When we were expecting our first child we started to think more about our finances and ways to protect our children should the worst happen: “What if one or both of us died?” We bought life insurance.. It’s the right thing to do, or so we were told. Everyone gets life insurance, right? Well, this week we cancelled our life insurance, and I’m going to tell you why.
Back when we lived like “normal” people, we did a lot of reading and analyzed our expenses and living situation. We came up with a value of required money if one or both of us died tomorrow so that our kids would be ok. This number was $800,000!! We definitively needed life insurance then, and we would still need it, had we not changed a lot of things about our lives.
When we thought we needed life insurance, we assumed we would live in our crazy, super expensive mansion forever. So we planned enough money to pay that off outright. We also planned to supplement the deceased spouse’s income for 10 years. These strategies are all good if we were planning on living the same lifestyle and requiring 100% of our incomes. But we soon decided that we were going to live in a mortgage free home and live on less than 30% of what our incomes actually were.
Once we reach FI, we won’t be relying on a working income so the need to supplement a lost income becomes obsolete. Also, if one of us dies, the other gets 100% of both retirement funds that we will have accumulated up to that point. So financially, the surviving spouse should be in an ok or even in a better position. Now I know there are also risks involved. For example, if one spouse dies and/or all of our investments and rental properties start really underperforming, leaving the other spouse in a difficult position. However the odds of both situations happening are pretty minimal. In such a case we would still have a sufficient emergency savings fund. This would suffice for a couple of years before having to go back to a regular job.
Another reason to have life insurance is in case both of us die. We have accumulated a good enough total net worth that we would be leaving behind a pretty generous amount. We don’t want to leave a huge sum of money for our kids. Really we just want to have enough so that the costs of raising them is covered. My sister and brother-in-law have agreed to take on this task if ever we die. They live very frugally as well and are well on their way to FI.
Our legal will dictates that they can use our net worth anyway they need to raise our kids. This could involve simply helping them quit their jobs so that they can spend all their time with the kids (they already have 2 so they would be raising 4). I know that they would treat our kids like they were theirs. So I trust that they would use our investments wisely to simply provide the best life for the whole family.
We started saving $60/month when we cancelled our life insurance. We feel we are comfortable with the added minimal risks in exchange for a significant savings over a long period. If we invest the $60/month over 20 years in a North American market indexed ETF generating on average 7%, we would have $30,000. That is $30,000 that we could use to take a trip around the world.
One alternative to cancelling our life insurance is to just get a smaller limit as a safety net. I did a few quick online quotes and we could get $100,000 of joint coverage on a 20 year term for about $20-$25/month. I don’t think it’s worth it for us. But it’s definitely an option for those looking to FI and want a little extra security in case one spouse dies.
Another option that we have considered is getting critical illness coverage. This type of coverage would provide a lump sum payment if one of us were to be diagnosed with a specific list of critical illnesses. This would be beneficial, as a critical illness may be our biggest threat. If ever we had to require some sort of uninsured medical treatments, such a coverage would be helpful. Again, the risks here are minimal. Especially with a pretty generous provincial health plan.
So, we’ve made an informed decision to go without life insurance because we don’t feel we need it at this time. Many people may think we’re crazy but…one of the many benefits of being FI is that you or your family doesn’t need to rely on a large sum of money to cover your debt and expenses should something happen to you. That said, every situation is unique, cancelling life insurance may not be the right move for you, but I challenge you to revisit your insurance coverage needs on a regular basis.