Good Decision/Bad Decision: Ditching Life Insurance

Good Decision/Bad Decision

Today’s subject will hopefully be part of a regular series of Monday posts.  As you recall, I recently started Gratitude Wednesdays.  This series will focus on my past decisions to shed light on some financial and emotional wins and losses.  My hope is to discover what I did right, and help others avoid my mistakes.  Whether epic fail or triumphant victory, these were my decisions. The topic for today is ditching life insurance.

As I talked about on the first ever post on this blog, it felt quite ironic cancelling my life insurance since my father’s policy had funded all of my education.  Yet, I also couldn’t justify paying for a policy that had fallen below my net worth.

Isn’t the point behind insurance to protect you from uncontrollable risk?  After reaching financial independence, isn’t that protection unnecessary?

Good Decision

When calculating our goal for financial independence, almost everyone uses some version of the safe withdrawal rate theory.  If you imagine an SWR of 4%, then for each million you have saved, you will be able to spend $40,000 a year in retirement.  So clearly, the less you spend every year, the less needed to retire.  This makes perfect sense.

There are two ways to get to financial independence faster.  Save (make) more or spend less.  No matter how much you earn, cutting unnecessary costs from your budget is downright prudent.  The cost of  a term life insurance premium is one of these budget items that becomes questionable as your net worth rises higher and higher.  If you spend $41,000 a year instead of $40,000, you need an extra 25K of retirement savings to support the annual $1000 fees.

When I finally became aware of the financial independence movement and learned how to accurately calculate my net worth, I came to a funny conclusion.  My life insurance policy would pay about half of my current net worth. Since I was already economically self-sufficient, did my family really need this windfall if something happened to me?  We already have enough, wouldn’t family costs go down with one less mouth to feed?

As morbid as that sounds, I was paying to insure for a sense of safety that was already there.

I could be my own insurance agency!

Ditching life insurance makes the most sense.

Bad Decision

While it is true that I have enough in the bank to insure myself already, sometimes it’s ok for such decisions to be made on more emotional and less logical grounds.  Of course my family would be fine either way, but after a devastating loss like this, wouldn’t it be nice to have a little extra cushion around so that my loved ones wouldn’t have to worry?

My wife would know that not only would she never have to work again if she didn’t want to, but that my kids would also have a nice financial framework to begin their adult lives.

Ditching life insurance sounds a little silly when you think of the paltry premiums that I pay.  For an extra grand a year, my family gets the safety and comfort of knowing that they will never have to worry about money if something untoward happens.

In Summary

After much thought, I couldn’t justify paying premiums for another year.  Although emotionally  the idea of having insurance is satisfying, reality suggests that in the tragic event that something happened to me, my family would be just fine economically.

Although I haven’t jettisoned my disability and long-term care insurance yet, I certainly am thinking about it.

The beauty of financial independence is having options.  If ditching life insurance makes me feel unprotected, even illogically, then there is no reason not to purchase it.

In this case, I felt my policies usefulness had run its course.

So I cancelled it.

How about you?  Do you still have life insurance?  Will you get rid of it after you reach financial independence?  Is there a place for it even after reaching FI?