Should I renew my life insurance policy?
February 20, 2014 2:40 PM   Subscribe

My parents bought whole life insurance when I was born and it needs renewed. I was going to let it lapse, they want me to renew - do I really need life insurance?

As the title says, I was going to let the insurance lapse as I'm a healthy late 20s male with no wife, kids, a decent savings amount and don't have much debt (3K remaining on a car loan). The only thing going against me is I have a preexisting condition (cancer) from when I was 10. They want me to renew since they were told by their agent that I'll be hard and expense to insurance if I let it lapse, I say it's not worth the premium.

It's a $10,000 policy for $80 a year, is it really worth it? I follow Dave Ramsey's advice who says it isn't worth it (get term when it's needed), but wanted to get the community's opinion or who might be more experienced with it.
posted by lpcxa0 to Work & Money (18 answers total) 1 user marked this as a favorite
If it is whole life, doesn't it have a cash value? Can you cash it out?
posted by kellyblah at 2:42 PM on February 20, 2014 [2 favorites]

In general, no, someone in your condition doesn't need insurance. That said, $10K is pretty much a trivial amount of insurance. If you think this cancer thing might come back then it may give you some piece of mind to know that for $80 a year you get $10K to cover funeral expenses.
posted by GuyZero at 2:43 PM on February 20, 2014 [3 favorites]

Do you even know if you can get term and what the premiums would be? Statistically, you have an increased risk of cancer recurring. You may not have a partner or kids now, but you also don't know if you'll be able to get insurance later.

IMHO, whatever life circumstances, everyone who can should carry enough insurance to pay for their own funeral. Yours is dirt cheap, and frankly $80 a year to make your parents feel better is peanuts.
posted by DarlingBri at 2:47 PM on February 20, 2014 [3 favorites]

Statistically I know that I have a higher chance of cancer returning, however maybe I'm confused on how insurance policies work because the math doesn't add up to me.

I'm currently 28, and let's say I have a life expectation of 90. That gives 62 years of living before life insurance is needed (not taking into account other factors such as kids, wife, etc.), I pay out alittle under 4500 through my life time. In the best case scenario, I double my money if I carry the insurance for the rest of my life or I take that money (I can cash it out) and invest it, eventually using it for a downpayment on the house.

If my situation changes, get term life. I understand that this isn't perfect as I can get hit by a bus tomorrow but I guess besides piece of mind, why would I carry insurance?

I also get supplemental through work but the way I understand that, it's only if I die in line of duty which at this point is getting shocked by a computer monitor.
posted by lpcxa0 at 2:57 PM on February 20, 2014

Given you may not be able to get term life because of your pre-existing condition, you should renew the policy. $10,000 isn't much, but it's better than nothing. Probably it's enough for your beneficiary/ies to cover funeral expenses should you pass.

My parents also bought whole life insurance for me when I was born. It's a $5,000 policy for about $24 per year. I'm also insured by a term life policy at work which is enough to pay off my mortgage and all of my debts in full should I pass, with some left over. I renewed the whole life policy, changed it to my name, and named my wife as beneficiary -- because, why not? Who knows if an extra $5,000 might help? I do have an option when I turn 38 or some such weird age to buy additional insurance at the same rate with no medical exam, but I don't think I will do that. Maybe I'll cash out the policy, but I really don't know what the difference is between whole life insurance and term life insurance, other than I've been told whole life is a better and more comprehensive policy. I should probably look that up.
posted by tckma at 2:59 PM on February 20, 2014 [1 favorite]

I hate to macabre about this, and I don't know how much it affects your calculations, but:

I am not sure why you assume that you have a life expectancy of 90. If we assume that you have average health, cancer not withstanding, and live in the United States, your actuarial life expectancy is probably 77. Source.

That said, I have no view about whether you should have life insurance.
posted by willbaude at 3:05 PM on February 20, 2014

There is no reason for you to carry life insurance. You aren't protecting yourself/your family against anything. If you have savings, your estate will be able to pay for your funeral. If for some reasons your savings are insufficient to pay for your funeral, then you are essentially broke and you need the cost of the life insurance to pay for your current expenses (which are guaranteed to occur) rather than your funeral expenses (which are only possibly going to occur, and can be eliminated by your descendants if they choose not to have a funeral to save money). More importantly, if you ever do need insurance (for instance, by having dependents), then this life insurance policy is not sufficient for them anyway.

The only reasons you've been given here to have insurance are that "it feels good". That's silly. Insurance costs money, and it is providing you with zero benefit. Get rid of it right now and move your money to investments that will help you when you are alive (when you want them) rather than when you are dead (when you don't want them).

Alternatively, feel free to send me $80/year, and I will happily provide you with chocolate that will make you feel better than the existence of that life insurance policy.
posted by saeculorum at 3:10 PM on February 20, 2014 [2 favorites]

Life insurance isn't for when you die at 90. Its for when you die at 50 with a teenager and a mortgage.

10k is so trivial in that context its hardly worth it. Not to mention whole life is a bad deal. Cash it out. When you get married and have a kid - then get it,
posted by JPD at 3:16 PM on February 20, 2014 [10 favorites]

I pay out alittle under 4500 through my life time. In the best case scenario, I double my money

Umm, no. You're not counting inflation or the time value of money. If insurance companies were really paying out twice as much as customers paid in, even when a customer lives to their expected lifespan, they would all be bankrupt. Investing 80 bucks a year for 70 years into an sp500 index fund would have a much higher expected payout than your policy. If you die early, you come out ahead, if you live long, you will have "lost" money on the deal, thats how insurance works.
posted by banishedimmortal at 3:31 PM on February 20, 2014 [6 favorites]

I suspect that if you want insurance now, the preexisting condition will not be a barrier since it was so long ago, assuming your health has been good since then. I also suspect that your statistical chance of cancer is not elevated, since again, the cancer was so long ago and has not recurred. So you should be able to get term life now or in the future if you want.

So, if you are uneasy about being uninsured, and/or want your parents to be happy, then get term life now, and then afterward, dump the whole life. The agent may ask whether you intend to dump your present policy; say yes. As someone said above, whole life is a bad deal.
posted by JimN2TAW at 3:33 PM on February 20, 2014

Renew or don't. I only have two questions:
1) As mentioned check current and future cash benefits
2) Is there a clause that permits you to increase the face value without a physical and/or at a guaranteed rate. Then your decision based on life plans.
posted by rmhsinc at 4:25 PM on February 20, 2014

This is a bad, overpriced policy for which you have no use. (For comparison, I pay $120/year for a $200,000 policy. And I'm 35, married, with a child, and I'm the sole provider.) Drop it and don't look back.
posted by waldo at 6:32 PM on February 20, 2014 [2 favorites]

I pay out alittle under 4500 through my life time. In the best case scenario, I double my money if I carry the insurance for the rest of my life

As banishedimmortal points out, you haven't accounted for inflation/value from investing the money, which becomes quite significant on the scale of decades.

You're paying $80 a year for a $10000 policy. And yes, if $80 now was $80 forever, with no way of earning interest, it would take the insurance company 125 years to break even, and you'd come out ahead if you died at any age prior to 125.

But if you can earn 3% interest on it (which, long-term, is pretty reasonable for "safe" investments, even if it seems ludicrously high in today's economy), the break-even point is about 52 years. The insurance company wins if you live to be older than 52, you come out ahead if you die before that.
posted by DevilsAdvocate at 6:51 PM on February 20, 2014

cash it out. 10 grand is chickenfeed anyway. be like me, when you die, your sibs get the assets and your cat gets the corpse.
posted by bruce at 9:44 PM on February 20, 2014

The only reason to keep this is if it allowed you some advantage at some point in the future when you decide to buy real insurance. Look closely at your original policy or have the agent explain it to you -- do you get a preferred rate or can you forgo underwriting or skip the physical? I doubt this is the case, but it's worth checking. Your cancer history won't prevent you from being able to obtain insurance, but it will be more expensive and the underwriting and the physical is what will determine your rate.

10,000 dollars is barely enough to cover a basic funeral and that's really not the reason why people buy life insurance. Your existing debts will be transferred to any other cosignators on your loans, so typically a car loan or student loans won't hurt your loved ones after you kick the bucket. Maybe it's important to you that you have a nice casket and grave stone -- I figure if I'm dead I don't care about that and if it's that important to my survivors that I not have a pauper's burial, then they can foot that bill.

Life insurance exists so that when you die, your family doesn't have to deal with losing their house while they are also grieving you. So that your son doesn't have to quit college and get a job because you're not around to pay tuition anymore. The amount you need is calculated over decades and it is commonly hundreds of thousands of dollars if not millions. You buy it when you start to have people you care about who depend on your income (ie when you marry, have kids, buy a house, etc) and you get rid of it as your debts lessen, your predicted years of productive income lessen, and your dependents are less dependent on you. This is mostly term life insurance I'm talking about here. You pay a premium every month/year (however you do it) and at the end of that term (typically 10 or 20 years) the money you've paid as premiums is totally gone and you no longer have insurance. This is different than whole life insurance, where you are paying into an account that matures at some point and you can the access that account.

You are probably holding whole life insurance which has a cash value after some policy defined period of time. Because the insurance company is taking your premium money and then investing it on their own, there's some point at which they have made the ten thousand dollars they've promised you when you die and everything else is extra money they are taking and investing. Most policies allow you to draw money out of this account as long as the insurance company is still making their money and they still have enough to cover your death benefit. (Your insurance company probably made the 10,000 dollars they needed to honor your policy long ago) Insurance agents try to convince people to buy these policies as a supplement to their retirement income, and hey, you'll get free life insurance out of the deal. My read of all this is that it generally doesn't make a lot of sense to let your insurance company manage your retirement investments because you can't easily access the money, nor can you dictate how the money is invested, and the cost of term life insurance is trivial when compared to what you are putting away for retirement.

Getting back to your question, 10,000 doesn't do much for you after you're dead. 10,000 isn't much of an investment to draw a low interest return off of. 10,000 of term life insurance (assuming you could even buy that low of an increment) would likely cost you extremely little even with your cancer history. There may be some cash value to your account that you could take now. There may be some way that this existing policy guarantees coverage in the future for when you decide to buy a real amount of life insurance, and you might decide 80 bucks a year is worth it for that alone, but I am skeptical this is the case.

I think what I would do is look closely at your current policy and try to figure out the cash value question and future guaranteed coverage question. Then, I'd walk into a insurance agent's office and apply for a real amount of term insurance, like $500,000. You'll do a short questionnaire, they'll set up a insurance physical and blood test and then give you a rate after it goes through underwriting. You don't have to actually pay for anything or sign a policy, but you'll have a more precise idea of what your current policy means and whether you should keep it.
posted by Random Person at 10:38 PM on February 20, 2014

You need to find out the terms of the policy. Perhaps you can increase the insurance or qualify for other (term?) insurance without a physical or any questions. The $10k might be something that could be leveraged to help your future family/partner or to make sure your parents won't have that burden. And, for $80, you get to make your parents feel like they made the right financial choice all that time ago.
posted by Chaussette and the Pussy Cats at 11:27 PM on February 20, 2014

Check out the terms of the policy as suggested above. It is a little wierd to me you are still paying on this 20 some years later. The whole life policy i bought for my daughter was "paid up" in 15 years, meaning i paid a nominal amount for 15 years and now she will never pay another penny. On top of that part of the dividends were used to purchase more life insurance, so her 10K policy that she will never pay another penny on is worth something like 13K in life insurance and 600 cash. There is also a guaranteed insurability rider where she can purchases additional insurance if she so chooses, even if she has health issues.

It is about impossible to buy just 10K in life insurance anymore. As an adult, term is the way to go, but don't let this policy just lapse without finding out a little more about just because it is the dreaded whole life. Those policies do have some purpose. Cash value if nothing else.
posted by domino at 9:01 AM on February 21, 2014

Dump it.

Whole life is usually very expensive.

Also, you don't need insurance until you die, you only need insurance to protect and help those you've left behind prematurely. As a single person, that's not anyone.

That's why term life. You select a term 20 or 30 years, and then you stop with it. Because after 30 years, you presumably have your financial shit together and anyone who might have been counting on your income is independant, or your mutual assests are enough to take care of them.
posted by Ruthless Bunny at 10:48 AM on February 21, 2014 [1 favorite]

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