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Life Insurance recommendations still a mystery

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.

1

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

2

This case study may be of interest to you.

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

Dan

3

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

4

Well, one way you can tell if the insurance recommendations are out to lunch is to run the survivor reports and kill yourself off in one of the years in which you purchase insurance. Assuming that your spouse is the low earner, their standard of living should be exactly that calculated for you in the main reports. If it isn't, then we have a bug, but if it is, then you really do need insurance to maintain their standard of living and you'll have to figure out why or file a support ticket and provide us with your database and details on which profile is giving you the problem so that we can figure out why the life insurance is being purchased since we don't see unnecessary life insurance purchases in tests.

Best,

Dick Munroe

5

Hi

A quick query on effect of "Contingent Planning" on Lower earner -spouse required insurance.

When I don't use the Contingent Planning module, no insurance is recommended on lower earner spouse. However if I switch on the Contingent Planning module (no other changes made, no boxes ticked etc), the program recommends a significantly higher insurance on the lower earner spouse.

Why is this so? I just want to check if my understanding is correct. Thanks.

6

Hi

A quick query on effect of "Contingent Planning" on Lower earner -spouse required insurance.

When I don't use the Contingent Planning module, no insurance is recommended on lower earner spouse. However if I switch on the Contingent Planning module (no other changes made, no boxes ticked etc), the program recommends a significantly higher insurance on the lower earner spouse.

Why is this so? I just want to check if my understanding is correct. Thanks.

7

Please call me at 617 834 2148 and we'll discuss this. best, Larry