Over the last several weeks, I’ve talked quite a bit about life insurance. By now, I hope you have a better idea of why young physicians need to get life insurance, what type of life insurance is best for young physicians, and how much life insurance you should get. The final question we need to discuss is when to get rid of your life insurance.
Before I can answer the final question, I want to first review the previous blogs.
- Why you need it: Life changes fast after residency. You’re starting your first attending job, getting a larger paycheck, and probably living a more expensive lifestyle. You might even be moving across the country, getting married, buying a house, or starting a family. With those major life milestones happening quickly, it’s important to be covered by life insurance as early as possible so that your dependents are taken care of if something happens to you.
- What type you want: Term is the best type of life insurance for young physicians. Not whole life, variable life, universal life, or any number of permanent life insurance options sold by aggressive salespeople.
- How much you should get: “Rules of Thumb” offer valuable insights into estimating your life insurance needs, but they are not perfect solutions. Personal circumstances, financial goals, and future plans all need to be considered when deciding what amount of coverage you need.
With that as our base, let’s explore when it’s the right time to get rid of your life insurance.
Reduced Future Expenses
The first reason you might get rid of your life insurance policy goes back to why you got life insurance in the first place. As mentioned above, young physicians need to get life insurance so that their dependents have the means to pay the mortgage, buy food, and cover other month-to-month expenses, while also having enough to cover future college and retirement.
The best way to understand what I mean is by going through an example. Meet Dr. Singh and his family. Dr. Singh is a Radiologist who lives in Texas, with his wife and two kids, ages six and three. After finishing residency in New York, the Singh’s moved to Texas (warmer weather) and bought their first house. Shortly thereafter, Dr. Singh purchased a $1.5 million, 20-year term life insurance policy. He also has a $500,000 group life insurance policy through his employer for a total of $2,000,000 in life insurance. Mrs. Singh, who stays at home with their kids, purchased a $250k, 20-year term life insurance policy at the same time.
At the time of purchasing their policies, the Singh’s had young children who were going to be under their care for the next 15 years or so. If Dr. Singh were to pass away, the life insurance proceeds would need to cover living expenses, college expenses, and debt payments for his family. If something were to happen to Mrs. Singh, the proceeds could be used to help replace everything she did to allow their household to continue running.
Fast forward 15 years, and their kids are now 21 and 18, both in college and close to being out on their own. They will soon be able to support themselves, and college expenses have already been taken care of. Plus, their mortgage is almost paid off with just a small balance left. At this time in their lives, they can consider getting rid of their life insurance because the main reason the Singhs purchased their life insurance doesn’t really apply anymore.
Attained Enough Assets
The second reason you might get rid of your life insurance is reaching the point of being “self-insured”. Being self-insured means you have enough money saved that equals or exceeds the death benefit of your life insurance policy.
To illustrate this, let’s look at Dr. Singh and his family again. Each year, Dr. Singh maxed out his 401k, plus he and his wife both maxed out their backdoor Roth IRAs. They also contributed $2,000/month to a taxable investment account for earlier financial independence. If this money grew at an average annual return of 8%*, they would have $1.5 million dollars in 13 or 14 years. At that point in time, they would have more money saved than Dr. Singh’s private life insurance policy would pay out, thus reaching the ability to “self-insure” going forward.
Consider Keeping Your Policy
Choosing to get rid of your term life insurance policy is not a simple decision. Although children growing up or saving enough money to become self-insured are great milestones to reach, they aren’t always the definitive answer. While these might provide “hard numbers”, there are other sides to the decision.
Now, keep in mind that just because you reach the ability to “self-insure” or your kids leave the house, you don’t have to get rid of your life insurance if you don’t want to. For some people, especially those who got life insurance while they were young, the premiums might not be a significantly monthly expense. In that case, they can choose to keep their term life insurance policy active and view the death benefit as an additional layer of protection if something tragic were to happen to them.
You should also discuss this with your spouse before deciding to cancel your life insurance policy. How would they feel if something happened to you? Would the death benefit provided by the life insurance policy make them feel more secure? Or would they prefer to cancel it so the money spent on premiums could be used for further savings, or to further enjoy life right now.
As always, the decision depends on so many variables and warrants an intentional discussion. Remember, once you’ve canceled a policy, you can’t get it back.
At Panoramic, we have intentional conversations with our clients to help them understand all sides of a decision to keep or get rid of their life insurance policy. Please click “Work With Us” at the top of the page to learn more.
*Investment returns are not guaranteed. Investing in securities involves risks, including the potential for loss of principal. Estimate is for illustration purposes only, is based on annualized returns of 8%, and is not intended to be representative of any specific investment or strategy.
The foregoing content reflects the opinions of Panoramic Financial and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Panoramic Financial does not give tax or legal advice. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.