What Life Insurance to Buy And Why Should You?

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What Life Insurance to Buy? by David Merkel, CFA of Aleph Blog

Another letter from one of my readers:

What Life Insurance to Buy

Hello :)

I am reaching out to you because you are among the “Got To Guys” in your industry

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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 without 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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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.