Life Insurance Recommendations Very Confusing

ESPlanner's life insurance recommendations continue to baffle me. I occasionally ignore them because I can't always explain them.

I'm working with a couple who are in their mid 50's who will be retiring in about 3 years. Both spouses have pension income ($40,000 for the husband and $55,000 for the wife) with 50% survivor benefits; household Social Security income is about $84,000; regular assets total about $800,000; and retirement accounts total about $1.5 million. When I run the analysis using a 7% nominal rate of return and a 3% inflation rate, no life insurance is recommended for either of them. When I change the rate of return to 5%, ESP recommends about $10,000 of life insurance for the spouse, for two years only, starting in 15 years. And when I change the rate of return to 3%, ESP recommends about $1 million of insurance for the wife this year, none for the next 10 years, then random amounts of life insurance for the spouse over the next 20 years (e.g., $635,000 in 2024; $149,000 in 2026; $787,000 in 2030; $480,000 in 2034; $0 in 2040; $220,000 in 2042; $0 again in 2043; $150,000 in 2045, etc.).

These are the most baffling life insurance recommendations I've ever seen (they jump all over the place and only come into play when I reduce the nominal rate of return).

Any insights would be greatly appreciated.

I'd be happy to upload the database if someone at ESP wants to look at it.



Not seeing the profile, this makes sense as the couple needs the higher RoR to maintain their living standard per adult (LSPA) in the event one of them dies early.

With the higher RoR, their assets earn enough to match the LSPA for the remaining spouse when combined with other income sources.

With the low RoR, their assets don't earn enough and the surviving spouse would suffer a reduced standard of living without the benefit of the recommended life insurance. While the LI recommendations jump around, they should match (year by year) the amount needed to supplement other assets and income streams.

There are probably other factors involved such as when their pension income starts, when SS starts for each spouse along with spousal benefits, etc. that occur in future years and change the needed LI over time. Also, ESPlanner, by default, tries to smooth consumption by holding tax-sheltered withdrawals constant (within certain constraints such as RMDs) while varying the spend down of regular assets to make up the delta in their income needs. With the lower RoR, they are probably constrained at various points in time with their regular assets. If I'm right, this should show up on the reports.


dan royer's picture

Yes, that's a strange one. Sometimes it helps to look at the survivor reports to see where the income is coming from (or not coming from).

What's also interesting about this profile is that both spouses have somewhat similar pension and Social Security income streams (the husband's pension is a little lower, but it has a small cost of living adjustment, whereas the wife's does not) and everything else (regular assets and retirement accounts) would be roughly the same regardless of who dies first. But life insurance is only recommended for the wife. I haven't had a chance to drill down on the details, or play around with the survivor reports yet, but will do so to see if I can figure out why the numbers look the way they do.

dan royer's picture

I'm suspecting it has to do with the pensions. I'd be curious to see what happens if you copy the profile and just eliminate the pensions--or set them both at 100% survivor benefit.

I'll modify the pension income as you suggested to see what happens and report back.

Since insurance recommendations are so confusing to so many, is there any way for a future update to ESPlanner to include some sort of audit trail showing how life insurance is actually calculated? Maybe a simplified explanation of the behind-the-scenes calculations (I'm sure the actual math is quite complicated). It seems like whenever someone has a question about recommended life insurance, we're always just sort of guessing at what might be happening and explaining it in general terms (i.e., it's whatever amount is needed to protect your living standard). While I understand in general how the loss of income, or the timing of income, or different rates of return would have an impact life insurance, it would be very helpful if there was a report showing how the different factors actually influenced the calculation. It would take some of the mystery out of this.


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