I was very surprised at the high level of life insurance ESP recommended when I ran it today. I used the program several years ago and it suggeseted I decrease insurance levels by a considerable amount.
Can you point me to a reference or otherwise explain how ESP arrives at the suggested life insurance level? In particular, what are the major variables that it keys on.
Thanks
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There is actually a bug in the current release, fixed in the upcoming update, that overinsured due to a mishandling of Medicare B costs in the insurance calculations.
However to answer your question, basically what happens is a level of consumption is picked, and the resulting financial details calculated. Then the amount of insurance necessary to maintain the standard of living in the event of death of one spouse or the other is calculated. The life insurance spending is then fed back into the consumption calculations and that goes back and forth until the difference in the standard of living is "small" for all the survivor states. Then another consumption is picked (I won't go into the details of how) and the overall process begins again. Once the difference between one pass and the next of the "outer loop" is "small" ESPlanner is done and you get your reports.
Small is usually defined as < $.0001, probably overkill but that's what was picked.
Best,
Dick Munroe
I can see from my regular asset schedule that the cash value of the policies are taken into account when calculating annual consumption. But are the face values also taken into account when calculating consumption? I should add that the program shows recommended amounts of zero for Life Insurance on the 2012 Suggestions schedule. Thank you.