Insurance World

If you and your loved ones depend on your salary for support, then you probably need long term disability income insurance.

Think about it: if you were to become disabled, even for a few months, how would you and your family manage? Who would pay your bills? Disabling illness or injury is one of the leading causes of bankruptcy in the United States.

Most people do not realize that their chances of becoming disabled are greater than their chances of dying prematurely. Yet they are more likely to buy life insurance than disability insurance. For this reason, people in the insurance industry call disability “the forgotten risk.’ According to statistics from the Journal of the American Society of Chartered Life Underwriters, if you are age thirty to fifty-five, your chances of becoming disabled are two to three times greater than your chances of dying.

If you are thirty-five years old, you have a 50:50 chance of experiencing a disability lasting last three months or longer before you retire. One in seven workers will become disabled for more than five years before he or she reaches age 65.

Many people mistakenly believe that the government or Worker’s Compensation will pay them an income if they become disabled. Actually, more than 80% of the people who apply for Social Security disability benefits are rejected. Social Security does not pay benefits for partial or short-term disability. Your disability has to either last a year or be expected to last a year before you can collect Social Security. Worker’s Compensation pays only if you were injured on the job and benefits are often limited to a few years.

Your health insurance will cover your hospital, doctor and other medical bills, but you will still not have a salary. Long-term care insurance only covers bills from nursing homes or assisted care center. Disability insurance, however, does not pay bills. Instead the insurance company gives you money on a regular basis. It is designed to replace your salary so that you and your family will not experience financial hardship during any period when you are too sick or injured to work.

What should you look for when you are buying long term disability insurance? First, the insurance company itself should have a top rating from Moody’s, A.M. Best, and Standard and Poor. These agencies rate companies in terms of capitalization, growth, earnings and other indicators of financial stability.

Secondly, you should make sure you understand the terms of your policy. Some policies require a waiting period before you start receiving benefits. For example, your policy may have a six-month waiting period before benefits are paid. In this case, your benefits would begin six months from the time of disability.

The waiting period is often called the elimination period. Choices usually range from 30 days to 720 days.

Look for a waiver of premium provision. This means if you become disabled, you will not have to keep paying for your disability policy.

What are the conditions for renewing the policy? If you’re policy is not automatically renewable, the insurance company has the right to cancel it.

Payment period options are another consideration. Some policies will only pay for a certain period of time, sometimes for only two years. Other policies last a lifetime. The most popular policies pay benefits until you reach retirement age, when you can begin to collect Social Security payments.

Most policies have a residual disability clause. If you suffer a disability, very often you will return to work part-time at first. Or because you were off work for a while, it may take you time to build your business back to the level it was before you became disabled. Your insurance should provide income for both these scenarios.

Check over the policy for a recurrent disabilities benefit. A recurrent disability is one that happens after you recover from your original disability. Your insurance should waive a new waiting period and/or not require proof that the two disabilities were related.

When you buy disability insurance, you buy it according to your income level. The more money you make, the larger the benefit of your policy. But you also have to figure that your income will rise as you get older. For this reason you want a future increase rider or automatic increase rider. These riders allow you to keep your policy but increase the amount of your benefits based on your increased earnings as you grow older.

When you buy your insurance, certain factors will affect your price. You will pay less for the insurance if you decide to replace 50% of your income instead of 80%. You also pay less if you opt for a longer elimination period. The insurance company factors in your current health and may exclude preexisting conditions. Women and smokers may pay more for disability insurance because they make more claims than non-smoking males. If you are in a high-risk job, your policy may cost you more.

Disability insurance policies can be confusing. It is always best to sit down with a professional insurance agent to discuss the terms of the policy together and to ask questions until you completely understand the details of the policy quotes being presented.

Purpose of Life Insurance

If you die, life insurance is designed to provide financially for those you have left behind and have listed as your beneficiaries. In buying life insurance you, the insured, enter into a legal contract with the insurance company, also known as the insurer. Basically, the contract states that if you make your monthly insurance payments in a timely manner, your family or other beneficiaries will receive a specific amount of money when you pass on.

Although some may find the idea of life insurance distasteful, it is considered to be essential in protecting the fiscal health of your spouse and children should they find themselves fiscally taxed due to your death.

Types of Life Insurance

There are two primary types of insurance: permanent life and term life insurance. Each provides specific types of protection for your loved ones.

Term life insurance, the simplest form of life insurance, is designed to protect your family for a specified length of time or “term.” Term policies, which range from 1 to thirty years, provide a one-time death benefit but no cash savings. This means term policies only provide benefits as long as the insured has paid the premium, which is the cost of the insurance. Premiums are divided into equal monthly payments that are assessed for the entire period of coverage. If you bought a policy that covered you for a three-year term, then you would make 36 equal premium payments on that policy.

Permanent insurance is designed to offer both a death benefit and an investment return after a length of time. Because this type of insurance offers a long-term savings plan, premiums are higher than those for term life insurance. Common types of permanent insurance are whole life, universal life, and variable universal life.

Term vs. Permanent

Term life insurance is especially appropriate for those who desire coverage for a specific length of time and who have limited funds. Because it is less expensive than permanent insurance, term can offer more coverage for less money. This is useful to people who have children, mortgages, and various types of loans. The right amount of term can cover these expenses and more. However, if you still desire coverage after a term policy’s period ends, factors such as poor health and age will result in higher premiums when you buy a new policy.

Permanent insurance, although more expensive, allows policyholders various benefits, including a premium that will not change as you age or if your health deteriorates. Also, permanent insurance will usually accrue monetary value, offering the policyholder a return on their investment that they can access as worth builds.

Whole or ordinary life is the most common form of permanent insurance. With whole life your premiums and the face amount of the policy are fixed over the life of the policy. Your premiums must be paid regularly. A more flexible policy, where you can pay premiums at any time in just about any amount, is universal life. With this kind of coverage, you’re allowed to modify the death benefit amount according to your needs.

A variable life policy carries both a death benefit and monetary value. The value of this policy is dependent upon the performance of investments. You select the investments for your portfolio and the better they perform the higher the death benefit and cash value of the policy. Some policies offer a minimum death benefit regardless of how your portfolio functions.

Variable-universal life carries elements found in both variable and universal life. You get the risks and possible rewards of a variable policy and the flexibility of universal coverage.

Choosing a Life Insurance Company and Policy

There are some important things to consider when buying a policy. Be sure to shop around before buying life insurance. Consumers can buy insurance directly from an insurance company via the Internet or over the phone. Buying this way is usually cheaper than going through an insurance agent because the agent receives a commission, called a “load,” when they sell a policy.

The life insurance industry is very competitive with hundreds of companies offering policies. This is a benefit for the consumer, because competition tends to aid the buyer; however, this can also be seen as a detriment because the range of choices can make finding the right policy from the best company daunting. Your search will be easier if you consider four basic criteria in making your selection—rates, budget, service, and stability.

Rates: Because it is such a competitive business, life insurance rates vary greatly from company to company. Find three to five policies with attractive rates for the amount of coverage you desire.
Budget: Once you’ve found these policies, be sure the premiums are within your budget. It doesn’t make any sense to go forward with any of these contracts if you aren’t going to be able to afford them.

Service: In determining the quality of each company’s service, you can do two things. If you are going through an agent, you’ll be determining the quality of that person’s service when you talk to them about the benefits of buying specific policies. The same is true if you buy directly from an insurance company without going through an agent. Do they answer your questions clearly? Do they seem to know what they are talking about? Do they leave out important information?

By considering at least three companies and/or agents, you’ll be able to compare their ability to answer questions and to give you their undivided attention. Along with interviewing potential agents and companies, you can check with your state insurance department to see how many complaints, if any, they have received concerning the company and/or agent.

Stability: An insurance company’s economic stability is directly connected to their ability to meet their future financial obligations. In other words, you want to make sure an insurance company will be able to pay your death benefit. The following companies rate insurance providers’ fiscal soundness.

A.M. Best
Oldwick, New Jersey 08858
908-439-2200
www.ambest.com

Moody’s Investors Services
99 Church Street
New York, New York 10007
212-553-0300
www.moodys.com

Standard & Poor’s Insurance Ratings Service
55 Water Street
New York, New York 10041
212-438-2000
www.standardandpoor.com

Weiss Research
4176 Burns Road
Palm Beach Gardens, Florida 33410
800-289-9222
www.weissratings.com

After going through these four steps you should be able to compare each company, agent, and policy and make an informed choice.

One more important place to check for affordable life insurance is your employer. Many businesses offer very competitive group rates, usually for term life policies.

How Much Life Insurance is Enough?

Some people will say that you can never have enough life insurance. However a common rule of thumb is to buy at least five times your yearly income. Many policies include a double indemnity clause, which means your beneficiaries receive double the value of your death benefit if you should die suddenly in an accident or due to some violent event.

In asking yourself “how much is enough,” you’ll want to make a list that includes yearly expenses, large debts (such as a mortgage), and long-term or future expenses (such as college tuition). You’ll know you’re adequately covered if your death benefit provides for large debts, with enough left over for at least one year of living expenses and for investing or sheltering for long-term or future expenses.

Finally, you need to decide what you want to get out of your life insurance. Is it simply a specific period of coverage with a large death benefit or do you want your life insurance to be part of your long range fiscal planning? Considering and answering all of these questions will help you find the policy that’s right for you.