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Low Survivor Standard of Living and No Insurance Recommended

Submitted by texorado@aol.com on 15 March 2007 - 10:48am

Hello,

I'm trying to figure out why ESP (v2.8.5 R1) isn't recommending Insurance for my spouse and me.

I realize this is may be a liquidity thing, but why doesn't ESP recommend insurance for me when my spouse will have a greatly reduced SL if I was gone? (Note that I added some Indebtedness to the configuration, but that didn't push her Survivor's SL up much.)

Also, increasing the Survivor's SL percentage (in the Estate section) allows me to force her SL up to the "proper" value, but with manual iterations.

Thanks.

Doug

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Submitted by Laurence Kotlikoff on 5 April 2007 - 11:21am.
1

HI, I need to see your data base to figure this out for sure, but I suspect that your surviving wife is liquidity constrained and has a low living standard as a young widow and a high one as an old widow, where the living standard when old exceeds the living standard you enjoy when you are both alive. When the program comes up with its life insurnance recommendations it ignores survivors' liquidity constaints. So in your case, it's saying to itself. Gee, if your widow can borrow, she'll have a higher living standard with no insurance as a widow than when you are still kicking. So it recommends no insurance. But then, when we come to telling the widow how to consume, we recognize that she will, potentially, be constrained and shows you results that implement the consraint.

So think of it like this. If your widowed wife can borrow, she'll be materially better off Each and Every Year in terms of living standard with you gone even if you buy no insurance. But if she can't borrow, she'll be better off on average over her remaining lifetime, but worse off early on and a whole lot better on later in life.

My bottom line: Watch your back. Larry

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