Finance 260 - Life/Disability Insurance

Finance 260 Life/Disability Insurance

High Impact, Low Probability Events

• Financial risk is transferred to insurance to mitigate the economic consequences of unforeseen events.

Disability Insurance

• Disability insurance is crucial for income protection if one cannot work due to injury or illness.

• Key concepts:

  • Definition: Provides income replacement for the insured if they cannot work due to disability.

  • Actuarial Estimates:

  • 1 in 3 people (approximately 33.3%) will experience a disability lasting 90 days or more during their lifetime.

  • 1 in 10 people (approximately 10%) will be permanently disabled before the age of 65.

Disability Definitions

• Policies can differ in how they define what constitutes a "disability".

  • Own Occupation: This is considered the best type of coverage. It states that if you cannot perform all duties of your specific occupation, you qualify for benefits.

  • Example: A surgeon who loses a hand cannot perform surgery but may still work in another capacity within the medical field, thereby qualifying for benefits under an "any occupation" policy.

  • Any Occupation: This type is less favorable. It states that benefits are available only if you cannot work in any occupation for which you are qualified by education, training, or experience.

Other Disability Considerations

• Benefits:

  • Typically, disability benefits range from 60% to 70% of one's gross pay, meaning the insurance company pays a monthly check equivalent to approximately 60-70% of what one earned in their previous job.

• Elimination Period:

  • This is the waiting period before benefits commence, usually lasting between 90 and 180 days after the disability incident.

  • Short-Term Disability Insurance: A separate policy meant to cover income loss during the elimination period.

• Duration of Benefits:

  • Benefits may continue until retirement or until the insured's death.

Term Life Insurance

• Characteristics:

  • Provides a lump sum of money (death benefit) upon the policyholder's death.

  • Policies are purchased for a specified duration, termed as 10, 20, or 30 years.

  • If the insured does not die within the term, no benefits are paid (a financial assurance against the risk of death).

  • It's generally the most affordable option for financial protection against death, especially when purchased at a younger age.

Key Considerations for Term Life Insurance

• To determine if one needs life insurance with a death benefit, consider the following:

  1. Are there dependents relying on your income?

  2. Do you have debts that need to be settled upon your death?

• Individual circumstances vary significantly, often highlighting a greater need for coverage when a spouse and/or children are involved.

  • Consider dependents, overall expenses, and long-term financial goals.

  • Rule of Thumb: Insure for 10-20 times one’s annual income.

Whole Life Insurance

• Also known as Permanent Life Insurance.

Characteristics:

• Upon death, the beneficiaries receive the greater of the death benefit and the policy's accumulated cash value.

• Two main components:

  • Death Benefit: Functions similarly to a term policy, but lasts until age 120.

  • Cash Value: Accumulates over time and can be invested.

  • Allows loans against the cash value, though repayment is required.

  • It is crucial to carefully consider overall needs for life insurance with a death benefit.

Important Considerations:

• Various products that claim investment potential may include hidden fees, often buried within lengthy contracts.

• Ensure understanding of whether the cash value is invested (often referred to as "variable"), influenced by stock market fluctuations—note that specific funds such as the S&P 500 Price Index may not reflect dividend earnings.

• High monthly premiums can be a burden as they encompass both the death benefit and investment components.

Contractual Considerations

• A legal agreement with an insurance provider should be taken seriously; companies can potentially face bankruptcy, and most states provide limited consumer protections.

• Alternative Financial Strategies:

  • For instance, consider this hypothetical example: If a whole life policy premium is $500 per month, could the individual instead purchase term life for $50/month and invest the remaining balance in the stock market for potentially greater growth?

Other Information

• Group Insurance:

  • Companies may offer Group Term Life Insurance or Group Disability Insurance at a discounted rate for employees.

• Health Questionnaire/Application Process:

  • Honesty on health questionnaires is critical when applying for life insurance, as it often involves a health examination, including blood tests.

  • A healthier individual typically qualifies for lower premiums, while dishonesty could result in a total denial of the death benefit if discovered.