I understand thinking about insurance is right up there with thinking about what happens with your money when you die (estate planning). Or thinking about taxes. All are horribly boring and can often be depressing to consider. To take the sting out of the thought of insurance, here is part five in a six-part series about what insurance you need, and what you don’t, if your aim is simplicity.
First, we talked about property insurance, along with its corresponding liability coverage. Now we turn our attention to insurance coverage that concerns our bodies — as in life, health, disability, and long-term care insurance. I have created a category for this that I call wellness insurance. (Please note this is a term I just made up, so don’t go to your agent and ask for that!) If you earn money for your household, you should consider insuring against loss of that income. If you anticipate experiencing good health, consider insuring against health crises. If you’re protecting your pile of loot for your old age, there is insurance for that, too.
Wellness insurance includes health, life, disability, and long-term care. This blog post tackles life and disability insurance.
What happens if you get hit by the proverbial bus today? Not only would your family grieve the loss of their beloved, they might also be in dire straits due to the loss of the household income you provided. This is where life insurance comes in. Life insurance is really a misnomer – you aren’t technically insuring your life, per se. This insurance is meant to provide a pot of money to your beneficiaries, ostensibly to replace the income loss due to your death. (But I suppose calling it “death insurance” wouldn’t be so attractive, would it?!)
If no one relies on your income, and therefore no one would suffer the loss of your income in the event of your death, you don’t need life insurance. If you want to think ahead and consider burial costs, you can carry a very small policy for those expenses. Better yet, pre-plan and pre-pay for your final expenses.
By the way, there are some people who don’t need life insurance. Children don’t need life insurance, nor do retired people with no debts and adequate retirement income and/or assets for surviving spouses.
Buy term life insurance, not whole life insurance. Unless you are in your 60s or later, whole life insurance is far more expensive. Remember that if you are trying to economize, most insurance should be approached from a catastrophe standpoint. Term insurance will allow you to buy more death benefit for the same premium dollars than whole life. A bunch more.
How much to buy? Get some help from online calculators, your agent, or a financial planner. One rule of thumb is at least ten times your annual income. If you are 25 years old today and making $30,000 per year, buy at least $300,000 in death benefit. Preferably for a 30-year term. Keep in mind, however, that 20 years from now, $300,000 is not going to go NEARLY as far as it does in today’s dollars, so there’s that. Buy as much as you can afford now and adjust as life circumstances change. Having children, for example, should trigger a re-evaluation of your life insurance.
For most people, buying life insurance is a given. But in fact, you are much more likely to become disabled than to die before age 65, statistically speaking. If you become disabled, your income to the household is also at risk. Worse, you are still alive and a drain on household expenses. Consequently, consider disability insurance a high priority.
Of course, disability insurance is among the most expensive insurance coverage you can buy. So, what is a diligent risk-managing consumer to do? Investigate getting long-term disability insurance through your employer. If your employer provides short-term disability and pays for it, great. But if you are trying to minimize your insurance costs, skip the short-term and spend your money on long-term disability. Remember the goal is to insure the MAJOR CATASTOPHE scenarios first with your insurance dollars.
Long-term disability kicks in generally after 90 days. There are two main types, based on how it pays a benefit. If you buy an own occupation policy, it pays benefits if you become disabled in a way that prevents you from doing YOUR occupation — but it doesn’t preclude you from engaging in other paid employment. A great example is a surgeon. If a surgeon accidentally cuts off fingers while using a chainsaw, he might not be able to practice as a surgeon anymore. He could conceivably still practice medicine, but even so, with an own occupation policy, he could collect a benefit.
The second type is called any occupation. This policy only pays benefits if you become so disabled you cannot work in any occupation. Guess which type is cheaper? If you are economizing (and who isn’t?), you want any occupation coverage. Insure for the catastrophic loss of income versus the inconvenient loss of income.
There you have it, some thoughts on protecting your household income in the event you become disabled or … dead. Here are a few parting shots for your consideration:
- Seek advice: It is best to get a licensed insurance agent to sit down with you to discuss your needs. This blog post can help you get the conversation started. Pay close attention to the recommendations an agent might give you, and if you feel you are being oversold, get a second opinion.
- Review your coverage regularly: Don’t buy life and/or disability insurance and then forget it. Review it annually to make sure all the coverage you have is still needed, or if any new coverage is required due to new circumstances in your life.
- Simplifying your stuff simplifies your insurance: I have no snappy ending here. Simplify other areas to save costs on other insurance so you can have a better shot at covering your disability and life insurance needs. Just sayin.’
Your turn. How have you handled (or not) your life and disability insurance needs?
Check out our entire six part Insurance Simplified series:
- Insurance, Simplified: Your Wealth (Part Six in a six-part series)
- Insurance, Simplified: Your Income (Part Five in a six-part series)
- Insurance, Simplified: Your Bod (Part Four in a six-part series)
- Insurance, Simplified: Your Stuff (Part Three in a six-part series)
- Insurance, Simplified: Your Ride (Part Two in a six-part series)
- Insurance, Simplified: Your Abode (Part One in a six-part series)