by David Bach
Nerd Wallet
www.nerdwallet.com
Great website for financial content in general. Their insurance screening tool helps you compare insurance from 30 companies (to find it from the homepage, click on “Insurance,” then choose the “Life” tab).
Select Quote
www.selectquote.com
Select Quote specializes in term insurance and helps you get quotes from over 70 carriers.
Ameritas
(800) 552–3553
www.ameritas.com
e-INSURE Services, Inc.
(855) 372–7400
www.einsure.com
Geico
(800) 207–7847
www.geico.com
USAA Life Insurance Company
(800) 531–8000
www.usaa.com
SAFEGUARD NO. 5
Protect yourselves and your incomes with disability insurance.
I used to think disability insurance was a waste of money. Then I saw what happened to Christopher Reeve.
Here was a genuine movie star, the original Superman in the movies, a guy so fit and healthy that he literally embodied Superman. Then, in 1995, he fell off a horse and broke his neck. In an instant, everything he had done with his life up to that moment—and everything he was looking forward to doing in the future—disappeared.
Though he continued to work until his death in 2004, Reeve became better known as a tireless advocate for the disabled. Through his Christopher & Dana Reeve Foundation (christopherreeve.org), he raised millions of dollars to support research aimed at finding more effective treatments and possible cures for spinal cord and other catastrophic injuries. This charity continues today.
Reeve also endorsed disability insurance. “I know all too well how quickly a person’s life can change and the importance of ensuring a family’s financial security,” he said. “That’s why I’m troubled by the fact that 60 percent of Americans lack any form of long-term disability insurance. That’s far too many people at risk.”
Reeve was right. Though far more people have life insurance than have disability insurance, the chances of your becoming sick or hurt are much greater than the chances of your dying prematurely. Without disability insurance you are playing Russian roulette with your income.
Consider the following statistics. In one year…
One out of every 106 people will die.
One out of every 88 homes will catch fire.
One out of every 70 cars will be involved in a serious accident.
But…
One out of every 10 people will have to cope with a severe disability!
What this means is that the greatest threat to your ability to finish rich may be the risk the two of you face of serious injury or illness! And the younger you are, the greater your risk actually is.
Other than your health, your income is probably your most important asset. Lose it and you could be losing your primary means of financial security. That’s why we all need to consider disability insurance.
WHAT IS DISABILITY INSURANCE?
Put simply, disability insurance provides income if you are unable to work due to an illness or injury. It will normally provide this income monthly, although there are new policies that can provide the income in one lump-sum amount.
HOW MUCH DISABILITY INSURANCE DO WE NEED?
Disability insurance is not designed to make you rich. Rather, like life insurance, it is a protection plan for your current earning power. Ideally, therefore, an adequate disability policy is one that would pay you the equivalent of the take-home pay you would lose in the event one or both of you were to suffer an incapacitating disability.
Most disability plans offer a benefit equal to about 60 percent of the policyholder’s gross (or before-tax) income. That may not sound like much, but if you pay for the disability policy yourself, any income you receive from it will be tax-free, so 60 percent of your gross will probably be enough to maintain your standard of living. (After all, 60 percent of the gross is about what most of us actually take home.)
If your employer pays for your disability insurance, any benefits you receive from it will be taxed. This means that if the policy only pays 60 percent of your gross income, you’re going to come up short. Indeed, once you’ve paid the taxes on your disability benefit, you’re likely to find yourself with only a fraction of your normal take-home pay. To guard against this, you should consider purchasing what is known as a “gap policy” to make up the difference.
DON’T ASSUME YOU HAVE DISABILITY INSURANCE
Many people mistakenly assume they automatically get disability coverage from their employer. Don’t assume anything of the kind. If you and your partner work for a company, first thing tomorrow check your benefits statements or phone your benefits departments to find out whether or not either of you has disability insurance. If you don’t, find out if you can get it and start the application process immediately. If either of you is self-employed and doesn’t currently have disability insurance, make getting it a top priority.
You should apply for disability insurance now, while both of you are healthy. For some reason, people always seem to put this off, waiting until something is wrong with them before they start trying to get coverage. By then, of course, it is too late. And don’t think you can fool the insurance company by fibbing on your policy application. Saying you’re healthy when you know you’re not, or that you don’t smoke when in fact you do, is not only immoral, it’s also pointless. Insurance companies will do just about anything they can to avoid having to pay out benefits—including hiring an investigator to check you out. Believe me, if you say anything on the application that’s less than honest, they will find out, and your policy will be canceled. (And, no, you won’t get your premiums back.)
QUESTIONS TO ASK BEFORE YOU SIGN UP
1. Is the disability plan portable and guaranteed renewable?
If you purchase your policy through your employer, you must make sure that you can take the policy with you if you leave the company. Also, you want a policy that is guaranteed renewable; there is no bigger rip-off than an insurance company that makes you “qualify” every year. This is how a bad insurance company gets out of having to pay you when you file a claim!
2. Under what circumstances will the policy pay off?
Specifically, you want to know whether the policy will cover you in the event you’re no longer able to do the work you currently do, or whether it pays off only if you are rendered unable to do work of any kind. In the insurance industry, this is known as “owner occupation” and “any occupation” coverage. Make sure you buy an owner-occupation policy. Why? Well, take me, for example. I happen to make my living talking on the phone, meeting with clients, and speaking at seminars. Now, if I lost my voice and couldn’t talk, I would for all intents and purposes be out of a job. But unless I had owner-occupation coverage, the insurance company could say to me, “So what if you can’t talk on the phone or do speeches? There are plenty of other jobs you could do—like digging ditches. So we are not going to pay you any disability benefits.” With owner-occupation coverage, they can’t do that to me. This sort of coverage is more expensive, but it is much, much safer.
3. How long does it take for the coverage to kick in?
Most disability policies start paying benefits within three to six months after you’ve been declared disabled. The easiest way to reduce the cost of a disability policy is to lengthen that waiting period. The larger the cash cushion you have in your security basket, the longer you can stretch it out.
4. How long will the policy cover me?
Ideally, your disability policy should pay you benefits at least until you turn 65.
5. Is the coverage limited to physical disability, or are mental and emotional disorders also covered?
A major cause of disability these days is stress. Not all disability policies cover it, however. If you are in a high-stress occupation, make sure yours does.
As with all good
and important things, there is a catch to disability insurance. It is expensive, as a result of which most people don’t have it. The reason it costs so much is that the insurance companies know there is a good chance they will have to pay off on the policies they write. (This alone should convince you that you need it.) In any case, my recommendation is that you first contact your company’s benefits department and see if you can get it through them. Group policies tend to be less expensive and easier to get. If your employer won’t cover you—or if you are self-employed—contact a disability insurer directly. Right now, statistically, the chances that you have disability insurance are low, as only one in four Americans have a disability policy, according to LIMRA and a Life Happens survey. Here is a list of some of the larger firms that provide disability insurance. Again, talk to your insurance professional first if you work with one; he or she should be able to assist you.
LifeHappens.org
This nonprofit site (backed by insurance companies) provides additional educational materials on all forms of insurance including disability insurance. They have a nice section on disability insurance, and I like their simple-to-use calculators.
Aflac
(866) 632–4648
www.aflac.com
Colonial Life
(800) 325–4348
www.coloniallife.com
Geico
(800) 207–7847
www.geico.com
Mutual of Omaha Insurance Company
(800) 205–8193
www.mutualofomaha.com
Northwestern Mutual Life Insurance Company
(866) 950–4644
www.northwesternmutual.com
State Farm Insurance Companies
(855) 733–7333
www.statefarm.com
SAFEGUARD NO. 6
If either of you is in your sixties, it’s time to consider long-term care coverage.
Once upon a time, individual families provided their own support systems to take care of sick or aged parents. Today, families are often spread out all over the country and, as a result, there is no support system. With average life expectancies climbing, more elderly people are finding themselves in need of either home care or a long-term care facility. Indeed, studies indicate that no fewer than one out of every three Americans over the age of 65 will eventually need this sort of help.
The cost of such care can be staggering. According to Genworth Financial, median nursing home costs can top $80,000 annually. Assisted living can cost more than $40,000, and home health aides will run about $45,000. You may think that Medicare will cover your nursing-care needs. Unfortunately, the reality is that in most cases it won’t.
BUSTING THE MEDICARE MYTH
According to AARP, many of us wrongly assume that Medicare will pay for our basic nursing-care needs when we get old. As I noted, we are in for an unpleasant surprise. The fact is, of the billions of dollars in nursing-home costs we incur every year, less than 10 percent are covered by Medicare.
The reason is simple. Most of the care that nursing homes provide to people with chronic, long-term illnesses or disabilities is custodial care, and Medicare does not pay for custodial care. Rather, Medicare is meant to take care of what are known as acute-care needs. For Medicare to cover a nursing-home stay, you must first spend three full days in an acute-care hospital and require skilled care or rehabilitation therapy at least five days a week. And even then, Medicare will cover you completely only for the first 20 days of your nursing-home stay. (After that, it may pay a portion of your care for the next 80 days, provided your health is actually improving as a result.)
And even if you turn out to be one of the lucky ones who meets the current qualification requirements, there’s no guarantee that Medicare will still be around in 20 years. Many experts think that the government will not be able to continue the funding of Medicare in its current form for very much longer because there will be so many more elderly people who need it. What about Medicaid? Well, Medicaid is, in essence, welfare, and to qualify for it you must be virtually destitute. That’s not how a Smart Couple wants to end up.
LONG-TERM CARE (LTC)
As valuable as it can be, LTC coverage isn’t necessarily something you need to buy right away (especially if you are under the age of 50). Most people start thinking about LTC coverage in their fifties and purchase it in their sixties. If you wait until your seventies or eighties, it can become prohibitively expensive. Unless you’re in terrible shape, you can still get a pretty good deal in your mid-sixties.
When you’re looking for LTC coverage, the first thing you need to understand is what it will not do. Long-term care insurance will not pay for acute care that you get in a hospital (say, in the immediate aftermath of a heart attack or a broken hip). This is typically the province of health insurance and Medicare. What LTC insurance will cover is the kind of care you get in a nursing home, a residential-care facility, a convalescent facility, an extended facility, a community hospice or adult-care center, or in some cases, care in your own home.
The type of LTC coverage you can buy varies from state to state. All things being equal, when you check out what’s available in your state, I recommend that you consider a comprehensive policy. The reason is that right now both of you are probably healthy and as a result can’t really predict what type of coverage the two of you will need in the future. A comprehensive policy will typically give you the most options. It will cost more, but should one or both of you eventually need the care, I’m confident it will more than justify the extra expense.
HOW TO KEEP YOUR LTC PREMIUMS DOWN
The cost of LTC coverage depends on a number of variables. These include your age, the level of care you want, the amount of coverage ($100 a day, $200 a day, and so on), the length of waiting time before your policy kicks in, your state of health and age, and how long you want your policy to last should you need to use it.
Not counting short stays of less than three months, statistics show that most people spend an average of about three years in a nursing-care facility. For most people, lifetime benefits are now becoming cost prohibitive and most companies are now not offering them. I recommend looking for a five-year benefit with a six-month waiting period up front. What this means is that your policy will take longer to go into effect. Most LTC policies start paying off within 90 days after you enter a nursing facility or put in a claim for home care. By stretching that out a bit, you can bring down your premium costs quite nicely.
Delaying the start of coverage may sound scary, but it’s actually quite sensible, since you will probably be able to afford the first few months on your own. It’s later on that you will need the most help. By taking a higher deductible and getting lifetime coverage you are covering the worst-case possibility, which is why you are buying this type of coverage in the first place. (By the way, the cost of this type of insurance can be tax-deductible, so check with your accountant if you decide to purchase it.)
QUESTIONS TO ASK BEFORE YOU SIGN UP
1. What exactly does the policy cover?
Remember, there are several different types of coverage available and they vary from state to state. Make sure you know exactly what type of coverage you are being shown before you sign up.
2. How much will the policy pay out in daily benefits? Will it be adjusted for inflation? At what point do my benefits kick in and how long will they last?
As I noted, you can keep your premiums down by requesting a higher deductible. Also, it’s probably worth paying a little more in order to get yourselves lifetime coverage.
3. Does the policy contain a premium waiver or will I still have to pay the premiums after I start receiving benefits?
With this waiver, you won’t have to worry about continuing to pay premiums while you are in the nursing-care facility.
4. Is there a grace period for late payments?
Make sure there is. You would hate to find yourself in a situation where you accidentally missed a payment and then discover
ed that you’d lost your coverage.
5. Are there any diseases or injuries that are not covered?
The answer should be no.
BE CAREFUL WHOM YOU BUY FROM
Because LTC insurance is still a relatively new insurance product, I recommend that you avoid purchasing an LTC policy from any company that hasn’t been in the business for at least 10 years. Many companies that have entered this space since this book was originally written have gotten out of it, or they have been downgraded by the ratings agencies. There are five major services that rate insurance companies (A. M. Best, Standard & Poor’s, Moody’s, Duff & Phelps, and Weiss), and you shouldn’t buy a policy from any company that hasn’t earned a top grade from at least three of them. You can find out what sort of ratings a company has received by asking it; if the company says it doesn’t know or doesn’t want to tell you, that’s a good sign you should take your business elsewhere. Before you buy any LTC policy use Google to search and review the insurance rating. Also use Google to check for “complaints” about the company. I recommend purchasing LTC insurance through a professional independent insurance agent—let them do the work of explaining these policies and shopping for the best one for you. If you don’t have an agent, here are some websites to use as starting points: www.LTCtree.com, www.Prepsmart.com, and www.AALTCI.org.
Here’s how to contact directly some of the biggest providers of LTC insurance with currently top insurance ratings. This list is not exhaustive.