Life insurance policies offer financial insulation in case a spouse passes away. While whole life insurance offers better protection since it never expires, term life insurance is more affordable.
However, a life insurance policy may become less valuable if the policyholder has accumulated significant fortunes. That’s why a Redditor finds himself at a crossroads with his insurance policy.
In his recent FAT Fire post, the 55-year-old Redditor explains that he has $7.5 million in liquid net worth plus a $3 million term life insurance policy. The policy costs $2,900 per year in premiums. He has two children in college with 529 plans projected to cover the costs.
He’s asking if it makes sense to drop the life insurance policy. I’ll share my thoughts, but it is good to speak with a financial advisor if you can.
The Life Insurance Policy Is Good for Another 9 Years
The Redditor’s life insurance policy offers coverage for another nine years. He will be 64 years old by the time the policy expires. While the Redditor can afford the monthly payments, it’s important to keep health in mind.
It makes more sense to hold onto a policy if your health is waning or your family has a history of health problems that starts in their late 50s or early 60s. However, the Redditor said that he doesn’t really have a need for it, implying that he is in good health.
Furthermore, he has already built a nice nest egg that will support his family. While a term life insurance policy can provide the nest egg, it’s just additional money on top of what the Redditor has already accumulated.
You Won’t Get Life Insurance This Cheap Again
The Redditor won’t get a life insurance policy this cheap again. Premiums go up as you get older, and it’s difficult to find an insurer that will want to work with you in your 60s. If the Redditor walks away from this insurance policy, it’s unlikely that they get another one.
It can be good to have a life insurance policy just in case something happens. An extra $3 million offers a financial cushion in case he passes away before turning 64. The risk of keeping the life insurance policy is low. The 55-year-old can keep up with the premiums, and it only represents a small amount of their annual income. A $2,900 annual premium is manageable and only comes to $242 per month. That’s roughly $8 per day.
When you break it down like that, the life insurance policy looks more valuable, even though it’s set to expire after nine years.
Opportunity Cost
While the life insurance policy offers extra financial security, that security has an expiration date. In the meantime, the Redditor will have to pay $2,900 per year for nine years, resulting in a total of $26,100 in premiums.
Both children are financially covered, so the life insurance policy isn’t essential. However, it’s good to keep in mind what happens if the Redditor lives past 64. Chances are high that the Redditor will outlive his policy, and that means all of the money would have gone down the drain.
Meanwhile, if the Redditor invests $26,100 into an index fund and averages an annualized 8% return over 10 years, that investment turns into $56,347.94, more than doubling his money in the process. Outside of a rare accident or a medical condition, the life insurance policy is likely a bad investment. The Redditor should consider the opportunity cost that comes from paying premiums instead of putting that extra cash into other investments.
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