/insurance-planning

name: insurance-planning
description: "Integrate insurance into a financial plan: decide what risks to retain vs transfer, size life insurance with needs-based and human-life-value analysis, and evaluate disability, long-term care, annuity, and liability coverage. Use when the user asks 'how much life insurance do I need', 'term vs whole life', about 'disability insurance' (own-occupation vs any-occupation, group vs individual), 'long-term care' insurance or self-insuring LTC, 'should I buy an annuity' (SPIA, DIA, variable, indexed), or an 'umbrella policy' for liability protection. Also trigger on 'DIME method', 'life insurance calculator', 'whole life vs invest the difference', 'elimination period', 'benefit period', 'hybrid LTC policy', '1035 exchange', 'beneficiary review', or questions about insurance riders, surrender charges, or whether an advisor can recommend insurance products."

Insurance Planning

Core Concepts

Risk Transfer vs Retention Framework

Insurance is a risk-financing decision, not an investment. Classify each exposure by frequency and severity:

• **High frequency / low severity** (minor repairs, small medical bills): retain. Self-fund through the emergency fund and cash flow; insuring these trades dollars with an insurer plus overhead. Raise deductibles to avoid paying for this layer.
• **Low frequency / high severity** (premature death, permanent disability, liability judgment, long-term care): transfer. These losses are rare but financially catastrophic, and the premium is small relative to the exposure.
• **High frequency / high severity**: avoid or mitigate the activity itself — insurance is expensive or unavailable.
• **Low frequency / low severity**: retain; do not bother insuring.
• **Retention capacity** grows with wealth: a household with large liquid assets can raise deductibles, extend elimination periods, and eventually self-insure entire categories (e.g., life insurance after financial independence, LTC above a threshold).

Life Insurance Needs Analysis

Two standard approaches; use needs-based as primary and the others as cross-checks:

• **Needs-based (capital needs) approach:** Sum the survivors' actual needs — final expenses, debt payoff (including mortgage if the plan is to retire it), education funding, and the present value of ongoing income replacement — then subtract existing resources (liquid assets earmarked for survivors, existing coverage, survivor benefits). Coverage = total needs − available resources.
• **Human life value (HLV):** Present value of the insured's future after-tax earnings, net of self-consumption, over remaining working years. Tends to produce larger numbers; useful as a ceiling and in wrongful-death contexts.
• **DIME quick check:** Debt + final expenses, Income × years of replacement, Mortgage, Education. Fast but crude — the income multiple ignores the survivor's own earnings, investment returns on proceeds, and can double-count debt service already inside the income need.
• Reassess at every life event (birth, home purchase, divorce, business sale) — need is not static, and it generally declines as assets grow and horizons shorten (a "decreasing need against level coverage" glide path).

Term vs Permanent

• **Term:** Pure death-benefit protection for a defined period (10/20/30 years). Cheapest per dollar of coverage; matches the temporary nature of most needs (children to independence, mortgage payoff, working years). Prefer guaranteed level premium and a convertibility rider (convert to permanent without new underwriting).
• **Permanent — whole life:** Guaranteed level premium, guaranteed cash value schedule, potential dividends (participating policies). Premiums roughly 8-15x term for the same face amount at typical issue ages (as of 2026 pricing; verify current quotes).
• **Permanent — universal life (UL):** Flexible premiums, interest-crediting on cash value; guaranteed-UL variants trade cash value for a lifetime death-benefit guarantee. Underfunded UL can lapse late in life exactly when needed — require in-force illustrations at reviews.
• **Permanent — variable life (VUL):** Cash value in market subaccounts; policyholder bears investment risk. VUL is a security — see the regulatory note below.
• **When permanent is actually warranted:** the need itself is permanent — estate liquidity for illiquid estates (business, real estate) and estate tax, often inside an ILIT; lifetime support for a special-needs dependent; business succession funding (buy-sell agreements, key person); equalizing inheritances. Permanent insurance as a *default* accumulation vehicle for someone who has not maxed tax-advantaged accounts is usually a mis-sale — "buy term and invest the difference" wins when the need is temporary.

Disability Insurance

Disability during working years is more probable than death and destroys the plan's core asset: earning power.

• **Own-occupation vs any-occupation:** Own-occ pays if you cannot perform *your* occupation (critical for specialized professionals — surgeon, dentist); any-occ pays only if you cannot work in any reasonable occupation. Many policies are own-occ for 2 years, then any-occ.
• **Elimination period:** The waiting period before benefits begin (30-365 days; 90 is typical). Coordinate with the emergency fund — a larger cash reserve supports a longer elimination period and a lower premium.
• **Benefit period:** To age 65/67 is the standard for long-term disability (LTD); short benefit periods (2-5 years) leave the largest risk uncovered.
• **Group vs individual:** Group LTD is cheap but typically covers 60% of *base* salary (excluding bonus/commission), is capped, ends at job change, and is non-portable. Individual policies are portable, underwritten once, and can be own-occ with riders (residual/partial disability, cost-of-living adjustment, future increase option).
• **Taxation follows the premium payer:** employer-paid (or pre-tax) premiums produce *taxable* ben