LIFE INSURANCE

[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.

Help me understand. A family lost its main breadwinner that was generating $100,000 of earned income, and you're expecting their INCOME to be generated from long-term capital gains?

Do you realize that there's a huge difference between the accumulation phase and distribution phase? Once capital is earmarked for income, the investment mix is more likely to be like a target dated fund that is at or past its target date.

[ExGingi]

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

I might fit that stereotype myself, except that I have a few years of real life experience selling life insurance, delivering death claims, and seeing what the beneficiaries are left to deal with.

I also have the "benefit" of observing friends and family (and personal experience) whose parents passed on. Based on those I can tell you that absolutely NOTHING compares to tax-free cash as an asset to pass on in all cases where there is more than one heir.

[ckmk47]

Help me understand. A family lost its main breadwinner that was generating $100,000 of earned income, and you're expecting their INCOME to be generated from long-term capital gains?

Do you realize that there's a huge difference between the accumulation phase and distribution phase? Once capital is earmarked for income, the investment mix is more likely to be like a target dated fund that is at or past its target date.

The assumption above was that the LI proceeds will earn enough for the family to live on.
That implies the LI is generating $100,000 of long-term capital gains.
Whatever mix of funds and investments.

[farmbochur]

Help me understand. A family lost its main breadwinner that was generating $100,000 of earned income, and you're expecting their INCOME to be generated from long-term capital gains?

The income should be generated from a blend of equities and bonds depending on financial needs, risk appetite, and time horizon. Contrary to conventional wisdom, more security can be found with equities for longer distribution periods. Excerpt from the updated Trinity Study below shows success rates (ie. probability that portfolio doesn't go to $0) for a variety of withdrawal rates, payout periods, and stock/bond allocation. Important to note that this is based on returns and inflation are based on historical data which may not represent future outcomes.

[aygart]

I might fit that stereotype myself, except that I have a few years of real life experience selling life insurance, delivering death claims, and seeing what the beneficiaries are left to deal with.

I also have the "benefit" of observing friends and family (and personal experience) whose parents passed on. Based on those I can tell you that absolutely NOTHING compares to tax-free cash as an asset to pass on in all cases where there is more than one heir.

How does the number of heirs make  a difference here?

[dm123]

How does the number of heirs make  a difference here?

If there's one heir, division of assets is pretty easy. Once there are more than one, cash is king. How do you divide a business or real estate? Obviously these things can be done, but it can get messy and create fights The addition of cash makes a mutually agreeable equitable solution much easier.

[ExGingi]

If there's one heir, there is no division of assets is pretty easy. Once there are more than one, cash is king. How do you divide a business or real estate? Obviously these things can be done, but it can get messy and create fights The addition of cash makes a mutually agreeable equitable solution much easier.

FTFY

[ExGingi]

The income should be generated from a blend of equities and bonds depending on financial needs, risk appetite, and time horizon. Contrary to conventional wisdom, more security can be found with equities for longer distribution periods. Excerpt from the updated Trinity Study below shows success rates (ie. probability that portfolio doesn't go to $0) for a variety of withdrawal rates, payout periods, and stock/bond allocation. Important to note that this is based on returns and inflation are based on historical data which may not represent future outcomes.

Are equities and bonds the only asset classes appropriate for the mix? How do things look if a portion goes into an income annuity?

When talking about risk appetite, the following image came to mind (#10 part of a twitter thread that I was going to post in the stocks thread):
https://twitter.com/BrianFeroldi/status/1548637139075751936

And going back to your actuary hunter joke as it relates to the chart you bring, how much less than 100% success rate is acceptable to a widow (in contrast to the cost of guaranteeing 100% success rate)?

[farmbochur]

When talking about risk appetite, the following image came to mind (#10 part of a twitter thread that I was going to post in the stocks thread):
https://twitter.com/BrianFeroldi/status/1548637139075751936

Indeed. Winning with stocks in the long run is more about temperament than intelligence.

[ExGingi]

Indeed. Winning with stocks in the long run is more about temperament than intelligence.

And providing a safe replacement of earned income by using capital has absolutely NOTHING to do with "winning with stocks".

And going back to your actuary hunter joke as it relates to the chart you bring, how much less than 100% success rate is acceptable to a widow (in contrast to the cost of guaranteeing 100% success rate)?

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.

So it's all about framing the question: In order to get 100% risk free success rate of income replacement, one would want to insure up to human life value. The cost for that would be $X. You can choose to spend a little less on protection (risk transfer) in exchange for assuming the risk of the capital amount coming short.

[I am not going to go into ways to reduce the cost while maintaining full human life value protection]

[farmbochur]

And providing a safe replacement of earned income by using capital has absolutely NOTHING to do with "winning with stocks".

Disagree. The typical American who achieves financial independence does so, by and large, with slow and steady investing in his or her 401k/IRA.

Using a rule-of-thumb of face amount = 40x income for young families impedes progress on that journey. Moreover, it does so precisely when the future value of dollars invested is at lifetime highs.

[Yehuda57]

Disagree. The typical American who achieves financial independence does so, by and large, with slow and steady investing in his or her 401k/IRA.

And if they need the money before 60?

ETA: this is not rhetorical. I'm not jumping onto either side of the argument

[dm123]

And if they need the money before 60?

Yes was about to mention that. Widow/widower/orphans would need access to funds immediately, whereas financial independence/retirement account:etc has a long term horizon, and as one approaches that horizon should be adjusting assets accordingly. That's why it's important to have some type of insurance to cover the gap until one reasonably estimates they'll reach self insurance.

[ExGingi]

Disagree. The typical American who achieves financial independence does so, by and large, with slow and steady investing in his or her 401k/IRA.

Using a rule-of-thumb of face amount = 40x income for young families impedes progress on that journey. Moreover, it does so precisely when the future value of dollars invested is at lifetime highs.

How many ducks did you bring home from the hunt?

[farmbochur]

And if they need the money before 60?

ETA: this is not rhetorical. I'm not jumping onto either side of the argument

See upthread

1. Insurance needs should be expressed as a multiple of annual expenses (plus anticipated big ticket items) rather than gross earnings. For many, this could reduce the face amount by 40-50% just by accounting for taxes and retirement savings.

2. Insurance needs should be offset by existing savings.

3. Why would you push a 40x multiple of earnings? That implies a miniscule 2.5% safe withdrawal rate or possibly even less if there are accumulated assets.

ETA: Not sure if this is what motivated your question, but the IRS does not penalize distributions from inherited IRAs prior to age 60.
 https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp

[Yosel]

The question is, would you shift your financial responsibility at age 40? Should you die suddenly, with 6 kids getting ready to get married. For a few pennies on the dollar.

Actuary or not.

Whole life or term or UL or VUL.

[ExGingi]

1. Insurance needs should be expressed as a multiple of annual expenses (plus anticipated big ticket items) rather than gross earnings. For many, this could reduce the face amount by 40-50% just by accounting for taxes and retirement savings.

I don't disagree in principle. Let's now try to break this down into practical terms:
A breadwinner earns $120,000 (pre-tax). What are the expenses? One way to figure out the expenses is to start to list them (and more often than not, things get forgotten or overlooked). May I suggest a more practical way to figure out expenses by seeing how much goes to savings, and assume everything else is expenses?

Now let's think about those savings. What are they meant for? Some are retirement savings (which happens immediately with a premature death, except that the money needs to last longer), and some are savings for "big ticket items" and/or emergencies and opportunities. Does the need for savings go away?

2. Insurance needs should be offset by existing savings.

Couldn't agree more. That is why there's an input for current savings/assets in https://lifehappens.org/human-life-value-calculator/ In most cases those savings will be a fraction of the capital needed to provide replacement of Human Life Value.

3. Why would you push a 40x multiple of earnings? That implies a miniscule 2.5% safe withdrawal rate or possibly even less if there are accumulated assets.

I am not pushing anyt amount. I am educating with the amount that underwriters will consider, showing calculators, alerting people to the risks. Ultimately everyone makes their own choices as to how much they should be insured for.

Can we agree that most people are under-insured? (see for example here, which is not very uncommon).

Maybe we should take an unscientific poll of how much insurance people on this thread have (or what is their multiple of earnings). I am willing to go first: I have about 32x earned income. And while at my current age underwriting would probably consider me only for 15x earnings, I bought the insurance when I was younger, and I also have other factors that cause me to want to be insured at that level (I will also note that at this point all of my coverage is Whole Life, which means that the only cost is the "lost opportunity cost" representing the difference between premiums paid and cash value - which isn't very significant at this point).

[ExGingi]

Also, if one insists on going with the needs based approach, there's a calculator for that too: https://lifehappens.org/life-insurance-needs-calculator/

[farmbochur]

Great to see that we are mostly in agreement!

I don't disagree in principle. Let's now try to break this down into practical terms:
A breadwinner earns $120,000 (pre-tax). What are the expenses? One way to figure out the expenses is to start to list them (and more often than not, things get forgotten or overlooked). May I suggest a more practical way to figure out expenses by seeing how much goes to savings, and assume everything else is expenses?

Sounds reasonable, though I'd net out taxes as well. Of course, the taxability of one's nest egg / LI benefit should also be considered.

Now let's think about those savings. What are they meant for? Some are retirement savings (which happens immediately with a premature death, except that the money needs to last longer), and some are savings for "big ticket items" and/or emergencies and opportunities. Does the need for savings go away?

All valid points

I am not pushing anyt amount. I am educating with the amount that underwriters will consider, showing calculators, alerting people to the risks. Ultimately everyone makes their own choices as to how much they should be insured for.

Fair enough. My main beef was with 40x for 18-30 yo's.

Can we agree that most people are under-insured? (see for example here, which is not very uncommon).

I'll defer to you on this, but it wouldn't surprise me.

(I will also note that at this point all of my coverage is Whole Life, which means that the only cost is the "lost opportunity cost" representing the difference between premiums paid and cash value - which isn't very significant at this point).

I think you should adjust your opportunity cost calc:

Increase by the hypothetical ROI you would have achieved be investing the premium dollars over the last 15 years (in <insert_fund_here>).

Decrease the cost of insurance from the premiums. Having this risk covered brought value to you even though the contingency didn't materialize (BH!).

[ExGingi]

Great to see that we are mostly in agreement!

Obviously! I never doubted your intelligence, and I don't think you doubted mine.

Sounds reasonable, though I'd net out taxes as well. Of course, the taxability of one's nest egg / LI benefit should also be considered.

Remember, the capital is invested FOR INCOME and is likely to be subject to ordinary income tax rates. The key is what is the after tax available cash flow (which is why permanent Life Insurance - AKA Whole Life makes a difference in retirement, as it allows for various tax advantaged cash flow strategies such as annuitization and reverse mortgage).

Fair enough. My main beef was with 40x for 18-30 yo's.

Let's just say that I haven't often seen 40x income being bought. But it's important in framing the conversation and state of mind, rather than people thinking they need $1MM (or less) and begrudgingly move up from there, when in today's day and age (of low interest rates) that doesn't really cut it no matter how you look (when I started off selling insurance we were looking at 20x to 25x income or less for young people). Let people feel they are buying less than what they are eligible for, rather than thinking that they got a sufficient amount (when I had my first child I bought a $500,000 VUL and thought I was set for life).

Can we at least agree that $4MM of coverage for a 20 something making 100,000/yr (especially frum lifestyle with expectation of large family, tuition and weddings) is much closer to what they need than $1MM which they are more likely to buy if they just called one of the companies that advertise term insurance all the time, rather than working with a professional agent that understands their lifestyle?

I think you should adjust your opportunity cost calc:

Increase by the hypothetical ROI you would have achieved be investing the premium dollars over the last 15 years (in <insert_fund_here>).

Decrease the cost of insurance from the premiums. Having this risk covered brought value to you even though the contingency didn't materialize (BH!).

Do you also think I should adjust my opportunity cost for arbitrage, where I am able to borrow against my policies at Prime-1.25% and the IRR of the cash value of several of my policies is around 4%?