life insurance and disability insurance health

Someone just sent me a PM. I'm changing it slightly to protect his identity.

"I saw you discussing disability insurance on this thread.
I'm in a situation where I need to apply for a personal policy as my company closed and I started my own business; I took clients with me so I have stable income but I have serious health issues..."

I wanted to post this because I can't stress something enough. We are healthy until the day that we are not. Why do I recommend that 25 year old single people buy life insurance? Every week, I talk to someone older who needs coverage but can't get it. The vast majority of people who are uninsurable (or insurable at high rates) in their 30's were insurable in their 20's. This isn't about an insurance agent earning commissions. The cost is too dirt cheap to take an unnecessary risk.

With disability coverage, most people have coverage through work. It usually needs to be supplemented (poor contractal language, lack of portability, insufficient coverage). One advantage of supplementing work coverage is that an individual policy should have a future insurability option rider. That means that the person who asked the question would not only have the individual coverage that he originally purchased, but he would also be able to buy more without health questions.

Good point. Any suggestions on life insurance/disability providers?

I agree the premiums are at historically low level. But one risk to keep in mind - if hyperinflation arrives, then the life insurance policies won't be worth much and today's low premiums will appear very expensive in hindsight.
That is why I explored and rejected ROP policies (Return of Premium)

We dont often agree, but I completely agree with Insurance Expert's OP - that you SHOULD get individual life and disability coverage in effect while you re healthy, and DO NOT depend on coverage through your employer.

Losing coverage because your employer fails is a greater risk these days than ever before.

boomp said: davegolden99 said: Good point. Any suggestions on life insurance/disability providers?

Once you've shopped around talk to your state insurance regulator.This goes for health insurance and any insurance really.
They can be very helpfull in sorting thru fine print and getting the most for your money.
Of course they are unbiased and not commision based like an insurance salesperson might be.

Boomp, can you explain a little more. I'm curious as to the type of conversation that a consumer would have with an insurance regulator. For instance, if you were my client, I might say something like, "I am recommending that you buy $1,200,000 of 20 year level term insurance from ABC Company. Additionally, I am recommending that you buy $4,000 a month of disability coverage from XYZ Company." What questions would you need the regulator to answer for you?

InsuranceExpert said: boomp said: davegolden99 said: Good point. Any suggestions on life insurance/disability providers?

Once you've shopped around talk to your state insurance regulator.This goes for health insurance and any insurance really.
They can be very helpfull in sorting thru fine print and getting the most for your money.
Of course they are unbiased and not commision based like an insurance salesperson might be.

Boomp, can you explain a little more. I'm curious as to the type of conversation that a consumer would have with an insurance regulator. For instance, if you were my client, I might say something like, "I am recommending that you buy $1,200,000 of 20 year level term insurance from ABC Company. Additionally, I am recommending that you buy $4,000 a month of disability coverage from XYZ Company." What questions would you need the regulator to answer for you?

All questions you'd have about what you are actually getting for your money. When I was comparing my health insurance to a competitor my state regulator was very helpful in sorting out what the fine print actually meant in my case.

anthonyu, I'm currently looking at options for disability insurance. It varies based on your occupation and amount of coverage you want. There are varying degrees of coverage (own occupation, guaranteed renewable, etc etc). You really need to talk to an agent for a realistic quote based on your situation. It is much more expensive than life insurance for good coverage (much more likely to become disabled at some point in your life.. than, well... die)

anthonyu said: InsuranceExpert:

1. I understand that each situation is unique, but what would be your possible recommendations to the person that PM'ed you?

2. If someone came up to you and said I need good disability insurance. I'm 30 and healthy. Go ahead and make whatever reasonable assumptions are needed from the client to write up a policy. What would a typical recommendation be and how much (estimate a range) would it cost?

1. The person who PM'd me is pretty sick and probably doesn't have any good options, but I'm looking into it. Unfortunately, for someone who is in poor health, they sometimes have to make employment decisions strictly based upon disability benefits. To give you an example, a client of mine has M.S. She has no individual coverage. She was offered a job that is closer to her home and pays significantly more. She couldn't accept it because of the lack of disability coverage.

2. More information is definitely needed. Some of the information that would definitely be needed would include:
Occupation?
Income?
Smoker status?
Sex?
Coverage through work?

Just as a rough estimate, a good policy for a male will cost 1-2% of their income. For a female, it would be 2-3%.

The way to mentally look at this is through the "2 jobs scenario". You have two job offers. They are identical in all respects. Job A pays $50,000. If you become sick or hurt, your income will stop. Job B pays $49,000. If you become sick or hurt, your income will continue to age 65. There's obvious more to it then that, but it's a good starting point.

amandaw33 said: anthonyu, I'm currently looking at options for disability insurance. It varies based on your occupation and amount of coverage you want. There are varying degrees of coverage (own occupation, guaranteed renewable, etc etc). You really need to talk to an agent for a realistic quote based on your situation. It is much more expensive than life insurance for good coverage (much more likely to become disabled at some point in your life.. than, well... die)

The last time that I checked, the chance of death was 100%. Your point is very valid during one's working lifetime. When someone doesn't have any work coverage, it can be pretty pricey. On the other hand, a young male attorney supplementing a work policy can buy a top of the line disability policy with all the bells and whistles for under $50/month.

SUCKISSTAPLES said: InsuranceExpert said: On the other hand, a young male attorney supplementing a work policy can buy a top of the line disability policy with all the bells and whistles for under $50/month.I fit that criteria exactly, but there is no way I can get such a policy.

What kind of benefit amount are you talking, and which DI issuer?

Lastly - will they consider a self employed attorney who takes HUGE business deductions to reduce tax liability to near 0?

A 28 year old male attorney making $100,000 a year with group disability coverage of 60% would qualify for about $1300/month benefit. If this attorney was contributing $1,000/month into his 401(k) plan, he could also have this covered.

With cost of living, partial, future insurability option and own occupation coverage, it will be less than $50 from Guardian/Berkshire.

SIS, no top quality carriers will want somebody with a tax liability of near $0. Let me rephrase that. They don't want someone showing very little taxable income. If someone is showing $500/month of income and they have a policy that will pay them $5000/month, there is incentive to become disabled. It makes for a bad risk.

and once again, Financally Savvy bites SiS in the butt...

Why is it that the smart and careful get screwed, while the dumb and careless get the great deals?

There's no question that being a business owner makes things tough. A business owner wants to make as much money as possible, but show as little income as possible. The insurance company can only base their underwriting decisions on how much a person shows. It makes sense from the insurance company's perspective that if someone is bringing in $7,000 of revenue, but has $6000 of business expenses, they have to base their decision on $1,000 of income.

More often than not, someone who is a business owner and is showing little to no income is making very little income or they aren't being honest on their taxes. (SiS, that's not meant to be taken personally. There are absolutely exceptions to this. I'm talking specifically about what I've seen and this has nothing to do with you.)

The more common example that I see is a very successful business where the owner could make a very nice living, but chooses to put the money back into the business to help it grow. In other words, the owner could take an income of $200,000 if he wanted to do so, but instead, only takes $100,000 because the rest is going back into the business. This person can only get personal DI based upon $100,000 of income, but should be doing things to make sure that if he gets sick/hurt his business will still have value.

geo123 said: SUCKISSTAPLES said: We dont often agree, but I completely agree with Insurance Expert's OP - that you SHOULD get individual life and disability coverage in effect while you re healthy, and DO NOT depend on coverage through your employer.I agree, although, as always, there are caveats to this. For instance, my firm pays 100% of my premiums for life insurance, health insurance, dental insurance, short and long term disability insurance and life insurance (yes, with life insurance, there are premiums imputed to my income). Under these circumstances I can't imagine that I'd be better off also getting additional disability coverage elsewhere just to ensure my future insurability since the premiums I would pay for this coverage would only buy me future insurability but would not provide me a single dollar of additional protection. Am I missing something with this line of thinking?

You say that your firm pays for life insurance? Up to what amount? Unlimited? My company pays for life insurance, but not enough IMO. If it is unlimited I would have 20,000,000.

geo123 said: mikef07 said: You say that your firm pays for life insurance? Up to what amount? Unlimited? My company pays for life insurance, but not enough IMO. If it is unlimited I would have 20,000,000.I'd like to see an unlimited life insurance policy If I am not mistaken my firm pays for a policy 2X my annual salary.

Frankly, we are not particularly concerned about life insurance in our situation. Although my wife is still a resident, after residency she'll be making enough money not to depend on my income, so whatever my firm provides in terms of life insurance is sufficient for us. Likewise, I don't depend on her income now and won't depend on it once she is finally done with residency. Hence, whatever her residency program provides (which, I think, is something like $100K) is sufficient.

I think that is what my wife's company and mine do. It is either 2x or 2.5x.

The only thing I can tell you is that you don't know how your wife would react. What if she was so depressed she doesn't want to work for a year or 2? I could live without my wife's income as well, but I want the choice of being able to not have to. Something to think about.

I agree, although, as always, there are caveats to this. For instance, my firm pays 100% of my premiums for life insurance, health insurance, dental insurance, short and long term disability insurance and life insurance (yes, with life insurance, there are premiums imputed to my income). Under these circumstances I can't imagine that I'd be better off also getting additional disability coverage elsewhere just to ensure my future insurability since the premiums I would pay for this coverage would only buy me future insurability but would not provide me a single dollar of additional protection. Am I missing something with this line of thinking?

Yes, you are missing something with this line of thinking. Take these comments as general comments and not specific since I know nothing about the specifics of your situation.

I am working on the assumption that most people work because they need their income.

There are a couple of points that must be understood. The first is that a work group disability policy is very different than a quality individual policy. What does it mean to be disabled? It depends on the contractual language. When an employer gives something to their employees, the employer wants this to be as cheap as possible. How does an insurance company make an insurance policy less expensive? They make it harder to collect on a claim. They do this via the contractual language. Group disability policies have very weak contractual language. This means that is very possible to lose some or all of one's income due to a disability and still not have a valid disability claim. Group disability policies aren't inexpensive because of group buying power. They are inexpensive because the insurance companies don't have to pay a lot of claims. Unfortunately, there is nothing that can be done about this. The employer gives you the benefit, so all that can be done is for you to say, "thank you".

The second point that must be understood is the fact that the policy is paid by the employer is a bad thing and not a good thing. It makes the policy taxable instead of tax free. This means that even if one can collect on the policy, they probably have an income shortage.

Ex. Joe is 35 years old and makes $100,000. He contributes $10,000 to his 401(k) and his employer contributes $5,000. His policy is the typical employer paid benefit of 60%. Let's assume that he suffers a total disability and is able to collect on the benefit. He'll collect 60,000/year. This will be taxable as income. Can Joe handle a 40% drop in income? Most people can't. What happens once we factor in inflation? If Joe's pay would just keep up with inflation and inflation is 3%, he'll earn $4,900,000. His total disability payment will be $1,800,000. This works out to 37% for a long term disability and not 60%. What happens at age 65? His benefit stops and he hasn't been able to invest for retirement. The $15,000 a year going into his 401(k) would be worth $1,800,000 at 8% assuming no increase in the amount being invested.

Purchasing additional disability coverage isn't just protecting one's future insurability, it's protecting one's current income. It would buy a lot of additional coverage. In the above example, Joe would get an additional $1310/month. This would be tax free. It would be indexed with inflation,so this would bring the total to $760,000 tax free. Additionally, $15,000/month would be put into a trust for him. The payment into the trust would be tax free. This will give him, at 8%, at age 65, $1,800,000 at retirement. To me, that looks like $2,500,000 of additional protection.

Going to one's 'state regulator' to get advice on what life or DI to buy is synonymous with going to your FDA chairman to find out how to administer anesthesia for surgery. Let me remind everyone on this forum that everyone works for a commission in this culture. The difference is the insurance agent has to validate whether the commission is warranted or not. Think about it. You can earn as much as you like or as little as you like. Get a job somewhere and you can hide most of they day and nobody will know....

InsuranceExpert said: I'd like to see an unlimited life insurance policy If I am not mistaken my firm pays for a policy 2X my annual salary.

Frankly, we are not particularly concerned about life insurance in our situation. Although my wife is still a resident, after residency she'll be making enough money not to depend on my income, so whatever my firm provides in terms of life insurance is sufficient for us. Likewise, I don't depend on her income now and won't depend on it once she is finally done with residency. Hence, whatever her residency program provides (which, I think, is something like $100K) is sufficient.

Are you planning on having kids? If so, do you want her to have to work even if it isn't in the best interest of the family? Also, it is highly likely that once she finishes residency, you will have a life style that matches the family's income, or is at least higher than your income. I don't know whether you should buy coverage or not. However, with term coverage being so cheap, it just doesn't seem like a prudent place to try to save a few dollars.We have a child and are not planning on my wife staying home full time, although the plan is for her to work part time after residency. Even her part time income after residency will be sufficient to support the same lifestyle, however.

As for our current and future lifestyle, we have a comfortable one that matches our needs and long term plans, which are far below our aggregate income. Even with my wife in residency we are already in the top 3% of income earners and see absolutely no need to increase our spending to match our income. That won't change much after my wife's residency.

Sure, term life insurance isn't expensive but given the above facts I don't quite see any reason to spend any money on additional term life insurance in our situation. In other words, if life insurance is supposed to provide the surviving spouse the ability to maintain the same lifestyle, but is not supposed to serve as a windfall, I don't quite see how additional life insurance makes any sense in our situation.

Every single employer-provided long term disability insurance that I've ever come across at both large law firms as well as medical offices/residency programs gave us the option of either accepting it on a non-taxable basis (so that the benefits would be taxable) or a taxable basis (so that the value of employer's premiums would be imputed to us, which would make the benefits non-taxable)

 

By the way, 60% of my current salary on a non-taxable basis is the rough equivalent of 100% of my taxable salary. If we chose to have the benefits to be taxable, 60% of my current salary would roughly translate into 70% of my taxable salary. We currently spend far less than that anyway and could easily handle it. The way I look at disability payments is the same (well, not entirely the same but close) way that I look at retirement income. Namely, the reason that it would be easy to maintain the same level of lifestyle on much smaller retirement income is because you would no longer need to save a portion of your salary to fund future retirement, emergency fund, investments, etc... I do realize that if the disability is long term but is not permanent (or if it is permanent but payouts end after a specified number of years or at a certain age), you may still need to eventually fund all these things, so it's not the same exact situation but I suppose it is all a matter of the cost-benefit analysis.

Most firms don't give people a choice, but some do. When you take the option to have the employer's premiums imputed to you, it is no longer employer paid. This is definitely the better way to do it. When this is the case, this whole conversation becomes meaningless because you become uninsurable. In other words, a private insurer won't be willing to give you any additional coverage. The only thing that they will be willing to do is to insure your retirement plan contributions.

The last thing to keep in mind is even if a group plan and an individual plan had identical contractual provisions, it would still usually much harder to collect on the group plan. This is because the plans are covered by ERISA. This makes a big difference because it is in the insurance company's interest to routinely deny claims with ERISA policies while this is not the case with individual policies.

InsuranceExpert said: We have a child and are not planning on my wife staying home full time, although the plan is for her to work part time after residency. Even her part time income after residency will be sufficient to support the same lifestyle, however.

As for our current and future lifestyle, we have a comfortable one that matches our needs and long term plans, which are far below our aggregate income. Even with my wife in residency we are already in the top 3% of income earners and see absolutely no need to increase our spending to match our income. That won't change much after my wife's residency.

Sure, term life insurance isn't expensive but given the above facts I don't quite see any reason to spend any money on additional term life insurance in our situation. In other words, if life insurance is supposed to provide the surviving spouse the ability to maintain the same lifestyle, but is not supposed to serve as a windfall, I don't quite see how additional life insurance makes any sense in our situation.

Do you insure your car? Do you insure your valuables? Do you insure your house? Why? These things have far less value than your life. I understand what you are saying. I'm in no way saying that you are wrong. Let me tell you what my thought process would be if I were in your shoes. I'm just telling you this because my thought process is different. I'd ask myself a bunch of questions:

Is insurance a necessity? No.
Would I want it if it was free? Yes.
If I died today, what would I want for my family? I would want my wife to be in a position to make all decisions based upon what is best for her and the kids without being forced to work.
Will this happen without insurance? No.
Will buying insurance have any impact on my current or future lifestyle? No.

Based upon those answers, I see nothing to gain by not buying coverage. It is sort of along the same lines why I have lots of coverage on my wife who does not work. If she dies, I'd like the freedom to be home with my family if that is what is in their best interest.

If you and your wife both die, is there enough money so that your child can have the life that you would want for him/her?

(I want to be very clear that I'm not saying that you should buy life insurance. I'm just showing you a different way to look at it.)

Pretty much why I did it. I could live pretty much the same lifestyle if something should happen to my wife. WHat if I did not feel like working for 2 years? 3 years? 4 years? In a word "Options". More options to me was better. For $40/month it definitely was better.

Since it's been a while since I've looked at the plan documents, I am having HR send them to me. In the meantime, here's their explanation:

The short-term disability is an in-house salary continuation policy. Attorneys are provided with 6 months of full salary continuation. Once the 6 months have been exhausted, attorneys are then eligible to apply for long-term disability benefits under the firm's fully-insured plan with [a large insurance company].

[The large insurance company's] policy provides for 60% of salary up to a maximum of $20,000 per month. The plan does have a residual disability benefit. Being residually disabled means that you are prevented from performing some, but not all, of the essential duties of your occupation and as a result your current monthly earnings are at least 20%, but no more than 80%, of your indexed pre-disability earnings. The residual disability benefit is calculated as follows: your indexed pre-disability earnings - your current monthly earnings = the monthly benefit payable.

The LTD policy does not contain own occupation coverage.

The LTD policy can be converted for yourself only if you leave the firm, unless you leave the firm due to disability or retirement. Since the STD is an in-house salary continuation policy, it is not portable.

The plan does not mention inflation guard but it does allow for pre-disability earnings to be adjusted annually by adding the lesser of 10% or the percentage change in the Consumer Price Index. This adjustment would be made January 1 of each year.

Geo, what if you decided to quit your job, to take care of your kids, found a better opportunity which didnt have same group benefits, decided to work on your own, or just got stressed out, etc. Unless your company life/disability insurance is portable, isnt it better to setup an individual policy now in case you do develop some health conditions making you uninsurable in the future? Since the cost is so tiny when you are young and healthy, it would seem worthwhile.

As you mentioned at the top of this page, you are buying future insurability, but also more options - options to change careers, choose employers without such generous benefits packages, and in the case of life insurance, you are getting additional coverage.

If you use the disability insurance, (if you have a critical accident) make sure you tell whatever kind of life insurance you have. They might give it to you, for free!