The following post is sponsored by SelectQuote, based in San Francisco. They’ve been around for over 30 years, and I had the opportunity to sit down with their CEO for an hour to talk about his business and how they’ve managed to grow for so long.
After giving folks a heads up about a common bait and switch tactic in the life insurance industry, I was asked by a number of people why I’d waste my money on life insurance premiums if I’m financially independent. It’s a good question that merits a deep dive because many of you will face the same dilemma once your passive income can cover all your living expenses or once your net worth reaches 20X your gross income. After all, you’re one of the few who care enough about your finances to read this site!
But I’m a little surprised why the folks asking couldn’t think of the many reasons why life insurance might be necessary after reaching FIRE. I guess if you haven’t reached FIRE, don’t have a family, or have never sat down with an estate planning lawyer, it’s hard to know.
Here are some reasons why life insurance is a good idea despite being able to self insure. You can click on the audio version if you scroll to the bottom.
Why Get Life Insurance After Reaching Financial Independence
1) Your estate’s value is still below the taxation limit. You may be financially independent, but your estate’s value might still be far away from the $5.49M limit per person. Anything you pass to your heirs beyond $5.49M per person gets taxed at roughly 40%. If you’ve got let’s say $3M left when you die, you can have up to $2.49M of life insurance get paid out tax free to people of your choosing.
2) Your estate’s value is above the taxation limit. Given you’ve got to pay a 40% tax on every dollar above $5.49M per person, your heirs might have a large tax bill if you are far beyond the limit. Leaving $8M as an individual would lead to roughly a $1,000,000 tax bill. A life insurance policy can help pay for the tax liability. High property taxes and ongoing maintenance costs are the reasons why many historically mansions are gifted to the state. Their heirs couldn’t afford to take care of them.
3) You believe you’ll die before the term limit is up. Despite all the blood work and physical exams, insurance companies can only come up with a best case guesstimate of when you will likely die. But despite all the actuarial data, you may know your health better than anybody. If you think you’ve got a greater chance of dying before the term limit is up, then life insurance becomes a better deal.
4) You want to provide liquidity. You may be leaving behind stocks, bonds, real estate, fine art, and collectibles, but they require an extra step to become liquid. Further, don’t assume that all your assets will neatly go to your heirs as your will directs. Probate court can tie up your assets for months or maybe years. Life insurance is a way of diversifying your giving.
5) You plan on setting up a life insurance trust. A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. A life insurance trust doesn’t count towards the $5.49M per person estate tax limit, provided it’s stood alone for a number of years. There is a limit to how much isn’t taxable, but you’ll have to check with an estate planning lawyer.
6) The premiums paid is worth the peace of mind. If you’re financially independent, the monthly premiums aren’t as big of a deal as they would be for someone who isn’t financially independent. Therefore, it’s easier for a financially independent person to afford life insurance to provide greater security for his/her family. It’s the same logic as people who can pay cash for a home taking out a mortgage because the interest rate is so low, compared to the person with poor credit who needs to take out a loan and has to pay a much higher rate.
7) You have a large amount of debt. You might have a massive net worth, but if you also have a large amount of debt, your net worth can disappear quickly during a downturn. The time to sell anything is during a bull market, not a bear market. Think about how many wealthy people had to declare bankruptcy due to being over-leveraged. Further, if you want to hold onto the assets left behind for sentimental reasons or because you believe it’s a good investment, life insurance can help.
Life Insurance Is A Good Deal
At some point, you truly may be sufficiently wealthy to not need life insurance. Maybe that net worth is over $10+ million per person, it’s an individual decision. But for the vast majority of us with dependents, having life insurance is a good idea. You can always reduce your coverage amount or cancel your policy as your wealth grows. That’s what I plan to do.
I like knowing that my wife and son will get an extra million dollars in case I’m stuck in a ravine somewhere with my car on fire. I like that life insurance will pay for a good portion of my estate taxes. It also makes me happy knowing that my son will never starve, even if my wife ends up spending everything or getting bilked out of everything I leave her through a revocable living trust.
Life insurance is relatively cheap for people on the healthier end of the spectrum. You do not want to wait until you have some type of illness before getting a quote. Just having something as common as sleep apnea can cause your premiums to quadruple.
If you’re middle class, then life insurance is even more valuable to your dependents than if you are rich. And if you’re wealthy, the cost of the premiums are such a small percentage of your income that it makes life insurance also worthwhile.
Providing peace of mind to your loved ones is a major reason why people buy life insurance. It’s a universal factor for people of all income levels, even those who are FIRE. SelectQuote, Amer
Readers, what other benefits are there to having life insurance after reaching financial independence that I may have missed?