| name | insurance |
| description | Insurance and risk transfer analysis — life, disability, annuities, and long-term care.
Activate when the user mentions life insurance, term life, whole life, universal life,
variable life, disability insurance, long-term care insurance, LTC, annuity, SPIA, QLAC,
fixed annuity, variable annuity, indexed annuity, insurance needs analysis, human life
value, income replacement, key person insurance, buy-sell agreement insurance,
or asks about insurance coverage needs or comparing insurance products.
|
Insurance & Risk Transfer Analysis
I analyze insurance products as risk transfer instruments, not investment products. The fundamental question is always: what financial catastrophe are we insuring against, and is the premium justified by the probability and magnitude of that catastrophe? I evaluate insurance needs from first principles, compare products on cost-effectiveness, and integrate insurance into the broader financial plan.
Scope & Boundaries
What this skill DOES:
- Calculate life insurance needs using income replacement, human life value, and capital needs methods
- Compare term vs permanent life insurance for specific planning objectives
- Analyze disability insurance coverage gaps and policy features
- Evaluate long-term care insurance vs self-insurance vs hybrid products
- Analyze annuity products (SPIA, QLAC, fixed, variable, indexed) for retirement income
- Model insurance within estate planning (ILIT, second-to-die, estate liquidity)
- Evaluate key person and buy-sell insurance for business owners
Use a different skill when:
- Retirement income planning (broader) →
/retirement
- Estate and trust structuring →
/estate
- Portfolio construction →
/portfolio
- Health insurance marketplace → out of scope (regulatory, not analytical)
Available Tools
| Tool | Command | When to Use |
|---|
| Monte Carlo | python3 tools/monte_carlo.py | Model self-insurance vs premium scenarios |
| IRR / NPV | python3 tools/irr.py | Compare insurance cost vs investment alternative |
| Loan Amort | python3 tools/loan_amort.py | Model premium financing |
Pre-Flight Checks
- Insurance type: Life, disability, LTC, annuity, or key person?
- Client profile: Age, health status, family dependents, income, net worth
- Existing coverage: Current policies, group coverage through employer
- Planning context: Estate liquidity? Income replacement? Retirement income? Business?
- Budget: How much premium is acceptable relative to income?
- Time horizon: Temporary need (term) or permanent need (whole life)?
Phase 1: Life Insurance Needs Analysis
Goal: Determine the right amount and type of life insurance coverage.
Three Methods
Method 1: Income Replacement
Annual income to replace: $[X]K
Years of replacement needed: [X] years
Discount rate: [X]%
PV of income stream: $[X]M
(-) Existing coverage: ($[X]M)
(-) Liquid assets available: ($[X]M)
(-) Social Security survivor: ($[X]M PV)
= Additional coverage needed: $[X]M
Method 2: Capital Needs
Immediate expenses:
Final expenses/funeral: $[X]K
Mortgage payoff: $[X]K
Debt payoff: $[X]K
Emergency fund: $[X]K
Education funding: $[X]K
= Immediate total: $[X]M
Ongoing expenses:
Annual living expenses: $[X]K × [X] years = $[X]M (PV)
= Ongoing total: $[X]M
Total need: $[X]M
(-) Existing resources: ($[X]M)
= Coverage gap: $[X]M
Method 3: Human Life Value
Current income: $[X]K
Annual growth rate: [X]%
Working years remaining: [X]
Discount rate: [X]%
PV of future earnings: $[X]M
(-) Self-maintenance costs: ($[X]M) (your own consumption)
= Economic value: $[X]M
Term vs Permanent Decision
| Factor | Term | Permanent (Whole/UL) |
|--------|------|---------------------|
| Need duration | Temporary (kids, mortgage) | Permanent (estate, business) |
| Cost (age 40, $1M) | ~$500-800/yr | ~$8,000-15,000/yr |
| Cash value | None | Yes (tax-deferred growth) |
| Premium | Level for term period | Level for life |
| Best for | Income replacement, debt | Estate liquidity, ILIT, buy-sell |
| Investment component | None | Mediocre (2-4% net of costs) |
Rule: Buy term if the need is temporary. Buy permanent only for specific
estate or business planning needs where the insurance must exist at death.
Phase 2: Disability Insurance
Goal: Assess income protection against the most likely working-age risk.
Coverage analysis:
Monthly income: $[X]K
Group LTD coverage: [X]% of income = $[X]K/month (taxable if employer-paid)
Maximum benefit: $[X]K/month (most group policies cap at $10-15K)
Gap: $[X]K/month
Individual policy to fill gap:
Benefit amount: $[X]K/month
Definition of disability: Own occupation (preferred) vs any occupation
Elimination period: [X] days (90 days standard — longer = cheaper)
Benefit period: To age 65 (standard)
COLA rider: [X]% (inflation protection)
Annual premium: $[X]K ([X]% of income)
Key insight: Disability is more likely than death during working years. A 35-year-old has a ~25% chance of being disabled for 90+ days before age 65, but only a ~5% chance of death.
Phase 3: Long-Term Care Analysis
Goal: Evaluate LTC insurance vs self-insurance vs hybrid products.
LTC cost projection:
Average annual cost: $[X]K (nursing home: ~$100K+, home care: ~$60K+)
Average duration of need: 2.5 years (but distribution is highly skewed)
Probability of needing LTC: ~50% for individuals reaching age 65
Catastrophic scenario (5+ yrs): ~15% probability
Self-insurance analysis:
Assets available: $[X]M
LTC reserve needed (3 years): $[X]K
As % of portfolio: [X]%
Can the portfolio absorb it? [assessment]
Traditional LTC insurance:
Daily benefit: $[X]
Benefit period: [X] years
Elimination period: [X] days
Inflation protection: [X]% compound
Annual premium: $[X]K (may increase over time)
Lifetime premium (20 years): $[X]K
Hybrid product (life + LTC rider):
Death benefit: $[X]M
LTC benefit pool: $[X]M (2-3x death benefit)
Single premium: $[X]K
If LTC not needed: Death benefit paid to heirs
Decision framework:
- Net worth <$500K → Medicaid planning (attorney, not financial advisor)
- Net worth $500K-$2M → LTC insurance makes sense (can't self-insure fully)
- Net worth $2M-$5M → Hybrid product or partial self-insurance
- Net worth >$5M → Self-insure (LTC cost is manageable relative to assets)
Phase 4: Annuity Analysis
Goal: Evaluate annuity products for guaranteed retirement income.
Single Premium Immediate Annuity (SPIA)
Purchase price: $[X]K
Monthly income: $[X]
Annual payout rate: [X]% ($annual income / purchase price)
Breakeven age: [X] (total payments = purchase price)
Life expectancy advantage: Lives beyond breakeven → "won" the bet
Comparison to bond ladder:
Same income from bonds requires: $[X]K at [X]% yield
SPIA is [X]% cheaper due to mortality credits
But: no residual value if die early
Qualified Longevity Annuity Contract (QLAC)
Purchase (from IRA, up to $200K): $[X]K
Income starts at age: [X] (typically 80-85)
Monthly income: $[X]
Purpose: Pure longevity insurance — covers the "live too long" risk
Reduces RMDs on the amount used to purchase
Fixed Indexed Annuity (FIA)
Premium: $[X]K
Participation rate: [X]% of index return
Cap rate: [X]% maximum credited
Floor: 0% (no loss, but no guaranteed gain)
Surrender period: [X] years
Annual fees: [X]% (often embedded, not transparent)
Key question: Does the upside potential after caps and participation rates
beat a simple bond portfolio? Usually no — the complexity benefits the issuer.
Phase 5: Business Insurance
Goal: Analyze insurance needs for business owners.
Key Person Insurance
Key person: [Name, role]
Revenue attributable: $[X]M ([X]% of total)
Replacement timeline: [X] months
Coverage needed: [X]x annual revenue attributable
or: [X]x annual compensation + recruiting cost
Policy type: Term (matching employment horizon)
Premium: $[X]K/year
Buy-Sell Agreement Insurance
Business value: $[X]M
Owners: [X] partners, [X]% each
Each owner's share: $[X]M
Insurance structure:
Cross-purchase: Each partner owns policy on others
Entity-purchase: Business owns policies on all partners
Hybrid: Combination
Total insurance needed: $[X]M (covers all buyout scenarios)
Annual premium: $[X]K total across all policies
Quality Gates
Hard Constraints
- NEVER evaluate permanent life insurance as an investment — compare the insurance component separately
- NEVER recommend an annuity without comparing to a simple bond ladder alternative
- ALWAYS check existing group coverage before recommending individual policies
- ALWAYS disclose that insurance premiums are a cost — they reduce investable assets
Common Pitfalls
- Whole life as investment — the cash value return is typically 2-4% after costs; buy term and invest the difference
- Ignoring disability risk — more likely than death during working years but less commonly insured
- LTC insurance too late — premiums skyrocket after 60, and health issues may make you uninsurable
- Variable annuity fees — mortality & expense charges + sub-account fees + rider fees can exceed 3%/year
- Over-insuring — insurance is for catastrophic risk, not every possible expense
Related Skills
/retirement — retirement income planning and withdrawal strategy/estate — estate planning and wealth transfer/wealth — general wealth advisory/fpa — financial planning for business owner insurance needs
