Harrison Lazarus Advisors: Top Ten Financial® - Chapter 8 - Living Insurance (Life, Disability, Health, and Long-Term Care Coverage)

You are valuable. If you multiplied your annual income by the number of years you plan to work, you would see what I mean. If you were unable to work because of some unforeseeable reason, you would lose that value. This is the primary reason for life, disability, health, and long-term insurance.

Life Insurance

Determining if you need it

If you were to die, would your death leave anyone in a financial bind? Do you have life insurance? How do you know if you need life insurance?

There could be many reasons to get life insurance: estate planning, cash accumulation, wealth transfer or estate liquidity. Generally, however, the only need for life insurance is to replace income when other people are dependent on it. For example, if you and your significant other were jointly responsible for a mortgage, and you were to die, the life insurance would help your spouse pay the mortgage. On the other hand, single individuals, independently wealthy individuals, and retired people usually don't need life insurance because no one is generally dependent on their income.

Calculating the amount

Remember the main purpose of life insurance - to secure a lump sum payment to replace the deceased person's income. You can do it the easy way, an easier way, or the easiest way.

The easy way is to multiply the insured person's after-tax income by the remaining years of income. For example, assume a 60 year old earning $100,000 after-tax income (W-2 earnings minus all federal, state and local taxes) and is planning to retire at age 65, has 5 years of earnings left. Multiply the $100,000 by the 5 years, and you calculate a need of $500,000 in life insurance.

An easier way is to add up any debts or major expenses, such as mortgages, loans and/ore college expenses and use that amount for your life insurance coverage.

The easiest way is to ask an insurance agent how much you need. Remember to seek independent advice to ensure the amount is in your best interest and not necessarily the agent's.

Deciding on the type of insurance

Remember the main purpose of life insurance - to replace income. In short, there are two categories:

Term Life Insurance - In exchange for your premiums, your designated beneficiaries collect the life insurance policy if you pass away during the term of coverage. Term is similar to homeowner's or auto insurance.
Permanent Life Insurance - This is all other life insurance, and it is called all sorts of names to entice you to buy it, cash value, whole, universal, and variable. In this case, your premiums pay for life insurance, and a portion is credited to an account that grows in value over time. In general, the premiums cost you 8 times more than term insurance.

Just like homeowner's or auto insurance, term is usually the right type for all; it covers you for a set period and at the lowest expense.

Buying term insurance

In addition to the resources listed in the prior chapter, here a few more direct sources of life insurance:

Selectquote 800 343 1985
Direct Insurance Services 800 622 3699
Wholesale Insurance Network 800 808 5810

You can also request a quote from an insurance agent who will educate you about the policies available.

Whoever you receive quotes from, remember when comparing policies to use the same term (5 to 10 years) and include guaranteed renewability (that way it can't be cancelled).

Disposing of cash value insurance

If you already have a cash value life insurance policy, and, after reading this book, decide to get rid of it, don't do it before you have replacement term insurance coverage first. This will ensure you are covered while changing insurance, if you do need to be insured!

Also, if the cash value is more than the premiums paid on the cash value life insurance policy, you will pay tax on the difference. In addition, if the policy includes tax-deferred retirement savings, you may also incur a 10% penalty on earnings withdrawn before you are 59 ½ years old. You can avoid the tax and penalties by doing a tax-free exchange into a variable annuity policy. You can contact one of the following companies to help you with it.

Vanguard 800 522 5555
Fidelity 800 345 1388
Schwab 888 311 4889

Buying cash value life insurance

Usually you need cash value life insurance if you have an estate tax problem or assets more than one million dollars. If you are in this situation, a fee only financial advisor, CPA, or estate attorney can help you through this process, as it is not easy. You may also call these vendors for policies:

Ameritas 800 552 3553
Wholesale Insurance Network 800 808 5810
USAA 800 531 8000

Who to designate as the owner and beneficiary?

The people named in a life insurance policy consist of:

The insured
The owner
The beneficiaries.

The insured is the person on whose life the insurance will be in force. The death benefit will be paid out if the insured dies.
The owner has control (while the insured is alive) over rights to make changes to the policy. This can be the insured, the beneficiary or someone else.
The beneficiaries receive the money paid out as a death benefit when the insured dies. They otherwise have no control over the life insurance policy unless they also happen to be the policy owner or have been designated as irrevocable beneficiaries.

A major factor to be considered in deciding who should be the owner or beneficiary of a life policy is the potential impact of the federal estate tax. If the owner of the policy is the insured, upon death of the insured, the proceeds will be included in the estate of the insured for federal estate tax purposes. To prevent insurance proceeds from being subject to federal estate tax upon death of the insured, the applicant generally designates the beneficiary, the insured's spouse, children, or the trustees of an irrevocable trust, as the owner of the policy. Legal council can help you with your decision for the right owner and/or beneficiary.

Disability Insurance

Determining if you need it

The purpose of disability insurance is to protect your income if you can't work, but you are still living and incurring expenses. This is intended for long-term disabilities, not when you have a runny nose.

Calculating the amount

Subtract your current take home pay (the amount after taxes) less any benefits listed below to calculate the amount of disability insurance to purchase:

State disability - If available, coverage is generally short term;
Worker's compensation - Only works if you are injured on the job and then disabled.
Social Security - Provides basic, low-level living expenses only if you are not able to perform any substantial and gainful activity for more than 1 year or disability is expected to result in death

Buying disability insurance

Buying is probably not necessary if:

Your employer covers you at work.
Your spouse earns a large enough income that you can do without your income
You've accumulated enough assets to offset the loss of income.

Some of the features to look for in disability insurance include:

Cost of living adjustments - This allows your benefit payments to increase with changes in inflation. This retains the purchasing power of your benefits.
Guaranteed renewable and noncancelable - This ensures your policy cannot be cancelled due to poor health conditions when you most likely need it.
Definition of disability - Similar to other insurance, take the broadest coverage. Own-occupation policies are narrow because they provide benefits only if you can't perform the work you normally do. On the other hand, reasonably trained policies are broad because they provide benefits only if you can't perform any job you are reasonably trained to do.

Sources of disability insurance are similar to the life insurance providers listed before:

Selectquote 800 343 1985
Direct Insurance Services 800 622 3699
Wholesale Insurance Network 800 808 5810

Health Insurance

For many, your employer offers you health insurance, and, as often, it is the most cost effective policy for you to have. In addition, if you are 65 or older, Medicare will cover you. There isn't a good reason for you not to have health insurance. As a human, you are bound to have health issues, and those expenses would be devastating to your finances if you paid for them out of your own pocket.

Choosing health insurance

Insurers use a lot of acronyms for their plan offerings, like HMOs, PPO's, HSAs. The main differences are as follows:

HMO - Health Maintenance Organizations - Insurer pays the majority of expenses if you use in network doctors.
PPO - Preferred Provider Organization - Insurer pays most of your expenses even if you use an out of network provider.
HSA - Health Savings Account - Allows you to save money tax-free combined with a high deductible plan.

The bigger and older the health plan, the better. The large plans (e.g., Blue Cross, Blue Shield, Kaiser) negotiate better rates with doctors, spread their risk among more people, offer lower premiums, and will more likely be around when you need to make a claim. In addition, they will sometimes take you regardless of any preexisting medical condition you might have.

If you have a particular doctor that you like or want to see in particular, call their office and find out what insurance type they take and which company they are affiliated with. This is the easiest way to pick the insurance you want. After doing that, you can narrow it down to which one you believe you can afford.

Features to include

Similar to life insurance, you want your insurance to include a few key features as follows:

Deductibles and premiums - Usually the higher the deductible, the lower the premiums. This is the best type of plan for most people. However, if you have known health problems, you may be better off with the lower deductible and higher premiums since your total costs may be less as you are using the services more.
Lifetime benefits - At today's high medical prices, ensure your plan has no maximum or a maximum of several million dollars.
Guaranteed renewable - Very important feature because you don't want to keep taking medical examinations to renew your coverage, especially if your health deteriorates.

Long-term care

Long-term care and/or nursing home insurance are the latest craze for people that usually results in being over insured. More likely than not, this is an unnecessary expense because most people don't live in a nursing home long enough to recover the premiums and lost investment income. Consider all the coverage that is already available to cover your long-term care:

Medicare - This federal program pays the majority of hospitalization costs for the first 150 days. The amount of coverage lessens after 60 and 90 days, but you would owe less than a $1,000 for the first hundred days. Medicare also generally covers the first 100 days nursing home stays.
Medigap - This is supplemental insurance that generally pays for any Medicare deductibles and copayment charges. In others, it covers any costs not covered by the items listed above in 1. - Medicare.
Medicaid - If you are unable to pay the deductibles and co-payments because your income is low, this state program will help pay your bills.
Relatives -You may have family who are willing and able to care for you. And if they can do it in your own home vs. a hospital or nursing home, your life will probably be a lot more enjoyable.
Retirement Assets - You have been saving these assets for this time in your life, and now is the time to use them. If you are hospitalized or in a nursing home, you are certainly not going to be spending this money on travel, recreation, or entertainment; so, invest in your wellbeing.

If you really would feel better having long term care, comparison shop, include life coverage, add an adjustable daily benefit amount (to account for increases in the cost of living), and allow care in your home. Also, consider a retirement community if it guarantees care for life and accepts Medicaid if you run out of assets. Lastly, check with the American Association for Long-Term Care Insurance at http://www.aaltci.org/consumer/ or 1-818-597-3227.

Final tip

Just as it is recommended you obtain your credit report, it is also recommended that you request your medical information file. Just mail a request to the Medical Information Bureau P.O. Box 105, Essex Station, Boston, MA 02112 or call them at 866-692-6901.

Above all, the best and most inexpensive life, disability, and health insurance you can buy is to take care of yourself. How? By not smoking and by exercising, eating healthy foods, getting regular health checkups, among other things. But I'm not your mother, so do what you want.

Chapter 8