One of the best ways to protect against the financial consequences of a primary wage earner’s premature death is life insurance. However, only about 6 out of 10 Americans actually own life insurance and 30% believe they do not have enough.1 However, choosing from the many types of life insurance policies that are available can be a difficult process. A few main categories are described here to help you search for a life insurance policy that is appropriate for you.
Keep in mind that the cost and availability of insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving insurance, it would be prudent to make sure that you are insurable.
Term Life Insurance
Term life insurance is the most basic and usually the most affordable. Policies can be purchased for a specified period of time. If you die within the time period defined in your policy, the insurance company will pay your beneficiaries the face value of your policy.
Policies can usually be bought for one- to 30-year time spans. Annual renewable term insurance usually can be renewed every year without proof of insurability, but the premium may increase with each renewal. Term insurance is useful if you can afford only a low-cost option or you need life insurance only for a certain amount of time (such as until your children graduate from college).
Permanent Life Insurance
The other major category is permanent life insurance. You pay a premium for as long as you live, and a benefit will be paid to your beneficiaries upon your death. Permanent life insurance typically comes with a “cash value” savings element. There are three main types of permanent life insurance: whole, universal, and variable.
Whole life insurance. This type of permanent life insurance has a premium that stays the same throughout the life of the policy. Although the premiums may seem higher than the risk of death in the early years, they can accumulate cash value and are invested in the company’s general investment portfolio. You may be able to borrow funds from the cash value or surrender your policy for its face value, if necessary.
Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, increase the chance that the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Additional out-of-pocket payments may be needed if actual dividends or investment returns decrease, if you withdraw policy values, if you take out a loan, or if current charges increase.
Universal life insurance. Universal life coverage goes one step further. You have the same type of coverage and cash value as you would with whole life, but with greater flexibility. Once money has accumulated in your cash-value account, you may be able to vary the frequency, as well as the amount, of your premiums. In fact, it may be possible to structure the policy so that the invested cash value eventually covers your premium costs completely. Of course, it’s important to remember that altering your premiums may decrease the value of the death benefit.
Variable life insurance. With variable life insurance, you receive the same death protection as with other types of permanent life insurance, but you are given control over how your cash value is invested. You have the option of investing your cash value in stocks, bonds, or money market funds. The value of your policy has the potential to grow more quickly, but there is also more risk. If your investments do not perform well, your cash value and the death benefit may decrease. However, some policies provide a guarantee that your death benefit will not fall below a certain level. The premiums for this type of insurance are fixed and you cannot change them in relation to the size of your cash-value account.
Variable universal life is another type of variable life insurance. It combines the features of variable and universal life insurance, giving you the investment options as well as the ability to adjust your premiums and death benefit.
As with most financial decisions, there are expenses associated with life insurance. Generally, life insurance policies have contract limitations, fees, and charges, which can include mortality and expense charges, account fees, underlying investment management fees, administrative fees, and charges for optional benefits. Most policies have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the policy. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing company. Life insurance is not guaranteed by the FDIC or any other government agency; it is not a deposit of, nor is it guaranteed or endorsed by, any bank or savings association.
Withdrawals of earnings are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59½. Withdrawals reduce contract benefits and values. For variable life insurance and variable universal life, the investment return and principal value of an investment option are not guaranteed and fluctuate with changes in market conditions; thus, the principal may be worth more or less than the original amount invested when the policy is surrendered.
Variable life and variable universal life are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses before investing. The prospectus, which contains this and other information about the variable life or variable universal life insurance policy and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
If you were to suffer an illness or disability that required long-term nursing care, would you be covered?
Maybe not. The vast majority of Americans go through their lives reassuring themselves that it will never happen to them. However, if past trends continue, 43 percent of those aged 65 and older will spend some time in a nursing home. And once in a nursing home, 21 percent can expect to stay five years or more.
That means it could very well happen to you. And while nursing home costs vary from area to area, the average cost of a one-year stay in a private room in a nursing home is $91,248.
Two-thirds of single people and one-third of married couples exhaust their funds after just 13 weeks in a nursing home. Within two years, 90 percent will be bankrupt.
Medicaid, the joint federal and state program that covers medical bills for the needy, pays a substantial portion of long-term-care costs but usually only for those who are impoverished.
And Medicare is not paying much of the cost of long-term care. That’s why the elderly should not rely on Medicare for their long-term-care needs.
Clearly, long-term-care costs pose a real problem for the elderly and their families. Long-term-care insurance can help preserve your accumulated wealth and provide coverage in the event you need long-term care. This can go far in helping to address financial need during retirement.
Sources: 1, 3) 2014 Field Guide, National Underwriter; 2) SkilledNursingFacilities.org, 2015
Medicare is the federal health insurance program for elderly persons and certain disabled individuals. In 1965, Medicare was enacted to provide a “safety net” of health-care coverage for qualifying individuals.
Medicare is packaged in two major parts. Part A is hospital insurance protection. It covers hospitalization, some hospice care, and a limited amount of post-hospital skilled nursing and home health care. Part B, which is medical insurance, helps cover physicians’ services, outpatient hospital care, physical therapy, diagnostic tests, and a variety of other services. More recently, Medicare added Part D, prescription drug coverage.
At first glance, it appears that Uncle Sam has everything covered. But unfortunately, there are many limitations.
Medicare Costs
Every time you go to the hospital, you have to pay a certain amount of your hospitalization costs, unless your visits are separated by fewer than 60 days. If that’s the case, you pay the deductible only the first time. If you stay in the hospital longer than 60 days, you will be required to pay a copayment every day for days 61 through 90.
You also have a lifetime reserve of 60 days that can be used in conjunction with more than one extended stay. These days also have an associated copayment. Medicare won’t cover any stays longer than 90 days once you have depleted your 60-day reserve.
Will Medicare Pay for Skilled Nursing Care?
Medicare will pay for the first 20 days of skilled nursing care, but only after you’ve been in the hospital for three days. This means you’ll have paid at least the deductible for that three-day stay. From the 21st day through the 100th day, Medicare will cover some of the costs of skilled nursing care, but you still have a copayment. After 100 days, Medicare will not pay for skilled nursing care, and you must bear the full cost. The 100 days are per benefit period.
What About Medigap?
Medicare supplemental insurance, or “Medigap,” is designed to pick up where Medicare stops. As such, it usually pays the deductibles and copayments required by Medicare. Coverage will vary according to the benefits outlined in each specific policy.
Medigap insurance may not pay for any additional procedures that aren’t specifically addressed by Medicare. Most policies will only help to cover the deductibles and copayments imposed by Medicare.
What About Long-Term Care?
Medicare provides only limited coverage for skilled nursing care and pays for only up to 100 days of care following a three-day hospital stay. Medigap doesn’t fill the gaps in this coverage.
If you are concerned about meeting your potential long-term-care needs, you should look into additional insurance to help fill in the gaps. In many cases, it may be best to consider purchasing a private long-term-care insurance policy to help protect against these potentially devastating costs.
In general, Americans are not sufficiently prepared to pay for long-term care. Many of them go through their lives simply hoping that they won’t ever need it. Unfortunately, in the event that you or a loved one does need long-term care, hope won’t be enough to protect you from potential financial ruin.
Also, the odds that you will need some kind of long-term care increase as you get older.
Self-Insurance as an Option
To self-insure — that is, to cover the cost yourself — you must have sufficient income to pay the rising costs of long-term care. Keep in mind that even if you have sufficient resources to afford long-term care now, you may not be able to handle rising future costs without drastically altering your lifestyle.
The Medicaid Option
Medicaid is a joint federal and state program that covers medical bills for the needy. If you qualify, it may help pay for your long-term-care costs. Unfortunately, Medicaid is basically welfare. In order to qualify, you generally have to have few assets or will need to spend down your assets.
State law determines the allowable income and resource limits. If you have even one dollar of income or assets in excess of these limits, you may not be eligible for Medicaid.
To receive Medicaid assistance, you may have to transfer your assets to meet those limits. This can be tricky, however, because there are tough laws designed to discourage asset transfers for the purpose of qualifying for Medicaid. If you have engaged in any “Medicaid planning,” consult an advisor to discuss any new Medicaid rules.
Long-Term-Care Insurance
A long-term-care insurance policy may enable you to transfer a portion of the economic liability of long-term care to an insurance company in exchange for the regular premiums.
Long-term-care insurance may be used to help pay for skilled care, intermediate care, and custodial care. Most policies pay for nursing-home care, and comprehensive policies may also cover home care services and assisted living. Insurance can help protect your family financially from the potentially devastating cost of a long-term disabling medical condition, chronic illness, or cognitive impairment.
A complete statement of coverage, including exclusions, exceptions, and limitations is found only in the policy.
Long-Term-Care Riders on Life Insurance
A number of insurance companies have added long-term-care riders to their life insurance contracts. For an additional fee, these riders will provide a benefit — usually a percentage of the face value — to help cover the cost of long-term care. This may be an option for you.
How Can I Determine the Financial Strength of My Insurance Company?
How do you compare life insurance companies? What features do you examine? What criteria do you use? How do you know what to look for? Making sure that your insurance company is financially sound is an important part of helping to ensure family security.
Fortunately, there are a number of independent companies that make these evaluations. These rating companies carefully examine each insurance company in the areas of profitability, debt, liquidity, and other factors. From the results of these examinations, they then issue overall ratings.
Looking up a company’s rating will provide you with a snapshot of that company’s financial health. Tracking the company’s rating on a regular basis may give you some advanced warning of trouble.
The four most prominent rating companies are A.M. Best, Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings. Each of these services uses slightly different criteria when rating companies. As a result, each may have a slightly different view of a given company. A.M. Best ratings are based on financial conditions and performance; Moody’s, Fitch Ratings, and Standard & Poor’s ratings are based on claims-paying ability.
You should be able to find copies of at least one of these ratings in the reference section of your local library. If you are unable to find them, or if the ratings in your library are outdated, you can contact the services directly. All four services will provide ratings over the phone.
A.M. Best Company: 908-439-2200, www.ambest.com
Standard & Poor’s: 877-772-5436, www.standardandpoors.com
Selecting health insurance is often one of the most important decisions you will make. Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are types of managed health-care plans and can cost much less than comprehensive individual policies.
Through the use of managed care, HMOs and PPOs are able to reduce the costs of hospitals and physicians. Managed care is a set of incentives and disincentives for physicians to limit what the HMOs and PPOs consider unnecessary tests and procedures. Managed care generally requires the consent of a primary-care physician before a patient can see a specialist.
An HMO provides comprehensive health-care services to the insured for a fixed periodic payment. There may also be a nominal fee paid for each visit to a health-care provider. Unlike traditional insurance, HMOs actually provide the health care rather than just making payments to health-care providers. HMOs can have a variety of relationships with hospitals and physicians. Plan physicians may be salaried employees, members of an independent multi-specialty group, part of a network of independent multi-specialty groups, or part of an individual practice association.
Because HMOs integrate health-care providers with insurance, they are able to provide improved health-care delivery. This unique relationship often allows HMOs to maintain a lower cost of service from plan providers. Because the HMO is both a provider and an insurer, this allows for lower administrative costs and paperwork for the patient.
HMOs also try to reduce costs by providing preventive care. Because visits to primary-care physicians are inexpensive for patients, the chance of early detection and care increases.
Preferred provider organizations have also contracted with hospitals and physicians to provide health-care services. Unlike the case with an HMO, you do not have to go to these physicians. However, you will pay more if you go outside the list of preferred providers. PPO plans usually have a deductible, which is the amount that the insured must pay before the PPO begins to pay. When the PPO plan does start to pay, it will usually pay a percentage of the bill and you have to pay the remainder, which is called “coinsurance.” Most plans have an out-of-pocket maximum. This helps protect you from paying more than a certain amount per year. After you exceed the out-of-pocket maximum, the coinsurance percentage paid by the PPO increases to 100%.
The out-of-pocket maximum, deductible, and coinsurance will each affect the cost of the PPO insurance coverage. You can help lower your premiums by having as high a deductible as you can afford to pay.
In this litigious society, no one is immune from potential lawsuits. Anyone with significant assets might need protection from the devastating effects of a liability lawsuit.
Elected officials and members of boards may be especially vulnerable. It’s not uncommon for plaintiffs to name everyone involved in an incident who has any perceived authority, responsibility, or ability to pay.
Personal liability lawsuits sometimes award the future earnings of the defendant. This makes many self-employed people, and some corporate officers, vulnerable to personal liability suits.
Fortunately, there is a way to help protect yourself. You can supplement both your auto and homeowners policies with excess liability insurance, or an “umbrella policy.”
For as little as a few hundred dollars per year, umbrella liability policies may provide between $1 million and $5 million of protection for you and your household members from negligence claims, libel, slander, or defamation.
And by buying your auto, homeowners, and excess liability policies from the same company, you may be able to reduce the total cost by as much as 15%.
Most individual liability policies, however, don’t cover occupational risks such as professional malpractice. In many cases, professional organizations such as the American Medical Association and the American Bar Association offer group policies for their members. The state equivalents of these organizations are usually quite aggressive in finding group providers to protect their members. In some professions, a local member may take the additional responsibility of helping to administer the group insurance for the state’s participants — overseeing and monitoring the coverage and costs and helping watch for abuses.
Because liability is an area connected with ongoing litigation, it changes often. Professionals should closely follow developments in their own fields in order to avoid expensive mistakes. In many businesses and professions, there are watchdog groups appointed to provide current information.
Large groups often evaluate competitive policies annually to assess the performance of their group’s insurance company. Such an organization may change insurance companies on a regular basis, as this is a very competitive area.
When evaluating your personal liability, consider the following:
Everyone in your household should be covered, including those who don’t live at home.
Your policy should cover physical injuries, libel, slander, invasion of privacy, malicious prosecution, wrongful eviction, defamation of character, and discrimination.
Shop around for the lowest number of exclusions. For example, many policies will not help you if you are sued as a result of your participation on a board or less formal committee.
Be aware of wording that limits coverage to exclusive causes of injury.
Rising health-care costs have driven the demand for, and the price of, medical insurance sky-high. The availability of group coverage through employment has helped many Americans face such costs. However, people who are not currently covered by their employers have few affordable sources for group coverage currently. However, as a result of the Patient Protection and Affordable Care Act, state and/or regional exchanges will offer coverage to individuals and some small businesses.
Individuals seeking medical coverage on their own can explore purchasing an individual health insurance policy. And those aged 65 and older may qualify for Medicare coverage.
There are three general classifications of medical insurance plans: fee-for-service (indemnity), managed care (e.g., HMOs and PPOs), and high-deductible health plan (HDHP).
Fee for Service
With a basic fee-for-service (indemnity) insurance plan, health-care providers (such as physicians, nurse practitioners, surgery centers, and hospitals) are paid a fee for each service provided to insured patients.
Indemnity plans normally cover hospitalization, outpatient care, and physician services in or out of the hospital. You select the health-care provider for consultation or treatment. You are then billed for the service and reimbursed by the insurance company, or you can “assign” direct payment to the provider from the insurance company. Indemnity plans typically require the payment of premiums, deductibles, and coinsurance. Limits on certain coverage or exclusions may apply. Lifetime limits on benefits are prohibited as are limits on annual benefits.
Managed Care
Managed-care plans became popular in the 1990s as a way to help rein in rising medical costs. In managed-care plans, insurance companies contract with a network of health-care providers to provide cost-effective health care. Managed-care plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.
Health maintenance organization. A HMO operates as a prepaid health-care plan. You normally pay a monthly premium in addition to a small copayment for a visit to a physician, who may be on staff or contracted by the HMO. Copayments for visits to specialists may be higher. The insurance company typically covers the amount over the patient copayment amount.
Each covered member chooses or is assigned a primary-care physician from doctors in the plan. This person acts as a gatekeeper for his or her patients and, if deemed necessary, can refer patients to specialists who are on the HMO’s list of providers. Because HMOs contract with health-care providers, costs are typically lower than in indemnity plans.
Preferred provider organization. A PPO is a managed-care organization of physicians, hospitals, clinics, and other health-care providers who contract with an insurance company to provide health care at reduced rates to individuals insured in the plan. The insurance company uses actuarial tables to determine “reasonable and customary” fees for each type of service, and health-care providers accept the PPO’s fee schedule and guidelines.
The insured can see any health-care provider within a preferred network of providers and pays a copayment for each visit. Insured individuals have to meet an annual deductible before the insurance company will start covering health-care services. Typically, the insurance company will pay a high percentage (often 80%) of the costs to the plan’s health-care providers after the deductible has been met, and patients pay the balance.
Although insured individuals can choose providers outside the plan without permission, patient out-of-pocket costs will be higher; for example, the initial deductible for each visit is higher and the percentage of covered costs by the insurance company will be lower. Because PPOs provide more patient flexibility than HMOs, they may cost a little more.
Point-of-service plan. A POS health-care plan mixes aspects of a PPO and HMO to allow greater patient autonomy. POS plans also use a network of preferred providers whom patients must turn to first and from whom patients receive referrals to other providers if deemed necessary. POS plans recommend that patients choose a personal physician from inside the network. The personal physician can refer patients to other physicians and specialists who are inside or outside the network. Insurance companies have a national network of approved providers, so insured individuals can receive services throughout the United States. Copays tend to be lower for a POS plan than for a PPO plan.
High-Deductible Health Plan
A HDHP provides comprehensive coverage for high-cost medical bills and is usually combined with a health-reimbursement arrangement that enables participants to build savings to pay for future medical expenses. HDHP plans generally cover preventive care in full with a small (or no) deductible or copayment. However, these plans have higher annual deductibles and out-of-pocket limits than other insurance plans.
Participants enrolled in a HDHP can open a health savings account (HSA) to save money that can be used for current and future medical expenses. There are annual limits on how much can be invested in a HSA. The funds can be invested as you choose, and any interest and earnings accumulate tax deferred. HSA funds can be withdrawn free of income tax and penalties provided the money is spent on qualified health-care expenses for the participant and his or her spouse and dependent children.
Remember that the cost and availability of an individual health insurance policy can depend on factors such as age, health (pre-existing conditions), and the type of insurance purchased. In addition, a physical examination may be required.
Medicare
Medicare is the U.S. government’s health-care insurance program for the elderly. It is available to eligible people aged 65 and older as well as certain disabled persons. Part A provides basic coverage for hospital care as well as limited skilled nursing care, home health care, and hospice care. Part B covers physicians’ services, inpatient and outpatient medical services, and diagnostic tests. Part D prescription drug coverage is also available.
Medicare Advantage is a type of privately run insurance that includes Medicare-approved HMOs, PPOs, fee-for-service plans, and special needs plans. Some plans offer prescription drug coverage. To join a Medicare Advantage plan, you must have Medicare Part A and Part B and you have to pay the monthly Medicare Part B premium to Medicare, as well as the Medicare Advantage premium.
Medicare Supplement Insurance, or Medigap, is sold by private insurance companies and is designed to cover the deductibles and copayments that Medicare doesn’t cover. At one point, there were more than 200 different policies available. Then the National Association of Insurance Commissioners stepped in and created 10 standard packages of coverage, designated by the letters A through J. Since June 2010, plans E, H, I, and J have not been sold, although you are able to keep your plan if you already had one of these plans before June 2010. There are also two new policies (plans M and N) that offer different benefits and premiums. Plans D and G bought on or after June 1, 2010, have different benefits than D and G plans bought before June 1, 2010 (although the benefits won’t change for those who participated in these plans prior to June 1). Only Medigap insurers are able to offer these plans. Although each standardized plan is identical from insurer to insurer, prices may differ and all these plans may not be available in every state.
Patient Protection and Affordable Care Act
In June 2010, Congress passed the Patient Protection and Affordable Care Act. Many of the provisions have already been implemented, including the law’s individual health-care mandate.
Basically, most individuals who are not covered by employer-sponsored health insurance, Medicare, Medicaid, or another government program will be required to have “minimum essential coverage” or pay an annual penalty. The penalty assessed is the greater of a flat dollar amount or a percentage of modified adjusted gross income. Taxpayers who claim dependents on their tax returns will be subject to the penalty for each dependent who does not have coverage, although college students and minors under age 18 would be subject to only 50 percent of the penalty.
Since 2010, as a result of the health-reform act, adult children up to age 26 have been eligible for dependent coverage under their parents’ health insurance plans provided they are not eligible for their own employer-based coverage. Insurance companies are no longer able to refuse coverage for children (under age 19) with pre-existing conditions nor can adults with pre-existing conditions be rejected or charged higher premiums.
Although most of us are aware of the need for health insurance coverage when determining our risk-management needs, many of us fail to consider the possibility that we could become disabled. A disability income insurance policy can help replace income lost because of an injury or illness. Few people would have an adequate “war chest” for an extended battle with a loss of income.
Unfortunately, many of us will need disability income protection before we retire. Without the appropriate coverage, a disability could spell financial disaster.
Disability at any age can disrupt income while medical expenses mount. Unless you have a battle plan, the effects of even a short-term disability could be financially debilitating and emotionally devastating.
Disability Protection
In the event that you become disabled and are unable to work, the benefits provided by disability insurance can help replace a portion of your earned income.
The appropriate amount of disability coverage will depend on your particular situation. However, there are a few issues you may want to consider.
First, consider carrying enough coverage to replace at least 60 percent of your earnings. Many companies limit benefits to between 50 percent and 80 percent from all sources of disability income prior to the disability. This would mean, for example, that the amount of any Social Security disability payments you receive could be deducted from your benefit amount.
If you are concerned about the cost of a private disability insurance policy, consider extending the waiting period, which is the time between when the disability occurs and when you start receiving benefits. Choosing a 90-day or 180-day waiting period (instead of 30 days) may help lower your premium.
Be sure to compare and review policy benefits carefully. Disability insurance can be an affordable way to help protect your assets in the event of a disability.
Your home is one of your greatest assets, and it should be well protected. It is startling to consider that an estimated 60% of American homes are inadequately insured by an average of 17%.1
Homeowners insurance protects against liability (in case someone is injured on your property), damage to the structure of your home and/or personal belongings, and theft. Most policies cover damage caused by certain “perils,” such as fire, lightning, and wind damage (except in certain locations). You must purchase separate policies to cover disasters such as floods, earthquakes, and tornadoes, which can be a good idea if you live in a high-risk zone.
Most insurance companies offer different levels of coverage. Standard policies usually cover a home’s contents for half the dollar limit carried on the house and reimburse only for the depreciated value of furniture and belongings. Other policies cover 80% to 100% of the value of a home, as well as its belongings.
When evaluating a homeowners policy to determine whether it is right for you, find out how much it would cost to rebuild your home. Typically, even if you are insured for 80% or more of the cost of rebuilding, your carrier will pay the cost of any repair only up to the limit of your coverage. Because of this drawback, consider a guaranteed replacement provision, a feature that ensures almost full reimbursement for replacement costs.
A guaranteed replacement provision places responsibility for valuation of a home on the insurance company. The insurance company conducts periodic appraisals, makes sure coverage is adequate, and automatically upgrades your policy as the value of your property increases. Of course, your premium rises automatically along with this increase in coverage. This type of policy will also pay to replace your furniture and belongings with new or equal-quality items at current market prices.
For an extra cost, additional valuables can be protected with “floaters” designed to cover such items as jewelry, silverware, furs, artwork, other value collections, and the contents of a safe-deposit box, up to a certain amount.
Regardless of your needs, you should be able to find a policy that will be well suited for your specific situation. The most important thing is to protect one of your greatest assets—your home.
