Life Insurance - necessary or necessary evil?

[Rich_by_the_Bay]

I'm curious about the group wisdom re: life insurance in or near retirement. Forget estate planning for the time being... an investment advisor (who does NOT sell life insurance) mentioned to me and my wife that it would be a good idea. I asked him why: if we have enough for both of us to last a lifetime, don't we have more than enough for the day when there is only one of us?

He fumbled around with some vague responses, and than said something like this"

"Suppose one of you gets a debilitating illness requiring $erious care, perhaps a nursing home. You linger 5-7 years or longer at $100K per year in cost plus the amount needed annually by the healthy one. That would erode your retirement savings considerably, maybe even jeopardizing the lifestyle of the survivor -- especially if it happened early. Life insurance would let you dig into your savings, knowing that at the end, you would be at least partially reimbursed when the sick one died."

$1 million would cost a 57 y.o male about $4-6000 per year. What have you done?

 

[REWahoo]

Here's a thread that may offer some insight:

http://early-retirement.org/forums/index.php?topic=5010.0

 

[shiny]

It sounds more like the case for Long term care insurance.

 

[samclem]

Rich,
I think he's come up with the only scenario for which life insurance might make some sense. But, wouldnt it be more starightforward to buy long term care (LTC insurance? Provided you are both insurable and the premiums are reasonable, that would be a better bet.

If you are healthy, the premium for this type of policy can be reasonable (a lot cheaper than the policy you were quoted). For example, the program offered to federal employees would cost a 57 YO man about 75 bucks per month for a policy that would pay up to $150 per day for a nursing home (or other care) if he can't take care of himself. You'd have another policy premium to pay for your wife. It pays for an unlimited period. With the life insurance idea you could eventually go broe waiting for the sick partner to pass away.

If you're concerned about ths problem, I think LTC makes more sense, if you can get it.

samclem

 

[Rich_by_the_Bay]

Here's a thread that may offer some insight:
http://early-retirement.org/forums/index.php?topic=5010.0

That's a good thread. I would have agreed with its drift until the above was pointed out, but now am not so sure.

Alas, like most of us, I rejected life insurance at this later stage of life (kids launched, nuf saved for wife and me for the duration, etc.). What I hadn't considered was the scenario in my original post: a prolonged, asset-eating illness requiring long-term care; carving into the savings to get through it, and then being left with much less than the magical safe withdrawal treasure chest than she or I anticipated.

Long-term care seems like an expensive and incomplete solution, best suited to those with marginal savings (who can't affort it), or those who can afford it (who probably don't need it) -- at least according to Consumer Reports. $150 per day of benefit might fall far short ($250+ might be closer to reality now, only to increase in the future). Many costs are not covered. I guess if you can get it cheap, LT care at least provides a hedge.

Life insurance as a hedge against this catastrophic scenario may actually be much cheaper than LT Care insurance in the end, if you have the savings to front-end it from savings for, say, 5-7 years. Unfortunately, most progressive nursing-home-requiring illnesses end in death within a few years so you would in theory recoup your FIRE in the end.

Just some happy thoughts to end the day with .

 

[cute fuzzy bunny]

I looked at long term care and ran the numbers. Unless both of us got very sick for a very long time, it wouldnt pay off. Not even close.

I guess thats how the insurance biz works...if its a good deal they wouldnt offer it at that price, but I suppose if long illnesses run in your family, maybe its worth a gander.

 

[haha]

I suppose one thing to consider is to get a divorce- that way there is a firewall between the two of you. Medical creditors seem to be the most leach-like, so this may well be a good idea. No one would even have to konw about the divorce. As long as you are in agreement, the divorce shouldn't cost much or create bad feelings.

Ha

 

[REWahoo]

I suppose one thing to consider is to get a divorce- that way there is a firewall between the two of you. Medical creditors seem to be the most leach-like, so this may well be a good idea. No one would even have to konw about the divorce. As long as you are in agreement, the divorce shouldn't cost much or create bad feelings.

Is this cheap, feel-good divorce from that "Japanese playbook" you've been telling us about? Bet it's called something like "Sayonara, Baby!"

 

[JPatrick]

"Suppose one of you gets a debilitating illness requiring $erious care, perhaps a nursing home. You linger 5-7 years or longer at $100K per year in cost plus the amount needed annually by the healthy one. That would erode your retirement savings considerably, maybe even jeopardizing the lifestyle of the survivor -- especially if it happened early. Life insurance would let you dig into your savings, knowing that at the end, you would be at least partially reimbursed when the sick one died."

$1 million would cost a 57 y.o male about $4-6000 per year. What have you done?

Based on the above thinking, I think it makes sense.  However, I think the million dollar figure may be a bit richer than needed.  At age 57, I'd think in terms of 500K.  I'm basing that on the typical length of that kind of care.  Gives you quite a chunk of cash, plus some inflation protection in case the need arises 20 years from now.

 

[brewer12345]

Hmmm, I think you are barking up the wrong tree here. LTC is badly overpriced and still lets the insurer jam you with big (50+%) rate increases if they feel they aren't getting enough money from policyholders. You are far better off self-insuring, IMO.

Life insurance after retirement, assuming sufficient assets? Seems unlikely. I suppose you could make a pretty stretched case, but if you retired with a 99% safe SWR portfolio/withdrawal, chances are you will be falling over your assets by the time end of life costs are an issue. In the meantime, you would be bleeding life insurance premiums that could have reduced your portfolio withdrawal.

 

[samclem]

Rich,

I must be missing something. Why pay $6000 per year for life insurane that would require you to first pay out of pocket for the long-term care, and in the end you might run out of money before your loved one died.

On the other hand, the LTC policy costs 1/5 as much for a "standard" policy $150 per day for as long as the person needs care. The $75 /mo rate can go up at a rate of 5% per year, and the daily benefit would raise, too. If you'd prefer to have inflation protection you could get a level rate policy (same coverage) for $206 per month starting now. It's still 1/3 the cost of the life insurance, and you don't have to go broke due to care costs waiting for the life insurance payout. .

If you think $150/day coverage isn't enough, you can buy more. Costs differ by region.

Like said, ths policy is available to fed employees/retirees, but I'd guess something comparable might be available to most folks.

The link to the handy calculator is at: https://www.ltcfeds.com/ltcWeb/do/assessing_your_needs/RateCalcPrePack

samclem

 

[Rich_by_the_Bay]

Life insurance after retirement, assuming sufficient assets? Seems unlikely. I suppose you could make a pretty stretched case, but if you retired with a 99% safe SWR portfolio/withdrawal, chances are you will be falling over your assets by the time end of life costs are an issue. In the meantime, you would be bleeding life insurance premiums that could have reduced your portfolio withdrawal.

Yep, that seems like sound thinking, and pretty much how I saw it.

Given that, how would you protect against that bad case scenario, i.e. early retirement, devastating injury or illness, drawn out care at very high cost of, say, 100K per year for 5-6 years? I'm a lousy judge since I work in a huge international tertiary cancer referral hospital (see the worst of the worst daily, young and old).

• Is this a doomsday scenario so unlikely that it is not worth planning for?
  
• Got enough assets to cover this and go on in an acceptable financial state? Maybe for some, but not for everyone if this happened in early retirement.
• LTC insurance - I'm not impressed.
• Life insurance to refresh assets at the end of the drama? Maybe - unappealing, but perhaps not the worst option, depending on price (not trivial).

I'm thinking maybe a hedge: some life insurance to ease the burden for a few years, buying time enough to regroup, maybe make some lifestyle adjustments or a move.

 

[Martha]

SamClem, the LTC insurance is a pretty good deal for federal employees because it is considerably cheaper as the feds negotiate the rates with the insurance companies.

LTC insurance is considerably more expensive on the individual market.

 

[Rich_by_the_Bay]

...Why pay $6000 per year for life insurane that would require you to first pay out of pocket for the long-term care, and in the end you might run out of money before your loved one died.

On the other hand, the LTC policy costs 1/5 as much for a "standard" policy $150 per day for as long as the person needs care. The $75 /mo rate can go up at a rate of 5% per year, and the daily benefit would raise, too. If you'd prefer to have inflation protection you could get a level rate policy (same coverage) for $206 per month starting now. It's still 1/3 the cost of the life insurance, and you don't have to go broke due to care costs waiting for the life insurance payout.

Samclem,

Sounds like a pretty good policy if you can get it. I'm no expert but the policies I've read about often have a limit as to duration of coverage, a several month waiting period before benefits begin, and provide partial coverage at best. I think the consumer report article summed it up well.

The rationale behind the life insurance option (right or wrong) is that for most of us here, if you have enough assets to retire early, you have enough to cover the necessary expenses out of pocket for such an ugly situation. Disruptive, but you can do it. Statistically, there is a high likelihood that such a stay would last no longer than 2-5 years just by the nature of the types of diseases that cause this. Yes, there are some that go on for decades, but that is when you get legal advice re: government aid eligibility, transfer of assets, and other drastic maneuvers. Ugh.

The problem comes at the other end: the agony is over and your previous treasure chest is reduced by 50% with all those ramifications. Life insurance lets you dip in early knowing that it will, unfortunately, all be restored when your loved one dies.

Good to get your opinion on this - I'll look into private LTC insurance more carefully.

 

[Rich_by_the_Bay]

FYI, a seemingly legitimate and cautionary piece on LTC insurance from the consumer perspective.

http://consumerlawpage.com/article/insure.shtml#buy

Caveat emptor.

 

[thefed]

I'm glad this was posted...I just signed an app for life insuranc the other day! I've overcome my 22-yr old mentality that I won't die, and got a small policy to at least cover what's left of my mortgage.

It's a 15 yr policy where I get every cent of my premiums back at the end provided I didn't kick the bucket. Only cost me $27/month, but is only for $125k.

I guess I do need more, but for now, that was a big first step for me.

Are there any life insurance programs out there where you get back MORE than you put in at the end of 15/20/30 years....ie interest?

Thanks

 

[brewer12345]

I'm glad this was posted...I just signed an app for life insuranc the other day! I've overcome my 22-yr old mentality that I won't die, and got a small policy to at least cover what's left of my mortgage.

It's a 15 yr policy where I get every cent of my premiums back at the end provided I didn't kick the bucket. Only cost me $27/month, but is only for $125k.

I guess I do need more, but for now, that was a big first step for me. 

Are there any life insurance programs out there where you get back MORE than you put in at the end of 15/20/30 years....ie interest?

Thanks

First: Do you have any dependents that would be in dire straits without your income? If not, YOU DO NOT NEED LIFE INSURANCE.

Second: don't buy return of premium products. They are generally a bad deal for the consumer and are constructed to offer an easy sales pitch that doesn't really pan out. If you actually have a need for life insurance (which I rather doubt), buy an annually renewable term or simple 20 year term policy with a conversion option.

 

[kz]

Very throught-provoking thread.

Hubby and I are in the early stages of discussing long-term care insurance. (ages 51 & 54 currently) We've had several schools of thought on this subject.

1) pay for nursing home expenses from our 457/Roth accts (we have very sufficient pensions for everyday expenses so this money is not needed presently)

2) pay LTC premiums from the 457 accts.

3) pay LTC premiums from part-time jobs

In the case of the first idea I hadn't even thought of the fact that we could replace the money used from the 457/Roth accounts with the proceeds from a life insurance policy.

I'm interested in anymore ideas anyone has concerning life/LTC insurance.

 

[Brat]

I am further ahead, in the retirement phase of my life.  Husband and I have LTC insurance because we have both seen our parents linger in long periods of incapacity.  IMHO cancer is not the condition in retirement one needs to fear IF you have good heath insurance.  The conditions to fear are Parkinson's, thinking disorders, brittle bones - for example.  Complicating these conditions is the fact that your spouse/domestic associate is less able to help because they are aged also.

Not many of the frail elderly who need help are in nursing facilities, they are in assisted living facilities - which are not cheap.  If you purchase LTC make sure it covers in-home and assisted living care.

As I noted in another thread my husband and I are evaluating continuing care communities as an option in 5-7 years.  Some of them include the cost of care.  They are more expensive than the fee for service communities (looks like about $1,200 more a month for a couple in the NW). 

A mix of LTC insurance and the above would cover all options.  Buy it now when it is cheap then drop the insurance if you move to a continuing care community that has a full service contract.

Life insurance isn't the cure for the financial hit of long term care.

 

[thefed]

First: Do you have any dependents that would be in dire straits without your income? If not, YOU DO NOT NEED LIFE INSURANCE.

Second: don't buy return of premium products. They are generally a bad deal for the consumer and are constructed to offer an easy sales pitch that doesn't really pan out. If you actually have a need for life insurance (which I rather doubt), buy an annually renewable term or simple 20 year term policy with a conversion option.

How is the return of premium offer a bad deal? My options are as follows: about $10/month and I get nothing back. $28/month and I get it all back. I COULD invest that $18/month, but see no way to come out AHEAD of getting the full 28 back.

I have a son who is under 1 yr old, and a fiance who is a minimal wage earner (nanny). My mortgage is the main concern, she could support the two of them just fine with no mortgage.

Can you plz elaborate?

 

[brewer12345]

How is the return of premium offer a bad deal? My options are as follows: about $10/month and I get nothing back. $28/month and I get it all back.  I COULD invest that $18/month, but see no way to come out AHEAD of getting the full 28 back.

I have a son who is under 1 yr old, and a fiance who is a minimal wage earner (nanny). My mortgage is the main concern, she could support the two of them just fine with no mortgage.

Can you plz elaborate?

Unfortunately, things are not as simple as you present them. What would you get back if you surrendered the policy today? Probably nothing. Return of premium (ROP) policies typically come with lots of strings attached, the main one being that you usually get little or nothing back if you lapse the policy before the last few years of the policy. Guess what percentage of these policies lapse before the last few years? Hint: most of them. It is unlikely you will still have the policy when the "return" period comes up.

Another question: did you calculate what the internal rate of return is on the extra premium dollars you are putting up? I bet it is in the single digits. Your choices are this: pay $10 a month and invest the rest and get whatever the invested $18 a month is worth in X years, or pay $28 a month and get back whatever the policy says you get back when you eventually lapse. In the ROP case, you are "investing" the extra $18 a month, just as you are in the first case. You should at least know what "return" you might hope for in the case of the ROP policy.

It sounds to me like you do need some life insurance, and likely more than the amount of your mortgage. Do you hope that your son might go to college some day? That's only one example of what you might want additional coverage for. If i were in your shoes, I would go price a 20 year level term policy for at least $250k ($500k would be better if you can afford it). Get quotes from TIAA-CREF, USAA, and Ameritas Direct. All three companies are financially sound and have a long record of treating policyholders well. I would be surprised if you couldn't get a 20 year level term policy for $500k for $28 a month.

 

[JPatrick]

I have a son who is under 1 yr old, and a fiance who is a minimal wage earner (nanny). My mortgage is the main concern, she could support the two of them just fine with no mortgage.

Can you plz elaborate?

she could support the two of them just fine with no mortgage.
On a "minmal wage"??  I'd really question that.  What about health insurance, college, and about a hundred more etc's.
Brewer has it nailed, you need bunches of cheap term from a good company.
Check your employer for a possible good deal also.  You ought to do this yesterday.

 

[thefed]

Unfortunately, things are not as simple as you present them. What would you get back if you surrendered the policy today? Probably nothing. Return of premium (ROP) policies typically come with lots of strings attached, the main one being that you usually get little or nothing back if you lapse the policy before the last few years of the policy. Guess what percentage of these policies lapse before the last few years? Hint: most of them. It is unlikely you will still have the policy when the "return" period comes up.

Another question: did you calculate what the internal rate of return is on the extra premium dollars you are putting up? I bet it is in the single digits. Your choices are this: pay $10 a month and invest the rest and get whatever the invested $18 a month is worth in X years, or pay $28 a month and get back whatever the policy says you get back when you eventually lapse. In the ROP case, you are "investing" the extra $18 a month, just as you are in the first case. You should at least know what "return" you might hope for in the case of the ROP policy.

It sounds to me like you do need some life insurance, and likely more than the amount of your mortgage. Do you hope that your son might go to college some day? That's only one example of what you might want additional coverage for. If i were in your shoes, I would go price a 20 year level term policy for at least $250k ($500k would be better if you can afford it). Get quotes from TIAA-CREF, USAA, and Ameritas Direct. All three companies are financially sound and have a long record of treating policyholders well. I would be surprised if you couldn't get a 20 year level term policy for $500k for $28 a month.

And why, may i ask, is it unlikely that I won't have the policy in 15 yrs? How does it 'lapse'? non-payment...what else? I read on the company website that there are no refunds if within first 6 years, only after that can you cancel and get a pro-rated amt back. (Fidelity and Guaranty)

Secondly, no I did not calculate what I would earn by investing the 18/month....but I will. I'm unsure of what you mean by knowing the return for the ROP policy. It's exactly what I put into it...no interest or anything. 28x 180months=$5040.

Brewer, you are right! I never expected these results, but here it goes! I'll get $5040 back in 15 yrs provided no lapse, with the ROP policy. If I get a straight term policy @ 10/month, and invest 18/month, @ 4%/yr, I'd end up with $4500!!! Only 500 difference, and obviously much more liquid .

Good deal! I wonder if it's too late to cancel that app! I'm calling the guy in a few minutes.


Thanks! Jason

 

[brewer12345]

And why, may i ask, is it unlikely that I won't have the policy in 15 yrs? How does it 'lapse'? non-payment...what else?  I read on the company website that there are no refunds if within first 6 years, only after that can you cancel and get a pro-rated amt back. (Fidelity and Guaranty)

Secondly, no I did not calculate what I would earn by investing the 18/month....but I will.  I'm unsure of what you mean by knowing the return for the ROP policy. It's exactly what I put into it...no interest or anything. 28x 180months=$5040.

Brewer, you are right! I never expected these results, but here it goes! I'll get $5040 back in 15 yrs provided no lapse, with the ROP policy.  If I get a straight term policy @ 10/month, and invest 18/month, @ 4%/yr, I'd end up with $4500!!! Only 500 difference, and obviously much more liquid .

Good deal! I wonder if it's too late to cancel that app! I'm calling the guy in a few minutes.


Thanks! Jason

The only way to lapse is if you choose to do so, assuming you were not fraudulent in your application.

Ugh, Fidelity & Guaranty! Also known as F&G (Effin' G), this is IMO a sleazy company that sells overpriced crap to unsophisticated buyers. They are also run very aggressively, so their risk of default (bad for the policyholder) is much, much higher than any of the three companies I mentioned. Please do yourself a favor and stay away from this company.

I used to analyze the credit quality of life insurance companies for a living. I have a policy with TIAA-CREF. My colleagues mostly patronized them, USAA, and Northwestern Mutual (good company, but very expensive).

 

[justin]

thefed,

Why not pay $28 a month for a half million in coverage? Screw the premium return. $125k doesn't cover a whole lot, but a half million will actually make a big difference in your family's life should you pass away. I checked an online quote - $24/month for $500000 for a 22 y.o. male in good health. 20 year term guaranteed rate. That will help out your family a lot more than the return of $5000 or so in premiums in 15 years. That's what I would do if I were in your shoes.