurance at this point in our lives? We have had two policies for almost twenty years. We originally purchased them because we had just gotten married and purchased a new house. Then of course our son came into our lives and it was a wise decision to continue to have these policies. We didn’t have a lot of income and the cost of the coverage was small, the benefits were big, and the peace of mind knowing that our small family would be taken care of in the event of a disaster was priceless.
Fast forward to current day and we are in a completely different position. We have money in the bank and our son is a year away from going off to college. Additionally, our income is much higher than it was twenty years ago and neither of us would be in financial ruin should we have to go it alone.
So is now the time to pull the plug on paying monthly life insurance premiums? Can we bank that money and self insure or are we making a premature and potentially costly mistake?
Our monthly premiums are $170 and the total coverage for our policy is $1.5M. The policies term out at age 75. Most of the coverage is for my wife because, well, she’s the smart one of the family and has a higher level of income. There’s a reason I’m the one writing this blog and not her, but I digress. The savings from canceling the policy would be $2040 a year and we would invest it in a mutual fund to help build our nest egg and to self insure against that which we don’t like to talk about.
Now on its face it looks like a bad idea given the high payout and low premium. But when I think about it, we have paid about $40k in premiums already. That money could have been invested and grown to a much larger sum. It wasn’t wasted money by any means as there is a benefit attached. And if something had happened in the last 20 years, we would have been grateful we had a policy. Can we do better on our own now without giving our money to an insurance company? Or would it be better to hold the policy until we reach FI, at the very least, or longer?
We have estimated that we will reach our FI number in approximately 5 years. Taking the sum of our premiums and assuming a normal market return of 7% over the next 5 years, we would gain a total of $15,414 before taxes. This would essentially be what it would cost us to continue with our coverage for the next 5 years instead of saving and investing the money for premiums.
This is where the dilemma comes in. We are considering giving up peace of mind at the unknown for a certain dollar amount of savings and growth potential. As much as we like having peace of mind, we also would like to save more money and possibly reach our FI number earlier.
The only reasons I can think of for keeping the policies is to make sure our son gets through college debt free in the event of our demise and as a layer of protection for my wife since she will not drive in the RV alone if I am no longer around.
So my question to the FI community is what would you do? Keep the policies or invest the cash?
Please leave a comment below with your opinion and/or experience with this type of situation.