LIFE INSURANCE

[dm123]

In case it wasn't obvious until now, let me clarify what a C client means. It is a money-losing client. It is a client who take more time, effort and cost to service than any revenue or referrals generated by such client. This has nothing to do with policy size or cost. Do you really think an agent needs to explain to such a client that he is such a client?

No agent will go into someone expecting them to be a C client at the outset. Everyone starts off as a potential B client. And any good agent will want to have lots of B clients. Some of those B clients will turn into A clients.

That's totally fine and understandable - but in that case there is no reason for both to lose out - the agent with an unprofitable client and the client not getting serviced properly. Once the agent classifies client as C the agent should be reaching out to the client and explain why he is unprofitable (again, I'm being blunt on the thread, IRL massage the language etc obv.) and how they can move forward with everyone benefitting (agent with a profitable client or letting go of an unprofitable client and the client getting an agent who feels its worth their time servicing said client, either through client changing themselves and becoming profitable or moving to a different agent who does find that client profitable).

[ExGingi]

Can you disclose on the amounts of the death benefits? I'm curious what the numbers are

What's the point? I really don't see how looking into other people's situations changes anything for yourself.

The fact is that in one case the death benefit was large enough that leaving the proceeds with the company to pay a guaranteed 3% was sufficient to maintain the family lifestyle, and in the other case that would not be sufficient. These could be totally hypothetical cases.

The only way to really asses things is to do a proper (guided, if needed) introspection at what things might look like if you were gone yesterday. What adjustments to lifestyle would you want for your family (other than those that have nothing to do with money)?

[ExGingi]

That's totally fine and understandable - but in that case there is no reason for both to lose out - the agent with an unprofitable client and the client not getting serviced properly. Once the agent classifies client as C the agent should be reaching out to the client and explain why he is unprofitable (again, I'm being blunt on the thread, IRL massage the language etc obv.) and how they can move forward with everyone benefitting (agent with a profitable client or letting go of an unprofitable client and the client getting an agent who feels its worth their time servicing said client, either through client changing themselves and becoming profitable or moving to a different agent who does find that client profitable).

It is not unheard of that a successful agent will hand over clients to a protégé, whose time might be less valuable than that of the experienced agent. And you never know, different personalities click differently, a client might have been a C client for one, and turn into a better client for another.

[dm123]

Do you really think an agent needs to explain to such a client that he is such a client?

Yes, I don't think it's right for agents to assume their client is self aware of how much value/drain they are for the agent. Some people may be self aware enough to know. Many are not. How does the saying go? Common sense ain't that common.

[farmbochur]

If an expense based calculation yields higher coverage needs than an income based calculation, you're very likely to either not get approved for such high coverage, or not be able to afford it.

More importantly, you should recalibrate your lifestyle such that there's some margin between income and expenses.

[dm123]

More importantly, you should recalibrate your lifestyle such that there's some margin between income and expenses.

In general 100%.
Although some people may have other factors aside from income... For ex. If someone is financing nice vacations for the family every year through points/miles would that show on the income side? Spouse may not be as astute in that and would need a cash amount to replace.

[farmbochur]

This is so wrong (in this context - this is part of an UNDERWRITING guide). While insurance sales departments would love to sell as much insurance as possible, they in no way want to over-insure ANYONE, which is where financial underwriting comes into play. These numbers are THE MAXIMUM an insurance company will consider a person for (unless some plausible explanation exists to insure for more than these multiples). Obviously anyone can chose to protect themselves for LESS THAN WHAT THEY'RE WORTH, but to an insurance company looking at numbers, this is the general rule of thumb of what a person is worth in dollars and cents.

OP'er wanted to know a rule of thumb for calculating the face amount

is there a rule of dumb regarding how to calculate the amount and what plan to take?

[farmbochur]

Based on that logic, if someone has a fully paid for $100,000 vehicle which they use to drive to work, it should only be insured for an amount that it would cost to get alternate transportation, even if that would be for a much lesser vehicle. And if a person has some money saved up, maybe they should forgo the insurance altogether, because they can self-insure.

You've precisely captured my philosophy with insurance:

I obtain coverage against (financially) catastrophic perils or where I'm legally / contractually obligated to do so. However, I forgo subsidizing the insurer's expenses / profit margins on risks that I can afford to swallow.

[ushdadude]

You've precisely captured my philosophy with insurance:

I obtain coverage against (financially) catastrophic perils or where I'm legally / contractually obligated to do so. However, I forgo subsidizing the insurer's expenses / profit margins on risks that I can afford to swallow.

There are quite a few people I know who are self-insured. The #1 way to do that is:

More importantly, you should recalibrate your lifestyle such that there's some margin between income and expenses.

[farmbochur]

Again, this is talking about needs (which no-one can accurately predict for the future) vs actual current financial value.

I think both are tough to predict with a great deal of accuracy. In any event, a needs based calculation is far more useful than one based on earnings.

If a person is earning $100,000/yr, and is young, it is reasonable to anticipate that their earned income will increase over the years. The multiples quoted above take that into consideration. If you're only focusing on needs and the person earning $100,000/yr only needs $60,000 to live on, where is the rest of the money going?

A large share goes to taxes: fica as well as federal and state income taxes. Ideally, a decent share is being saved for retirement.

I have yet to hear about a person who received a death benefit complaining that it is too large, and they don't have what to do with the money. OTOH I am aware of two young widows, one who's husband left a life insurance death benefit which was sufficient to generate enough income with 0 risk and without need to touch the principal or make a fundraising campaign, and another who's husband left a smaller death benefit who will need to figure out how she gets by even after the death benefit and the money raised in a fundraising campaign.

No surprise that the subset of families that have suffered an untimely death aren't complaining about a benefit that is too large. I'm addressing the OPer's question and have provided a balanced recommendation. A solid financial plan should address both mortality and longevity risk. If someone is considering a face amount of 40x earnings, I think they'd be wise to reduce that to 25-33x expenses (less accumulated assets) and put the difference in tax advantaged investment vehicles.

[Yehuda57]

I have yet to hear about a person who received a death benefit complaining that it is too large, and they don't have what to do with the money.

No kidding

[Euclid]

No kidding

Well if the person died due to stress from building that "too large" death benefit....

[ExGingi]

I think both are tough to predict with a great deal of accuracy.

[Accurate] predictions aren't just tough, they are more likely impossible. Which is why the earnings based approach isn't making any predictions, it is using a formula to put a CURRENT value on a person (based on many years of industry experience).

In any event, a needs based calculation is far more useful than one based on earnings.

Until it is not, due to unforeseen circumstances.

A large share goes to taxes: fica as well as federal and state income taxes. Ideally, a decent share is being saved for retirement.

Do those go away when a death benefit is paid? And while I the discussion up until now was only on the death benefit amount rather than type, having a portion of the death benefit coverage in Whole Life can actually make for more after tax cash flow in retirement.

[dm123]

Do those go away when a death benefit is paid?

Thats why I asked earlier

2) What do you mean save on taxes? Is the plan to use principal of insurance payout or live off the income generated by the principal?

But yes I am also curious to know if @farmbochur  meant there is no more need to pay into retirement savings - what if it happens C"V before retirement savings are ready? Shouldn't LI account for that?

having a portion of the death benefit coverage in Whole Life can actually make for more after tax cash flow in retirement.

Wouldn't self insuring by putting into a Roth also provide tax free cash flow in retirement or for spouse/children inheritance? Or should we already move to a whole life thread like this https://forums.dansdeals.com/index.php?topic=18021.0 for this question?

[farmbochur]

Which is why the earnings based approach isn't making any predictions, it is using a formula to put a CURRENT value on a person (based on many years of industry experience).

Of course you're making predictions. As you wrote above:

If a person is earning $100,000/yr, and is young, it is reasonable to anticipate that their earned income will increase over the years. The multiples quoted above take that into consideration.

As an actuary, I earn a living making inaccurate predictions. Reminds me of the joke:

Two actuaries are duck hunting. They see a duck in the air and they both shoot. The first actuary's shot is 20 feet wide to the left. The second actuary´s shot is 20 feet wide to the right. The actuaries give each other high fives, because on average they shot it.

The joke is actually relevant to our discussion. Undershooting on one's LI needs can be offset (in part) by aggressively putting money away in investments to save for retirement. Unfortunately, the inverse doesn't really hold.

Further debate on the last sentence should definitely go to the WL thread.

[farmbochur]

Until it is not, due to unforeseen circumstances.

Ein l'davar sof. The important thing is to have a balanced plan that optimizes protection against both mortality and longevity risk. Insuring up to the max allowed by underwriting is not the right approach.

Do those go away when a death benefit is paid? And while I the discussion up until now was only on the death benefit amount rather than type, having a portion of the death benefit coverage in Whole Life can actually make for more after tax cash flow in retirement.

Do taxes go away entirely? No. Though the tax liability for a family with $100k of earned income is vastly different from one with long term capital gains from a (likely tax free) LI benefit and tax advantaged assets that may be held in Roth accounts and HSAs.

[ExGingi]

Do taxes go away entirely? No. Though the tax liability for a family with $100k of earned income is vastly different from one with long term capital gains from a (likely tax free) LI benefit and tax advantaged assets that may be held in Roth accounts and HSAs.

Spoken like an actuary!

[yos9694]

Spoken like an actuary!

Blinking rapidly while looking at his shoes?

[ExGingi]

Blinking rapidly while looking at his shoes?

Not sure if that went 20 feet over me or twenty feet under me, but I am still curious to know which one of you two shot twenty feet to the right and which one shot 20 feet to the left.

[Euclid]

Not sure if that went 20 feet over me or twenty feet under me,

(He's poking fun at the stereotype that actuaries are introverted and have poor social skills.)