Most people don’t want to think about insurance. No one likes to consider the possibility of long-term illness, disability or death. And, for some people, the thought conjures up the image of a slippery salesman in a plaid polyester suit.
Choosing insurance doesn’t have to be scary or negative. Think of it as giving you power — the power for you and your family to have choices in the future.
When working with clients to develop a financial plan, we include a conversation about insurance. Insurance can provide a contingency plan to care for you and your loved ones in the event of an illness or death. Together we review a variety of options, including life, long-term care and disability insurance to help determine what might be appropriate for your overall situation.
Life insurance is a sophisticated tool that can serve many purposes, from protecting a family in case of the death of a loved one, to providing the potential for tax-free income in retirement, to helping preserve the value of a large estate by helping pay for estate taxes.
Amount of Coverage
To determine your needs, a comprehensive analysis of your financial situation should be done to help define lifestyle expectations in the event of your death and whether adequate and appropriate resources exist to meet your family’s future financial needs. Determining the proper amount of insurance coverage is often part science and part art, and an experienced advisor can help you with that process.
Type of Coverage
In addition to the amount of insurance, the type of insurance should be considered as well. Term policies may be appropriate for some clients while, for others, permanent coverage might be appropriate—providing coverage over a longer period with the advantage of building a cash value.
Existing policies should be regularly examined for their performance as well as the ratings of the insurer in general. Your insurance should be reviewed periodically to determine if the policy continues to meet your needs.
Long-Term Care Insurance
As our parents age and begin to need long-term care, there is more awareness of the cost associated with this type of care. Some important facts to note:
- The US annual nursing home cost is $85,000.*
- Seven in 10 Americans age 65+ will need some type of Long-Term Care. **
There is a misconception that the government will provide coverage through Medicare, but that isn’t the case. Medicaid will provide coverage in their own facilities, but eligibility requires very little income and savings.
There are several alternatives for covering long-term care expenses, should you need it:
- Self-insure – With this approach, you would set aside funds to cover these expenses. You pay no premiums and you maintain control of your assets, but run the risk of depleting your assets as you pay for care. If you have a surviving spouse, this could be a financial disaster.
- Traditional policy – You pay a premium every year, it’s simple and provides funds to cover expenses. Unfortunately, should you never need care, you lose the premiums you have paid in and premiums could potentially increase in the future.
- Hybrid Policies – This type of policy combines a permanent life insurance policy with a long-term care policy. You pay in a single premium or premiums over time. The policy builds a cash value and provides a long-term care benefit. Note that these hybrid policy premiums may carry additional fees and charges. Should you not need the long-term care coverage, your beneficiaries receive the death benefit. If you decide in the future that you no longer need the coverage, you can surrender the policy and will be paid all or a portion of the premiums you’ve paid in, based on the provisions of your contract.
Over the years, insurance companies have made changes to the way they cover long-term care expenses and the structure of their policies. Your advisor can help determine the most appropriate type of policy for your needs. With all policies, you should review the contract carefully for provisions and restrictions before purchasing.
Disability insurance is different from long-term care insurance. Disability insurance pays you a percentage of your income should you become disabled and unable to work. A disability can be due to a prolonged illness, such as cancer, or due to an injury.
Many employers provide long-term disability coverage. If they pay for the coverage, the benefit received would be considered taxable. As a result, having an individually owned policy in addition to your employer-provided policy is generally a good idea, as those benefits are not taxable. Individually owned policies are portable, while policies through your employer may not be portable if you change jobs.
Items to consider when analyzing your disability income insurance coverage include:
Benefit Inflation – It is generally a good idea to have some level of inflation adjustment so your benefits increase over time to keep up with inflation.
Definition of Disability – It is important to understand how your policy defines disability. Will it pay benefits if you can perform another job?
Residual and Recovery Benefits – A recovery benefit would pay you as long as you continue to have a partial loss of earnings due to your prior disability, even if you return to work. A residual benefit provides just a portion of your benefit if you are not totally disabled and you are unable to earn an income at your prior level of earnings.
You have worked hard to accumulate assets and build a life. It is important to protect you and your family’s future by putting the appropriate safeguards in place through insurance.
Although the options can seem overwhelming, beginning with a comprehensive plan and insurance review with an experienced advisor is a great way to start the process. They will be able to work with you to determine what is appropriate and put together a personalized insurance plan.
* 2013 Sourcebook for Long-Term Care Insurance, American Association for Long-Term Care Insurance.
** U.S. Administration on Aging, Department of Health and Human Services, April 2014
This material contains only general descriptions for educational use and is not a solicitation to sell any insurance product or security, nor is it intended as financial or tax advice. For information about specific insurance needs or situations, contact your insurance professional. Guarantees are based on the claims paying ability of the issuing company.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor. HighPoint Advisor Group, LLC and Stonebridge Wealth Advisors are separate entities from LPL Financial.
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