Actuaries don’t buy whole life insurance and ILPs
BY DRIZZT

In fact, they don’t buy a lot of insurance!

Actuaries are well trained professionals who help insurance companies balance the risks of insurance product versus an effective value that consumers will be willing to pay for it.

Actuaries mathematically evaluate the likelihood of events and quantify the contingent outcomes in order to minimize losses, both emotional and financial, associated with uncertain undesirable events. Since many events, such as death, cannot be avoided, it is helpful to take measures to minimize their financial impact when they occur. – Wikipedia

So what do most actuaries buy to insure themselves?

An old article in Sunday Time’s interviews Christopher Tan, CEO of Providend:

“I asked an actuary (someone who designs insurance products) who had left an insurance company what he buys for himself. Like many former actuaries I have spoken to, he said he would never buy an investment-linked plan or a whole life plan as it is just too expensive and doesn’t make sense. He has protected his family with term plans. So, if the chef doesn’t eat his own cooking, why should we?

At the simple dollar, the blogger spoke of a conversation with his friend who became an actuary for a large life insurance company

He basically told me that if I am a financially sound person, I am throwing my money away on life insurance unless I meet a few strict criteria (young, a relatively low net worth, and young children). This kind of blew me away considering he’s in the life insurance business, but when he broke it down for me, it made a lot of sense. Note that the advice that follows is based on a conversation between friends and shouldn’t be viewed as professional advice and you shouldn’t just follow it blindly without doing your own research, but it is quite interesting and worth sharing.

* unless you are a financial train wreck, you should never buy anything but term life insurance

* if you have no dependents and no spouse, don’t buy life insurance

* the more net worth you have, the less insurance you need

* think about your family’s needs carefully

* when your policy expires, don’t renew it immediately – recalculate


The people that systematically access risks through quantitative means questions the viability of expensive insurance, probably assessing that the probability to make a claim versus how much you pay for it isn’t worth it. Why then do we do the opposite most of the time?
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Opinions from a trained actuary: Stick to simple insurance


I managed to get into contact with a US investment professional David Merkel. David is a trained life actuary as well as a CFA. He current managed his own fund, Aleph Investments, and talks about investment mainly in the domain of bonds and insurance companies at The Aleph Blog.

So I pose this question to David:

When I know that you are trained as an actuary it got me curious. They say that actuary assess the risks of insurance products to find value for consumers, at the same time evaluate the probable risks of the product.

What kind of insurance does an actuary actually buy for his and his family? Insurance are often sold with economic bias so what better way to know then find out from people that use actual data and determined it through quantifiable methods.

I heard that actuaries often buy only term life insurance only and that investment linked and limited whole life policies do not make sense. At the same time, it would seem that the way you can claim critical illness is such that most of the time you can claim it, you are almost very disabled or near death. In such a scenario wouldnt [sic] a pure death and tpd [sic] term life be suffice?

David’s reply was as follows:

This is my opinion, given my dealings among actuaries. I could be wrong. Actuaries avoid complexity in insurance products. Why? In general, complex products hide high profit margins. Products that are easy to analyze, like term life insurance, are competitive, and profit margins are low.

The same is true for savings products, like deferred annuities. Actuaries tend to buy simple products that cover basic needs.

Also, they tend to use insurance as catastrophe cover, because they know that having insurance companies pay on a lot of small claims is expensive on average.

There is an exception to all of this. If you are so rich as to need to stiff the taxman, buying cash value insurance policies can make a lot of sense. In that case, wealthy actuaries with clever tax advisors buy cash value life insurance. Death benefits do not pass through the estate.

Actuaries are generally conservative, and avoid insurance products that are not easily analyzed. That should be true of most insurance buyers.

I think that’s why my AIA insurance agent kept selling to me that his well heeled clients buy a lot of endowments.

We wonder whether many of us are in the same situation.

Whatever it is, the common myth in a person not knowledgeable in insurance is cheap equals lesser benefits. This sort of debunks it since guys factor in multi factors in their computation. Then again I could be wrong since there may be some important factors that were assumed, which could be gravely wrong when put into practice.

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What Life Insurance to Buy?

David Merkel

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.