Life Insurance Recommendations

I've read all the posts in the various threads on life insurance. I'm with the users who remain totally confused by the software's recommendations. I've looked around esplanner.com without success. Until in ran into the life insurance recommendations the planner is giving me I did think I understood that a key concept is consumption smoothing.

If someone is interested, I'd like to pose a couple of scenarios and learn what the life insurance recommendations would be and why. And I'd like to learn how to get results that take into account my preferences about life insurance.

Comments

You don't have preferences about life insurance. Insurance is calculated automatically primarily in order to preserve the living standard of your survivors, i.e., spouse and children. Life insurance will also be recommended if you are not borrowing constrained and have borrowed money to maintain your living standard. In that case, life insurance will be recommended in order to pay off any borrowed money.

Typically your needs for life insurance decrease over time because one generally accumulates assets over time and eventually no longer needs insurance to maintain the living standard of survivors.

You can always choose not to purchase life insurance in the real world, but you do so with the risk of dieing early and leaving your survivors with a lower standard of living than they enjoy while you are alive. If you choose this option, you can adjust the standard of living of your survivors downward until life insurance is no longer purchased.

Best,

Dick Munroe

dan royer's picture

This case study may be of interest to you.

http://www.esplanner.com/case-buy-right-amount-insurance

Dan

dan royer's picture

Thanks for the quick replies.

Our situation is that our only debt is a mortgage, $140,000. I'll retire in a very few years. My wife is much younger. If I die she will have ample assets and income. These will be ample even if she pays off the mortgage when I die. We have no children. We have not borrowed to maintain our living standard.

I believe that, if I die, my wife will have, without life insurance, a higher standard of living, given our assets. So I am puzzled that the program calls for $366,000 in life insurance.

The premiums start at 25% of the amount in the discretionary spending column and rise to almost 50% for many years.

(Thanks for the information that I have no choice about life insurance. If I am so stubborn as to not buy insurance, should I make an additional calculation on my own for each year, adding the life insurance premium to the amount shown for discretionary spending? But then don't I lose control of setting my desired discretionary spending?)

I did read the case study. Thanks. It makes perfect sense. If we had young children, our situation would be similar (smaller numbers!). It isn't.

Cordially, Joaquin

dan royer's picture

One of the important functions of the program is to calculate life insurance needs. This calculation is not a rule of thumb like what you might get from your financial planner or the the insurance industry. This calculation look at each year from now through the end and compares the living standard the survivor would have with the living standard the survivor has with both alive. So it is designed so that we don't have to guess or assume or use a rule of thumb. The program knows to the dollar how much insurance each person needs to keep the survivor's living standard up to what it was before. You can see this play out by running a survivor report. If you want the survivor to have a lower living standard in the event if your death, you can set that in the estate folder area. This will lower or eliminate life insurance recommendations but of course it means the survivor has a lower living standard. Remember too that contingent planning allows you to adjust for contingencies such as "we won't need that special expenditure of 20K for a second car that we entered," or "the surviving spouse would go back to work if I die" or "my husband won't be getting that inheritance we entered as a special receipt." Such adjustments will all impact the life insurance recommendations.

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