Association Insurance Feed

Disability Insurance Basics

Shutterstock_416729059It’s fairly common to have at least a small understanding of life insurance, but it’s not often we hear about disability insurance. Every now and again, you’ll hear that a friend is “out on disability,” but what does that really mean and what types of disability insurance are out there?

There are two very different types of coverage – short term disability and long term disability. Depending on your policy and your state’s laws, short term coverage generally covers a period under 1-2 years – although many policies cover a much shorter timeframe, say 3 months. Short term coverage is only available through an employer. Many plans allow you to carry over a limited amount of unused vacations days (up to a maximum) to add to your “short term disability bank.” If your employer doesn’t offer this coverage (or if you’re self-employed), you may want to consider having a 3-6 month savings set aside in the event that you suffer a disability.

Long term disability (LTD) is meant for illnesses or injuries that prevent you from working for at least several months. Coverage may be available from an employer and/or from an outside source, such as an association to which you belong. This is where things get tricky.

Employers like to tout that benefits like LTD are paid on a pre-tax basis. While that is attractive when you are paying your premiums, those benefits have to be taxed sometime – and that sometime is when they are paying out. What that means is that if your policy replaces 60% of your income, that 60% payout is going to be taxed – meaning less money to pay bills. Another caution with employer plans is that they are not portable. If you leave the company, the policy will cease to exist.

If you purchase an external plan, the inverse is true. Your benefit amount will not be taxed and you keep the policy so long as you remain eligible and continue to pay your premiums – regardless of switching employers. You may also find better rates if you’re purchasing through an association group plan.

Long term disability policies differ in pricing based on a “waiting period” (sometimes called an “elimination period”), or the period you have to wait from the time you incur your disability until the time the policy starts paying. 30, 60 and 90 day waiting periods are very common. Prices decrease for longer waiting periods. This gap is where your emergency fund or STD policy can be critical to staying afloat financially.

It’s important to note that disability coverage isn’t health insurance. The money is not earmarked to only pay medical bills. It should be thought of as income replacement that allows you pay for your normal bills until you get back on your feet again.

A feature you will want to look for is called “own occupation.” In other words, the policy considers you to be disabled (with some other stipulations, such as the inability to do certain activities of daily living) when you cannot do your exact job, not just any job.

You will not find a policy that will replace 100% of your income and insurance companies require you to disclose other policies to ensure the addition of their policy does not equal a high percentage of your income. Policies will generally pay around 60% of your income – with some plans going as high as 80%.

LTD insurance typically requires full underwriting, which means you will fill out an application and undergo some medical testing. On occasion, group plans may offer a limited benefit amount to which you can secure coverage with only answering a few short questions (known as simplified underwriting). These offers cannot be made frequently, so you may want to consider them when you receive one.

Disability insurance can be confusing, but it’s coverage that most of us should consider. After all, how many of us could afford not being able to work while incurring medical bills? Feel free to message us if we can answer any additional questions about disability insurance.


Understanding Insurance Underwriting

Shutterstock_223155742When being presented with an insurance offer, you’re likely to encounter one of three scenarios:

  1. The offer doesn’t require an application and states that you cannot be turned down for coverage.
  2. An offer with a series of around 3-5 short questions, typically requiring a “yes” or “no” answer.
  3. An offer that includes a full application.

The first scenario is what’s called “guarantee issue.” If the product is individually underwritten, you may pay higher rates due to the increased risk to the insurance company. In a group plan (such as through an association), the rates are normally unchanged. In a plan such as dental or vision, it’s very common for the plan to be guarantee issue at all times. For life or disability insurance, these offers are usually only offered at very infrequent intervals – maybe only once every other year. These offers can be to add onto your existing coverage or to start a new policy. It can be a quick and simple way to add to your insurance portfolio with minimal effort.

The second scenario, with several “yes” or “no” questions is “simplified issue.” These questions are often referred to in the insurance world as “knockout questions” because the insurance company may consider a “yes” answer to any of the questions as disqualification for coverage. This isn’t always the case though. Certain “yes” answers may be okay or it may trigger additional underwriting activities.

Lastly, when you receive a full application, this is called “fully underwritten.” In some cases, the application information will be enough for the insurance company to approve or deny your coverage. More often than not though, they will have a paramed appointment set up with you where the company will come to the location of your choice and collect blood and/or urine samples. For very large policies, you may also have to go through financial underwriting to prove that the policy isn’t unreasonable in comparison to your assets. For instance, if you make $30,000 annually, the company may not approve a $2 million policy. It’s important to note that the fully underwritten process can take a bit of time to complete; thirty to ninety days is not completely unheard of.

We hope that this blog helps you to understand the different types of insurance offers you may receive. Of course, if you have additional questions, please feel free to comment, send a message or call us.


How much does long-term care insurance cost?

Shutterstock_60862267Research has shown that many of us both underestimate the risk and cost of long-term care and overestimate the cost of protecting ourselves with long-term care insurance.

With research showing that approximately 7 out of 10 American’s aged 65 or over will need some form of long-term care services during the remaining years of their lives, many people have turned to products like long-term care insurance to protect themselves against this potential catastrophic cost.

Many survey responders who chose not to buy long-term care insurance (and have therefore chosen to self-insure a risk that could be well over $300,000 per year per person) cited the cost of insurance premiums as a primary reason not to buy.  Granted, long-term care insurance isn’t affordable for everyone but it is generally less expensive than most people believe and there are ways to minimize premiums.

First, it’s important to understand that long-term care insurance premiums for newly purchased policies increase with age.  To state it another way, the older you are when you buy the more this insurance will cost.  It’s also worth noting that this product is medically underwritten and the older you are the more likely you will be to have a medical condition that will prevent you from buying insurance or that will cause you to pay higher premiums. 

Secondly, there are basically four (4) major components to designing a long-term care insurance policy that drive the cost.  Each of these can be changed to impact the cost of your policy.  They are:

  1. Your daily or monthly maximum benefit.  This is the amount that the insurance carrier will reimburse you for care received each day or with more flexible plans, during a given month.  Selecting a lower daily or monthly benefit, will lower your premiums however you may also be “choosing” to co-insure part of the future risk.
  2. Lifetime maximum – stated in a number of years.  This option is usually stated as 2, 3, 4, 5, 6, etc. years.  It’s very important to understand that the lifetime benefit you select does NOT limit you to that number of years.  This option is only used to establish your pool of money (benefits).  Someone who selects a $6,000/month benefit and a 5 year lifetime maximum benefit will start with a $360,000 pool of money ($6,000 x 12 x 5).  Benefits paid to the policyholder are deducted from that pool without regard to the number of years.  So this plan could last a lot longer if the claimant is using less than $6,000 per month.
  3. Elimination Period.  The Elimination Period (EP) is like a deductible but stated in terms of days instead of dollars. The EP, usually expressed as 0, 30, 60, 90, 120, 180 or 360 days is the period of time once you are certified to be on claim that you will have to wait until the insurance company will begin paying your claim.  Obviously the longer the EP the lower your premiums will be.
  4. Inflation protection.  Many people are buying long-term care insurance in their 50’s and are most likely to use their policy in their 80’s.  Companies offer various inflation options for that will inflate both your daily/monthly benefit as well as your lifetime maximum (pool of money).  Some of these options can be very expensive however many insurance companies offer more affordable options that may suit your needs.  Your LTC insurance specialist can also show you how purchasing a larger benefit up front with a lower inflation option may actually save you money.

Finally, you may be eligible for discounts on your policy based on your membership in an association (e.g., alumni associations and professional groups).  

You and your long-term care specialist agent can manipulate all of these features to design a policy the meets your needs and fits your budget.  There are also many other options available in these policies to tailor the policy to your particular desires.

Remember… you will never be younger (so rates won’t be less expensive) or healthier (rates go up with medical conditions or you may not be able to qualify) and you can take control of your policy design and premiums.

 

A Millennial’s Guide to Life Insurance Part 2: What Type of Life Insurance is Best

Shutterstock_262997165We’ve gotten through why life insurance is probably more necessary than we think, but here’s where things get a little more complicated. Like everything else in life, life insurance policies come in a variety of shapes and sizes. For someone like me, who isn’t exactly financially literate, it’s hard to keep them all straight. But after reading and re-reading a host of articles on the subject, I think I can break it down for you. [1]

1.) Whole Life

Whole life insurance is one of the two permanent life insurance options I’ll be discussing. As you’ve probably guessed, a permanent life insurance policy does not expire until you do, or until you cancel your policy. You can also expect to pay a very high premium, but there’s a reason for this.

With a whole life policy, the amount you pay each month goes to two different places:

  • Part of it is used to cover the cost of your policy.
  • The other part is placed into a savings account, typically with decent interest rates.

With whole life you have the face value of your account (what your beneficiary will receive) and the cash value (the amount of money accumulated in the savings account). With a whole life policy you can take out a loan with the insurance company and use your cash savings as collateral. Since you’ve accumulated cash value, the loan is very low risk and will often offer lower interests rates than you’d find elsewhere. Also, if you decide to cancel your policy, you will receive the entire cash value of your policy.

2.) Universal Life

The basics of universal life are pretty similar to whole life, but with an additional amount of flexibility. Like whole life, it is a permanent policy and a portion of the premium increases the cash value of the policy. You may take a loan out against your cash value, and will receive it in full if you cancel.

 Some of the distinctive features of universal life include:

  1. It is possible to increase or decrease the face value (death benefit) of your policy.
  2. Your cash savings account can be a part of an investment portfolio.
  3. The amount you pay each month is very flexible.

Unlike whole life, which places a fixed amount of money in your cash value account, with universal life, you decide how much you put in your cash account after paying the cost of the policy.  This means that if you’re strapped for cash one month, you can pay a smaller premium. Conversely if you have some excess cash, you can choose to pay high premiums now, building up cash value, and eventually use the cash account to take out loans, or even pay your monthly premiums.

As for me, who couldn’t save unless tricked into it, the cash value of my policy would probably increase faster with whole life’s fixed premiums.

3.) Term Life

Term life insurance has the awesome advantage of being way cheaper than other types of life insurance. However, it does have its drawbacks as well.   To start off, it doesn’t include any of the bells and whistles other policies offer, and it’s temporary. Insurance companies offer a diversity of term lengths (10, 20, 30, 40 years), and your premium will stay the same from the moment you get the policy until the term is up. The issue with this, though, is that once your term is up you will lose all you coverage and have to take out a new policy from scratch. Of course, we age along with our policies, so when applying for a new policy you can expect to see a major hike in premium costs. Just the icing on the cake you needed, right?

But, there is an advantage to term life as well. Many term life policies include a conversion clause which will let you convert your term policy into one of the permanent policies outline below. This can be a good option, but you’ll have to be careful because many policies will not let you convert after a certain amount of time.

4.) Group Life

For those recently or even semi-recently out of college, finding a job that includes benefits can be a pretty difficult task. But if you are one of the lucky few, you’ll likely have access to a group life insurance plan. This type of policy is pretty different in that you are not the actual owner of the policy, but rather your employer or union will offer you a plan as a part of your overall benefits package. These are typically term life policies that renew every year.

A great advantage is that your employer pays for some if not all of the premium costs, so you will be paying considerably less each month. However, since your employer is the policy holder rather than you, you have less control over the plan you are given. The face value of these policies will often cover one or two times your salary. Should you leave your company, you can cancel your policy or in some case, you’ll be able to convert your policy into an individual plan.

Where Do I Go From Here?

Here’s the thing: after researching life insurance and giving you guys some insight on it, I’m still not sure if I’m actually going to take out a policy. But in the process I realized something that was pretty shocking: even at my age and in my financial situation, life insurance is an option that I should be taking seriously. One of the most liberating and terrifying things about being in my 20’s is that I am going to be in a completely different place in my life in 10-20 years. By the time I’m 33 I may have bought a house or gotten married. If I take out a 20 year term life policy out now, I’m covered for any of those life changes that seem so irrelevant now, but may be an option in the not too distant future.

Bottom line, life for us is constantly in flux, and paying an extra $20 a month to have stability in the midst of all these changes may be something to consider. I know I have. 

If you missed Part 1 of our guide, be sure to check it out. 

 

[1] Please note that this is a general overview of different types of life insurance policies and their features. Different policies will have difference features, exclusions, etc. So before purchasing a policy, carefully review the terms to make sure you are getting what you want out of it. For the record, I'm not a licensed agent. Definitely call one and discuss your specific situation with them.