Term insurance pays if the death occurs during the "term" of the policy, generally five to 30 years. Two types of term insurance are available.
Level term where the death benefit stays the same throughout the duration of the policy as does the payment.
Decreasing term means that the death benefit drops over the course of the policy's term. This type is commonly used to insure that a mortgage will be paid off in the case of a primary income earner.
Whole Life Insurance
Whole Life Insurance is life insurance that continues in force for as long as the premiums are paid. The insurer looks at your current age, health, and lifestyle, the reviews longevity charts that predict your length of life. If you enjoy dangerous sports, your policy will cost you more. The insurer creates a level premium which is higher than necessary to cover expected losses when you are young, then lower than necessary as the policy gets close to the end.
Some whole life policies offer investment options. Others offer variable premiums. Variable life, universal life, and variable-universal life are potential options for to consider as a part of your personal financial planning. You may also want to consider term insurance when you are young and need a lower premium for larger benefits, which then converts to whole life insurance when your income will allow for more investment.
Universal Life Insurance (UL)
Like Whole Life, Universal Life Insurance (UL) includes a savings element that grows, tax-deferred. A portion of the premium is invested by the insurance company in very conservative vehicles such as bonds or treasuries. If the insurance company does well with these investments, the interest rate return on your accumulated cash value will be higher than the policy guarantee (usually around 4%). It works like this:
From each premium payment, an expense charge (usually 5%) is deducted. The balance (95%) is added to the policy Account Value.
Next, the actual cost to the insurance company for all insurance benefits and expenses related to the policy for that premium period are deducted from the Account Value.
The Account Value earns interest in that premium period which is credited to the account (but not less than the minimum).
A major potential advantage of UL is that if the company does very well with its investments, you may have excellent growth in the cash value of the policy. UL is also more flexible than whole life in that the death benefit and commonly the premium payment are flexible. Unlike other whole life policies, you can increase (subject to insurability) or decrease the death benefit without surrendering the policy or getting a new one. Also you may choose from a variety of premium payments options.
On the other hand there are some added risks to a UL policy. In a whole life policy, the death benefit is guaranteed to be paid if all premium payments are made. In a UL the policy will lapse if the cash value combined with premium payments are not enough to cover the cost of insurance. Insurance companies are not interested in having policies lapse, so generally there are multiple safeguards against this happening.
Many people use UL Insurance as a source of cash payments to the owner of the policy, including loans, withdrawals, collateral assignments, split dollar agreements, pension funding, and tax planning. Ask you Jaffe Insurance professional more about how this works.
Being disabled is commonly referred to as "living death." An individual who is severely disabled due to accident or illness continues to need financial resources to live, often is consuming additional funds to deal with the disability, and yet is no longer earning income to help pay for these expenses. Insurance to replace some of that income stream is available and is known as disability insurance. This category of insurance is often characterized as the "forgotten risk." Families that have been very prudent to take out auto, homeowners, and life insurance think that they are adequately covered for disability or that there is only a low likelihood of ever needing this type of coverage.
The reality is quite different. While some employers provide disability coverage as part of their insurance package, and while it is true that workers' compensation insurance at the state level and Social Security at the federal level will potentially help a family when the breadwinner becomes disabled, each of these solutions may end up far from adequate as you will see.
The potential that an accident or illness will result in disability is also much higher than you might think. The odds of becoming disabled are much higher than the odds of dying. In any given year, 12% of the population will suffer a long-term disability. Your chances are one in seven that you will suffer a period of disability lasting a five years or longer before you reach age 65. Almost half (44%) of all workers now 45 or older will be disabled for 3 months or longer before reaching retirement.
Families dip into savings to take care of short term disabilities or borrow on credit cards. But these decisions destroy nest eggs for college or retirement and create long term strains on family finances. Many families don't have the reserves or the credit available. In a 2007 NAIC survey, more than half (56%) of adults said they could not meet their expenses if they were out of work for a year.
If you are employed in the State of California, your employer is required by law to carry Workers' Compensation Insurance. This insurance covers you for job related injuries. There are four issues you need to consider regarding this coverage.
1. Some employers do not follow the law, or fail to keep payments up during hard times. You may not be covered even if you think you are.
2. This insurance requires proof that the injury is job related. The insurance company and your own employer will be allied against you in an attempt to show that the injury or illness was not job related.
3. The payments may be delayed for months or years while the legal issues of fault are worked out.
4. The payments are often limited in amount and time of coverage.
Therefore, having your own policy instead of or in addition to your company policy may be a good decision for you and your family. A Jaffe Insurance Agency representative can help you design a program that wraps around your current coverage.
If you pay into the Social Security program, you are covered by Social Security in the case of some kinds of disabilities. Unfortunately, collecting on this insurance is one of the most difficult of all types of insurance. 80% of all claims are turned down on the first presentation, and it is commonly necessary to hire an attorney to help you through the legal morass to get SSI.
State Disability Insurance
You also pay a percent of your income into SDI in California. Like Social Security, this program is designed to step into the gap, especially in long term or severe disability situations. Like Social Security, compensation generally takes time and effort.
Employer Supplied Disability Insurance
Many employers offer disability insurance as part of your compensation package. As with all insurance, this policy will have limits and conditions. Most small employers do not offer this kind of insurance.
If you are self employed, or if you are a principle owner in your company, you may be exempted from paying into Workers' Compensation. Therefore one of the most critical elements of your coverage may not be there for you if you were to become disabled. Obviously the disability of a member of the leadership of a company can have even more debilitating effects for all concerned.
Four Primary Variables in coverage for An Individual Policy
Monthly Benefit - Most disability policies have a fixed monthly benefit. The amount can include an inflation adjustment for an additional premium. You can also purchase extra coverage that offers higher payment schedules.
The definition of disability - Two major options are known as "own occupation" (the inability to perform the duties of your specific occupation) or "any occupation" (the inability to perform the duties of any job for which your education and training make you qualified).
Waiting Periods - The waiting periods (the time after you become sick or injured before the payments begin) can range from one week to two years. The longer you are willing to wait and cover your own expenses, the less your premiums will cost.
Benefit period - The benefit period can range from six months to life, depending on what you choose and what your insurance company is willing to offer you.
Options to Consider
Consider a rider that pays you if you can return to work, but only on a part time basis.
A Social Security offset rider provides a payment equal to the social security payment if you do not qualify under social security, but you do qualify under the terms of the policy.
Additional-purchase options guarantee you the ability to purchase additional disability coverage in the future, regardless of your health at that time.
If you are self employed, if your employer does not provide disability insurance or if you feel that your employer provided insurance is inadequate, your Jaffe Insurance Representative can help you determine how to fill in the gaps. Here are some things to consider.
The monthly amount for which you can qualify, the benefit period, and the amount of the premium all depend upon how hazardous your occupation is. If you are an loan broker, your disability insurance is going to be cheaper than if you are an roofer. Your current physical and mental health are factors as well.
Consider the following when you are looking for an individual policy:
Get the highest monthly benefits for which you can qualify.
Try to get "own occupation" coverage for life.
Get the longest waiting period you can afford. A policy with a six-month waiting period is substantially less expensive than one with a one month waiting period.
Get coverage for the longest benefit period possible. You will generally want to be covered until age 65 or even for life, but if you need to choose between a higher monthly income payment or a longer benefit period, the general rule would be to take the longer benefit period.