Decreasing term life insurance linked to inflation?

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martincmartin
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Decreasing term life insurance linked to inflation?

Post by martincmartin » Tue Jan 26, 2016 10:00 am

I want life insurance so that, if I die, my kids will be taken care of.

What I really want is income replacement until my kids are out of college and financially independent. Since the amount of income that needs to be replaced goes down over time, it seems like decreasing term life insurance is what most people need.

But of course, inflation will cause the value of the payout to erode. So what I really want is something where the payout is in 2016 dollars, adjusted for inflation. Maybe the premium too.

If this is what most people need, why doesn't it exist? A standard fixed term life insurance policy is a bad approximation to decreasing-term-adjusted-for-inflation.

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mhc
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Re: Decreasing term life insurance linked to inflation?

Post by mhc » Tue Jan 26, 2016 10:22 am

Can you ladder the term life insurance to create the curve you desire?

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Frugal Al
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Re: Decreasing term life insurance linked to inflation?

Post by Frugal Al » Tue Jan 26, 2016 10:45 am

MHC makes a good point: there are other ways to achieve your goal, at least somewhat. As to the reason there aren't polices designed with the attributes you seek, I suspect the chief reason is that inflation has a beneficial economic influence to the insurance company for most (virtually all) of their products--a benefit they'd be loathe to relinquish. And while a couple decades of benign inflation would seem to make the development of inflation indexed products fairly straight forward, unanticipated inflation would be very difficult to plan (and price) around. That is also probably why there seems to be so much apparent risk priced into inflation indexed annuity products, and so few companies offering them.

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Re: Decreasing term life insurance linked to inflation?

Post by BruDude » Tue Jan 26, 2016 11:12 am

martincmartin wrote:I want life insurance so that, if I die, my kids will be taken care of.

What I really want is income replacement until my kids are out of college and financially independent. Since the amount of income that needs to be replaced goes down over time, it seems like decreasing term life insurance is what most people need.

But of course, inflation will cause the value of the payout to erode. So what I really want is something where the payout is in 2016 dollars, adjusted for inflation. Maybe the premium too.

If this is what most people need, why doesn't it exist? A standard fixed term life insurance policy is a bad approximation to decreasing-term-adjusted-for-inflation.
Because it would be very confusing to explain to people and in all likelihood, not any better of a deal than a straight term life policy. I know that as an agent myself, I would never even quote a product like that because it would be a very niche request and most people want a regular term policy, so it wouldn't be comparing apples-to-apples.

Just buy a term policy for 20-30 years from a company that allows you to decrease the coverage any time you want, like Prudential. Last time I checked, they allow unlimited policy reductions. Some companies only allow the coverage amount to be reduced one time, or once every five years, etc.

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Re: Decreasing term life insurance linked to inflation?

Post by EHEngineer » Tue Jan 26, 2016 11:26 am

martincmartin wrote:So what I really want is something where the payout is in 2016 dollars, adjusted for inflation. Maybe the premium too.
My Amica term life policy benefit is inflation adjusted. This policy has a fixed premium for the term of the policy. I did not pay extra for this. In fact, this policy was the lowest cost one I found from a decent credit rated insurer. You can call Amica at 800-234-5433
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

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Re: Decreasing term life insurance linked to inflation?

Post by Frugal Al » Tue Jan 26, 2016 11:36 am

EHEngineer wrote:My Amica term life policy benefit is inflation adjusted. This policy has a fixed premium for the term of the policy. I did not pay extra for this. In fact, this policy was the lowest cost one I found from a decent credit rated insurer. You can call Amica at 800-234-5433
Interesting, EHE. How long is the policy term? Do you know what inflation data it is indexed to?

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Re: Decreasing term life insurance linked to inflation?

Post by EHEngineer » Tue Jan 26, 2016 11:55 am

Frugal Al wrote: Do you know what inflation data it is indexed to?

Image

Regarding the additional premium note, my policy has listed on the cover sheet a "current annual premium" and a "maximum annual premium" Those numbers are the same for the initial term (25 years), so my policy premium cannot increase.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

PlayingLife
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Re: Decreasing term life insurance linked to inflation?

Post by PlayingLife » Tue Jan 26, 2016 3:54 pm

I ran into this problem too as I'm currently in the middle of purchasing term life insurance....Dave Ramsey is finally earning some income from me. Anyway, I needed a $1M 25 year policy and decided to opt for $1.250M to accommodate inflation since the price wasn't drastically different. The closer I get to 25 years, the less my family should have to depend on this policy, so it was simple enough for me.

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Re: Decreasing term life insurance linked to inflation?

Post by Independent » Tue Jan 26, 2016 9:06 pm

EHEngineer wrote:
martincmartin wrote:So what I really want is something where the payout is in 2016 dollars, adjusted for inflation. Maybe the premium too.
My Amica term life policy benefit is inflation adjusted. This policy has a fixed premium for the term of the policy. I did not pay extra for this. In fact, this policy was the lowest cost one I found from a decent credit rated insurer. You can call Amica at 800-234-5433
When I read the page you provided, I see a section on "Additional Premium". It looks like the premium goes up every time the death benefit goes up.

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Re: Decreasing term life insurance linked to inflation?

Post by Independent » Tue Jan 26, 2016 9:16 pm

martincmartin wrote:If this is what most people need, why doesn't it exist?
Some ideas:

It's complicated for the company. Different people will want different decreasing patterns and different terms.

Some people will decide they don't really want to match prices, but rather their incomes (which they hope go up faster than prices). The point of insurance is often to "maintain our pre-death standard of living". That makes the match a little better. Should the company offer something that goes up by CPI + __% ?

Deciding on the "correct" amount of insurance even at the beginning isn't an exact science. Even the people who do a calculation make lots of assumptions and end up rounding to some even number. So getting the "correct" pattern from a number that starts as an approximation seems a little odd.

Term is often viewed as "cheap". Buying a little too much isn't a disaster.

People who feel strongly that they want a decreasing death benefit can ladder two policies and get a rough approximation.

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Re: Decreasing term life insurance linked to inflation?

Post by Independent » Tue Jan 26, 2016 9:18 pm

Frugal Al wrote: I suspect the chief reason is that inflation has a beneficial economic influence to the insurance company for most (virtually all) of their products-
Why would that be true? The company takes a fixed premium, to pay a fixed death benefit, and invests any early "over-payments" in fixed bonds. I don't see how inflation helps the company.

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Re: Decreasing term life insurance linked to inflation?

Post by Raiddinn » Tue Jan 26, 2016 9:43 pm

You don't need to link term to inflation. Inflation doesn't really matter that much.

If we had, for example, 3% annual inflation in prices such that your million term was only worth 997, 994, 992, etc then your wages should probably be going up the opposite direction as well. Just buy every 5 or 10 years another tiny little policy to make up the difference or get the insurer to push up the one you already have.

It's not really going to be that hard to keep up with if you are any kind of organized.

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Re: Decreasing term life insurance linked to inflation?

Post by EHEngineer » Tue Jan 26, 2016 10:24 pm

Independent wrote:
EHEngineer wrote:
martincmartin wrote:So what I really want is something where the payout is in 2016 dollars, adjusted for inflation. Maybe the premium too.
My Amica term life policy benefit is inflation adjusted. This policy has a fixed premium for the term of the policy. I did not pay extra for this. In fact, this policy was the lowest cost one I found from a decent credit rated insurer. You can call Amica at 800-234-5433
When I read the page you provided, I see a section on "Additional Premium". It looks like the premium goes up every time the death benefit goes up.
I anticipated this question and answered two posts prior to you posing it.
EHEngineer wrote:Regarding the additional premium note, my policy has listed on the cover sheet a "current annual premium" and a "maximum annual premium" Those numbers are the same for the initial term (25 years), so my policy premium cannot increase.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

edge
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Re: Decreasing term life insurance linked to inflation?

Post by edge » Tue Jan 26, 2016 11:03 pm

Most people do not want this feature because their liabilities are eclipsed by assets as they get older.

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Frugal Al
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Re: Decreasing term life insurance linked to inflation?

Post by Frugal Al » Wed Jan 27, 2016 4:18 am

Independent wrote:Why would that be true? The company takes a fixed premium, to pay a fixed death benefit, and invests any early "over-payments" in fixed bonds. I don't see how inflation helps the company.
Although life insurance companies practice a form of liability matching, it is imperfect due to the duration of some of the liabilities--it's not on a 1:1 basis: http://www.naic.org/cipr_newsletter_arc ... _rates.htm

EHE, thanks for the info on the Amica policy. I've never seen that on a term policy before.

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Re: Decreasing term life insurance linked to inflation?

Post by EHEngineer » Wed Jan 27, 2016 8:53 am

Frugal Al wrote:
Independent wrote:Why would that be true? The company takes a fixed premium, to pay a fixed death benefit, and invests any early "over-payments" in fixed bonds. I don't see how inflation helps the company.
Although life insurance companies practice a form of liability matching, it is imperfect due to the duration of some of the liabilities--it's not on a 1:1 basis: http://www.naic.org/cipr_newsletter_arc ... _rates.htm

EHE, thanks for the info on the Amica policy. I've never seen that on a term policy before.
You're welcome. I stumbled on the CPI-U adjustment too. I didn't know my policies had this until the paper policy docs were delivered.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

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Re: Decreasing term life insurance linked to inflation?

Post by NotWhoYouThink » Wed Jan 27, 2016 9:03 am

Term insurance and inflation work together exactly the way I need them to. The younger I am and the more of my earning years are in front of me, the more insurance I need to makes sure my family is taken care of. The older I am and the more of my working years are behind me, and the more I have saved and invested, the less insurance I need. With a fixed dollar value policy, inflation erodes the real value of the payout. What's the problem again that you are trying to solve?

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Re: Decreasing term life insurance linked to inflation?

Post by EHEngineer » Wed Jan 27, 2016 9:44 am

NotWhoYouThink wrote: With a fixed dollar value policy, inflation erodes the real value of the payout. What's the problem again that you are trying to solve?
I designed my policies with the same intent, with decreasing need and decreasing real benefit as I continue to accumulate. And I agree, 2% inflation works in the way you suggested. However, inflation is not guaranteed to stay low. The inflation provision could be helpful if inflation becomes larger. I take some comfort in knowing my policies have the feature. It's insurance for my insurance.

As a side note, I took an extra step to reduce my LI over time. I have 4 LI policies in a ladder, 10, 15, 20 and 25 years. So my real benefit decreases stepwise, and much faster than inflation. This also helps with the $20k annual inflation cap. The 4 policies give me a combined $80k inflation cap.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

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Re: Decreasing term life insurance linked to inflation?

Post by Independent » Wed Jan 27, 2016 2:24 pm

EHEngineer wrote: I anticipated this question and answered two posts prior to you posing it.
EHEngineer wrote:Regarding the additional premium note, my policy has listed on the cover sheet a "current annual premium" and a "maximum annual premium" Those numbers are the same for the initial term (25 years), so my policy premium cannot increase.
I'd guess that "current" and "maximum" don't mean exactly what you think. However, if you've already passed your second anniversary, and you got a notice of a face amount increase, and you didn't get a premium increase, then my guess would be wrong.

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Re: Decreasing term life insurance linked to inflation?

Post by Independent » Wed Jan 27, 2016 2:28 pm

Frugal Al wrote:
Independent wrote:Why would that be true? The company takes a fixed premium, to pay a fixed death benefit, and invests any early "over-payments" in fixed bonds. I don't see how inflation helps the company.
Although life insurance companies practice a form of liability matching, it is imperfect due to the duration of some of the liabilities--it's not on a 1:1 basis: http://www.naic.org/cipr_newsletter_arc ... _rates.htm
Okay. If interest rates increase after the policy is priced, then the company will invest some of the renewal premiums in higher yielding bonds than it had expected, and that would make the policy more profitable.

You were assuming that inflation and interest were linked, I hadn't made that connection.

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Re: Decreasing term life insurance linked to inflation?

Post by EHEngineer » Wed Jan 27, 2016 2:44 pm

Independent wrote:
EHEngineer wrote: I anticipated this question and answered two posts prior to you posing it.
EHEngineer wrote:Regarding the additional premium note, my policy has listed on the cover sheet a "current annual premium" and a "maximum annual premium" Those numbers are the same for the initial term (25 years), so my policy premium cannot increase.
I'd guess that "current" and "maximum" don't mean exactly what you think. However, if you've already passed your second anniversary, and you got a notice of a face amount increase, and you didn't get a premium increase, then my guess would be wrong.
When I saw that clause I was concerned because I requested and was sold a policy that had a fixed premium. So I called, and they explained that it was indeed limited to zero premium increases by the maximum premium. But I haven't passed the second anniversary yet. Feel free to call and inquire yourself, maybe we'll both learn something new.
Or, you can ... decline to let me, a stranger on the Internet, egg you on to an exercise in time-wasting, and you could say "I'm probably OK and I don't care about it that much." -Nisiprius

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