Life and Disability Insurance: What You Need to Know

Death and disability are two of the most difficult things for a family to discuss. But insuring against both is an important part of safeguarding a family’s future. While most families have some form of life insurance, usually purchased at marriage or with the birth of children, disability insurance is not a given. But if one or both spouses become disabled during their working life, not having it is a far greater risk to family solvency. This is where disability insurance is important. This primer will examine the basics of both types of insurance.

Life Insurance

Life insurance comes in a variety of forms meant to accomplish a range of objectives, from providing for survivors to moving assets out of your estate. The prices for it depend not only upon how much coverage you want but also upon what type of policy you get, either for a finite period of time or indefinitely.

The first question you need to ask, though, is how much insurance do you need? There is not a clear answer on this because it depends on your expectations. The better question is this: What am I trying to provide for with life insurance? If your concern is your spouse, a common calculation is to take out a policy that would cover all living, personal and household expenses for at least one year. This allows the surviving spouse to grieve without worrying about bills, and it also gives the spouse a period to begin making decisions for life without you.

If there are dependent children, however, the amount of insurance you need increases. Again, the dollar value depends on several factors, including the age of your children and what you want to provide for them. The person who wants to send his three children to private school and private college is going to need a lot more than the person looking to provide for the basic needs of one child in public school.

In insurance, desire is something that does not always align with reality. How much life insurance you are going to get also depends on what you can afford in terms of premiums as well as how much insurance a company will sell you. Just because you want a $5 million policy and can pay the premiums on it does not mean a company will underwrite that amount. Like a loan to a person flush with cash, insurance companies would rather sell large policies to healthy people who are going to live for decades. This gives them time to turn your premiums into more than the face value of your policy. The person who is already sick but wants to provide for his family will, in all likelihood, struggle to get an adequate amount.

Now onto types of insurance.

TERM Term life insurance is a popular and relatively inexpensive form of insurance. It covers a person for a period of time, usually 20 years. During the term, if the insured dies, his heirs receive the full value of the policy. After the term expires, they get nothing. Furthermore, the policy never has an intrinsic value — unless the person dies during the term.

Term life, then, is a contract, not an investment, to buy peace of mind. It is a good for a particular period — say the time it takes for a child to mature and leave home — and will pay the insured’s heirs the full value of the policy if he dies, regardless of how long he has been making the payments.

One variant on this, offered by a few insurers still structured as mutual companies — where their policy holders actually own the company — is convertible term life. This starts out as basic term, with its comparatively low premiums for the amount of coverage. But within a set period of time, often the first 10 years, it can be converted to whole life. The premiums will increase but the person does not have to be screened again for insurance.

WHOLE Whole life insurance plays a dual role for many people. It is both insurance in the case of an untimely death as well as an estate planning tool for when that final day comes. It is also considerably more expensive than term life. The reason is that it has an intrinsic value, from which you can draw if you need the money. And whereas term life is for a period of time, whole life lasts in perpetuity, unless you stop paying the premiums or cash in the policy.

Since whole life is also an investment for some people, some companies offer the policy holders the option of selecting the underlying securities that back the death benefit. This adds a small element of risk to the eventual payout. While the value of the portfolio can, obviously, increase or decrease, the insurer sets a floor for how low its value can fall. While investment losses are capped there are other downsides. First, there are fees associated with the trading portfolios, which can also chip away at the policy’s value. And then there are those who believe that you can get better returns by investing on your own.

This is where you have to evaluate why you want a whole life policy. If it is to move assets out of your estate tax-free, then any additional upside is good. If it is to increase the amount you leave to your heirs through the underlying portfolio, then you may not see the increase that you expect during your lifetime. Buying term life for a greater amount is an option, though those prices increase as you get older (and closer to the point where the insurer is going to have to pay out). Regardless of the type of policy you select, the payment to your beneficiaries is tax-free.

Disability Insurance

Article source: http://feeds.nytimes.com/click.phdo?i=4b0a2538fb3ecdf9ecf42a81fc12c805