Monday, March 10, 2014

Death and Disability

I don’t spend a lot of time discussing insurance. I guess I just assume it is a given that people with a car have liability insurance, people who live in a building have either renters’ insurance or home owners’ insurance, and people with minor children have life insurance (term – not whole life). For a brief time in our history following WWII, health insurance was a given if one family member had a job. Unfortunately that is no longer a safe assumption. This morning I looked at a brief report from Learnvest funded by the Guardian Insurance Company examining what 20 somethings and 30 somethings think about life insurance and disability insurance. The results are somewhat depressing but not surprising.

Much of the problem is self inflicted. Insurance salesmen have such a bad reputation that 25% of those surveyed would rather clean out their refrigerator than speak to an “insurance professional.” In fact, 6% said they would rather eat a live bug than talk to an insurance salesperson. Surprisingly, the same participants in this survey trusted “financial advisors,” most of whom operate on the same commission sales model as the dreaded insurance salesman. There is another problem inherent in the product. It isn’t life insurance, it is death insurance. Nobody, especially young adults, wants to think about their own death.

However, if you have minor children or plan on having minor children in your life, you need to think about your death. The rules of thumb are $250,000 per child or 10 times your annual salary. That should be enough to get your children to age 18, but not enough to get them through college. 30 year level term insurance is not all that expensive. Since the cost is dependent on your age and the results of a medical examination, get enough insurance for the planned size of your family, not the actual size, at the earliest reasonable date. Even though a stay at home mom doesn’t need to protect her income with life insurance, there is a monetary value associated with all that she does for her family. For this reason, she should carry enough low cost term insurance to pay someone else to perform these services in her absence.

There may be another reason to think about at least some life insurance, student loans. While Government student loans can be dismissed with the death of the debtor, the problem is more complex with student loans from a private source. Most of these loans require a cosigner. That would usually be the parent, but it could be surviving spouse. In such cases, expect to pay for your loved one’s student loans, even if they are dead. In community property states, such as California, the surviving spouse might well be required to pay off those student loans even if they did not cosign for the loan. If such a tragedy befalls you, consult an attorney. This could get complicated. If you know that your survivors are going to be on the hook for your loans, dead or alive, a small amount of low cost term life insurance might be a good idea.

For the record: When I graduated from engineering school, we had about $2,000 and one paid for car. My new employer offered a very low cost life insurance policy equal to roughly one year’s salary. I decided to sign up reasoning that if I died it would give my wife a year to deal with my death. Of course I have long since outgrown any need for this insurance. I just left it in force since it was so inexpensive that I didn’t really even notice the cost as it was deducted from my pretax earnings. If I leave it in force until age 65, it will convert to a free $30,000 burial insurance policy. Since I am almost 65 I will continue to pay for this unnecessary coverage.

Actually, you do have disability insurance, Supplemental Security Income (SSI), a component of Social Security.

From the Social Security Website:

Supplemental Security Income (SSI) is a Federal income supplement program funded by general tax revenues (not Social Security taxes):

It is designed to help aged, blind, and disabled people, who have little or no income; and

It provides cash to meet basic needs for food, clothing, and shelter.

Social Security will calculate the amount of disability payment using a complex formula based on your earnings history. Most monthly payments will fall between $300 and $2,200. The average payment in 2014 is $1,148. The maximum possible disability payment in 2014 will be $2,642. This is enough to put food on the table, but not enough to replace your income. In the early 1980s when I first looked into disability insurance, it was an expensive rarity. Since I worked in a factory (considered a moderately dangerous occupation) the rates were well beyond my pay grade. Since then the cost of disability insurance has dropped significantly. Sometimes employers offer low cost group policies.

You definitely should consider buying private disability insurance, even if you work in a safe little cubicle. According to the Council for Disability Awareness, one in four of today’s 20-year-olds will become disabled before they retire. Back injuries, cancer, heart disease, and other illness are responsible for most long term disability, not accidents. If you have a history of back problems or any psychiatric issues finding disability insurance could be problematic. Consider long term disability insurance with a longer waiting period, sometimes called the deductible, before the benefits kick in. This could significantly lower the cost of the coverage. If you have a three to six month cushion in your emergency fund this should not be a problem. The ideal goal would be enough to replace your take home income. This would be somewhere around 60% to 70% of your gross income.

The Learnvest survey discovered that young adults don’t understand their insurance coverage. Over one third don’t even know what kind of insurance they own. 20% don’t know the value of their own death. 35% don’t know what coverage their significant other owns. As always, stop, breathe deeply and take personal responsibility for your own situation. Take some time to discover your current condition and your needs. After researching the problem carefully, set your own goals. Once you have decided what you want then go out and price competing policies. Particularly with life insurance the Internet has changed everything. When shopping for low cost term policies, it is easy to get the facts without dealing with time consuming high pressure sales tactics. This is one of those instances when you need to watch your own money. Don’t expect that someone else will have your best interests in their heart.

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