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Do You Need Life Insurance After Financial Independence?

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Do you need life insurance after Financial Independence?Do you need life insurance after Financial Independence? That’s a deceptively simple question. If you have reached financial independence, then you don’t really NEED life insurance. Financial independence means you don’t have to work anymore to support your lifestyle. By that definition, you don’t need life insurance because your family already can maintain their lifestyle without you. However, real life is usually more complicated than that.

For example, let’s look at me. If I pass away suddenly, it would a huge change for my family. I hope this won’t happen anytime soon, but who knows the future. Anyway, let’s focus on the financial part for now. We are comfortable financially, but it is complicated… Mrs. RB40 doesn’t want to deal with all these complications and it would be best to simplify our finances a bit. By the way, my plan is to simplify our lives by the time we’re 50. It’s definitely a work in progress.

Life is complicated

  • Rental properties – She does not want to be a landlord. She should sell our rental properties, but it will take time. The taxes will also be very complicated and she will need to find a good tax accountant to help with the transactions.
  • Childcare – I’m a stay at home dad and Mrs. RB40 will need help with our kid. She’ll need to pay for afterschool care or find a part time babysitter. Alternatively, she could retire and become a SAHM. That could work out, but who knows. She may not like staying at home all day.
  • Dividend stock portfolioOur dividend stock portfolio is pretty simple. We mostly have solid dividend growth stocks. These should do well for many years, but you still need to keep an eye on them. Mrs. RB40 will need to learn more about dividend stocks or gradually move the money into a passive index fund. You don’t want to do this quickly because there would be tax implications.
  • My condo in Thailand – This condo isn’t worth a huge amount, but it’s another thing to deal with. She is not a Thai citizen and that will make it very complicated. I guess we could transfer it to my brothers.
  • Various miscellaneous accounts – I have accounts with Prosper, Kickfurther, Digit, and Loyal3. She’d need to track them down and sell them all off. These are just complications that she doesn’t want. I also have a small pension at Fidelity and a few shares of the old employer stocks at UBS.
  • Retire by 40 blog – I have no idea what she’d do with Retire by 40 if I’m not around to run it. Ideally, she would take it over and keep it running, but I doubt that would happen. If she doesn’t update the blog, I think it would still bring in passive income for a while. But, her best bet would be to sell the business. (Note to Mrs. RB40: Talk to J Money if you need help with this.) She’d also need to track down my various business banking accounts, PayPal, and credit cards.

Our finances are complicated because I set it up to generate cash flow to help fund our early retirement. If Mrs. RB40 moves everything to a passive income fund, I’m not sure if there would be enough income to cover her expenses. This is especially true in this low yield environment. Vanguard Dividend Growth Fund only pays out 2%. The fund just closed a few months ago so that’s not even an option anymore. She’ll need to find a good fund and that can be daunting for beginners. She probably should get a good financial advisor to help her figure all these things out.

Cash is King in uncertain times

When life is uncertain, cash can help to smooth things out. I have a $250,000 term life policy and it will be very useful for my family. All the things I listed above will take time to deal with. Having some extra cash to help pay for unexpected expenses will let Mrs. RB40 take her time with them. She could even payoff our mortgage if she chooses to. That way, her monthly expenses will be quite a bit less and easier to cover.

Other benefits

Oh yeah! I almost forgot about my Social Security benefit. I just checked my online statement and my family will receive the following survivorship benefit from Social Security:

  • My child (until he is 18): $2,070 per month
  • My spouse who is caring for my child (until child is 16): $2,070 per month

This is actually a significant amount and it will cover over 90% of our monthly expenses ($4,500.) The rest should be easily covered by the dividend income. The cash flow equation looks good when we take Social Security into account.

What about Mrs. RB40’s life insurance?

Mrs. RB40 has life insurance through her employer. Her coverage is 5x her annual income. That’s a lot of coverage for a very affordable cost, but she will only be there for a few more years. She is 42 and it’s probably best to get some life insurance coverage outside of work very soon. The rates for term life insurance increase as you get older.

I could probably handle our finances if I was alone, but I would be very stressed out. I know I’d be in a deep depression if something happens to Mrs. RB40. I wouldn’t be able to deal with the finances for a while. At least, her accounts are a lot less complicated than mine. She only has a few retirement accounts under her name.

Let’s stay healthy

Dying sounds like a ton of trouble for my family. I’d better stay healthy and live another 42 years. Mrs. RB40 needs to do the same. That will give us time to simplify our finances. There are different levels of financial independence. I feel like we’re just a beginner in the FI world. In 10 years, we will be more comfortable and we might not need life insurance then.

Do you think you need health insurance after financial independence?

Getting Life Insurance

If you need life insurance coverage, you should get it sooner rather than later. The rates will increase as you get older and your health won’t get any better either. I prefer term life insurance for simplicity and affordability.

The term – I selected a 20 year term because that’s the crucial period for my son. Once he’s old enough, he can take care of himself.

Coverage – This really depends on your financial situation. I picked $250,000 because that would be enough to pay off our mortgage and leave a little extra for the family. If you don’t have any debt and already set enough aside for your kids, then you probably don’t even need life insurance.

Getting a quote – Getting a quote is fairly simple. One company that can help is SelectQuote. I filled out their online form and they called me right back. Mrs. RB40 has some existing conditions so they needed a bit more detail. Here is the rate for a 20 year term life insurance for her.

  • $250,000 coverage for $51 per month
  • $400,000 coverage for $79 per month

Wow, that’s more than what I’m paying now. I pay just $25 for my $250,000 policy. I didn’t have any existing conditions when I got the policy and that makes a big difference. I was younger, too, when I got my policy. That’s why I think it’s better to get a life insurance policy sooner rather than later.

You can get a free quote in just about 10 minutes by filling out the online form at SelectQuote. They have been in business for over 30 years and has expertise in finding the lowest cost life insurance option.

*This article was sponsored by SelectQuote, but all thoughts and opinions are my own.

Image by freestocks.org

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{ 42 comments… add one }
  • Dividends Down Under October 5, 2016, 2:09 am

    Nice post Joe. It’s always important to make sure our family is looked after, in every sense of the word.

    At the moment I have life insurance, enough for my wife to buy a property like the one we live in if she wanted to buy one.

    I think we’ll keep life insurance for a long time, maybe forever. If I were to go early, I’d want my wife to be able to set up her life in a very secure way.

    Tristan

    • retirebyforty October 5, 2016, 3:41 pm

      It’s great that you take your wife into consideration. I didn’t get life insurance until we had a kid. 🙂

  • Jon @ Be Net Worthy October 5, 2016, 3:21 am

    Term life is the way to go and you raise good points about who is going to handle childcare, etc… It is true that term life is pretty cheap too. There’s really no reason to not get coverage just in case. It’s annual enrollment time at the office again and I need to look at what we have and see if I need to take my coverage up or maybe even down.

    • retirebyforty October 5, 2016, 3:43 pm

      You should shop around outside a little bit too. Increasing your coverage through the office might not be that cost effective. If you’re young, you can get good coverage for around $20/month.

  • The Green Swan October 5, 2016, 4:04 am

    I think once we hit FI and are comfortable retiring, we would probably drop insurance coverage. Like you said, at that point, my family would be able to support their lifestyle fine without (maybe better since they won’t have the drag of my expenses). That, along with the SS survivor benefits, I think they’ll be set.

    • retirebyforty October 5, 2016, 3:45 pm

      I think we’ll be there in about 10 years or so. Right now, their expenses will only increase. My personal expense is very low. 🙂

  • J. Money October 5, 2016, 4:12 am

    Love this topic – especially since we’re so used to being told we need life insurance forever, but once we hit financial independence it’s def. different! But you’re right – it still doesn’t solve everything especially if you go sooner than later (ie when kids are out of house, everything’s paid for fully, etc etc). Really interesting read.

    (And I’ll totally make sure your blog is taken care of if that time ever comes :))

    • retirebyforty October 5, 2016, 3:47 pm

      Thanks for giving me some peace of mind! FI is better than no FI, but it will still be tough being a single parent.

  • Apathy Ends October 5, 2016, 4:41 am

    I think we would still carry small insurance policies – at least until our future kids are old enough to support themselves

    Currently we get our policies through work – pretty cheap but we would have to re-evaluate if we switch employers

  • Ms October 5, 2016, 5:22 am

    We have been having similar talks. Together our finances are fine, but things would change if one passed away and we would actually need more income. From extra childcare help, to a repair person. Although the ss might cover that gap. The biggest reason we keep coverage is if we both pass away. It would be a HUGE expense for anyone else to care for all 5 of our kids. We want to make sure we can provide people $6k-8k a month to cover those costs.

    • retirebyforty October 5, 2016, 3:51 pm

      You’re right about childcare expense for 5 kids. That’s tough. Hopefully, they’ll be adults before anything happens. We have just one kid so it’s not as big of a problem, but still…

  • Brad, Financial Coaching October 5, 2016, 5:24 am

    We’ve reach FI but continue to hold on to our term insurance. We’ve had the 20-year policy for 12 years now and the $750k policy is only costing us $830/year. Even though we don’t “need” the insurance, it’s a fairly low cost for that amount of money in case something were to happen to either of us (it’s a “first to die” policy) in the next 8 years.

    • retirebyforty October 5, 2016, 3:53 pm

      That’s probably what I would do too. By the time that we’re comfortable enough to not need it, the cost will be negligible. I’ll carry mine until the term expires.

  • Dan October 5, 2016, 7:01 am

    Very interesting thoughts. My goals are very similar in that I would like to eventually have a simplified portfolio. This is ideal.

    Reminds me of a story of a rich family during the dot com bubble that had a significant fortune in Disney stock. So basically they have an almost ideal conditions of having a fortune and also having it in a blue chip stock. Perhaps a little bit of diversification would be better but this is nearly the best thing possible. Rather than having a complicated vast empire requiring many employees they just had one large stock position.

    Anyways they margined this position to the hilt and bought crummy dot com era tech stocks and had to sell much of their Disney stock after the dot coms hit the deck.

    Another similar story I’ve heard and couldn’t believe was a person who inherited a couple million dollar portfolio of blue chip stocks. Instead of keeping that and holding on to it for forever(she had already won in my book) she also margined a huge portion of the funds to start a business. Eventually losing a large portion of it.

    • retirebyforty October 5, 2016, 3:56 pm

      Thanks for sharing. That’s part of the learning. If you built your own wealth, then you’d probably be more conservative. At least, I am. Our diversification is a minor part of our portfolio. It’s to keep me busy and learn. I’d never margin my account at this valuation. It’s not worth it.

  • Mrs. SimplyFinanciallyFree October 5, 2016, 7:24 am

    Great post. I am glad you mentioned all of the additional costs a surviving spouse may encounter just to keep their household running (the big ones being childcare and just keeping a household running). These are often overlooked and although once both spouses reach FI and leave the workforce I think it still would be good to have a small amount of coverage just to cover the initial gap where you are trying to figure out your new life. Most carriers will let you reduce your death benefit so maybe this is a good compromise. Having immediate access to take care of final expenses and cover bills for a few months would be great as the surviving spouse works out the mechanics of the rest of the finances.

    I know for us since we have two properties, both with sizable mortgages totally just under $500k, that we will keep some insurance even into our early years of reaching FI. If something were to happen, I would love to at the very least pay off the mortgage on our primary residence. Having that amount of debt is scary enough when we are both working even though both provide a nice cash flow but getting rid of it would be a huge relief. Obviously everyones situation is different but it is important to look at your entire picture before cancelling things.

    • retirebyforty October 5, 2016, 4:00 pm

      Having some cash right away would be very helpful. We usually keep less than $10k in our checking account and it will take time to raise money. Even selling stocks take a few days and the timing might not be optimal.
      We still have mortgages too. It will take time to sell the properties and cash out.

  • Fiscally Free October 5, 2016, 8:04 am

    I was planning on ditching life insurance when I “retire,” but this got me thinking it might be good to get a small policy to cover the transition period. Thanks for making me consider that.

    • retirebyforty October 5, 2016, 4:01 pm

      I think you should keep it for a bit especially if you have kids. It’s relatively cheap compare to everything else.

  • Tawcan October 5, 2016, 9:46 am

    Interesting topic Joe. I think it really depends on each individual. In your case you probably want to have a small amount of life insurance. Right now both Mrs. T and I have a 25 year term life insurance. Our thought is that once the term expires we probably won’t need life insurance anymore. Or if we do need it, the amount will be much lower.

    • retirebyforty October 5, 2016, 4:02 pm

      That’s exactly what I’m planning. By the time the term expires, we’d be comfortable enough to stop buying life insurance.

  • James October 5, 2016, 9:51 am

    Unless someone is a complete FU money financially independent, I think everyone should get life insurance if they have a young family. More realistic case early retiree FI type of people may need to prepare for financially is if a spouse decide to leave the relationship, which occurs quite frequently compared to early death.

    • retirebyforty October 5, 2016, 4:04 pm

      You’re right about the relationship issue. I never wrote about that because I don’t want to think about it. I’d probably become a drifter if Mrs. RB40 ever leaves me…

  • Mr. Tako @ Mr. Tako Escapes October 5, 2016, 10:56 am

    Good post. I could see this as being a manual for your wife of what to do just in case you were to “kick the bucket”.

    I don’t have any life insurance right now, but maybe it’s something I should consider. You never know!

    • retirebyforty October 5, 2016, 4:05 pm

      Can your family maintain the same lifestyle if something happens? Your finance is simpler than our so maybe you don’t need life insurance.

  • Mike H. October 5, 2016, 11:15 am

    Dying is a somewhat expensive thing to do. Between funeral costs, certain taxable events for your assets, court filing fees, etc., you can expect your survivors to need thousands of dollars to settle things. And then there are the delays: it can takes weeks to transfer accounts. If there’s any disputes among your family, your assets might be frozen until the probate court can sort through things. And mistakes do happen: certain properties can be incorrectly seized, and then they have to deal with a lot of paperwork and delays.

    Having an insurance policy with a VERY simple and clear beneficiary designation, and a will that doesn’t contradict that beneficiary designation, seems like a good idea in most circumstances. For me, it’s a pretty simple decision: if a person has a family, then life insurance is a good idea. It’s just a matter of how much insurance you need. I think your policy is well thought out and a good size. Are you planning on re-upping once your term life policy expires?

    • retirebyforty October 5, 2016, 4:09 pm

      It’s a huge headache for the family to deal with. I don’t even want to deal with it for my parents. I’ll need to talk seriously with my dad when we’re in Thailand this time. If we continue to prosper, I don’t think I will need to renew once the policy expires. We should be comfortable enough in 10 years.

  • Doug arnold October 5, 2016, 1:28 pm

    I would definatly say its something that needs to be discussed among families as you definatly don’t want your spouse to have to sell assets to cover costs and reduce future income. Just depends on the situation and what people want some will say yes some will say no. But I don’t think there is a right or wrong answer

  • Alberto October 5, 2016, 3:19 pm

    Simplification is the key to many things in life but specially true for retirement. We looked at this closely in our lives and concluded that no we do not need it. All possible life major events are covered with assets.

    One can designate an account and pay ourselves the premiums and after a few years the risk is covered. Mrs. Alberto would do extremely good in my absence.

    • retirebyforty October 5, 2016, 4:11 pm

      That’s great! Someday we will be in your position. My term life policy is so cheap that it doesn’t make a dent to our budget. Self insurance might work better for Mrs. RB40.

  • MyMoneyDesign October 5, 2016, 6:07 pm

    Good points. I’ve always thought we’d drop our Term policy after we reach FIRE. But maybe we shouldn’t. Especially in the unfortunate circumstance that I go before my wife, I think I might need the life insurance money to go into some sort of trust that pays my wife and family as if I was still there.

    • retirebyforty October 5, 2016, 8:50 pm

      Good idea with the trust. For us, I think cash is better. Mrs. RB40 is very responsible with money and she can use it to pay off the mortgage if she’d like. A trust would be better later on. Life is always changing..

  • Michael October 5, 2016, 9:06 pm

    Thanks Joe, you just reminded me to go set up online access to mySocialSecurity. I was able to set up my account and look up the survivor benefits.

  • Michael October 5, 2016, 9:13 pm

    I am now curious – have you written a Will or set up a Living Trust? You might want to look into both. You may be interested in this – http://stretchadime.com/estate-planning-will-living-trust/

    Honestly, this is on my to do list.

    • retirebyforty October 5, 2016, 11:43 pm

      We have a will, but no living trust. If you have kids, you really need a will.

      • Michael October 6, 2016, 4:37 am

        It is good that you have a Will. A Will is required if you have minor children and you need to assign a Guardian.

        If you have a Living Trust, you can transfer all your assets to your beneficiaries bypassing the court probate process.

        If you have a Living Trust and a simple “pour over” Will, then whatever assets that were not moved into the Living Trust at the time of your death would be moved into it – the asset being moved via pour over must go through the probate process though.

        For a person with a lot of assets and minor children, it is worth considering a Living Trust and a simple pour over Will.

  • MoneyAhoy October 6, 2016, 5:08 am

    To me, the only reason to have life insurance is to ensure your dependents can MAINTAIN their quality of life if you pass away. If your debts are close to zero and there is enough money to cover the funeral, then there is little reason to carry this if your cash flow is in good shape after you’re gone.

  • Dave in Sunny FL October 6, 2016, 12:37 pm

    A very matter-of-fact presentation, Joe. But… do you have dreams and aspirations? If I were in your position, I would be imagining the day when the RB40 retirement guide is on the NYT bestseller list, the blog gets more traffic than Yahoo Finance, and you’re mulling an offer for a weekly radio show. Part of my dreams would be that these projects provide income and wealth for my loved ones. As you realize, those dreams would die with you, if you passed before they came to fruition. And THAT is what I would want life insurance to cover: not just the “drone” of where you are now, but the soaring–yet reachable–stretch goals that you set for yourself, for the benefit of your family. Thanks for your hard work and sharing!

  • FI_Kiwi October 13, 2016, 9:53 am

    I’ve got a teenage daughter and have a modest amount of life insurance to provide a separate fund for her should I snuff it earlier than I hope too. My daughter is not my wife’s daughter so it seemed easier this way.

  • Alex October 13, 2016, 2:39 pm

    Seems to me that if you *need* life insurance it would mean you are not financially independent. The reason’s you have it makes it sound like it’s a nice to have for you. Life insurance is primarily an income replacement (and childcare/housework replacement to an extent). Generally I think financial independence means you don’t need your income to maintain your lifestyle. I thought you also had enough money and truly passive income to allow your wife to quit working any time…? If something is a “need” that means to me you are dependent on it, so if you need life insurance you aren’t financially independent, doesn’t mean it’s not a good idea.
    My wife and I are near-ish to reaching FI and only have life insurance through our jobs. We also think our lifestyles are high enough that there is a lot of elasticity to downsize if necessary.

  • Mrs. Need2Save October 14, 2016, 12:01 pm

    Hey there. Our kids are little older (one just started college, one starting next year). We both have ample term life (both company paid and supplemental) very cheap through our current jobs. When we are ready to retire early, it will be just after both of the kids are done with college if they finish in 4-ish years. I also currently have a term policy that I took when I was a SAHM and pay $20/month for $250k. But when it ends at the end of the 20 year period (in 3 years) we do not plan to renew or replace it. Mr. Need2Save could live very comfortable on our current retirement savings and likewise for me. For a couple, if one of you dies, the other does not need the same amount as both of you to sustain their current lifestyle (assuming all the retirement assets will go to the other spouse).

  • JayP October 18, 2016, 2:12 pm

    Great points. We dropped our $1M term and $500K term when we no longer needed it to maintain our lifestyle. We don’t have the complications with rentals, blogs, etc. Plus our costs were significantly higher than the $25/month you are paying.

    The tipping point for me was the Social Security benefits you mentioned. Not only would my wife have enough to get by at my death, but a significant benefit for her and the kids through SS.

    Thanks for pointing that out.

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