Life Insurance Long-Term Care Financial Planning

Transcription

1 INSURANCE PLANNING GUIDE PROTECTION FOR YOU AND YOUR LOVED ONES Your promotional imprint here and/or back cover. BC ABC Company 123 Main Street Anywhere, USA

2 THE IMPORTANCE OF INSURANCE 1 Insurance is a piece of the financial planning puzzle that is sometimes overlooked. Too often people underestimate its importance. However, for most people, having appropriate levels of insurance coverage is critical to financial security. THE MEANS TO GO ON Insurance can provide your family with the financial means to go on if something happens to you. It can provide income if you become disabled or allow you to obtain quality longterm care without depleting your financial resources. And it can serve several business planning purposes. In this Guide, we look at the various types of insurance you may need to protect yourself and your loved ones: Life Insurance Long-term Care Insurance Disability Insurance We also answer the questions that everyone asks: What kind of insurance should I buy? How much coverage do I need? What should I look for in choosing an insurance company? FOR YOUR SPOUSE When you have adequate insurance, your spouse will be spared unnecessary stress and worry during the difficult period that inevitably follows disability, prolonged illness, or death. Insurance can bring peace of mind by providing money for your spouse to pay your mortgage and other debts, everyday living expenses, and funeral expenses.

3 2 FOR YOUR CHILDREN Following the disability or death of one parent, the other parent often has to return to work or work longer hours to make ends meet. Insurance can provide a financial cushion so that the working parent has more flexibility and can give children the time and attention they need to better cope with the illness or death. Insurance can also help ensure that your children will receive the college education you want them to have. Without adequate insurance, your or your spouse s prolonged illness or death may force your family to dip into savings and investments that were earmarked for college. FOR OTHER LOVED ONES Is there someone else who depends on you for support an elderly parent, a relative, or a significant other, for example? You can use insurance to make sure your loved one will continue to be taken care of if something happens to you. And, in the case of life insurance, proceeds are paid directly to the person you name as your beneficiary. So, you know that your loved one will receive the money you want him or her to have. ADJUSTING TO A SPOUSE S DEATH Financial challenges often faced by surviving spouses include: Having to find a job or work more hours to make ends meet Paying for child care and household help Finding more affordable housing Securing health insurance Putting money away for retirement

4 3 BE PREPARED Justin never imagined he d be a single parent. Unfortunately, due to his wife Judy s tragic death in a car accident, he is now the sole parent of their two young children. When their first child was born, Judy left her job to stay home and care for him. The couple also reexamined their life insurance needs at that time and, fortunately, decided to purchase coverage on both of their lives. Although life is quite challenging right now for Justin and the children, at least he doesn t have to worry about being able to afford household help and the quality child care he wants for the children. FOR YOUR BUSINESS If you own a business, life insurance can play a vital role in maintaining continuity should a key employee die. It can also help ensure that your business will survive without you. If your business represents a large part of your estate, life insurance can give your family the financial cushion it needs to pay estate taxes without having to sell the business or cash out other assets. And offering group life and disability insurance to your employees can help you recruit and retain your work force. FOR YOURSELF When you have adequate insurance coverage, you gain: Peace of mind because you know that your family s finances will be secure if something happens to you. The assurance that you will be able to afford the long-term care you may need in the future. Freedom to concentrate on your recovery without having to worry about your finances should you become ill or disabled.

5 ESTIMATING LIFE INSURANCE NEEDS 4 Whenever you re planning to purchase insurance, the first step is to determine how much coverage you should have. To identify your life insurance needs, review any coverage you may already have through your employer and/or any personal policies you ve already purchased. You ll then be ready to calculate how much additional life insurance, if any, you need to provide your family with full protection. GENERAL GUIDELINES The rule of thumb used to be that life insurance coverage should be five times annual income. Today, higher multiples are sometimes recommended. But simple rules like these don t take into account your family s specific financial situation. You may end up underestimating or overestimating your needs, unless you analyze your situation closely. A BETTER WAY Instead, consider what you want your life insurance to accomplish. How much income do you want to provide? Enough to totally support your family? Or will it only be necessary to supplement other income your family members will have? Estimate how long the income from your insurance will be needed: Until your children finish school? For the rest of your spouse s life? For some other period? Also consider whether you want your spouse to be able to pay off your home mortgage and other outstanding debts immediately. Don t forget to consider funeral expenses and potential medical bills. And think about your children s college education expenses. How much of those costs do you want your insurance proceeds to cover? Once you ve determined what you want your life insurance proceeds to accomplish, you can use the worksheet on the next page to calculate how much coverage you need. We would be happy to help you.

6 5 HOW MUCH LIFE INSURANCE DO YOU NEED? HOUSEHOLD INCOME Without Your Earnings Spouse s or dependent s earnings (after taxes) Social Security benefits (after taxes) Pension plan benefits (after taxes) Investment income (after taxes) Current annual income Value of current assets (savings, retirement accounts,* investments, etc.)... Estimated annual after-tax investment return Estimated annual income from assets and insurance TOTAL EXPECTED ANNUAL INCOME ANNUAL EXPENSES (don t include your mortgage if you want to pay it off) ADDITIONAL ANNUAL INCOME NEEDED $ % $ + $ + $ + $ = $ + $ = $ $ $ Income factor from table (based on the number of years income will be required) Principal needed to provide additional annual income $ Remaining mortgage balance $ Children s college education expenses $ Outstanding debts $ Medical $ Funeral costs $ Total life insurance needed $ Value of existing life insurance policies on your life $ AMOUNT OF ADDITIONAL LIFE INSURANCE NEEDED * Assumes tax-deferred retirement accounts (IRAs, 401(k)s, etc.) remain in a tax-deferred environment and that distributions of income from those accounts are taxable. $ INCOME FACTORS Years Required Factor Assumes 4% inflation and a 7% average annual return on investments. Actual inflation and investment returns may be different. Source: NPI

7 TYPES OF LIFE INSURANCE 6 Once you determine how much life insurance you need, the next step is to choose the insurance policy that s right for you. Life insurance falls into two broad categories: term and permanent (or cash value ). Within those categories, you have several types of insurance to choose from, each with different features. Understanding the differences will help you select the insurance that best meets your needs. TERM INSURANCE Term life insurance covers you for a specific length of time or term and pays a death benefit to your beneficiary if you die while the policy is in effect. At the end of the term, the policy expires without any value. For this reason, term insurance is sometimes referred to as temporary insurance. A CASE FOR PRIVATE INSURANCE Maria and Miguel each have group-term life insurance through their employers and were reluctant to buy any additional life insurance. But a talk with their financial professional changed their minds. The advisor pointed out that their employer-provided coverage equal to one year s salary might not be enough, especially if they plan to have children. In addition, a job loss would mean a loss of coverage. Replacing the coverage in the future could be difficult and/or expensive. Maria and Miguel bought permanent life policies to supplement the insurance their employers provide. Recently, Miguel developed health problems that could have affected his ability to buy affordable coverage. The couple feels more secure knowing that they have adequate insurance protection and that their policies are building cash value that they ll be able to tap into in the future for their retirement or other financial needs.

8 7 Renewable Term. A renewable term policy allows you to extend your coverage for additional terms without having to undergo medical exams or provide other evidence of insurability. While your premiums will stay the same during each specific coverage period, they will generally increase according to your age each time you renew. Insurers usually limit your right to renew once you reach a certain age, often 65 or 70. Convertible Term. A convertible term policy allows you to buy term insurance that can be converted to a cash value policy later on without having to provide evidence of insurability. Some insurers place a time limit on the right to convert, so be sure to read the fine print. When Term Insurance May Be Right. A term insurance policy may be a good fit for your needs or circumstances at a particular stage in your life, or it can serve as a stepping stone to a permanent insurance policy. You may want to consider term insurance when: Your need for insurance is temporary, such as when you have dependent children or a home mortgage you would want the proceeds to pay off. You want to supplement cash value coverage by attaching term riders to your policy. PERMANENT INSURANCE Permanent life insurance is often referred to as cash value insurance because part of the premium you pay goes toward building equity (cash value). The cash value increases over the years until it reaches the policy s full face amount. Most policies have a loan feature that allows you to borrow against your policy s cash value. You can also surrender your cash value policy once your need for protection diminishes and receive the equity that has built up. There are several types of cash value life insurance, including: Whole Life. With a traditional whole life policy, you pay a fixed annual premium and earn interest on the cash value that your policy builds. If you die while the policy is in force, your beneficiary receives a fixed sum of money the death benefit amount. Universal Life. Universal life offers more flexibility than traditional whole life by allowing you to change the amount, date, and frequency of your premium payments. You may also increase or decrease the amount of the death benefit. Typically, you can choose from among several death benefit options, which may include a fixed benefit plus an additional benefit equal to the policy s cash value or premiums paid.

9 8 Variable Life. A variable life policy differs from other permanent life policies because neither the cash value nor the death benefit is guaranteed. Instead, benefits are connected to the performance of selected investment portfolios (or sub-accounts ). If you choose a variable life policy, you take on some risk. But you gain the potential for a higher death benefit and a greater cash value if your investments perform well. Straight variable life offers a fixed premium. Universal variable life allows you to vary your premiums and reconfigure the death benefit. When Cash Value Insurance May Be Right. While all life insurance policies are designed to provide a measure of financial security for your family if you die prematurely, cash value policies may be appropriate for other financial planning needs as well. You may want to consider cash value insurance when: You want to have a life insurance policy in force throughout your lifetime. The savings element appeals to you. LIFE INSURANCE RIDERS Once you have chosen the type of policy that s appropriate for your situation, you can tailor it to better suit your personal needs by adding optional provisions and riders. The additional coverage comes with added cost. Here are some of the options you may want to consider. Accelerated Death Benefit. If you become terminally ill, all or part of your policy s death benefit may be paid prior to your death. Accidental Death Benefit. The amount of the death benefit will be increased if you die because of an accident. Additional Insurance Option. This provision guarantees that you will be able to buy additional coverage without providing evidence of insurability. Cost of Living Rider. Your coverage automatically increases to keep up with inflation. Disability Income Rider. If you become totally and permanently disabled due to illness or injury, you ll receive a monthly income payment (following the waiting period specified in your policy). Term Riders. Riders that add term coverages to a basic cash value policy. This may be a way to increase the amount of insurance you have at a reasonable cost. Waiver of Premium. Your policy premiums and other charges are waived if you become totally and permanently disabled before reaching a certain age. Not all riders available in all states or with all policies. Terms may vary. Check your policy for specifics regarding your coverage.

10 LIFE INSURANCE STRATEGIES FOR INDIVIDUALS 9 Determining how much life insurance you need and what type to buy is not the only consideration involved in insurance planning. You also need to look at how life insurance fits into your estate plan and your overall financial plan. CHOOSING A BENEFICIARY The proceeds of your life insurance policies will be paid directly to the beneficiary you ve designated. Unless you ve made other arrangements (such as having the proceeds go into a trust), your beneficiary will be able to use the insurance settlement immediately for any purpose he or she wants. If you don t name a beneficiary, your life insurance proceeds will be paid to your estate to be distributed under the terms of your will. Your family won t receive the proceeds until your estate has gone through probate, which could take months or even years. Primary and Secondary Beneficiaries. For each of your life insurance policies, you should name one primary and at least one secondary (or contingent) beneficiary. The secondary beneficiary will receive the insurance proceeds if your primary beneficiary predeceases you. Married individuals typically name their spouse as their primary beneficiary and other family members often, children or grandchildren as secondary beneficiaries. This strategy usually works well. Under some circumstances, however, you may want to provide greater protection for your loved ones by naming a trust as the beneficiary of your life insurance proceeds. (See the following section on Life Insurance Trusts.) Other Considerations. Once you name a beneficiary, you generally can change that designation if you wish. Be sure to review your beneficiary designations after any important life change and revise them, if needed. That way, you ll be sure that the proceeds of your policies will be distributed as you intended.

11 10 LIFE INSURANCE TRUSTS If you have a substantial amount of life insurance, you may want to create an irrevocable life insurance trust. Under this arrangement, the trust is the owner and beneficiary of your life insurance policy. At your death, your trustee (a person or institution you name when you set up the trust) will collect the proceeds and manage them for the benefit of the trust beneficiaries, usually your family. Why is this useful? A life insurance trust gives beneficiaries who are not used to handling large sums of money the help they need. Most trustees are chosen because they are skilled at managing money. The trust can be set up to provide support for a child, grandchild, or other relative with special needs. A life insurance trust can potentially reduce estate taxes. As long as the trust is properly structured and implemented, the insurance proceeds won t be included in your estate for federal estate-tax purposes. DOUBLE PROTECTION Nick has a substantial amount of life insurance. Following his divorce, he wanted to change his beneficiary designations from his ex-wife to his three children, ages 10, 13, and 16. His financial professional had a better idea. The advisor recommended that Nick set up an irrevocable life insurance trust, transfer his insurance policies to the trust, and name his children as the trust beneficiaries. Nick followed that advice. He likes the fact that, with the trust, he knows the insurance proceeds will be professionally managed and distributed for his children s benefit by an investment manager he has chosen. Nick also likes the fact that his children won t automatically receive all their proceeds once they reach age 18 and be tempted to use the money unwisely. His trust provides for one third of each child s proceeds to be distributed at age 25, another third at age 30, and the remainder at age 35.

12 11 MAXIMIZING PENSION PAYMENTS Another strategy you may want to consider is using life insurance to maximize your pension benefits. Your employer s retirement plan may offer you a pension or annuity option that will pay you a certain monthly benefit during your retirement. When you retire, you ll have to choose whether to receive benefits based on your life expectancy only ( single life option) or based on your and your spouse s joint life expectancies ( joint and survivor option). Choosing the single life payout will give you higher monthly payments. But the payments will end at your death, leaving your surviving spouse (or other beneficiary) with no pension. If you choose the higher monthly pension payments and use a portion of the payments you receive to buy insurance on your life, however, the insurance can provide your spouse with the income he or she would need following your death. This strategy may have several advantages. Assuming the numbers work out, it could give you more income during your lifetime and still provide an income for your spouse after your death that is comparable to the survivor annuity. In addition, you d have: Access to the policy s cash value (or the opportunity to cancel the insurance) should your spouse predecease you, The flexibility to change the policy beneficiary, and An opportunity to provide your children or other heirs with an inheritance if your spouse invests the policy proceeds and doesn t use all the money. However, you should also keep in mind potential risks: Your surviving spouse would not have the benefit of any cost-of-living increases that are often associated with a joint and survivor pension. If you had to cancel the life insurance policy for financial reasons, your surviving spouse could be left without adequate financial resources. The death benefit associated with the insurance policy you purchase may not be sufficient to provide your surviving spouse with the income he/she needs if the benefit fluctuates with interest rates. We can help you weigh all the issues and make an informed choice.

13 12 WEALTH REPLACEMENT Life insurance also can help you make a substantial gift to a favorite charitable organization without shortchanging your family or other beneficiaries. For example, suppose you own valuable property, let s say an art collection, that you would like to donate. But you re hesitant to make the gift because doing so would diminish the amount your children will eventually inherit from you. You could purchase insurance on your life in an amount equal to the value of the art collection and name your children as policy beneficiaries. That way, you could make your charitable donation secure in the knowledge that your children will receive the insurance proceeds upon your death. A wealth replacement strategy using life insurance is often used by individuals who establish charitable remainder trusts. EQUALIZING INHERITANCES It s not unusual for parents to own a business, farm, home, or another specific asset that they want one or more of their children to have, but not all their children. For example, one child might be involved in the day-to-day operations of the family business and another might work in another profession and not be interested in the business at all. If the parents want their children to share equally in their estates, leaving the business to one child and not the other wouldn t work. In this type of situation, life insurance might be used to equalize inheritances among heirs. All Things Equal illustrates this strategy. ALL THINGS EQUAL Lillian s daughter Susan and her two children live with Lillian. Susan was a great help during Lillian s recent illness. Although her health is good now, Lillian is looking ahead. She wants to leave her house to Susan, but she doesn t want to shortchange her son, Gregg. The house is Lillian s largest asset. Lillian has decided to buy a life insurance policy in an amount that will be close to the likely market value of her home at her death and name Gregg as the policy s beneficiary. That way, Gregg will receive an inheritance similar in value to what his sister will receive.

14 LIFE INSURANCE STRATEGIES FOR BUSINESS OWNERS 13 If you are a business owner, you can take advantage of life insurance planning strategies to help make your business more successful now and in the future. Consider the following. GROUP-TERM INSURANCE Smart employers are always looking for ways to attract and retain hard-working, dedicated employees. Group-term life insurance is a popular benefit with employees. Group-term life insurance is generally renewable insurance that covers the lives of a group of people in this case, your employees. Your business provides coverage according to a formula that is usually based on age, years of service, compensation, or position. For instance, you might provide insurance valued at twice an employee s annual salary. These plans are typically economical and easy to administer. In general, the cost of premiums is deductible for federal income-tax purposes, and employees can receive up to $50,000 of employer-paid coverage without being taxed on the cost of the coverage. A group-term life insurance plan is worth considering if you want to offer your employees a valuable, yet affordable, benefit. KEY PERSON LIFE INSURANCE What would happen if your best manager suddenly died? Or your top salesperson? Your business could be in for a real struggle. To protect your business, your company should consider buying key person insurance on the lives of employees who are critical to the company s success. Then, if one of those employees should die, your company would have the insurance proceeds to help stabilize its finances until a qualified replacement was found. Obviously, no amount of insurance can ever make up for the loss of an employee. But, by purchasing key person life insurance, your company would be better prepared for the unthinkable. Also, having key person insurance in place can help assure the company s creditors and customers that the business will be able to continue even without the key person.

15 14 BUSINESS SUCCESSION Many successful businesses fail to outlive their original owners due to inadequate succession planning. Sadly, part or all of a family-owned business often has to be sold to pay estate taxes or other expenses when the owner dies. With upfront planning, life insurance can help you arrange for a smooth succession. Buy-sell Agreement. This is a succession arrangement between business partners or coowners. It establishes that if one owner departs (due to death, disability, or the desire to sell), the remaining owner(s) or the company itself will buy out that owner s share of the business. Details, such as a formula for figuring out the purchase price, are spelled out in the agreement. Life insurance is a popular way to provide the cash needed to complete a buyout pursuant to a buy-sell agreement. A properly structured buy-sell agreement: Provides funds for the purchase of a departed owner s business interest. Provides for an orderly transfer of the business. Allows family members or other owners to continue in their business roles. Lets you plan your estate and taxes ahead of time. First-to-die Insurance. You might want to consider first-to-die life insurance as the funding vehicle for your buy-sell agreement. A first-to-die policy insures more than one life, but pays only one death benefit. Premiums are generally lower than the premiums payable on individual policies. A first-to-die policy would pay benefits when any one of the insured owners dies. The benefits could then be used to pay the heirs of the deceased owner for his or her interest in the business. The policy would then expire, and the remaining owners could take out a new first-to-die policy. Tax Considerations. Does your business make up a large part of your estate? If so, consider whether your family or other heirs will have the cash they need to pay any estate tax that may be due at the time of your death. It s not unusual for families to have to sell part or all of a business to come up with the money for taxes. Life insurance could provide the cash your family will need and allow them to continue operating the business without you.

16 PAYING FOR LONG-TERM CARE 15 While life insurance is important, it s only one part of a comprehensive insurance plan. On average, a person who turns 65 years old today can look forward to living about 18 more years.* Unfortunately, longevity doesn t guarantee good health. Many seniors eventually need some form of long-term care. How would your family cope if you or your spouse were no longer able to live independently? MEDICARE AND MEDICAID Many people assume that, when they reach age 65, they ll be able to rely on Medicare and Medicaid to cover the cost of nursing home stays or long-term care in their own homes. In reality, Medicare pays very little of these expenses. And Medicaid pays only after most of your personal assets are gone. The better you understand Medicare and Medicaid before you need coverage, the better prepared you ll be to navigate the system and arrange for the long-term care insurance you may need. Medicare. Generally speaking, Medicare coverage is short term. It will provide some coverage for up to 100 days in a skilled nursing facility each time you re admitted, as long as you have been hospitalized for at least three days before each stay. Medicare will also pay for a limited amount of home health care. Medicaid. Unlike Medicare, Medicaid will pay most of the costs of long-term care, including care in a nursing home. But you have to meet strict income and asset limits to qualify. (Requirements vary from state to state.) Other Insurance. Like Medicare, HMOs and other types of health insurance generally provide only limited coverage for long-term custodial care. * Source: National Center for Health Statistics, 2007

17 16 LONG-TERM CARE INSURANCE Long-term care insurance can protect against the high costs you ll face if you are unable to live without help due to a physical or mental condition. Insurance is available that covers care received in a nursing home, an assisted-living residence, an adult-care center, or your home. Long-term care policies and premiums differ among insurance companies, sometimes greatly. Be sure you carefully compare policies and benefits. The terms you choose will have a big impact on the premium. Benefits. The benefit amount and maximum length of coverage vary from one policy to another. Generally, the higher the benefit amount and the longer the coverage period, the higher a policy s premium is likely to be. Also, the definition of disability is different from one policy to another. Be sure you know what physical and mental conditions are necessary to trigger benefit payments. Waiting Period. How soon coverage begins will also vary. Usually, you ll have to wait between 20 and 90 days after your care begins to start receiving benefits. The waiting period you choose should depend in part on how much you can afford to pay on your own before benefits begin. In general, the shorter the wait, the higher the premium. Inflation. Some policies increase the benefit amount to keep up with inflation. You ll probably pay a higher premium for this protection, but it may be worth it to help ensure that policy benefits will keep pace with what could be substantial increases in the cost of care in the future. Qualifying for Benefits. In comparing policies, check to see what conditions must be met before benefits will be paid. For example, a health-care professional may need to confirm that you are unable to perform certain daily physical activities, such as bathing, dressing, and walking, or that your mental ability has greatly deteriorated. Tax Benefits. If your policy meets certain requirements, you could be eligible for tax benefits. Within tax law limits, qualified policy premiums are deductible as a medical expense. (Medical expenses are an itemized deduction. Only aggregate expenses that exceed 7.5% of your adjusted gross income are deductible.) And policy benefits are tax free (again, within certain limits). There is no right time to buy long-term care insurance. Many people purchase longterm care policies between ages 55 and 65. The longer you wait, the higher the premiums will be. On the other hand, if you buy coverage when you re younger and premiums are lower, you may have to pay premiums for many years before any need for care occurs. We can help you weigh the options.

18 17 OTHER OPTIONS Long-term care insurance isn t the only way to protect yourself and your family from the expense of a lingering, debilitating medical condition. Depending on your financial situation, some of these other options might be appropriate. Accelerated Death Benefits. As mentioned earlier, some life insurance policies offer the option of adding an accelerated death benefit rider that, in the case of a terminal illness, will pay a substantial part of the policy s face value to the policyholder before death. You may want to consider such a rider to meet potential long-term care expenses. Viatical Settlements. Another option for covering long-term care costs is to sell your life insurance policy to a viatical settlement company. The payoff is usually an immediate lump-sum payment of a portion of the policy s face value (generally, between 60% and 80%). The company becomes the policy beneficiary and makes the remaining premium payments. Viatical settlements are complicated. Make sure you compare both the settlement amounts and the reliability of several companies before you make a decision. We can help you with this comparison. Self-insuring. If you have substantial assets, your most advantageous choice may be to self-insure. One way to do this is to earmark assets in an investment account specifically for long-term care. An individual retirement account that you won t need for retirement income might be a good choice. Or you can plan to use the equity in your home if necessary. You could access your equity, as needed, through a home equity loan or a reverse mortgage. ARE ACCELERATED DEATH BENEFITS TAXABLE? Tasha s father is gravely ill. His cash value life insurance policy has an accelerated death benefit rider. But Tasha is concerned that it may not be a good idea to take the money now if it means paying a lot in income taxes. Talking with her financial professional, she learns that the accelerated death benefit would not be taxable income because her father meets the IRS s definition of a terminally ill person. (Amounts received in a viatical settlement also may be excludable.) A chronically ill person may also qualify for the exclusion. Additional requirements apply.

19 DISABILITY INSURANCE 18 When you re healthy, it s hard to imagine life being any other way. Unfortunately, life can change sometimes very rapidly. Disability insurance helps cover the financial gap that would result should you be unable to work due to an illness or accident. CURRENT PROTECTION Like life insurance, the amount of disability insurance you should have depends on your particular circumstances. To help determine how much coverage you may need, first look at the protection that may already be available. Social Security. The Social Security Administration (SSA) pays a monthly cash benefit to qualified individuals who expect to be out of work for a year or more because of a disability. Social Security disability payments are generally intended to help recipients pay their most immediate and pressing bills, but are unlikely to replace a paycheck for most working adults. Note that the SSA defines disability quite strictly, so count on this coverage only in the case of a severe disability. Workers Compensation Insurance. Payments from workers compensation are given only to employees who have been injured on the job. In general, payments do not fully replace lost income and are for a limited time only. Employer-provided Insurance. Some employers provide disability insurance for their employees. While some employers offer both short- and long-term coverage, many offer only short-term policies that cover a percentage of pay (e.g., 60%) for a limited number of weeks. Long-term policies cover disabled employees for longer periods, often ending when the disabled person reaches age 65.

20 19 ADDITIONAL COVERAGE If you don t have disability insurance at work, or if your employer s policy isn t adequate, you should consider buying additional coverage to protect your income. You need enough coverage to maintain your present lifestyle. We ve included a worksheet to help you estimate how much that is. Be sure you take all of your expenses into account mortgage, car payments, food, utilities, loans, credit card payments, and so on. ESTIMATING DISABILITY INSURANCE NEEDS HOUSEHOLD INCOME Without Your Earnings Spouse s (dependent s) earnings (after taxes) Social Security benefits (after taxes) Pension plan disability benefits (after taxes) Existing disability insurance benefits Current annual income Value of current assets (savings, investments) $ Estimated annual after-tax investment return % Estimated annual income from assets TOTAL EXPECTED ANNUAL INCOME ANNUAL EXPENSES (mortgage, car, and loan payments; food; utilities; credit card payments; etc.) ADDITIONAL INCOME NEEDED $ + $ + $ + $ = $ = $ $ $ $

21 20 WEIGH YOUR CHOICES Compare disability policy options carefully. Know and understand your coverage before you buy. Definitions of Disability. If you can t work at your own occupation because of an illness or injury, but you can do other jobs, some policies pay only a little or nothing at all. Other policies provide full coverage if you are unable to work at your own occupation. Before you purchase a policy, be sure you understand exactly how disability is defined. Benefit Period. The length of time benefits are paid, known as the benefit period, depends on the policy and on the options you choose. Elimination Period. This is the period of time you are required to wait before benefit payments start. Inflation Protection. This is important, particularly if you are young or plan to purchase long-term coverage. Inflation protection guarantees that future disability payments will keep up with increases in the cost of living. Renewability. A guaranteed renewable policy means that the insurance company will keep renewing the contract as long as you pay the premiums on time. If the policy is also non-cancelable, the insurer cannot change the provisions of the policy or increase the premiums. Again, you must pay your premiums in a timely manner to keep the policy active. COMPARE POLICIES Policies and premiums vary from insurance company to insurance company, and the options you choose will have an impact on how much the policy will cost. If you would like help evaluating disability insurance policies, please don t hesitate to call us.

22 INSURANCE COMPANY RATINGS 21 When you buy insurance, you want to be sure to choose a solid company. An insurer that is having financial difficulties now may not be around when you or your loved ones need to file a claim in the future. Insurance ratings provide information about the financial well-being of insurers. UNDERSTANDING RATINGS Insurance companies are rated by independent rating agencies, including: A.M. Best Fitch Ratings Moody s Investors Services Standard and Poor s Weiss Ratings The rating agencies compare an insurance company to its peers and to industry standards. They also look at the company s ability to pay on its policies and contracts. Other factors, such as the company s balance sheet, exposure to risk, operating performance, business profile, profitability, asset quality, and management, may or may not be taken into consideration in an agency s rating. The agencies don t all use the same factors, and some raters may be more subjective than others. You may want to look at the criteria the agencies use before making a decision.

23 22 RATING CATEGORIES The ratings themselves are letter grades, similar to those teachers use. An A rating indicates better performance than a B or C rating, and so forth. While the five agencies all use letter grades, each uses a different system to signify their ratings. This can get confusing. For example, a B from A.M. Best indicates a fair rating. But a B from Standard & Poor s designates a weak rating. USING RATINGS Insurance ratings are benchmarks. You can use them to compare the strength and reliability of different insurance companies. Keep in mind that a superior rating doesn t guarantee that a company will be able to pay out benefits. Nor does a marginal rating mean a company won t be there when you need it. But researching insurance ratings will help you make a more informed decision. Insurance companies may be able to provide you with copies of their rating reports. The Internet is a great tool for finding out a company s ratings. Or ask us about the companies you re considering. You ll get a clearer picture of a company s financial situation if it has been rated by more than one agency. Checking three or more ratings is ideal. If the ratings are all similar, you probably have a pretty good indication of the insurance company s performance. If the ratings vary, you may want to take a closer look. Insurance is an important and expensive purchase. While there are no guarantees, buying insurance from a highly rated company may be the best way to make sure you re protected.

24 CHANGING NEEDS 23 Insurance planning is an ongoing process. To ensure that you have adequate protection, you should review your insurance coverage regularly and decide if changes are necessary. The accompanying box highlights life events that may trigger the need for an insurance review. We would be happy to help you with such a review. Or, if you are just beginning your insurance planning, contact us for help getting started. Our financial professionals can assist you in analyzing your situation and putting in place the protection you and your family need. IS IT TIME FOR AN INSURANCE REVIEW? You ll have different insurance needs during different stages of your life. It s smart to review your insurance if you: Get married or divorced Buy a home Add a child or grandchild to your family Buy or sell a business Receive a substantial inheritance Assume the responsibility for helping to support a parent or other loved one The general information in this publication is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.

25 24 GLOSSARY OF INSURANCE TERMS Accelerated death benefit. A benefit paid before the policy owner s death to cover costs associated with a catastrophic illness. Beneficiary. A person designated to receive the proceeds of a life insurance policy. Buy-sell agreement. A contract under which business owners agree to buy each other s interests (or a company agrees to buy an owner s interest) during life or at death. Such agreements are often funded with life insurance. Cash value. The equity that builds up in a life insurance policy when policy premiums are invested. Disability insurance. Insurance that provides periodic payments to replace lost income when the insured is unable to work because of illness or injury. Face amount. The dollar figure stated in a life insurance contract as the amount that will be paid in case of death or when the contract matures; it does not include dividends or amounts payable under accidental death or other special provisions. First-to-die insurance. A life insurance contract that pays a death benefit on the first to die of two or more individuals covered under the policy. Group insurance. Any plan that insures employees (and their dependents) under a single policy issued to an employer. Insured. The person covered by an insurance policy. Key person life insurance. Employer-sponsored life insurance that covers key employees. Long-term care insurance. Insurance that covers the costs of custodial care at home, in a nursing home, or in another extended-care facility. Permanent life insurance. Essentially, any form of life insurance except term insurance. Premium. The payment(s) a policy owner must make to keep an insurance policy active. Rider. A document that amends an insurance policy, often for the purpose of increasing benefits. Also called an endorsement. Self-insurance. Paying for expenses with personal funds instead of buying insurance from a commercial insurance company. Surrender charge. The penalty insurance companies charge for the early termination of a life insurance policy. Term insurance. Life insurance that provides coverage for a specified, limited time and pays a death benefit only if the insured dies during that time. Universal life. A type of permanent life insurance that lets the policy owner change the death benefit from time to time and vary the premium payments. Variable life. A type of cash value life insurance; the value depends on the performance of a set of investments selected by the policy owner. Viatical settlement. The sale of a terminally ill person s life insurance policy to a company in order to provide that person with money for care. Whole life insurance. Permanent life insurance with premiums that are payable for a specified number of years or for the insured s entire life. COPYRIGHT 2005, 2008 by NPI. FR /E ING

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