Selling Your Life Insurance
Why Early Retirement Might Mean You Don't Need Life Insurance
This is a guest post from my friend Eric Rosenberg, a personal finance blogger and podcaster at Personal Profitability in partnership with Mason Finance. He writes about personal finance, credit cards, entrepreneurship, and technology.
Here at The Early Retirement Roadmap, getting out of your day job to take more control over your time and schedule is the name of the game. One key to early retirement success is building a big enough savings and investment nest egg that you don’t need to keep on working unless you want to.
Because someone interested in early retirement probably has a good financial head on their shoulders, an early retiree likely picked up life insurance along the way. But when you can retire early, do you still need life insurance? Let’s dive in and take a look.
When you do need life insurance
Life insurance is an important tool to ensure your family’s financial stability. In a worst case scenario where you are no longer around, life insurance offers a payout , called a death benefit, to the policy beneficiaries.
Most people rely on the income provided from working to cover monthly living expenses and other long-term goals, like retirement and paying for a child to go to college. Life is expensive, and when the primary income earner of a family passes away, it can lead to serious financial stress.
Life insurance helps avoid that specific stress. The most popular type of life insurance is term life insurance because it has a low cost for a big benefit. But for anyone who has reached early retirement, life insurance may not be so important.
Why early retirement makes life insurance obsolete
To reach early retirement, you need to have enough assets and income to cover your regular expenses and those future milestone goals. If you already have the ability to do that, do you still need life insurance? Probably not.
In fact, one could argue that having life insurance after you reach the ability to retire that maintaining a life insurance policy is a bad idea. After all, it just costs you money every month for something you no longer need.
Some life insurance policies grow in value through an investment, but others don’t carry a big cash value over time. But just because you don’t have a big cash value in your policy does not mean you should let it simply lapse. You can turn it into a one-time lump payment in your pocket and you don’t have to die to get it!
Turning your old life insurance into an asset
If you have reached the FI (financial independence) point or see it close on the horizon, you may want to take steps to turn your life insurance policy into a cash payout instead of charging you each month. It is easier than you may realize.
Some investors buy into pools of life insurance policies where they make the payments and take a share in any payouts. You can sell your policy to investors through a life insurance settlement. Your life insurance policy may be very valuable depending on your age, the policy’s details, and the policy value.
Check out this life insurance policy estimator to get a quick idea of what your policy may be worth.
In summary, if you stop making payments on a term life insurance policy, the policy will lapse and you don’t get anything in return. If you take a settlement, someone else will take over the payments and the benefit, and you get a one-time lump payment. If you are going to stop paying for your insurance, you might as well get something valuable in return.
Don’t waste money on insurance you no longer need
You wouldn’t pay for car insurance if you don’t have a car, and you shouldn’t pay for life insurance if you no longer need it. But don’t let all of those past payments go down the tubes. Instead, consider ending your policy with a life insurance settlement so you get something in return.
But don’t rush to drop your life insurance policy if you are on the fence. Make sure you have a solid foundation for your family’s long-term future before pulling the plug. Once you settle, the policy is gone for good and you may not be able to get a new one to replace it at the same rate.
If you have run the numbers and you are comfortably at the point of financial independence, however, you can confidently turn that old life insurance policy into cash in your pocket. But don’t spend it all in one place. Knowing early retirees, you will probably want to put that payout in savings. That’s a great idea. Better to save than continue supporting a big expense.