Life, Disability, & Other Insurance

The content contained on or made available through this website is not intended to and does not constitute as legal or investment advice. Please use and refer to the information at your own risk, and consult with a professional before making any finance-related decisions. Refer to the full Terms & Conditions here. Last updated January 1st, 2020.

 

Takeaways

  1. Learn about the coverage options offered by your employer

  2. If you have a family or are in debt, consider a term life policy

  3. Protect yourself against being unable to work with a long-term disability policy

  4. Do the math to see if vision or dental coverage is worthwhile

  5. Consider ancillary insurance options to help with out of pocket expenses

 

The types of insurance described in this article are not essential benefits, like major medical. They can, however, offer highly important protection against unforeseen circumstances. Weather you receive them through your employer, an insurance broker, or directly with an insurer, consider each option against your unique circumstances.

Life Insurance

 

Life insurance is not often a big focus for young and healthy individuals. And while those just entering the workforce can sometimes forego this coverage, that mindset can and should change over time. The addition of a family and other obligations means that, if something were to happen, the people that depend on you may be left in financial ruin.

 

The following types of life insurance policies can help protect those you love against the worst case scenario:

 

  • Term Life: This is the most pure form of life insurance. With term life, you are paying solely for the following year of coverage. If the insured dies within the coverage period, a benefit equal to the face value of the policy will be made available through lump sum, monthly payouts, or an annuity. The length (or term) of a term life policy is flexible, but lasts typically around 30 years or until retirement. Premium payments can be made at a flat rate or start low and increase over time. Given its simplicity, term life is often the cheapest way to obtain life insurance.

 

  • Whole Life: These policies provide the same benefits as term life with the addition of what is called a “cash value” (essentially a savings or investment account held by the insurer). Unlike term life, whole life policies are meant to last until the death of the policyholder. If the policy is terminated before death, surrender fees and other charges will be made to the cash value. Since policyholders are tasked with contributing towards the cash value and the insurer is tasked with managing the cash value, premiums for similar face-value policies can be 5-10 times more expensive than those for term life.

 

  • Universal Life: This type of policy is similar to whole life in that policyholders contribute to both the insurance coverage and the cash value. Those with a Universal Life policy, however, can change premium payments and the death benefit without receiving a new policy. Essentially, the policyholder will always be responsible for the minimum premium (enough to cover the following year of insurance). What makes this type of policy unique is that this minimum premium can be paid by the plan’s own cash value (in a way allowing for “missed” payments). Policyholders can also contribute more than the minimum in any period to increase the policy’s cash value. It is this flexibility that makes Universal Life plans attractive to many people. Note that the added complexity of having a cash value again increases the overall cost of the plan.

 

Whole and Universal life policies (those with cash values) can be categorized as traditional or variable. Traditional policies place the cash value in insurer-owned savings accounts. These savings accounts can exhibit fixed or fluctuating (market-condition dependent) interest rates. A variable policy, however, places the cash value in a subset of investment accounts. As a result, the cash value in variable life policies can experience the same ups and downs as the stock and bond market. The average return on these policies is substantially higher, as is the risk.

While there can be some favorable tax implications to life insurance policies that hold a cash value, it is almost always optimal to elect a term life policy that covers family and repays debt upon your death. The additional premium that would otherwise funnel into the cash value of a whole or universal life plan can then be separately invested in retirement or taxable brokerage accounts. This minimizes the fees and maintenance costs associated with life policies that accrue a cash value.

Short & Long Term Coverage

 

Life insurance is meant to protect those that depend on you from your untimely death. Equally important, however, is protecting yourself from a sudden inability to work and/or live unassisted. It is nearly impossible to plan for a complete loss of income during your career; the following coverage options supplement your income and provide you with the care you need should something happen to your ability to work:

 

  • Short Term Disability (STD): STD is meant to protect workers from a short-term inability to carry out their current occupational duties. This coverage is most often offered by employers, and can be quite expensive if sold on its own. Payments typically span between 14 days from the disability to 3-12 months following. During this time, standard policies reimburse beneficiaries around 60-80% of their pre-disability income.

 

  • Long Term Disability (LTD): While STD covers you for the first few weeks or months following the onset of a disability, LTD protects you thereafter. The duration between the date of disability and when benefits begin is called the “elimination period,” and is typically 30, 60, or 90 days. If you have STD coverage, it will support you during this time. LTD comes in two forms: own occupation and any occupation. Own occupation plans will cover a percentage of your lost income (e.g. 50%) if you cannot perform the duties of your current occupation. Any occupation plans will trigger only if you cannot perform the duties of an occupation for which you are reasonably suited (given your education, experience, and age). Own occupation plans are significantly more expensive than any occupation plans, but they are far more reliable in terms of receiving benefits. Some LTD policies will combine the two definitions, allowing for own occupation coverage the first few (e.g. two) years, and any occupation coverage thereafter. 

 

  • Long Term Care (LTC): LTC covers many expenses that traditional health insurance does not (e.g. in-home nursing care, nursing homes, assisted living facilities, and adult daycare centers). If ever you find yourself requiring full time care, the associated expenses can be exorbitant. That is the benefit of LTC coverage. A LTC policy typically caps benefit payments at per day and per lifetime limits, and only triggers when a policyholder can no longer perform at least two of the following Activities of Daily Living (ADLs): bathing, toileting, dressing, caring for incontinence, and transferring (e.g. from a bed to chair). The number of insurers offering LTC has plummeted over the past few decades. Most did not correctly anticipate the future cost of care for members that remained on the plan. As a result, LTC can be quite expensive, and is often not covered by employers. 

 

Most long-term coverage policies can be broken down further into “guaranteed renewal” and “non-cancellable” categories. A guaranteed renewal policy ensures that the issuer will continue coverage as long as the premium is paid. Premiums can, however, increase over time based on individual policy and group coverage variables. These premium increases are largely out of your control. A non-cancellable clause on a life, LTD, or LTC policy ensures that the issuer will both continue coverage and that premiums will remain flat over the life of the policy.

If not offered by your employer, STD is often not worth the cost. LTD, on the other hand, is a nearly essential benefit. If offered by your employer at a baseline level of coverage (e.g. 50% of pre-disability income), look into options for buying up coverage (e.g. to 60-65%). If possible, everyone should be insured against becoming disabled and unable to earn a livable wage. Lastly, since LTC can be quite expensive, the best reason to purchase a policy is in order to protect a large net worth as you age.

Dental & Vision

 

Unlike major medical insurance, adult dental and vision coverage is not guaranteed to be offered by a large employer. There are multiple services, however, that dental and vision policies cover that major medical does not. Depending on your needs, it can therefore make sense to search the broader insurance market for reasonably priced coverage. 

 

Dental and vision plans can be categorized as either traditional PPO/HMO coverage or discount programs. The PPO/HMO option acts like traditional medical insurance, where you pay a premium and receive coverage. Conversely, under a discount program you essentially pay for a “membership” card that grants you access to the discounted rates otherwise paid by the insurer. These can reduce the cost of care by as much as 50% or more at the point of service.

 

Below are the descriptions and nuances of dental and vision insurance:

 

  • Dental: Most traditional coinsurance-based (i.e. non-copay) dental policies offer tiered coverage. For instance, diagnostic and preventive care (e.g. routine cleanings) will be covered at 80-100%, restorative care (e.g. fillings and gum treatment) will be covered at 60-80%, and major procedures (e.g. root canals and crowns) will be covered at 40-60%. Similar to major medical coverage, dental plans also have copays and/or a deducible. However, unlike major medical, most dental plans have an annual maximum (e.g. $2,000). The insurer will not cover claims in excess of this amount. Lastly, a dental policy will carry limitations (e.g. two cleanings per year), exclusions (i.e. a list of services that will not be covered), and a waiting period (i.e. the amount of time you must be on the plan before you can receive certain expensive services).

 

  • Vision: Vision policies vary significantly in what they cover. One plan may cover any lens and frame combination for a pair of glasses, while another only covers basic lenses and up to a $200 frame. For more expensive procedures (e.g. cataract surgery), the plan may pay out a flat benefit and leave the rest up to the policyholder. Many of these decisions are made in order to reduce the cost of coverage (i.e. the premiums). But it does mean that, if you prefer light-weight anti-glare lenses, you will likely be paying out of pocket for the upcharge. Similar to dental, vision policies also have limitations (e.g.one eye exam per year), exclusions (potentially including pre-existing conditions), and a waiting period. Given the sheer variance in plan designs, vision coverage can be difficult to evaluate. Before signing up, read the policy and have a firm understanding of what is, and what is not, covered.

 

Making the decision on dental and vision coverage can be tricky. Thankfully, foregoing these policies does not bring forth nearly the same risk as doing so for medical. And, if deemed “medically necessary,” most serious mouth and eye-related injuries or diseases will be covered by medical insurance.

Dental and vision expenses are much more predictable than those for major medical coverage. For instance, you may plan on receiving two teeth cleanings, and know that perhaps you may need a filling. The cost of these services can be reasonably estimated and compared to the price of your insurance premiums. If your estimation is lower than what you would be charged for coverage (plus deductible and other out of pocket expenses), then insurance may not be worth it. But if you need a root canal in the near future, the opposite may be true.

Ancillary Coverage Options

 

These supplemental benefits may or may not be offered by your employer. They are far less expensive than traditional health/life/disability benefits, and cover a more narrow range of insurable events.

 

  • Critical Illness: These policies cover you from a very small list of medical emergencies, such as heart attack, stroke, transplants, cancer, and coronary bypass. The benefit traditionally comes in the form of a lump sum payment upon a qualifying diagnosis. Critical illness insurance is meant to protect against the exorbitant out of pocket expenses associated with the covered list of diseases. And since benefits are paid in the form of a lump sum, this money can also be used for non-medical expenses. Critical illness policies vary in terms of what they cover, and some diseases that are technically covered may have very narrow definitions. Many also include provisions for how long one must survive after the insured event (e.g. 30 days) before a benefit is paid out. Read these policies carefully to avoid any surprises.

 

  • Accidental Injury: This form of insurance covers policyholders for expenses related to a specific set of accident-related injuries. These injuries are broadly categorized as follows: dislocation, laceration, concussion, fracture, eye injury, burn, dental injury, and accidental death and dismemberment. The payout for an injury can be a fixed amount or variable, in which case it depends on the severity of the injury. The face value of many accidental injury policies is often not very large – typically in the range of a few thousand dollars. However, their low cost may make them an attractive option for supplementing core medical and disability insurance.

 

  • Accidental Death & Dismemberment (AD&D): AD&D coverage insures policyholders against their accidental death or dismemberment. It can be sold on its own, as a part of accidental injury coverage, or as a rider to a life insurance policy (e.g. doubling the payout if death is accidental). AD&D policies are very strict when it comes to evaluating claims. For instance, the insureds death or dismemberment must occur shortly after and be proven to be the direct result of an accident. In these cases, dismemberment includes the loss of a limb, eyesight, hearing, speech, or paralysis. Policies generally pay a portion of the face value for the loss of a single limb (including sight in one eye or hearing in one ear), and the full face value for the loss of two or more limbs. Overall, AD&D is very narrow in what it covers, but is commensurately affordable.

 

  • Hospital Indemnity: This type of policy pays a per diem (up to a maximum number of days) or lump sum to a policyholder in the case of their hospitalization. These payments are again meant to supplement traditional medical insurance with out of pocket expenses (both medical and non-medical). Hospital indemnity policies cover a wide range of reasons for a hospital stay, but they may vary from plan to plan. If you are particularly at risk for a hospital stay, make sure that your condition and circumstances will be covered before enrolling.

 

Each of these coverage options should be viewed as supplemental to traditional medical and disability insurance. Their purpose is to partially offset the burden of meeting your deductible/out of pocket maximum and to help with the other non-medical expenses associated with the insured event.

 

Some or all of these plans may be offered by your employer, in which case there will likely be no underwriting and the rates may be partially or completely subsidized. If you seek this coverage on your own, however, the premiums can be higher and you may be subject to individual underwriting. This can be as simple as a short medical survey or as detailed as a full biometric and physical examination.

These ancillary coverage options are usually only worthwhile when offered by an employer (or through some other form of group insurance). Otherwise, they can be pricy and subject the policyholder to various methods of underwiring. As long as rates are affordable, these policies can help protect against catastrophic and unforeseen events. A good rule of thumb would be to elect enough coverage to help meet your deductible and/or out of pocket maximum.

Conclusion

No one wants to think about a time they will need to call upon an insurance policy. But when unforeseen events take place, you want you and your family to be protected financially. In many cases, it is best to absorb the upfront cost of coverage in order to prevent the possibility of financial ruin. Insurance options provided by an employer are often the best deal, as they have the benefit of insuring a large group, which inherently spreads risk and lowers premiums. Employers also may subsidize a percentage of your premiums by paying for a portion themselves. If not offered by your employer, it is completely reasonable to search externally for near-essential benefits, such as LTD and term life insurance.

The content contained on or made available through this website is not intended to and does not constitute as legal or investment advice. Please use and refer to the information at your own risk, and consult with a professional before making any finance-related decisions.

© 2020 London Levinson LLC