Can my 86 year old mother have life insurance?

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PostPosted: Wed Jul 01, 2009 8:39 pm   Post subject:   

I like the concept. I'm a big believer in the value of permanent life insurance. It just doesn't work well with the numbers as presented. You are starting with an incorrect premise.



The life expectancy for an 86 year old female is 6 years. This includes ALL 86 year old females. 86 year olds living out their last days in a nursing home are included as is the 86 year old with cancer and the 86 year old with the bad heart as is the 86 year old with diabetes as is the 86 year old on life support, etc.



An 86 year old who can get standard insurance rates has to be in pretty good health. The life expectancy for the population of HEALTHY 86 year olds must be longer than the life expectancy of all 86 year olds.



Let's use your numbers combined with logic to understand that 6 years is not the life expectancy for a healthy 86 year old female. $28,824 will buy a death benefit of $291,000. That works out to a 15% annual return at life expectancy if life expectancy is 6 years. How can the insurance company earn 15% after all expenses? They can’t. What’s realistic when looking at the return on the death benefit at life expectancy is 5-6%. This would change life expectancy to 8 years. This is much more likely to be the life expectancy for a relatively healthy 86 year old.

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PostPosted: Wed Jul 01, 2009 8:57 pm   Post subject:   

Quote:
I dont think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%




What does the rule of 72 have to do with this? At 5% interest, it will take 14 years for money to double. With the GUL policy, the money will never double. The longer that the person lives, the worse the return.



Quote:
Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.




That's true, but the difference is that the vast majority of 35 year olds will get standard or better, but the vast majority of 86 year olds will get worse than standard or will be declined.



With the numbers given, there simply isn't much of an upside to the life insurance. The best case scenario is that death occurs right away. Even if that happens, the life insurance advantage isn’t huge. The advantage is only the death benefit less $200,000. As I said, the break even point is about 8 years. If interest rates go up and/or the person lives well past life expectancy, the life insurance is a real loser.
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PostPosted: Wed Jul 01, 2009 9:01 pm   Post subject:   

If we change the facts just a little bit, I would be very much in favor of the life insurance. Ex. Mrs. Smith is 86 years old and can get insurance at standard rates. She is receiving a pension and getting $29,000/year after tax. She doesn’t need the money. She can use this money to buy a life insurance policy that will pay $275,000 (or whatever figure we are using).



In this example, life insurance makes much more sense because if death occurs early, this year, for example, her beneficiaries will get $275,000 instead of $29,000. In the other examples, her beneficiaries would still have been getting $200,000.

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PostPosted: Wed Jul 01, 2009 10:08 pm   Post subject:   

Quote:
Quote:

I don't think you remember your rule of 72. 72/5%=14.4 years. So it will take 14.4 years to double your money at 5% interest. Or we could work my example in revers to give..... 72/6 years=12%





What does the rule of 72 have to do with this? At 5% interest, it will take 14 years for money to double. With the GUL policy, the money will never double. The longer that the person lives, the worse the return.




THis is because at a life expectancy of 6 years she would have paid about 500k into the policy for a return of 1mm.....doubleing her money.



Quote:
Quote:

Standard for an 86 y/o is NOT the same as standard for a 35 y/o. a 35 y/o standard will obviously be in better physical shape then a 86 y/o preferred. This is because the preferred rating for an 86 y/o is based on a statistical evaluation FOR AN 86 y/o.





That's true, but the difference is that the vast majority of 35 year olds will get standard or better, but the vast majority of 86 year olds will get worse than standard or will be declined.




This is not true...that is what i was trying to explain. The magority of 86 y/o will get standard. That is why they call it standard! just like the majority of 35 y/o will get standard. Standard is different for each age. Standard for 35 is NOT the same standard for 86.





Quote:
With the numbers given, there simply isn't much of an upside to the life insurance. The best case scenario is that death occurs right away. Even if that happens, the life insurance advantage isn’t huge. The advantage is only the death benefit less $200,000. As I said, the break even point is about 8 years. If interest rates go up and/or the person lives well past life expectancy, the life insurance is a real loser.




OK i still do not understand this statement at all. The numbers work for life insurance in this case.



So lets analyze again:



The mortality tables give a statistical average (actually it is much more complex then a simple average). Meaning it is the average mortality....meaning some people will live longer and some will live shorter.....this is the definition of standard risk. But I am not an acctuary or an insurance carrier so I do not know exactly what the mortality is for an 86 y/o at standard risk at Transamerica.



So instead of trying to guess an LE let figure out our break even ( or the over all benefit to here heirs each year she could die.



Lets assume 4 options:



1) She hides her 200k under he mattress and her heirs find it.



2) She invests her money in guaranteed CD at 5% compounding interest per year.



3) Purchases a paid up life insurance policy



4) Use a SPIA to fund a Life policy.



In all cases lets assume no estate taxes.







Net to heirs

Year Age Option 1 Option 2 Option 3 Option 4

1 86 $200,000 $206,700 $265,000 $320,000

2 87 $200,000 $213,735 $265,000 $320,000

3 88 $200,000 $221,122 $265,000 $320,000

4 89 $200,000 $228,878 $265,000 $320,000

5 90 $200,000 $237,022 $265,000 $320,000

6 91 $200,000 $245,573 $265,000 $320,000

7 92 $200,000 $254,551 $265,000 $320,000

8 93 $200,000 $263,979 $265,000 $320,000

9 94 $200,000 $273,878 $265,000 $320,000

10 95 $200,000 $284,272 $265,000 $320,000

11 96 $200,000 $295,185 $265,000 $320,000

12 97 $200,000 $306,645 $265,000 $320,000

13 98 $200,000 $318,677 $265,000 $320,000

14 99 $200,000 $331,311 $265,000 $320,000

15 100 $200,000 $344,576 $265,000 $320,000



(Note on calculations: option 2 is calculated as follows: 200k * 1.05. Then we multiply that by 1.05 again and so forth each year. We then back out the taxes by subtracting the basis...200k....and multiplying by 0.67 and then adding the basis back...200k)



We can see that our break even point between option 2 and 4 is in year 13 or age 98. This will well past life expectancy for an 86 y/o.



I don't know.....maybe I am missing something but the annuity maximization strategy seems to be the best option. (not to mention that i am feeling lazy so i assumed the CD is growing tax deferred...which it does not....so the true break even is probably past year 100).
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PostPosted: Wed Jul 01, 2009 11:23 pm   Post subject:   

Quote:
THis is because at a life expectancy of 6 years she would have paid about 500k into the policy for a return of 1mm.....doubleing her money.




First of all, I have no idea where you are generating these numbers. Secondly, the rule of 72 deals with how long it takes to double a single lump sum payment and has nothing to do with annual payments. Finally, the return that one ultimately gets on a life insurance policy will be based upon actual year of death and not life expectancy.
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PostPosted: Wed Jul 01, 2009 11:32 pm   Post subject:   

Quote:
This is not true...that is what i was trying to explain. The magority of 86 y/o will get standard. That is why they call it standard! just like the majority of 35 y/o will get standard. Standard is different for each age. Standard for 35 is NOT the same standard for 86.




You have wrong information. The majority of 86 year olds are not insurable at standard rates. The majority of 35 year olds will get better than standard.
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PostPosted: Wed Jul 01, 2009 11:40 pm   Post subject:   

Quote:
The mortality tables give a statistical average (actually it is much more complex then a simple average). Meaning it is the average mortality....meaning some people will live longer and some will live shorter.....this is the definition of standard risk. But I am not an acctuary or an insurance carrier so I do not know exactly what the mortality is for an 86 y/o at standard risk at Transamerica.




The mortality tables give the average mortality for everyone regardless of health. Underwriting allows the insurance company to charge people based upon their health. Since the insurance company can get rid of the unhealthy people, they will have mortality that is longer than average. I'm not sure why you are having a problem with this. I also don't know the mortality is for an 86 y/o at standard risk at Transamerica, but I'm smart enough to know that it has to be longer than 6 years.
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PostPosted: Wed Jul 01, 2009 11:49 pm   Post subject:   

Quote:
We can see that our break even point between option 2 and 4 is in year 13 or age 98. This will well past life expectancy for an 86 y/o.



I don't know.....maybe I am missing something but the annuity maximization strategy seems to be the best option. (not to mention that i am feeling lazy so i assumed the CD is growing tax deferred...which it does not....so the true break even is probably past year 100).




You are missing a couple very important points.



1) After 6.5 years, the annuity is only kicking off $19,000 after tax and not $29,000. This won't be enough to guarantee the death benefit.



2) The death benefit at the premium that you are quoting is only guaranteed to age 100. A healthy 86 year old female has about a 10% chance of living to age 100. This would be $0. It's convenient to ignore this in the calculation.
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PostPosted: Thu Jul 02, 2009 1:23 am   Post subject:   

Quote:
You have wrong information. The majority of 86 year old are not insurable at standard rates. The majority of 35 year olds will get better than standard.




You do not understand how carriers underwrite life insurance. Standard risk is NOT static. It is dynamic. think about it....you are trying to tell us that an average 35 y/o is in the same health as a standard 86 y/o. 86 and 35 each have there own STANDARD. that being said it is not relevant. I have already said that i assumed the 86 y/o female was standard.
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PostPosted: Thu Jul 02, 2009 1:45 am   Post subject:   

Quote:
You are missing a couple very important points.



1) After 6.5 years, the annuity is only kicking off $19,000 after tax and not $29,000. This won't be enough to guarantee the death benefit.




This is not true.....do I really need to attach an illustrations? the SPIA will generate 29k for life. after principal has been repaid the client must pay taxes on the income. after income taxes the client will receive 19k a year for her life period.



Using this stream of income I can solve for guaranteed death benefit. If you don't believe me ask your IMO to run a Hancock illustration with that stream of premiums and see what they say. I get $191,235. till age 121.



or if you use Transamerica you can guarantee $320k to age 100 or $300k to age 107. your choice.......depends on how much risk your client wants to take.



So we take the first point that you said I missed "the premiums wont guarantee a policy". this is wrong....the premiums DO guarantee a policy.



and the 2nd point that you said I missed "you only guaranteed to age 100". So this point was not missed...it was intentional. But to be fair i runt the number to age 121.



Now to be completely fair i looked up the interest rate on a 5 year CD....turns out to be 3.6%. and I re-ran my previous number without the tax deferral and to age 121 (i am only showing to age 100).



Given that a standard 86 year old had a standard life expectancy of 6 years i think that the life option blows the other option away.



Net to heirs

Year Age Option 1 Option 2 Option 3 Option 4

1 86 $200,000 $204,824 $265,000 $291,235

2 87 $200,000 $209,764 $265,000 $291,235

3 88 $200,000 $215,627 $265,000 $291,235

4 89 $200,000 $221,385 $265,000 $291,235

5 90 $200,000 $227,386 $265,000 $291,235

6 91 $200,000 $233,521 $265,000 $291,235

7 92 $200,000 $239,830 $265,000 $291,235

8 93 $200,000 $246,307 $265,000 $291,235

9 94 $200,000 $252,960 $265,000 $291,235

10 95 $200,000 $259,792 $265,000 $291,235

11 96 $200,000 $266,809 $265,000 $291,235

12 97 $200,000 $274,015 $265,000 $291,235

13 98 $200,000 $281,416 $265,000 $291,235

14 99 $200,000 $289,016 $265,000 $291,235

15 100 $200,000 $296,822 $265,000 $291,235
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PostPosted: Thu Jul 02, 2009 1:50 am   Post subject:   

Quote:
healthy 86 year old female has about a 10% chance of living to age 100




Also an 86 y/o female has a 4.8636% chance of living to age 100 not 10%
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PostPosted: Thu Jul 02, 2009 10:58 am   Post subject:   

Quote:
You do not understand how carriers underwrite life insurance. Standard risk is NOT static. It is dynamic. think about it....you are trying to tell us that an average 35 y/o is in the same health as a standard 86 y/o. 86 and 35 each have there own STANDARD. that being said it is not relevant. I have already said that i assumed the 86 y/o female was standard.




Marpol, don't put words in my mouth. I never said or implied that a standard 86 year old is as healthy as a standard 35 year old. The 86 year old has one health issue that is already built into the mortality tables...old age.



An 86 year old who is slightly overweight and takes medication to control both their blood pressure and cholesteral and otherwise healthy will probably get standard just like a 76 year old, 66 year old...35 year old.



Allow me to repeat myself. Most 86 year old people can't get standard rates. I don't understand why you are having so much trouble understanding this.
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PostPosted: Thu Jul 02, 2009 11:16 am   Post subject:   

Quote:
This is not true.....do I really need to attach an illustrations? the SPIA will generate 29k for life. after principal has been repaid the client must pay taxes on the income. after income taxes the client will receive 19k a year for her life period.



Using this stream of income I can solve for guaranteed death benefit. If you don't believe me ask your IMO to run a Hancock illustration with that stream of premiums and see what they say. I get $191,235. till age 121.




That is not the $320,000 that you were using.



Quote:
or if you use Transamerica you can guarantee $320k to age 100 or $300k to age 107. your choice.......depends on how much risk your client wants to take.



So we take the first point that you said I missed "the premiums wont guarantee a policy". this is wrong....the premiums DO guarantee a policy.



and the 2nd point that you said I missed "you only guaranteed to age 100". So this point was not missed...it was intentional. But to be fair i runt the number to age 121.




So, you were intentionally being disingenuous with your numbers. Otherwise, why wouldn’t you show what happened at age 100? When I talk about guaranteeing a policy, I am talking about guaranteeing a policy until death. You obviously have a different definition of this.
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PostPosted: Thu Jul 02, 2009 11:22 am   Post subject:   

I did not mean to mis-state you. My apologies. I understand where you are coming from I just don't agree with your last statement that most 86 yo don't get standard. It was my understanding that standard for any age was the most commone risk class. Again I am not an underwriter so maybe I am wrong. I do have some contacts at a few carriers who I will call tomorrow to see how they actully do it. I will see what I can find out.


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PostPosted: Thu Jul 02, 2009 11:22 am   Post subject:   

I did not mean to mis-state you. My apologies. I understand where you are coming from I just don't agree with your last statement that most 86 yo don't get standard. It was my understanding that standard for any age was the most commone risk class. Again I am not an underwriter so maybe I am wrong. I do have some contacts at a few carriers who I will call tomorrow to see how they actully do it. I will see what I can find out.


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