Most people understand that life insurance is an important part of protecting your family’s financial security in the event of a worst case scenario, but life insurance works a little differently for people dedicated to FI. While you certainly still need life insurance to protect dependents, you may find that, over time, your need for life insurance does not persist beyond your FI date.
Follow along to learn why life insurance is important while in pursuit of FI, what happens when you reach your FI goals, and how to get the most in return for a life insurance policy you no longer need.
Why life insurance is important
If you are in the FIRE movement, you already understand the basics of how a solid nest egg can provide financial security to a point where you may not need to work. This is an amazing concept, and it applies perfectly to life insurance.
With FI, you know that a certain level of savings and investments can support a lifestyle at a certain monthly cost. For example, if your family lives on $3,000 per month, you can calculate a savings and investments target that can maintain that lifestyle without working. But what happens if the primary income earner were to suddenly pass away. Not only would FIRE be out the window, the entire family’s financial stability might be in question.
This is where the power of life insurance comes in. If you already know what you need for FIRE, you should have life insurance for at least that value. If you know your family can get by with $500,000 in savings, you should have at least $500,000 in life insurance, for example.
This way, if something does happen to you, your family can still enjoy financial stability and FIRE. But something interesting happens with FI families that might make life insurance obsolete once you hit your FIRE targets.
What happens with FI: self insuring
The entire point of FIRE is to end your reliance on outside income to meet your family’s monthly living costs. If you can keep costs low and build up large investments, the cash flow from those investments can cover living costs without going to work.
But when you hit that point, your life insurance needs change dramatically. You no longer need life insurance if you have enough money in the bank to support your family indefinitely. This is where the concept of self-insuring comes into play.
The easiest comparison here is with a mortgage. Mortgage lenders require you to have homeowner insurance to replace the property in the event of a dramatic loss. But if you have hundreds of thousands of dollars in the bank that you don’t need for anything else, you may be able to cover your home insurance needs without paying a home insurance company every month. (This is very risky and I don’t suggest it. This discussion is more about the concept of self-insurance.)
The same can happen with life insurance. The purpose of life insurance is to provide income for your family to live without your income. If you can do that anyway, you don’t need additional life insurance or the monthly costs that come with it.
The right way to cancel an unneeded life insurance policy
So let’s say you have term life insurance, the most popular form of life insurance and best for most FI seekers, and you hit your FI goals. You have enough cash in the bank, funds invested, and a monthly cash flow that meets your family’s needs. Congrats!
You might just find that your life insurance is no longer needed at this point. If that’s the case, don’t just stop paying or cancel your policy right away. You may have some much more lucrative options available.
An aged, existing life insurance policy may have some built up value that you can cash out from your insurer if you cancel your account, but investors may offer you much more for your policy. While many regular investors are not familiar, there is an entire industry of investors who buy old life insurance policies, take over monthly payments, and collect any future death benefit. This means that even if you don’t need your life insurance any more, someone may be willing to pay you for it!
This life insurance value estimator tells you roughly what your life insurance policy is worth to investors today so you can sell your policy and cash in. That can further pad your FI savings and investment accounts for an even more ideal financial future.
Maximize your life insurance for the best value
The need for life insurance changes over time, and that’s okay. As part of the FIRE community, you may not need life insurance forever. But that doesn’t mean you don’t need it today or have to cancel a policy for nothing in return in the future.
Following the right strategy, you can get the best of both and offer your family the best possible financial protection at the lowest cost. That is what life insurance and FIRE are all about.