I'm often asked why get life insurance if you're financially independent. It's a good question that merits a deep dive. I became financially independent in 2012 and have life insurance because I had children in 2017 and 2019.
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 also click on the audio version of this post if you scroll to the bottom.
Benefits Of Life Insurance If You're Financially Independent
Here are seven key reasons why you should get life insurance after reaching financial independence or keep an existing policy.
1) 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 should 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.
2) You want to provide liquidity.
You may leave 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 to diversify giving.
Even if you have a trust and can avoid probate, illiquid assets take time to sell. You may also not want your heirs to sell certain assets.
On the other hand, life insurance payouts can be available to your beneficiaries in as quick as seven days. However, the typical payout is 30 days, which is still much faster than illiquid assets can usually be sold.
3) 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.
If you set up a life insurance trust, it doesn't count towards the $11.58M per person estate tax limit, provided it has 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.
Here's a cool graphic on how a life insurance trust works. You create the life insurance trust as the Grantor and the life insurance policy proceeds are passed onto your beneficiaries. This structure allows the proceeds to pass on without estate tax.
4) The premiums paid are 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 to get life insurance if you're financially independent because you can afford it. And in turn provide greater security for your family.
It's the same logic as comparing people who can pay cash for a home but take on 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.
5) You still 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 in the last recession due to being over-leveraged.
Further, if you want your heirs to hold onto the assets you leave behind for sentimental reasons or because you believe they are a good investment, life insurance can help.
6) You have or plan to have dependents.
If you achieve financial independence at a young age, fantastic! You may have dependents already or plan to in the coming years.
When you have people depending on you or want to start a family soon or in the not too distant future, it's a good idea to shop around for life insurance rates.
Life insurance premiums rise as you age, and can spike dramatically if you develop a health condition later. Use your youth and good health to save money while you can and protect your family.
I wish I bought more life insurance before I had kids when I was younger and had fewer items on my health records.
7) Your estate's value is above the taxation limit.
Given you've got to pay ~40% tax on every dollar above the $11.7M estate tax limit per person ($23.4M per couple), your heirs might have a large tax bill if you are far beyond the limit. Hopefully, the estate tax threshold amount will continue to go up. However, I wouldn't bank on it with President Biden.
A life insurance policy can help your beneficiaries pay for any tax liability from your estate. High property taxes and ongoing maintenance costs are the reasons why many historically mansions are gifted to the state. Their heirs simply couldn't afford to take care of them.
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, the ideal net worth amount for retirement. Ultimately, 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 kids will get an extra million dollars in case I'm stuck in a ravine somewhere with my car on fire. And I like that life insurance will pay for a good portion of my estate taxes if the estate tax limit gets lowered back down in the future.
It also makes me happy knowing that my kids 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.
Financial Independence And Life Insurance
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.
Get Free Life Insurance Quotes Instantly
If you want to get free quotes from top insurers for a new life insurance policy today, check out PolicyGenius. You can check rates online with just a few clicks. And you can also talk to one of their life insurance reps to get personalized help for free.
Working with only highly rated life insurance companies, PolicyGenius shops multiple plans to help you deliver peace of mind to your family. Get a free quote today.
During the pandemic, my wife was about to double her life insurance amount for less money with PolicyGenius. We now have the same amount of life insurance coverage, which makes perfect sense since we are equal partners in raising our children and managing our finances.
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