Broker Check

Critical Insurance Information

| February 20, 2017

Executive Summary

If you are retired or nearing retirement and only want to read what might be critical for you ...

Single / Widow / Divorced
If you live alone, have no one financially dependent on you, and leaving an inheritance for anyone else is not a high priority for you, you might not "need" any life insurance or long-term care insurance.

Couples
If you are part of a couple that are sharing resources for the retirement you want ...

  1. Social Security / Pension offset or replacement
    A. When the first spouse dies, the surviving spouse may choose the larger of the two Social Security payments, but not both.
    B. If the loss of this income will create a financial hardship for the surviving spouse, Permanent Life Insurance might help.  See below.

  2. Incapacity of one member of a couple
    A. When one member of a couple becomes incapacitated and needs Long Term Care -- either Home Care or at a facility -- if that person has resources (Pension, Social Security, 401-k, IRA, etc.) those resources will have to be spent to pay for that person's Long Term Care.
    B. Genworth's 2015 survey of cost of care shows a median cost of $80,300 for a semi-private room in a nursing home.
    C. If this expense would prevent the healthy spouse / member of a couple to enjoy the retirement she / he wants, Long Term Care insurance might help.  See below

Term Life Insurance 

Description

  1. In force for a fixed number of years e.g. 10, 20, etc.
  2. Pays a death benefit while in force
  3. Pays zero after the term of years is over
  4. Convertible to permanent insurance with no health underwriting if convertibility offered & taken at time of purchase.
  5. Nearly always much less expensive than permanent insurance
  6. Health underwriting required

Uses / Best Practices

  1. Insuring young breadwinners typically with children in the home.
  2. Ideally, after children are educated and leave the nest, no longer needed.
  3. Certain business purposes with fixed & known time period needed.

Considerations / Misuses

  1. Term life insurance is very inexpensive for healthy young people
  2. So there is a financial incentive or temptation to use it when permanent insurance should be used.
  3. When one spouse of a married couple dies, the surviving spouse can receive the larger of the two Social Security payments, but not both.
  4. When the spouse of a pension recipient dies, sometimes the surviving spouse receives a reduced pension benefit ... or worse, none at all.
  5. Term insurance is ineffective and therefore inappropriate to address these above two issues.
  6. Permanent insurance is required.

Permanent Life Insurance 

Description

  1. Guaranteed to stay in force for insured’s lifetime …
    (Or for a designated time / age, e.g. to Age 100)
  2. If designed at issue
  3. If premiums paid as scheduled
  4. If no loans or withdrawals from cash value are taken
  5. Whole life typically accumulated guaranteed cash value
  6. Universal life may not accumulate guaranteed cash value

Uses / Best Practices

  1. For “when” you die not “if” you die.
  2. Offset the loss or reduction of a pension.
  3. Offset the loss of Social Security
  4. Offset estate tax
  5. Business uses – succession planning

Considerations / Misuses

  1. Permanent, fixed (not variable)  “cash value” life insurance is not legally an investment and typically can not legally be described as an investment.
  2. Permanent life insurance has important uses.
  3. It should not be used for unintended uses.

Traditional Long-Term Care Insurance 

Description

  1. Medicare pays little or zero LTC expense.
  2. Medicaid does pay but "spend down" of assets often required.
  3. Typically you must use your own resources first. (IRA, pension, Social Security)
  4. "Healthy" partner / spouse at considerable financial risk if retirement is mainly based on the incapacitated partner's resources
  5. Qualify medically for benefit if unable to perform "2 of 6" "Activities of Daily Living without assistance
    (A)  Bathing.   (B) Dressing   (C) Eating   (D) Transferring  (E) Continence   (F) Bowel movement
  6. Pays a set dollar daily (e.g. $100 per day) or monthly (e.g. $3,000 per month) benefit for a set period of time (e.g. 5 years.)
  7. Choose dollar benefit amount at time of application
  8. COLA recommended
  9. Makes policy much more expensive with potentially much bigger benefit.

Uses / Best Practices

  1. When one partner / spouse has accumulated the great portion of the resources and the other partner has far fewer resources, the resources of the higher-earning partner must first be used for that partner's care.
  2. So the other partner faces financial stress if not actual financial catastrophe.
  3. Although most couples with significant resources will buy LTCi on both partners, it is theoretically possible to buy LTCi on just one partner.
  4. Such planning might require a divorce if the lower earning partner did not have LTCi, thereby putting that partner onto Medicaid.

Considerations / Misuses

  1. LTCi is medically underwritten.
  2. So the time to purchase it is when you are relatively healthy.
  3. Conditions that might require extensive care but are not immediately life-threatening may make you uninsurable for LTCi.
  4. LTCi, especially with COLA, is expensive
  5. Premium not guaranteed
  6. Premiums can go up.
  7. Premiums have been raised by carriers in recent past
  8. Premium increases could continue.
  9. Premium increases might require state insurance regulator approval.
  10. Typically no cash value
  11. Return of premium might be available but can be very expensive

Hybrid Long-Term Care Insurance 

Description

  1. Similar to Traditional LTCi above ... medically underwritten, etc.  but with certain exceptions.
  2. Premium often guaranteed.
  3. If so, carrier may not raise dollar amount of premium or number of years to pay after policy issue.
  4. Often combined with LI - life insurance death benefit.
  5. Sometimes combined with CV - cash value

Considerations / Misuses

  1. Hybrid LTCi provides one or perhaps several benefits in addition to the LTCi daily or monthly benefit.
  2. Insurance carriers and savvy clients understand
  3. The additional benefits also cost
  4. So typically the amount of LTCi benefit per premium dollar paid in a Hybrid LTCi policy is much lower than the LTCi benefit per premium dollar paid for a Traditional LTCi policy.
  5. When a Hybrid LTCi policy is combined with LI - life insurance -- keep in mind that collecting a significant amount of LTCi benefit could ... might ... significantly reduce the amount of LI - life insurance ... remaining in force.

Uses / Best Practices

  1. Guaranteed premium dollar amount and (possibly) number of years to pay is a very significant advantage of Hybrid LTCi.
  2. A Hybrid LTCi policy might be able to be structured to pay X premium dollars for Y years ... with zero payments thereafter ... contractually guaranteed.
  3. This possible peace of mind might be valuable and "worth it" to clients who can afford to buy enough LTCi benefit using a Hybrid policy.

Disability Income Insurance (Long-Term)

Description

  1. LTD - Long Term Disability Income insurance - will pay a monthly income to (partially) offset working income when you are disabled and unable to perform some or all of your job duties.
  2. Social Security may also ... but may not ... pay such an income benefit. Typically only when you are 100% disabled.
  3. Income is typically paid through Age 65 but terms of each policy apply.
  4. LTD income might typically represent 50% - 65% of what you were earning in your full time work.
  5. LTDi can be purchased as part of a group plan or as an individual policy.
  6. Individual LTDi can typically be bought "non-cancellable."
    A. The premium is guaranteed.
    B. The policy can not be cancelled by the carrier when premiums are paid as specified.
    C. The policy is typically portable, so you can maintain it when you change to a different employer.
  7. Group LTD is typically established by an employer
    A. Premiums are not typically guaranteed.
    B. Employer can typically change or cancel the plan
    C. The plan is typically not transferable if you change your employer.
  8. Individual LTD will typically require medical underwriting.
  9. Group LTD might have an Open Enrollment period where medical underwriting might not be required. Or some medical underwriting might be required.
  10. Check with your tax professional.  Individual disability income benefits might be income tax-free
  11. Group DI benefits probably will be taxable

Uses / Best Practices

  1. If you (+ partner if part of a couple) are financially independent -- have enough resources to live the rest of your lives without needing any income from working, then you do not need Long Term Disability Income insurance. (And the financial underwriting might disqualify you.
  2. Otherwise, LTDi of some kind  - group or individual is critical.
  3. Lifetime benefit LTDi may have gone the way of the dodo bird.  But grab it if you find it.
  4. "Non can""(non-cancellable) LTDi is highly preferable (more expensive) but once issued, the carrier can not raise your rate.
  5. COLA of some kind is critical unless you never expect your earnings or your future living expenses to go up.  More expensive but worth it.
  6. "Own Occ"(own occupation) has historically been aimed, for example, at surgeons.  A hand injury could prevent them from operating but not necessarily from teaching medicine. Really depends on your situation.
  7. If your 401-k / any retirement plan needs more funding, I really like the kind of rider that will also fund an additional annual  contribution while you are disabled. This would be over and above the monthly income benefit the policy pays.

Considerations / Misuses

  1. Individual LTDi requires medical underwriting.
  2. Individual LTDi also typically requires financial underwriting.  
    A. Tax return.
    B. W2.
    C. 1099s.
    D. Existing Group LTDi.
  3. If you start your career in your own "shop," you buy individual LTDi.
  4. If you later go on House Staff as a surgeon employed by a Hospital, you might be able to use the hospital Group LTDi and keep your own personal LTDi ... potentially a lot more coverage.
  5. The situation is not symmetrical.  
  6. Over-reliance on Group LTDi can come back to haunt you.
  7. If you start out in your career in a Group LTDi program and then want to go out on your own, you will have to pass the LTDi medical underwriting at an older age with potential health issues that might have arisen.
  8. At that point becoming a Sole Proprietor, Small Business / Professional Practice Owner might be prohibitively risky.

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