Saturday, January 25, 2014

Life Insurance Advice?

Here is the full post from The Aleph Blog:

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Another letter from one of my readers:
Hello,
I am reaching out to you because you are among the “Got To Guys” in your industry
I am doing an “expert” and “common man” round up on my blog and I think a lot of people including me will benefit from your expert advice
 I will publish a detailed post in about 10 days and will obviously mention your blog along with a link back to your website. I will also be adding a custom infographic related to the topic of discussion and reach out to journalists when I am ready with my post.
I just need few minutes of your time to answer TWO questions mentioned below:
 If you can tell me:
“If you had to buy life insurance at current age, which policy would you buy? and which company will be your choice?”
I appreciate your time and it will be a favor if you reply back.

There are only two reasons to buy life insurance. You can:
  • Protect your loved ones after your death.
  • You can scam the taxman.

If you are young, the first reason predominates.  In order to do that, long-dated term insurance will do the trick.  Insure yourself for 20-30 years, and over that time, build your assets so that at the end of the life insurance policy, your heirs will not need the insurance.  And neither will you, should you survive.  That is what has happened to me.  I have no life insurance — instead, I have assets.  Should I die, my family will survive with my wife having to go to work, intelligent lady that she is.
(She doesn’t have a financial bone in her body, she is a princess, as her father was well-off.  She has lived with me long enough to absorb my prejudices, and grasp that there are no easy pickings in markets, so avoid those with get rich quick ideas.)

If you are old and wealthy, the second impulse is important.  How do you send money to heirs, away from the taxman?  Life insurance in the US is outside of the estate.  A large insurance policy can take assets that would be taxable to an estate, and move them outside of the estate.

As an aside: estate taxes are stupid.  The intelligent wealthy don’t pay them, or pay little of them.  The wealthy have a phalanx of helpers who they hire to reduce their estate (and other) taxes. It would be far better to tax everyone as traders, and capture income taxes when they are really earned.

As to your second question: what insurance company to buy from?  If your policy is small, it doesn’t matter.  If your company fails, the state guaranty association will pick up the remainder.  If your policy is large, buy from the highest quality companies, you don’t want to deal with the guaranty associations after a default.

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Suddenly this makes SO much sense to me. Why invest in life insurance if you can invest in real investments? I am currently very tempted to do a very in depth analysis of getting a 30 year term insurance now, locking in the low rates until I reach 55. By then, I would have proper assets to bequeath to loved one. Why do I have to die to make it work?

If I'm not wrong, based on the time value of money, it is really more worth it to purchase a cheap, simple, no-frills term insurance plan, and then wisely invest the remainder.

At least at the end of the day, you will be able to enjoy a large chunk of your assets, rather than having a whole block square off for your future loved ones to squabble about. I will really consider this soon over the next few weeks.

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