Insurance Planning

Life Insurance

If you have loved ones who will not be able to pay your debt (mortgage, car payment, etc.) and and be financially safe, then you need to have life insurance.

There are two types of life insurance: term life insurance, and permanent life insurance.

A term life insurance policy remains in effect for a specified period, such as 5, 10, or 15 year. This makes sense if you know beforehand when your need for life insurance will disappear (say when your child graduates from college, or your mortgage is paid off). The disadvantage of term life insurance is that it usually has no savings component. When the term ends, you are left with nothing.

Like term insurance, a permanent life insurance policy pays a death benefit at the insured's death. Unlike term policies, a portion of the premiums paid for permanent insurance is invested by the insurance company on your behalf, and the money grows tax-deferred. However, the returns earned may be lower than the potential returns offered by alternative savings vehicles. A permanent insurance policy has a cash value, which you can borrow. At the insured's death, the beneficiary receives the policy's death benefit, not the cash value. The death benefit may be reduced by the amount of loans takes against the policy's cash value. Permanent life insurance has the following varieties:
1. Whole Life policy: same premium for life, guaranteed death benefit. You must keep paying the premium for keep the policy in effect. If you decide to cancel the policy, you receive the cash value. For a young person, whole life insurance premiums will initially be higher than term life premiums. Later in life, as it becomes more expensive to purchase term insurance, the premiums on an established whole life policy could be lower than those on a new term life policy. However, if you have the discipline to set up your own savings program, you probably can get better returns elsewhere.
2. Universal Life policy: lifetime coverage, adjustable premium and death benefit. You can reduce your premiums (thus reduce your death benefit). Or you can keep the same premium, but reduce the death benefit and put a greater portion of your premium into the savings component. Some universal life policies also pay a market-based (rather than fixed) rate of interest on your policy's cash value, who can be valuable in times of high inflation.
3. Variable Life policy: lifetime coverage, usually a promised minimum death benefit, more flexibility in terms of how to invest the money. Think of a variable life policy as a savings tool with some life insurance attached.

Disability Insurance

Disability insurance can help you manage the risk that serious injury or illness will eliminate your income. Most insurance companies will insure no more than 60% to 70% of a person's income. However, these policies can be very costly.

Disability policies provide either short-term or long-term coverage. Short-term policies may cover 13 weeks to 2 years. Long-term coverage may extend throughout the policyholder's working life, often until the age of 65 (after that, the person can usually qualify for Medicare, the federal health insurance program for older Americans.)

A policy's definition of disabled is commonly determined based on two standards: "own occupation" and "any occupation." "Own occupation" means you are unable to perform the primary duties of a job similar to your current job. "Any occupation" means you are unable to pursue any form of gainful employment. Apparently "own occupation" is more attractive and more expensive.

Such a policy often has a elimination or waiting period, ranging from 30 days to 2 years. If you become disabled, you won't begin to received benefits until the end of this period.

Make sure that the policy allows for a waiver of premium, mean that if you become disabled, the insurance company will waive the policy's premium payments during your disability.

Some policies offer an inflation rider, at extra cost. This means the insurance payment will keep pace with the inflation.

An important part of a policy is the insurance company's obligation to pay. Here is a list of the different contracts, from most to least secure:
1. Noncancelable - as long as you pay the premium, the insurance may not cancel the policy for any reason or raise the premium. This is the most expensive option.
2. Guaranteed Renewable - the insurance company must continually renew coverage over a specified period. No contract modification can be made, and rates may be raised only for an entire class of policyholders.
3. Conditionally Renewable - the insurance company may cancel the policy, but not to discriminate against a particular policyholder. Rates may be raised only for an entire class of policyholders.
4. Optionally Renewable - the insurance company has the option to renew a policy on anniversary dates or payment dates. At that time, it may raise premiums and modify the contract.
5. Cancelable - the insurance company may terminate coverage for any reason by giving due notice to the policyholder.

Pretax or after-tax dollars: if you have paid the policy premium with post-tax dollars, the benefit (when you are disabled) will be tax-free. If you paid with pretax dollars, then the insurance benefit is regarded as income and subject to taxes. You can check with your employer to see if you have both options.

Long-term Care Insurance

Health insurance usually won't pay for nursing-home care or assistance with the basic activities of daily living. A long-term care insurance can fill the need.

Nursing home care can be very expensive - an average of $40,000 per year (cheaper in rural areas than in major cities). Therefore, these policies can be very expensive. Furthermore, there is no guarantee that you will be approved for a long-term care policy. When you apply, the insurance company will most likely require a medical exam.

Long-term care insurance is most appropriate for middle-income workers with moderate assets. Lower-income people may qualify for Medicaid coverage, and very wealthy people can use their own assets to pay for long-term care.

The premium for long-term care insurance rises with age. In general, it is wise to buy a policy around age 60, when the risk for long-term disability is high enough to warrant coverage, and the chance for getting an affordable policy is still good.

When purchasing a long-term care policy, pay attention to the following:
Waiting Period - usually 30 days, but can be much longer. Make sure you can pay for your own care during the waiting period. If you are eligible, Medicare may pay for the first 20 days of long-term care.
Maximum Benefit Period - the shorter the benefit period, the lower the premium. The average stay in a nursing home is less than 2 years. However, it may not be wise to use this number to determine you own needs. The cost of increasing coverage from 2 years to 6 years is relatively low, compared to the cost of an unexpected lengthy nursing-home stay.
Benefit Level - The lower the daily benefit, the lower your premium. The range is about $50-300 per day. The average nursing home charges more than $100 per day.
Inflation Protection - This option increases the daily benefit level in line with the rising cost of living.
Waiver of Premium - The option waives premium payment after you've received benefits for a specified time, often 60 or 90 days. If you recover and no longer need care, premium will resume.
Home Health Care - The benefit level for home care is usually half of that payable for nursing-home stays. A variation of home health care is adult day-care benefits, which provide for assistance while family caregivers are unavailable.
Additional Considerations - Make sure that your policy is guaranteed renewable for life. Select a policy that covers Parkinson's disease, Alzheimer's disease, and other organically caused conditions.

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