When Stevie Wonder sang, "Don't you worry 'bout a thing", he probably wasn't thinking about the benefits of insurance. However, if you stop and think about it, having insurance for the 'things' that matter to you can certainly help reduce the worry. Insurance is one of the financial tools that help preserve wealth and keep the bad things that may happen from becoming catastrophic.
In this issue, we would like to take a closer look at the topic of insurance, and why it's important. Specifically, we will examine Life, Health, Long-term Care, and Earthquake insurance. We'll try to address topics like what makes a good policy, how they are priced, and what to avoid.
Let's start with Life Insurance, beginning with the basic options available:
- Term – Term insurance prioritizes protection above all else at the lowest possible cost. The thought is the need for life insurance is temporary (i.e., your dependents grow up, move out, earn their own incomes, etc.), and you'll be able to maximize your retirement savings by spending less on it. The coverage period is a fixed term (10 to 30 years) and, unless the policyholder passes away during the term, will end without paying any death benefit.
- Return of Premium (ROP) –
ROP is similar to term insurance, in that it provides coverage for a specific term (again, between 10 to 30 years). The key difference is that ROP will pay back all premiums paid, tax-free, assuming you outlive the term of the policy. Because of this ROP feature, the premiums are typically higher than a standard term life policy.
- Whole Life – As the name implies, this type of policy is active for your "whole" life. Because it continuously provides coverage over the course of the policyholder's life, this type of insurance may be a better fit for individuals with lifelong dependents and/or more complex financial planning needs. Whole Life policies carry a "cash value" and can be borrowed against. They also act as a kind of "forced savings", since you are paying into them throughout your life. Whole life tends to be more expensive than other choices, and it is important to remember that penalties apply if you cancel coverage.
How much life insurance do I need? The reality is, deciding on appropriate insurance coverage is part financial and part emotional. Some individuals consider 5-10 years of annual income as a good target for their coverage. Others focus solely on debt so that liabilities like a mortgage, other loans, and funeral expenses can be paid off in the event of the policyholder's death.
Making the decision on life insurance coverage can be daunting. As part of our Mid-Year Prosperity Planning Session, we will work with you to filter out the emotional aspects and focus on financial considerations through a "Life Insurance Needs Analysis" to determine if there are any gaps in your coverage.
Health care costs are among the most poorly understood yet valuable coverages to consider. Here is a summary of some key points to consider:
- Coverage Through Your Employer – if you work full-time (or even part-time with some employers), health insurance is typically made available when onboarding, during a qualifying life event, or during annual open enrollment. The choice of which plan to use generally comes down to how healthy you are. Employees with chronic health problems requiring ongoing medical visits and prescriptions are generally better off opting for the plan that offers both the lowest deductibles and lowest out-of-pocket maximums. On the other hand, people in good health can usually opt for the lowest cost option. Health Savings Accounts (HSA's) are also a great idea for those in good health, and they offer the added benefit of being triple tax-free when used for qualifying health expenses.
- Pre-age 65 Retirement Options – If you are fortunate enough to be able to consider retirement prior to age 65, you will face a set of choices related to your health insurance. Most employers do not allow coverage to continue after retirement, so many "early" (pre-65) retirees need to look for coverage through their state's Health Insurance Marketplace. Also, as a way to fill in the gap between employee health insurance coverage and Medicare, some employers offer COBRA coverage for up to 18 months after retirement. It is strongly recommended to compare COBRA options to the options available through your state, as COBRA can frequently be expensive.
- Medicare - At age 65, you are automatically eligible for Medicare – that's the good news. The bad news is that the "free" part of Medicare, Part A, only covers hospitalization costs. Everything else, from routine doctor's visits to prescriptions to any other expense, is an additional cost. There are supplemental Medicare policies that will address some of these costs, but these policies also come with a price tag, and they do not include co-pays, dental, hearing, or vision coverage.
If your 2020 income was $91,000 or less ($182,000 or less for married filing jointly), you qualify for the lowest premiums, as shown on the following chart. Note that the higher your income, the higher your Medicare premiums are.
- Part B (Medical): $170.10/mo
- Part C (Medigap or Medicare Advantage): Varies by Plan, typically $100-200/mo
- Part D (Prescription Drugs): $35.50/mo
Statistically, there's about a 50% chance you will end up in assisted living, a nursing home, or bringing in a caregiver to help out in your home. Costs for these facilities or agencies run as much as $5,000 –10,000 or more per month, depending on your needs and where you live. From a planning perspective, it may be important to include caregiving costs in the final few years of your retirement plan. If it appears that your plan cannot withstand the pressure from expenses associated with long-term care, exploring long-term care coverage could be a wise choice.
Long Term Care premiums (LTC) vary by age, gender, and the type of plan and carrier you choose. On average in 2021, a single 55-year-old male purchasing a $165,000 policy benefit will pay $950 per year, while a single 55-year-old woman will pay $1,500 annually. Adding 10 years, a 65-year-old single male will pay $1,700 per year for the policy, while a single female of the same age will pay $2,700. Bear in mind that, if you have an HSA, part of your premium can be paid with funds from this account.
When Does Coverage Begin?
Required assistance with two or more of the defined activities of daily living (ADLs) will trigger the activation of benefits under most LTC policies. Cognitive impairments can also trigger LTC benefits, even if assistance with ADLs is not required. ADLs include bathing or showering, dressing, getting in and out of bed or a chair, walking, using the toilet, and eating. Here is a link to an AARP online tool to calculate LTC costs in your area -
Earthquake/Natural Disaster Insurance
In this final section, we'll cover protection for one of your most valuable assets, your home. We have found that misunderstandings can arise as to what is covered under a homeowner's insurance policy. We hope to provide some clarity.
Does my homeowner's insurance cover natural disasters?
- Wildfires – It's an unfortunate reality that wildfires can occur. The good news is that most homeowners' insurance policies cover damage from wildfires. Be sure you understand the terms of your policy and whether the replacement cost or market value of your home is appropriate in today's environment.
- Earthquakes - Damage to your home caused by an earthquake is typically not covered under your standard homeowners' policy. Separate earthquake insurance is offered in many states to supplement your homeowner's policy; however, prices vary widely based on the home's location and other risk factors.
- Flood – Generally speaking, homeowner's insurance does not cover damage caused by flooding. You'll typically need a separate policy to protect against flooding.
- Wind – Homeowner's insurance typically covers wind damage but does again vary based on location. For example, if you are in a high-risk hurricane zone, you'll likely need an additional policy to cover wind damage.
It's important to periodically check with your insurance company about coverage for the various natural disasters that could damage your home. You may not need or want coverage based on the risk factors impacting your own property, but homeowners should be aware of what their policy does (and does not) cover.
News and Coming Events
Let's Get Together!
In-person meetings are now available for clients at our Long Beach office. Please contact Jenny Molnar at email@example.com to schedule a meeting. To help us better serve everyone, we ask that you book an in-person meeting at least one week in advance.
Save the Date - Client Appreciation Events
Our annual client appreciation events are back! It's been too long since we've been able to all get together to share a laugh, a story, and a hug. Keep an eye out for more details about these fun evenings.
Texas: On October 13th, we will be hosting an event with our Texas-based clients at Cru Food & Wine Bar in Plano.
California: On November 10th, we'll see our California-based clients at Tin Roof Bistro in Manhattan Beach.
Articles of interest
|Supercharge Your Finances - Episode 2: Common Retirement Mistakes|
|Average American Budget|
|Risk Management: Property, Casualty, Life, Disability, and Extended Care Insurance|
|Why Everyone Needs an Inheritance Strategy|
There is so much more to insurance than the brief comments mentioned here. For any questions you might have regarding your own policies, please contact us and let us know how we can help you. As always, it is our commitment to constant improvement and customer service that drives our desire to help you make the best decisions for yourselves.
Wishing you all a fun-filled summer -