Insurance Protection For Children, Families, And Elders

We have a duty to take care of loved ones and ourselves, but too many otherwise smart, well-intentioned people mishandle some critical areas necessary to fulfill this duty. People often take the security of insurance coverage for granted or fail to understand the problems coverage prevents. Owning proper insurance coverage helps prevent many legal problems from arising. For instance, under Ohio law with few exceptions, the state may legally take a person's home for repayment of nursing home costs paid by Medicaid. Long-term care coverage may pay enough to prevent an elderly person who needs nursing home care from losing their home to the government. Insurance discussed here includes life, disability, and long-term care.

Life Insurance

Insurance is not an investment but protection and coverage. People commonly buy life insurance to provide survivors with money, a death benefit, to compensate for the financial loss of a person who has died. For instance, a father may buy life insurance to take care of his wife and children if he suddenly dies.

Life Insurance: coverage that pays a death benefit

Six questions immediately come to mind about life insurance.

1. Who needs life insurance?
2. How much is needed?
3. When should life insurance be bought?
4. How long is it needed?
5. What type of life insurance should be bought?
6. How much is it going to cost?

Who needs life insurance? Noting the purpose of life insurance is to protect financially those dependent on the insured's financial resources, those who have no dependents probably do not need life insurance. Before quickly choosing not to carry life insurance, it is necessary to interpret the word dependent in a broad sense. People often think of dependents as only spouses and children, but elderly parents may also depend on their children's financial support. Dependents may include people outside the immediate family such as more distant relatives who rely on an individual or business partner. On the other hand, people with dependents should provide enough life insurance to protect them from financial hardship.

How much is needed? Theories vary about the answer to this question. One theory suggests that between 15 and 20 times the yearly amount of money needed is the proper amount of coverage. Yet another theory favors coverage equal to three to five times gross income plus gross debt plus $100,000.00 for extra expenses. A simpler theory recommends between five-and-ten times yearly income as the proper amount of coverage. The answer to this question is unique for each circumstance, but the coverage should be enough to meet the beneficiaries' current and future needs. The trick is to realize fully the size of the beneficiaries' financial needs.

When should life insurance be bought? Although there are many arguments for waiting until one is middle-aged or older to buy life insurance, waiting can be dangerous. A financially strapped young widow with children would be hard to convince that it is unwise for younger people to carry life insurance. Obviously, people of all ages need protection suitable for their circumstance. Shortly before or on assuming dependents, people should buy life insurance.

How long is it needed? Life insurance coverage can be bought for several amounts of time typically ranging from one to twenty years. Some policy types even provide coverage for a lifetime. The time needed varies from person-to-person, but coverage should be carried as long as one has dependents.

What type of life insurance should be bought? For most people term life insurance is best. Term life insurance simply provides a death benefit and no more. Typically, large amounts of term insurance can be bought inexpensively.

How much is it going to cost? The cost of a given type and amount of life insurance depends on many factors including the buyer, the provider, and the seller. A person in a low risk category usually receives a better price than high-risk buyers. Low risk factors include nonsmoking, young, and good medical history. A policy bought from a cheap provider may result in money wasted if the company goes out of business or for any reason cannot fulfill its obligation. Cost must be weighed against company quality.

Above it was stated that term life insurance is the most suitable for most people. That being said, term life insurance and other life insurance choices should be understood. A good way to classify life insurance policies is no cash value and cash value. Cash value life insurance policies amass dollars in the policy from dividends and investments made by the issuer besides providing a death benefit.

Term Life Insurance
Term life insurance is a no-frills policy that pays a death benefit to beneficiaries if the policyholder dies during the coverage period. Term life does not produce a cash value in addition to the death benefit. This is the least expensive life insurance to buy, but remember that premiums vary from circumstance-to-circumstance. Term insurance premiums increase with age. If an insurance agent suggests another policy type, be sure to clarify why they are recommending it.

Cash Value Policies
As previously discussed, cash value policies provide a death benefit and amass cash value. Also, returns earned grow tax-free through a policy's duration so cash value insurance also serves as a tax-deferred investment. The premium paid for cash value policies pays for the death benefit, expenses and commissions while the rest is invested. The three major types of cash value policies are whole life, variable life, and universal life.

Whole Life Insurance
Whole life insurance is a cash value policy that typically has the features of a guaranteed death benefit and a fixed or level premium throughout the policy's lifetime. The premium is fixed and is heavily based on the insured's age when bought. Insurance companies set the premium higher than necessary to satisfy claims in the early years of new policies thus producing a surplus of funds. The surplus is invested so the death benefit, expenses, and cash value obligation can be met. Normally the issuer of the policy invests the surplus conservatively in fixed income securities and guarantees a minimum rate of return. Whole life policies are flexible in the sense that a benefit from the policy can be enjoyed before the death of the insured. For instance, a loan can be taken out against the policy or the cash value can be used for payment of the insurance premium.

Variable Life Insurance
Variable life insurance is similar to whole life except that the rate of return is determined by how well the underlying investments perform. The underlying investments are chosen from a set of investments made available by the insurance company including stock, bond, and money market funds. Of the three cash value policies discussed in this article, variable life is the riskiest. Although a minimum death benefit is usually guaranteed, the rate of return of the cash value portion is not.

Universal Life Insurance
Universal life insurance is a more flexible and typically less risky version of variable life insurance. Universal life allows the policyholder to vary their premium subject to a predetermined cash value minimum. In addition, the death benefit can be adjusted upward or downward, but an increase in death benefit may be contingent on a satisfactory medical exam. A major difference between universal life and variable life is that universal life guarantees a minimum rate of return.
Now that term life and three cash value life insurance types have been discussed, it is worth remembering that it was previously stated that term life is the most attractive for most people. This is because cash value policies have relatively high fees and selling costs. An alternative strategy to buying cash value insurance is to buy term insurance and invest the cost difference.

Disability Insurance
Unpleasant as it is to consider, for most a loss of salary would be a financial nightmare. Yet it happens far more often than people realize. Statistics show that about 70% of workers in the 30 to 50 age group will be unable to work for at least 90 days. If one were unfortunate enough to become disabled, would the family home be lost? Would children be deprived of needs? Would the family's dignity be gone? Disability insurance offers protection against this unpleasantness.

Disability Insurance: insurance that provides coverage for a decrease or loss of income because of health conditions

Selecting a disability policy can be difficult. A good place to start is to decide how much income one needs to keep an acceptable standard of living and protect selected assets. It would also be wise to find out what if any coverage is employer provided. Unfortunately, employer provided coverage is usually inadequate. Now comes the hard part, understanding the terms and conditions of a specific policy can be tough.

Several elements are keys to understanding a disability policy. First, what constitutes a disability must be clear. For instance, a worker may believe he is disabled because he cannot perform a specific job while the insurer may not consider the worker disabled if he can perform another job. Three different disability designations are own occupation, any occupation, and income replacement.

Own Occupation: disabled if a specific job cannot be performed

Any Occupation: disabled only if a comparable job cannot be performed

Income Replacement: disabled if only jobs at a lower salary can be performed, but coverage guarantees pre-disability salary level by paying difference
Second, the portability of the policy should be defined. In other words, will the insurer continue coverage if the insured changes employers? Third, the policy's replacement ratio should be known. The replacement ratio is the percentage of income the payments are to replace. Fourth, understand exactly when disability payments are to begin and when they are to end. The time between becoming out of work and the beginning of disability payments is called the waiting period. Lower insurance premiums are associated with longer waiting periods. Sixth, some policies provide for cost of living adjustments. The last key element is the cancellation rights of the insurer. A good policy should not be cancelable by the issuer.

Disability insurance has unique tax consequences. In general, if the premium paid for disability insurance is deducted from income taxes, the benefits received from the policy are taxed. However, the benefits received from disability are not taxed if the premiums are not deducted. Most people are better off not deducting disability insurance premiums and keeping the benefits tax-free.

As with any insurance, the cost varies from person-to-person based on many factors including the terms of the policy and occupation. Clearly, disability insurance should only be purchased from quality companies. It would be wise to discuss companies with people who have direct experience making disability claims to find out how resistant to paying claims specific insurers are. This is important since it is often a subjective determination about whether an individual's health allows them to perform a job or not. The bottom line is that buying disability insurance requires much homework.

Long-Term Care Insurance
Why do people resist buying long-term care insurance? The answer to this lies with the fact that people just do not understand it at all. Some people fail to understand that about one out of three people over the age of 65 eventually spends some time in a nursing home. Others fail to realize that a stay in a nursing home is quite expensive. Probably the most ridiculous misunderstanding is the government through Medicare and Medicaid will pay for it. This is nuts! Medicare usually will not pay for it and when Medicare does pay, it is only for a limited amount of time. Sure, Medicaid will pay for nursing home stays but only after an individual has used their own resources to the point of near destitution. In fact, Medicaid can even seize the family home so heirs do not receive it. Probably only two categories of people should not consider buying long-term care insurance, and they are the extremely rich and the barely getting by.

Long-Term Care Insurance: coverage that pays to care for an individual when they are no longer able to care for themselves (nursing home care and/or home healthcare)

Most people should consider buying long-term care insurance when retirement is near. A good policy provides coverage for both home healthcare and nursing home care. Long-term care policies are quite expensive, but compared with even a single year in a nursing home the long-term care premiums do not look so terrible. Once again, shop around and fully understand the terms of the policy.

This article has provided a brief survey of often-overlooked insurance needs. Insurance should be considered an important part of a family plan. When buying insurance always know why you are buying it and what you are getting.