Lots of people reassess their insurance arrangements after repaying their mortgage.
That’s fair enough. It’s a significant financial milestone. A lot of people also associate insurance with debt — it’s common for people to arrange insurance around the same time they take out mortgages (and it’s often the same people advising on getting their mortgage and their insurance).
Lots of people, upon repaying their mortgage, reassess their insurance arrangements and decide to make some changes. This often includes cancelling their income protection insurance.
I often think this is a bad move (or was a bad move, since I usually find out about this after-the-fact).
A comfortable retirement probably relies on retaining your income
If you’re mortgage-free, it might feel like you’re less reliant on your income. You’ve managed to get rid of a significant household expense. In fact, it’s probably been the biggest household expense for much of your adult life.
However — you need to step back, think about the big picture, and the long-run.
Most people don’t build wealth in a linear fashion. There are times where we experience financial headwinds, and periods where we face financial tailwinds.
Having a mortgage can represent a significant headwind. Once people repay their mortgage, they often find themselves in a position where they have the same income but substantially less expenses — and an ability to save that they may not have had at any other point in their financial life.
Chances are, you’re experiencing financial tailwinds, thanks to all of your hard work.
For most people, this is the time to build wealth so they can retire comfortably.
What happens if you can’t work?
We usually think of retirement as a voluntary thing. However, retirement often happens involuntarily — because of displacement from the workforce, or for health reasons.
If something happens to you, so you have to retire early, or take a significant amount of time off between now and when you retire, will this have a significant impact on your ability to retire comfortably?
If so, then it’s still important to protect your income via insurance.
If you’re in a position where you feel assured about your financial trajectory, then congratulations! Cancelling your insurance might be appropriate.
If your answer is equivocal, you might be able to make some adjustments to your policy. For instance, you could explore increasing your wait period further, or you could investigate whether protecting a lower proportion of your income may be appropriate.
In this article, I’ve talked only about income protection insurance, because this is the type of insurance that strikes me the most in situations like this. But consider it when thinking about other types insurance, as well.
Income protection insurance will probably be the last personal insurance I cancel
Let’s put it this way: when my wife and I are nearing the last 5 to 10 years of our working lives, my guess is that we won’t have a need for life insurance, trauma insurance, or total and permanent disability insurance. Our need for cover will have reduced gradually over the years as we’ve built wealth and are able to weather the financial consequences of these situations.
But we’ll probably have some form of income protection insurance right until the end of our working lives. This will be long after we’ve repaid our mortgage.
To be clear: I am NOT an insurance adviser. I have NEVER received commission or anything like it. I’m not saying this to make money. I’m saying it because the idea of people getting rid of cover, and later wishing they’d kept it, breaks my heart 💔