I think you are just dealing with a different mentality of people here. FWF is generally filled with tightwads that aren't really interested in leaving millions of dollars to relatives or providing said relatives with millions in incentives to help them kick the bucket.

In general people that inherit or are gifted significant amounts of money tend to under perform their peers in terms of income and savings so really the best thing that Grandma can do for her niece is spend that extra money on hookers and blow.

Porqin said:You can buy $2.75M worth of coverage at age 75 for only $1M?
Even I was surprised by it. I am sure "excellent health" (and being female and hence larger life expectancy) play a crucial role.

ETA: Per this Life expectancy table, a female age 75 in the US has a life expectancy of 12.25 more years. It is based on "average" data over US population from 2005. If we assume a 15 year expectancy for a 75-year Grandma in "excellent health", 1M --> 2.75M over 15 years represents an annual compounded rate of 7%.

If Grandma can not stomach risk, why would she take a credit risk of a single insurance company for $2.75MM?

That insurance companies must have gots to be rated quadruple-A for Grandma to even think about it.

With 15 year life expectancy and a 15-30 year invetment horizon for the heir, this investment is best kept in a well-diversified asset portfolio.

If tax-exempt gifting is possible, then I would vote for a well diversified portfolio.

InsuranceExpert said: She has long term care insurance.
Most long-term care insurance products I have seen cover only 1-3 years maximum of nursing home stays. Do you have access to sell long-term care insurance longer than 2 years? My personal experience has suggested there are two types of nursing home patients, those that die within 1 year and those that live there for over 5 years. Typically the people that die quickly are the ones that go in with some kind of serious health problem or illness that progresses very quickly. The ones that spend a long time in the nursing home are the people who are physically fit but develop some kind of managable condition that progresses slowly but still requries they receive care (Alzheimer's comes to mind, but I am sure there are other things).
Honestly I don't know why katx would buy (or continue to pay the premiums) long-term care insurance (especially if it has a max paout of 1-2 years) if she had 1,000,000 in the bank. Nursing homes cost approximately 5K per month, which is 120,000 over two years. With the standard long-term care insurance policies she is paying for insurance on something that she can afford to pay out of pocket.

InsuranceExpert said:Good posts. Keep them coming! I won't be able to respond until tonight.
Does anyone have any ideas that will lead to more money for Katx?

As other have mentioned 7% isn't a bad compounding rate, but there is a real risk of the life insurance company going under along with inflationary risks (some people think that current Govt. spending weak dollar etc.. may cause abnormally high inflation in the next 10 years or so). A diversified stock/bond mix has a more broad risk profile, and would also be hurt less by inflation. At least in theory.

Then granma dies in what the Insurance company considers "questionable circumstances", and they refuse to pay. Katx is left homeless and without wifi, unable to log-in to FWF and respond to tripleB's thread: "What was your biggest Financial mistake?"

InsuranceExpert:

I've gotta give you credit for being persistent. Also, credit is due for keeping your cool while being, on the whole and in general, informative. Having said all that (here it comes)...I still think life insurance is one of mankind's cruelest and most devious inventions. Many older people who have life insurance don't need it and definitely don't understand their other options.

After reading your hypothetical case, it strikes me odd that you would pick someone fitting the description of Grandma Sylvia to make your point. Grandma Sylvia represents what I'm guessing is much less than 1% of the general population, and at best a tiny percentage of even our senior citizens.

For example NONE of my relatives and friends have long-term care insurance. And I am well acquainted with their financial situations. There's no doubt that long-term care insurance has a place but it's very expensive when purchased late in life. Very few potential customers over 75 who need it can comfortably afford long-term care insurance. Even though Grandma Sylvia can afford long-term care insurance, she doesn't really need it. The poor and the wealthy don't need long-term care insurance.

I'm not sure if I completely understand the policy you've described. But if you mean buying a single premium life insurance policy for $1M, I think it's a very bad idea to "give," "invest" with, call it what you will, $1M to an insurance company if $1M represents basically your entire life's savings--ESPECIALLY if you're a healthy 75 and looking forward to many more good years.

Regardless of the investment's safety, and the insurance company's strength, I for one (especially at that age) wouldn't sleep nights with that kind of arrangement. Even with benefit of a $100k annual income.

Also, I'd never consider this strategy based strictly on principle: I couldn't knowingly buy an insurance policy that benefited the salesman so handsomely, for so little work, and in most cases, for so little knowledge. I will concede, however, that InsuranceExpert's insurance knowledge does seem to be a cut above most others in his field.

This plan opens up too many risks. There is no need to risk the $1m in order to make an extra 1.75m. Subjecting 5/6 of your portfolio to a single non-guaranteed asset is always a bad idea, especially when there is no time left to rebuild wealth. As mentioned the insurance company could go under or may just not pay out. There may be fraud involved with the agent, especially with a tempting $1m coming in. What if she needs $400k for cancer treatment?

I'd actually postulate that doing nothing is better than this plan. Sylvia can guarantee leaving $1m rather than a potential $2.75m. I liken it to a game of deal or no deal when the contestant wisely accepts a less than optimal settlement when the amount risked exceeds a certain percentage of his overall net worth, either current or based on his future estimation. Of course if the cost of the insurance was less than 5/6 of her net worth it would be a different story. Maybe even 1/2 might make sense compared to doing nothing. I ran this through a kelly criterion calculator and was surprised with how high it said to wager with even just a 95% chance of collecting the $2.75m. It actually said to wager $1.1m but a gambler's rule of thumb is to risk half of that to avoid large swings in his bankroll. Remember this is just between the two options of doing nothing or making the 95% 1.75/1 payout bet.

What's more important though is that with either amount of money Katx will have similar life options. If she decided to blow $1m or $2.75m I'm sure she could do it. If she invests it wisely, she will retire in style starting with either amount.

There are of course better options than doing nothing. A diversified portfolio heavy in inflation protected assets would protect against inflation far better than this plan. High inflation also usually means high interest rates available and Sylvia is essentially locking herself into a lifelong relatively low yielding investment. With high inflation it is likely that the death tax minimum will be raised past $2m anyway, completely negating the tax advantage of the life insurance plan.