I got this via email from a two-doc couple a while back.

Q.

We have over $1M in invested assets. I am married to another physician. We have only ever carried $1.4M in life insurance each and the maximum (66% of salary) for disability.  I bought multiple disability plans and two term life insurance policies for each of us long ago with the idea of slowly dropping them as our invested assets increased.

Now, we are at the point where we could drop the life insurance and reduce the disability. The life insurance is a pittance because we both have the ultra-preferred rates $550/year total each for $1.4M total each. However, the disability insurance is a sizable investment each year. About $12k after tax for me and $8k after tax for my wife. We both have dual Guardian plans, and I have an extra Principal plan for me (She is also covered through her job).

That said, I’m at the point to implement my plan and can’t bring myself to do it. I can’t be the only one struggling. Any advice?

A. 

This is a very important question but unfortunately one with no right answer. A key aspect of this whole idea of insuring only until financial independence is to actually drop the coverage upon reaching financial independence.  This can even be done gradually as you approach financial independence as you originally planned. It is important to recognize that your need for life and disability insurance is greatest in the beginning when you have a high potential future wealth but have not yet converted any of your time and work into actual wealth yet. Then as you gradually convert your time and effort into actual wealth throughout your life, that need for insurance gradually decreases until it eventually disappears. If you continue to pay premiums at that point you are not insuring against financial catastrophe, you are making a bet against an insurance company and hoping you will win. That isn’t necessarily a bad thing to do (especially if you aren’t feeling well) but it is a different thing to do. For example, some people choose to ride out their level-premium term insurance to the end of the term. Since the premiums are level, they recognize that they overpaid for insurance in the beginning and are now “getting a good deal” on it. You can avoid that issue with an annually renewable term policy.

Another aspect of your situation worth discussing is the fact that in some ways you are married to a life and disability policy. Each of you earns a great living and I suspect you two could live very happily on just one of your incomes. One might argue that you don’t really have a need for life or disability insurance at all already. What you need, is a plan in the event of the disability or death of one of you. If the plan is to live on the other’s income, you could have dumped all this insurance years ago. That’s a totally different situation from mine where my spouse’s professional training is in school teaching, which earns an order of magnitude less than an emergency doc in this part of the woods. I suppose there is a very small chance of both of your dying prematurely or becoming disabled at the same time. You might be able to find a life insurance company willing to sell you a term second to die policy (probably they’d want you to buy a permanent product to get that feature) but I doubt that any company offers a second to be disabled policy. And of course there is the risk that you cancel insurance, then get divorced and maybe even remarried and find you now have a need for insurance but are no longer insurable. Again, it seems a relatively low risk and maybe not one worth insuring against.

I am also surprised to hear you feel that a million is a large enough sum that you’re already ready to cut back on coverage. That amount of assets can probably only be counted on for $30-40K a year of income if you’re going to start drawing it in your early 40s. That seems much less than I would expect most two-physician couples would be use to spending. Heck, it would only cover my mortgage payments. If $1 Million makes you rethink your coverage, you’re probably dramatically overinsured. If you have really maxed it out, I wouldn’t be surprised if you have twice as much disability coverage as your actual expenses.

Another option to save money might be to cancel some disability insurance riders. A cost of living rider becomes less valuable each year and you certainly don’t need to be paying for a future purchase option rider. If you’ve bought riders you now regret (such as the retirement benefit rider or catastrophic disability rider) you could cancel those too and save some money.

When To Drop Life Insurance

Let’s examine carefully when a reasonable time might be to drop life insurance. The key is to go back to the decision to buy it. What were you planning to use the proceeds to cover in the event of the death of the insured? Perhaps your plan was to:

  • Pay off a $400K mortgage
  • Put $100K toward college for each of three kids
  • Use $1M to create a nest egg that would pay for spouse’s retirement at 65
  • Maintain an income of $100K per year from now (age 35) to 65 for spouse.

Let’s say you totaled that all up, made some projections of returns, and decided to buy $400K + $200K (it had time to grow) + $1 M + $2M = $3.6M of insurance. Now here you are a few years later at 45. The house is paid off. You have the college accounts adequately funded. You have a million dollar portfolio. If you were buying insurance today, how much would you buy? Well, maybe now your need is only $1.5 Million. So technically, you would drop $2.1 Million worth of coverage. Reassess again in 2 or 3 years and maybe you can drop another $500K-$1M.

When To Drop Disability Insurance

Disability insurance can be a little more straightforward. You only need enough disability insurance to cover your after-tax monthly expenses and your retirement savings. If you’re done saving for retirement (it wouldn’t be unreasonable to expect that $1M to grow to $4M over the next 20 years and cover retirement), then you only need enough disability benefit to cover your monthly expenses. If you spend $10K a month, then you need $10K of benefit.

Your Situation

Personally, in your situation where it isn’t even clear that you need the life and disability insurance at all, and you’re paying $21K total for it (compared to the $6K I’m paying,) I think I’d take a moderate approach. You obviously weren’t comfortable with being each other’s life and disability policies before so you probably aren’t now. Why not cancel one disability policy each and cut your life insurance back to $500-$1 Million each and give it a year or two and see how you feel about it? Then you can reevaluate.

What do you think readers? How did or will you decide when to drop your life and disability coverage? Will you carry it all right up to the point of financial independence or drop it gradually as you approach? Comment below!