We generally do not recommend permanent life insurance policies because term life insurance is a lower-cost way to cover the financial risk an untimely death would cause to our families or dependents. Term life insurance provides life insurance over a certain period of your life. Pinpointing the exact term over which you need life insurance can be more difficult than simply determining that you need it. Choosing the term and deciding when you no longer need life insurance requires some financial planning on your part and an honest assessment of your financial status and goals going forward.
The Traditional Single-Income Path
The simplest term life insurance plan involves purchasing life insurance for the duration of your career and gradually decreasing the payout as you get closer to retirement. (You accomplish this by purchasing a “decreasing” term life policy, as opposed to a “level” term life policy where the payout—i.e., the “death benefit” in insurance parlance—stays constant.) The logic behind this is that if you die early in your career, you would have very little money saved for retirement. If you support a spouse/partner and/or children, they would need a lot of money to support their lives in the event of your early death. Alternatively, if you die five years prior to your planned retirement, your children may have already left home and graduated college. Your significant other was expecting a few more years of income, but they were also expecting you to be alive and spending some of that money, so even they likely do not need very much money. Most folks still have a little bit of coverage for this scenario, but we tend to fall into a contrarian viewpoint on this one.
In the scenario of dying five years before planned retirement with all children fully raised but a surviving partner reliant on your income, you probably do not need life insurance. Why? In a single income household, the earner was planning for retirement assuming that any retirement savings and investments would pay for the full lifestyles of two people. If only one person needs to survive off of the money, less money is required.
This does not necessarily mean that you can cancel your life insurance when you reach the halfway point to your retirement savings and investments goal. There are some costs that will likely remain fixed whether you have one or two people living off your nest egg. For example, do not force your mourning partner to immediately downsize the home: Assume the full property taxes, home insurance, mortgage (if not paid off) or rent remain for the surviving partner. However, your partner will not need to buy as many groceries as when there were two of you. Estimate how much it would cost to support one of you with your retirement savings and investments given the 4% rule. In other words, estimate an individual FI number in addition to your household FI number. Once you hit that number in investments, you can cancel your life insurance because the surviving partner could live the remainder of their life without worrying about money.
Most single-income households planning for retirement will reach this number later in the individual’s career, but it will still be years prior to hitting a full FI number. Saving money by not paying life insurance for multiple years makes calculating this number worthwhile.
The Dual-Income Path
While it has similar logic to the single-income path, the dual-income path is a bit more complicated to estimate. This again assumes any children are paid for entirely and grown. Just like the single-income methodology, it is important to know both the household FI number and a hypothetical single surviving partner FI number.
But you do not need to reach the full nest egg where a surviving partner could survive in perpetuity. Instead, you no longer need life insurance when the retirement nest egg combined with their income would be enough to allow the surviving partner to continue living at their current lifestyle, retire at the same age as planned, and then survive in perpetuity off the nest egg.
This is not as easily calculated. Assuming the surviving partner’s income could support all household expenses, this point is reached at the point of hitting “Coast FI.” Coast FI is when you have invested enough money that if you retired at normal retirement age the money would be enough to support you for the remainder of your life. In other words, you need to earn an income to cover your day-to-day expenses but do not need to invest any additional money.
From there, you can adjust according to whether the surviving partner’s income is higher than the household expenses, excluding expenses, or lower than them. A higher income means life insurance can end sooner while a lower income means you need a bit more of a nest egg saved before that life insurance can be terminated. The duration and amount of life insurance required for each partner will likely vary unless your incomes are similar. Since this is nuanced and based on the specific divide of your household’s respective income, it is worth consulting a financial advisor to figure out the right plan for you. In general, if you are part of a dual-income household, saving a little extra is not a bad idea since it is better to fund the grieving period of the surviving partner rather than provide too little money.
The FIRE Path
My suggested life insurance solution for those on the FIRE path simultaneously becomes a bit simpler and more complicated than the dual-income households due to the timing of life events. First the simpler: We generally recommend getting to the individual FI number before canceling life insurance. In other words, if you die early, your partner will not have to work another day in their life. However, there are exceptions. If you have side hustles and/or relatively passive income streams, you can hit the FI number minus the income earned from your partner continuing side hustles, part-time work, or managing passive income.
If you are child-free, that is it, and this path is likely simpler. However, if you have (or plan to have) children, this is where it gets more complicated. Your children are less likely to be adults by the time you retire if you are on the FIRE path; you should consider their needs when planning when to drop your life insurance. You will certainly be able to cancel it by the time you retire early since your nest egg will be enough to take care of their needs. However, you cannot necessarily cancel the life insurance once your partner’s individual FI number is met. Instead, calculate what support you would want to provide your children including any further education you intend to fund. Add this amount to the surviving partner’s FI number to determine how much money you need to accumulate before canceling your life insurance.
Again, everyone’s path is different, and this can be more complicated depending on the number of kids you have or intend to have, if either partner intends to stay home with the child or children for any period of time, or if each partner intends to retire early at different times. Consult a financial advisor to create the perfect plan for your family, but know that you do not need life insurance until the day you retire. After all, if your family uses life insurance, it is because there is one less person to support.
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