Making Life Insurance "Occam Simple"

Our digitally-saturated culture does not tend toward simple explanations or applications. It's just too easy to produce a 10-minute video and attach 50 photos, instead of distilling our message into a concise, well-ordered document. But there's a point where minutely detailed, all-inclusive explanations actually obstruct our comprehension. That's when it's time for Occam's Razor.

Occam's Razor is a problem-solving principle named after William of Ockham, a 13th-century English philosopher and theologian. In his writings, Ockham championed the idea of explaining the universe, whenever possible, in the simplest of terms. His defining statement: "Among competing hypotheses, the one with the fewest assumptions should be selected."

The metaphorical "razor" expressed in Ockham's writing is the discipline to shave away unnecessary complexity. Simple explanations - even if they contain small inaccuracies - are often the most practical. This is particularly evident in a numbers-driven field like finance. Institutions are in an arms race to roll out ever-more sophisticated models for investing, retirement planning, and financial management. But it is questionable if the fine-grain detail of these programs produces better outcomes.

Take the issue of life insurance. An Internet search for "How much life insurance do I need?" delivers over 26 million results, the majority of them on-line calculators that use a series of consumer-provided assumptions to arrive at a number. Some make their calculations based on a few basic assumptions, like annual income and current age. Others go deeper, taking into account health history, funeral costs, debt, ages of dependents, inflation, college funding, rates of return, etc. Invariably, each calculator arrives at a different amount of life insurance. And greater complexity doesn't narrow the range of answers.

When complexity leads to greater confusion, it's time to apply Occam's Razor. So back away from the laptop. Set aside the smartphone app. Let's try to make life insurance "Occam simple."

That's it. Sure, there might be a lot of details to be worked out (it's one of the reasons life insurance professionals exist). But as a basic model for life insurance, these are workable assumptions. And although William of Ockham might not think it's necessary, here is a brief explanation why.

Apply for the maximum life insurance benefit available.

Life insurance exists because people have an economic value that will be lost or diminished when they die, particularly if they die unexpectedly. A life insurance benefit is a lump-sum payment that attempts to replace that economic value. So if life insurance is seen as a desirable component in your financial plans, there are several reasons why it makes sense to apply for as much as possible.

The anticipation of all parties - the insured, the beneficiaries, and the insurance company - is that a claim is not an imminent event; everyone expects death to occur sometime in the future. Right away, this means an attempt to insure based on current needs cannot be accurate. The only practical way to secure sufficient future value is to ask the insurance company for the maximum amount it will offer today, including any guaranteed future purchase options.

The practicality of applying for maximum life insurance can be illustrated by a parallel example of a wrongful death settlement. If someone died due to the negligence of an impaired driver, would a surviving spouse and/or children petition a court for just enough to meet current needs, or for an amount equaling the maximum projected financial value of the victim? We would consider it right and just to award the family the maximum.

A financial settlement in a wrongful death is a de facto life insurance payment. Isn't it equally right and just to apply for the same level of protection from an insurance company that a family would seek from a judge? Don't minimize your economic value. Better to let the insurance company calculate it, instead of relying on your complex - and inaccurate - estimation of needs.

There is another practical reason to apply for maximum benefits: Approval of most life insurance policies is conditional on the health of the insured, and the general trend for health is downward over one's lifetime. Applying for as much life insurance as possible (including options to obtain additional coverage at a later date without proof of insurability) takes into account the fact that every approval may be the last one.

Buy as much life insurance as you can afford

Just because an insurance company says you're worth $20 million doesn't mean you'll have the resources to pay for the coverage. Many households, particularly those looking at life insurance for the first time, are going to find that the amount of life insurance an insurance company might offer could exceed their budget. But if you understand the financial principles behind maximum insurability, you'll want to lay claim to the biggest benefit you can afford today.

At this juncture, many life insurance discussions veer into the contentious waters of "term versus permanent" insurance. You don't have to go there.

What you want is the maximum benefit now, with options to reconfigure the program later, typically through conversion privileges and future purchase options. For those with budget constraints, term insurance usually isthe most cost-effective way to initially secure the highest insurance benefit. It is true that term life insurance is designed (and priced) to expire before the insured is likely to die. It is also true that in order to keep an insurance benefit until death, term policyowners will eventually change to policies with higher premiums, typically some form of cash-value life insurance. But even though all parties in a life insurance transaction expect death will occur later, the biggest financial risk is that it might happen today.

Keep the largest benefit in force until death.

Among insurance instruments, life insurance is unique in that the likelihood of the event occurring is 100 percent. A house may never burn down, a car may never be damaged by an accident, a worker may never become disabled, but everyone dies. This reality creates a unique financial equation: for a guaranteed price, a guaranteed event will result in a guaranteed payment. And, under almost all circumstances, this transaction will be profitable: the final insurance benefit paid to beneficiaries will exceed premiums paid.

When integrated with the other pieces in a financial plan, there are all sorts of ways the financial certainty of life insurance can be used to improve one's overall financial performance. A guaranteed life insurance benefit1 can be a permission slip to spend other assets, provide a tax-free inheritance, prevent valued assets from being sold to meet estate or tax obligations, supplement retirement income2, defray long-term care expenses, and more.

And here come the "Yeah, buts…"

These three statements are life insurance in a nutshell. Working out the details that proceed from these life insurance assumptions will vary based on individual circumstances, but these principles are reliable guidelines for making productive life insurance decisions. At this point, someone, somewhere, interrupts with, "Yeah, but…" followed by something like:

"I only need a specified amount of life insurance as collateral for a bank loan."

"If I live a long time, the historical returns from other financial products might be higher."

"This doesn't apply to me. I'm not married, and I don't have kids."

"Buying as much life insurance as possible would make me worth more dead than alive."

As Seinfeld would say, "Yada, yada, yada." It is possible the details of a specific situation could result in a life insurance decision that seems to contradict the three principles listed above. And there may be some omissions in this explanation of life insurance that a tax expert, actuary, or financial compliance officer would say ought to be included, either as clarifying details, or disclaimers. But remember, the idea of Occam's Razor is to identify essentials that can be used as the basis for practical decisions. In a way, this article is also an intellectual "trimming" as well, an attempt to present some essential concepts without cluttering the discussion with too many details.

The Occam simple takeaway from this discussion:

Does your current life insurance program
reflect these three principles?

1All life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company.

2 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 1767 Sentry Parkway West, Suite 200, Blue Bell, PA 19422, 267-468-0822. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Comprehensive Wealth Strategies is not an affiliate or subsidiary of PAS or Guardian. 2016-27738 Exp. 8/18

This newsletter is prepared by an independent third party for distribution by your Representative(s). Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice. Links to other sites are for your convenience in locating related information and services. The Representative(s) does not maintain these other sites and has no control over the organizations that maintain the sites or the information, products or services these organizations provide. The Representative(s) expressly disclaims any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. The Representative(s) does not recommend or endorse these organizations or their products or services in any way. We have not reviewed or approved the above referenced publications nor recommend or endorse them in any way.

Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC.
OSJ: 1767 Sentry Parkway West Suite 200, Blue Bell PA.
267-468-0822 PAS is an indirect, wholly-owned subsidiary of The Guardian Life Insurance Company of America® (Guardian), New York, NY.
Comprehensive Wealth Strategies is not an affiliate or subsidiary of PAS or Guardian.

This material is intended for general public use. By providing this material, Guardian is not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial professional for guidance and information specific to your individual situation.

Important Disclosures

2015-6636 Exp 6/17

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