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Wednesday, 24 January 2018

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BRENDAN O.

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  • in reply to: Life Insurance-keep or drop #27123

    BRENDAN O.
    Participant

    Hello, Gerald!

    BACKGROUND:

    I have to frame my substantive reply so you have context for what I am going to say. (And a private message is invited if I may be of further assistance.)

    I’m about 10 years your junior. I have good enough health to stay out of doctor’s clutches – no meds at all. Our net worth is not great but it should keep me and the wife out of trouble as long as my investment model continues to perform. We live quite modestly but happily. (I would be very surprised if we are not at the lowest percentile of net worth within the group but the information delivered to us so far has been an excellent value.)

    My two term policies are, in aggregate, sized roughly equal to yours. They come up for renewal in two years. I am planning on NOT renewing them at that time.

    WHAT I AM DOING NOW:

    The only reason that I have the policies is to make sure that there is something available for a select few extended family members (hit by prior misfortune beyond their control) in the event that my wife and I would be simultaneously deceased (plane, train or automobile) and therefore unable to monitor/maintain assistance to them.

    Our children (5) are currently provided for by a good will though I am looking to create a suitable family trust or family limited partnership. I am also looking for a different vehicle for care of those “select few”. If I can accomplish both objectives, I would drop the policies prior to age 60.

    ON TO YOUR QUESTION:

    “Does it make sense on actuarial basis to continue payments at $15,000 p/a?”

    Well – – if you live in the US then your projected life expectancy as a male at 68 years currently is another 15 years and a month. (Well, if you believe in that kind of accuracy from statistics!) Link here, BTW:

    http://www.ssa.gov/oact/STATS/table4c6.html

    (There are other sources for life expectancy by gender, by country. Family history matters though! Look to your parents’ and grandparents’ health history.)

    Let’s look at the nominal numbers first…

    Policy coverage, as you relate, means you could expect to pay out $225,000 (assuming a guaranteed level-premium term policy) to re-coup $500,000 for survivors at your demise.

    Against that I posit two straw-man models of $15 K p/a investment in two different scenarios:

    Case A: $15 K p/a investment with 6.5% nominal return and 4% annual inflation rate. This is my “Outperform but High Inflation Model”. I come up with (at the end of 15 years) a portfolio value of $386,310 (nominal) and “current buying power” equivalent of $209, 413.

    Case B: $15 K p/a investment with 1.5% nominal return and 2% annual inflation rate. This is my “Underperform but Low Inflation Model”. I come up with (at the end of 15 years) a portfolio value of $253,986 (nominal) and “current buying power” equivalent of $187,586.

    For the question at hand – Policy Value – it is the “nominal” numbers that matter because no policy adjusts for inflation. You would have to be confident of getting at least 10% nominal returns, consistently, on alternative investments (after taxes) in order to beat what the life insurance is promising to deliver. On this basis alone, the life insurance makes sense BUT!…

    COUNTERPARTY RISK:

    How strong is your life insurance policy writer? A lot of these folks have invested in dodgy real estate, CDS and CDO instruments plus may have broad market risk exposure. It makes sense to check them out via a 3rd party ratings agency – here is one for US insurers (http://www.weissratings.com/), if you can find another for the US please let me know.

    At the very least, it makes sense to review your insurer’s balance sheet for quality of assets but… you are still trusting to luck that they have not buried liabilities off-balance sheet. This systemic risk is the main reason I am looking to cancel policies at age 60. I do a lot of finance in my project work and I trust formal accounting documents less every month…

    IN THE FINAL ANALYSIS…

    There are a few more questions that need to be answered on a personal level…

    – Why did I buy the policy(ies)?

    – Are those reasons still valid?

    – Are there other places that I can place the $15 K p/a to greater effect?

    I hope this helps a bit…

    Warmest regards,

    Brendan

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