Insuring the risks of everyday life
Published 10/14/2018 in The Maryland Daily Record
(Last of three parts on personal financial planning)
Knowing what type of insurance coverage to purchase is a daunting task. There are often conflicting sources of information about who needs what type of coverage, how much to buy and how much it should cost. I was raised by a father who began his career selling life insurance in the 1960s. The experience he shared was that no one who ever filed a claim said the insurance benefit was too much. He also held the belief that the way people planned for their affairs during their life is a direct reflection of how they felt about taking care of their family when they ultimately died.
With this in mind, the closing topic of this three-part series on actionable personal financial planning ideas will wrap up with insurance planning. There are three key areas of insurance that will be covered because these specific questions spark curiosity from clients above all other types of insurance.
Regardless of whether you are just starting out in adult life or approaching the passing on of your estate to the next generation, life insurance continues to serve a meaningful purpose in the overall financial planning picture of many individuals and families.
At the most basic level, it’s the ability to provide a benefit should you die too soon and not be afforded the time to earn and save enough to provide for meaningful goals, such as caring for your spouse and children. The amount and cost will vary, based on your age and health status at the time you apply.
A general rule that I advise people to follow is to purchase the maximum amount of term insurance you can afford and insure both spouses equally. The notion that a husband won’t need a meaningful insurance benefit if his wife were to die too soon is just not true. Beyond the emotional impact of a grieving spouse, which is not to be underestimated, the pure amount of resources that it takes to fill the gap in whatever the wife’s role was in the household is meaningful. For either spouse, a meaningful death benefit paid in cash, no questions asked, is a critical part of planning ahead.
My guidance for families starting out is typically $1 million to $ 3 million per spouse, with a 30-year level term with the highest rated insurance company available.
Beyond life insurance for pure income replacement, the market is very sophisticated with a variety of planning techniques to serve different objectives. The key is to find an insurance adviser rather than an insurance sales person. An adviser will be able to help evaluate any existing coverage that you have in place and recommend ways to improve upon what you have, including the ownership structure to protect the future value from estate taxes. There is a lot to consider in this area and having sound guidance is critical.
Long-term care insurance
In our late 40s to early 50s we start to hear more about the need for insurance to cover medical expenses associated with in-home care or nursing home care should the need arise. There has been a lot of publicity about the increase in premiums for existing policyholders and the difficulty of securing traditional coverage as less providers exist in the market place.
An emerging product that is gaining popularity is a hybrid of long-term care and life insurance that affords the potential for the unused portion of benefits to be returned at the death of the owner in the form of a life insurance benefit. This product has less rigorous underwriting and for those who can afford the annual premiums — which are much greater than a traditional long-term care policy — this is a solid alternative.
We also see adult children who expect to be financially responsible for their parents considering purchasing this type of insurance and paying the premiums for their parents. This limits their future costs by locking in a fixed premium now for a future benefit.
The type of insurance that provides a benefit should you no longer be able to do the work that you have been trained to do is often the most difficult to secure and actually the most likely to be needed. It is important to at least find out what you would qualify for and how much it would cost.
Many employers offer long-term disability coverage as a benefit with some offset to your current earnings, so finding a supplemental policy is an option. For self-employed people, this insurance is crucial. A key to be prepared for is that underwriting is tricky, and despite how healthy you may be the insurance company often views things differently.
Go in with an open mind to see what is available for your situation. This way you’ll be making a more informed decision rather than avoiding the unknown and hoping for the best.
—Dorie Fain, founder and CEO of &Wealth