A Matter of Life and Death

How often do you think of your own death? Do you value your life more when you do?

The philosophy major in me loves questions like these — existential exercises that allow us to contemplate our own mortality. At one time, I considered studying questions like these for a living. Then I got frustrated that I could never find concrete answers.

Luckily, my current career mixes philosophical theory with pragmatism.  I guide my clients through thought exercises that envision significant life changes and then help them take steps to protect against worst-case scenarios. This week in my insurance series we’ll explore how to protect against premature death or disability.


Why It’s Important

According to LIMRA, a marketing research organization, 41% of people have individual life insurance policies and 33% have individual disability policies. Though people are reluctant to purchase these policies, they know they’re important. Simply put, they provide you and your loved ones with financial security if you can’t earn money, whether because of death or disability.

You need this protection most when people depend on you. But, even if you just support yourself, you still need to offset some risk. It may make it even more crucial since you won’t have other income to depend on if you become disabled.


Disability Insurance: Insuring again the risk of long-term illness or injury.

This insurance protection may be the most underused form of risk transfer, despite the fact that about one in four 20-year-olds will become disabled before they retire. In addition, a disabling accident occurs once every second in the U.S and 18.5% of Americans are disabled.

Most disability policies cover 50-70% of your lost income. If you got 100%, the theory goes, you wouldn’t be as motivated to go back to work as soon as possible. But if you can’t work, you can purchase additional riders that will allow you for automatic increases without a medical exam should you need additional benefits.

You can choose from both short-term and long-term disability. Short term benefits usually last 10 to 26 weeks. If you’re going to be out longer than that then you will need to purchase a long-term disability policy.  This is especially crucial for married couples who likely have another person depending on their income and whose expenses will increase if one spouse is disabled.

Most policies have a time period (i.e., elimination period) before your benefits kick in. You can reduce your premiums by extending the elimination period and/or applying for a shorter benefit period. However be prepared to have premiums that cost 1.5% to 3% of your income.

Two last things to consider: 1) pay your premiums after tax, so the benefits are not taxable to you if you receive them, and 2) consider a retirement protection policy, as a supplement to your disability policy in order to protect your retirement in the case of a long-term disability early in life.


Life Insurance: Insuring against the loss of income due to a death in the household.

Money will never replace the joy and love people bring into your life. However, having to deal with a financial loss (especially the loss of a breadwinner) on top of the personal loss can be devastating.

To begin with, rather than asking how much you need, ask yourself what you need to replace. Income? Living expenses? Enough money for a spouse not to work for the rest of his or her life?  Answering that question will help determine how much coverage you should consider.

Again, this process is crucial for couples who have each other and/or dependents relying on the lost income. You may need less if your spouse also works. You can also insure non-working partners based on the amount of insurance a working spouse can have (usually $1 for $1 up to $1million).

You have to option of two types of policies — term and permanent. I’m a firm believer in buying level-term life insurance. Term policies cover you for a specific period of time — usually 10, 20 or 30 years. In return, you pay a level premium (that is, the amount you pay the insurance company for the policy doesn’t change) and get a fixed death benefit (the amount the insurance company pays your beneficiaries if you die while the policy is in place).

I like to think of it in terms of winning a bet. If you die during that specified time frame, your beneficiaries win because they receive the insurance proceeds. If you don’t die, the life insurance company wins and gets to keep the money you paid in premiums.  Though of course, you also win, because you don’t die.


Where You Can Buy Policies

You can buy policies in several ways — through your employer, through a captive insurance agency like a State Farm, Allstate, etc., through online brokers like a Policy Genius or TermLifeInsurance.com or by working with a financial advisor.

I suggest using someone that has access to multiple insurance companies so they can find the best policy for you and your circumstances. This is especially important if you have complicated individual or family medical history or have special circumstances like mental illness or previous suicide attempts.

I’m often asked whether work policies are enough. Usually they’re not. First, work coverage tends to have a lower death benefit, and the policy premiums tend to increase with age. Also, if you leave that employer the policy goes away or won’t convert to suitable coverage.

No matter which route you choose, make sure to know the financial strength of the insurance company (you can check this on sites like A.M Best) and what you’re paying in total, including insurance premiums and the fees for the person getting you the policy.


As always, I would love to hear your questions and concerns about purchasing life and disability insurance. Email, message or tweet me on the links below.