Money, Health, and Other Things

Educational Blog in the Area of Family and Consumer Sciences for the Middle Peninsula

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Risk Management and Insurance Basics, Part XIII

This week, we’ll wrap up our discussion on disability insurance.

Should everyone have disability insurance? That depends. For one, it depends on your preference as it relates to risk management – do you want to insure against this risk, protecting your household from a potential loss of income, or retain those risks and avoid paying premiums? It also depends on your current financial situation. Do you have enough in non-retirement savings to cover the loss in income? Do you have assets that you’d be willing to sell to make ends meet? Is there another employed spouse in the household that earns enough to comfortably live with just their income?

If you do decide to get disability insurance, here are a few things to consider.

For long-term disability insurance, the longer the elimination period, the lower the premium. With that said, be sure you have adequate non-retirement savings to cover your household expenses during that elimination period.

If you are going through a divorce and the ex-spouse is expected to pay child support and/or alimony, consider requesting in the divorce decree that they buy disability insurance to protect those support payments.

There are a number of features you can add to your policy, but remember, virtually all of them will make that policy more expensive. Selecting a non-cancellable policy means the insurer cannot cancel the policy, raise the premium, or decrease the benefits. Generally, long-term disability insurance covers 50-70% of net income. Some insurance companies will provide options to increase the benefit amount if you don’t think that’ll be enough to support your household. If the policy has residual benefits, that means they’ll provide you partial benefits if you’re still at your job but unable to work at full capacity. For instance, if a disability results in you working 20 hours instead of 40, a disability insurance policy with residual benefits may provide you 50% of the policy benefit amount. A cost-of-living-adjustment rider, or COLA, allows for your benefits to increase with inflation. A waiver of premium rider means the insurance company will not charge you for premiums if you become disabled, though how that’s implemented and for how long differs from policy to policy. Lastly, a recurrent disability clause means the policy will waive your elimination period if you become disabled soon after a previous disability period, if it’s from the same injury or cause. Generally, policies will have a limit on time between these two disability claims, often six months, for the policyholder to be eligible for the recurrent disability.

That concludes our discussion on disability insurance, we’ll return next week to discuss umbrella insurance.

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Risk Management and Insurance Basics, Part XII

Over the next two weeks, we’ll return and discuss disability insurance.

Statistics on disabilities can be more sobering than many of us realize. According to the Social Security Administration, more than one in four 20-year-olds are expected to become disabled before reaching retirement age, and roughly one in five Americans, at over 50 million, are currently living with a disability.

One option to address this concern is through disability insurance. Disability insurance is generally either short-term or long-term. Short-term disability coverage generally lasts between three to six months, with very short elimination periods (the period you have to wait until receiving benefits), typically only a couple days to a couple weeks. Long-term disability coverage lasts considerably longer, anywhere from 2, 5, 10 years or up until retirement. However, long-term disability also tends to have a much longer elimination period, generally around 3-6 months or longer, which is why some policy holders and employers combine short-term and long-term policies.

Another consideration is “own occupation” vs “any occupation.” Any-occupation coverage will cover you if you’re unable to work in a job that is reasonably suitable for you given your education, experience, and age. The key with these policies is whether or not the disability prevents the policyholder from performing a job which they are reasonably qualified for. For instance, if a surgeon were to badly injure their hand, but continued to work in the medical field in a non-surgical position, they may not qualify for any-occupation disability benefits. However, if the injury was severe enough to prevent them from functioning professionally in the medical field at all, they would likely qualify. Own occupation does not have these specific requirements – instead, if the insurance holder is unable to perform the duties of their specific occupation, they will generally qualify for disability benefits. Going back to the earlier example, if a surgeon injures their hand and is no longer able to perform surgery, instead taking a lower paying non-surgical medical position, they would likely qualify for benefits from an own occupation disability policy. With that said, disability insurance policies will often limit the benefits if you are employed at another job, even for some own occupation policies. They may, for instance, limit the benefit so that your combined disability benefits and current income are not more than your previous income.

What’s the trade-off? For the added flexibility and coverage, you will typically pay more for an own occupation disability policy than an any occupation policy with the same benefit amounts and length of benefits. Which of these option makes more sense for you will depend on how specialized your job is, the income level for your current job vs. other jobs you would be qualified for and potentially be able to do with a disability, what you’re willing or able to afford in a disability policy, and your personal preferences for risk management. Next week, we’ll wrap up our discussion on disability insurance.

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Risk Management and Insurance Basics, Part XI

This week, we’ll return and conclude our discussion on life insurance.

How do you determine how much insurance you need? While there are common simplistic formulas, like 10-times your salary, you may want to look at your individual financial situation to get a better idea.

Here are some questions to consider:

How much is your family dependent on your income? How much would they need annually to cover necessary expenses?

How long would it take them to adjust expenses? Some situations may allow for quick and significant reductions in household expenses, however, if you have multiple young children in a home where you’re paying off a mortgage, it may take a number of years before expenses can be significantly reduced.

What will your “final expenses” be? Funeral costs, as well as the accompanying food and lodging costs, can be expensive and should be included in your life insurance calculation.  

Which debts would you need your plan to pay off if you were to pass prematurely?

If you plan to have your children attend college as adults, how much would be needed for college expenses if you were to pass away?

Also, consider any other specific needs for your household – for instance, do you expect estate or inheritance taxes? Do you have a special needs dependent that may require medical and/or custodial care as an adult?

Once you’ve addressed some of these specific questions, you should have a better idea of how much you would need for life insurance.

In addition to avoiding simplistic formulas, here are some additional life insurance tips. Try not to cancel existing policies until you have a new one in hand. Be sure to periodically review beneficially designations – this should be done annually for all insurance policies and assets with beneficially designations; be sure the right people are supported if you were to pass away! Lastly, in the event of a divorce where the other person is the higher earner, consider making it a requirement for an ex-spouse to have life insurance to protect any alimony or child support.

Next week we’ll return and discuss disability insurance.

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Risk Management and Insurance Basics, Part X

Over the next two weeks, we’ll discuss life insurance.

Life insurance involves a contract where the insurer promises to pay a beneficiary a sum of money in exchange for a premium, upon the death of an insured person. But who should have life insurance? While answering that involves some degree of personal preference and personal approach to risk management, there are certain people that life insurance tends to make more sense for. First are wage earners with dependents; if you have children or dependents and they would be significantly impacted financially if you were to pass, you should probably consider life insurance. This is especially true long-term if you have a dependent with special needs, as that financial support may be necessary beyond the age of 18. Also, people with significant debt, that would otherwise be left to a spouse or family member in the event of passing, may want to consider life insurance as a way to address the financial burdens that would be left with their estate. Unfortunately, your debts do not disappear when you’re gone!

Broadly, there are two common forms of life insurance. First is Term Life insurance. Term Life provides coverage for a specific defined period, like 10, 20, or 30 years. Term Life rarely includes a cash-value account, investment options, or a way to create “cash surrender value” – an amount of money that an insurance company would pay out if the contract were terminated before the insurer passes away.

The other common form is Permanent Life. Permanent Life insurance will cover you indefinitely until you die, and typically provides you options to create a cash-value account and create cash surrender value, possibly through investments. The major downside of Permanent Life, compared to Term Life, is that Permanent Life is typically more expensive for the same payout.

Which option makes more sense for you will depend on personal preference and your current situation – if you only want coverage until your children are adults, and prefer lower premiums over building cash value with the policy, Term Life probably makes more sense for you. If you like the idea of a cash value account, and would like coverage indefinitely until you die because of dependents with special needs or wanting to avoid leaving a large debt with your estate, Permanent Life may be the better choice.

Next week, we’ll return and conclude our discussion on life insurance!