Home Insurance FAQ’s
What is a Deductible and How Does it Work?
The dollar amount you the “insured” will have to pay out of pocket before the insurance company “insurer” begins to cover the remaining costs.
Things to consider:
- The range for deductibles is zero (often referred to as “first dollar coverage” and clearly the most expensive) to multiple thousands of dollars. However, what is typically offered by insurance companies are: $50, $100, $250, $500, $1,000, $2,500 & $5,000.
- There is an inverse relationship between deductible and premium (cost of insurance). That is, a $50 deductible will carry a much higher premium than a $2,500 deductible.
Illustrated:
Bob and Deb’s home catches fire and before the fire department can contain the fire it caused $75,000 in damage. Fortunately they had a homeowner’s insurance policy with dwelling coverage of $500,000 and a deductible of $2,500. ABC Construction performed the repairs for $75,000 of which Bob and Deb paid $2,500 and their insurance company paid the balance of $72,500.
How to Determine the Correct Deductible?
Careful consideration should be given before selecting a deductible amount. Here, it is important to remember what might be adequate for one family may not be for another.
Things to consider:
- Choosing a deductible will impact your annual premium i.e., a higher deductible will reduce the dollar amount of your premium as a lower deductible will be more costly.
- If you have very limited cash reserves and select a higher deductible such as $2,500 you may find it difficult or impossible to come up with your deductible portion of a claim.
- If you have substantial cash reserves such that having to come up with the deductible amount would not pose any problems consideration of a higher deductible may be sensible.
- Irrespective of your situation, you should ask for a premium quote with two or more deductible options. This will better equip you to analyze what is best for you.
Illustrated:
Cathy and Tom are newlyweds, very fortunate newlyweds. Cathy’s parents adored Tom and were looking forward to their future grandchildren. So much so that they provided the kids with a substantial down payment on a new home (relatively close to their home). But it was made clear that the kids were on their own with respect to maintaining their household. Although Tom had a promising career ahead of him as an accountant, things were a bit tight at the moment. Their mortgage payment, property taxes and property insurance took up a substantial chunk of his take home pay and there was little flexibility in modifying that outflow. Their mortgage payment was fixed as was their property taxes but they learned there was a little flexibility in their property insurance payment. After agreeing on adequate coverage, their insurance agent presented them with two policy options: one with a $500 deductible and the other with a $2,500 deductible. The accountant in Tom surfaced. He liked the lower premium associate with the higher deductible of $2,500 but understood in the unlikely event of a claim, they could not comfortably come up with the $2,500 deductible. Thus, the decision was made to elect the higher premium lower deductible keeping that only as long as it took them to save a large enough financial nest egg to be able to easily handle a $2,500 deductible. They thought that could be accomplished in less than year.
What is Umbrella Insurance?
It is liability insurance that provides protection in excess of an insured’s specified limits of their primary homeowner’s and automobile insurance policies. Oftentimes these policies provide broader coverage than what is covered in typical homeowner’s and automobile policies. In cases like this, an umbrella policy acts as primary insurance for losses not covered by the other policies.
Things to consider:
- A few examples of liabilities that might be covered in an umbrella policy that may not be covered in a homeowner’s policy would be libel, slander, invasion of privacy to name a few.
- Typical Limits of Liability coverage range from $1,000,000 – $5,000,000, usually in million dollar increments.
- If you are in need of additional coverage, it is available as a separate Excess Umbrella Insurance policy…usually place through a specialized insurance company.
- It is one of the best buys in the insurance industry. A $1,000,000 policy will normally have an annual premium of less than $200 and even less than that for each additional million.
Illustrated:
Rob and Marge have live conservatively all their lives. Even after putting their children through college, they were still able to build a net worth of nearly $2,000,000. They felt like they were now on easy street and were until they caused an auto accident that cause property damage and bodily injury and resulted in a legal settlement of $1,000,000 to the injured parties. Their auto policy provided Bodily Injury Liability coverage of $500,000 and Property Damage Liability coverage of $100,000. Here’s what happened. Their insurance company paid the limits of the policy totaling $600,000 and Rob and Marge we responsible for the balance of $400,000…putting a measurable dent in their net worth.
Who Needs an Umbrella Policy?
If you are concerned about losing your financial net worth (assets minus liabilities = net worth) as the result of a lawsuit for personal injuries and/or property damages caused by you, you probably need an umbrella policy. Probably? Yes, because you might already be adequately covered by your homeowner’s and auto policies.
Things to consider:
- First, you need to know your net worth. Without knowing, it becomes a guess as to whether you are adequately covered.
- Calculating you net worth can be easy. It is a matter of creating your Personal Balance Sheet (assets minus liabilities = net worth). Here are a few tips:
Assets:
– Savings
– Stocks & Bonds
– Real Estate
Liabilities:
– Credit card debt
– Auto loans
– Real estate loans
- If your net worth can be protected by the coverage limits in your homeowner’s and auto insurance policies, there is likely no need to have an umbrella policy.
- The cost of umbrella insurance is relatively inexpensive for the peace of mind it can provide. A million dollar policy will likely be less than $200 per year and each additional million dollar increments will be even less than that.
- Umbrella policies often times cover personal liabilities that are excluded from homeowner’s policies like the following:
Personal Liabilities:
– Libel
– Slander
– Invasion of privacy
Illustrated:
Tim and Christy embraced fiscal responsibility even prior to their marriage 10 years ago. Something they both learned from their very conservative parents. Even sharing that philosophy, they could not agree on the need for an umbrella insurance policy. Christy thinking they were adequately protected with their current coverage limits on their homeowner’s and automobile policies. While Tim believed dollar for dollar this was the best bargain in insurance coverage and given their personal net worth of over $1,000,000 a few premium dollars spent today could save a boatload down the road. He convinced Christy that for less than $200 per year, they could add an additional $1,000,000 of liability coverage to the $500,000 they already had by way of their other policies. It turned out to be a very wise decision. In an odd lawsuit, the court held that Tim and Christy were liable for their child’s actions to the tune of $250,000. It turned out that their homeowner’s policy excluded the coverage but they were saved when they learned they we protected by their umbrella policy.
Should I Have Earthquake Insurance?
If you can’t sleep at night worrying about an earthquake destroying everything you have, you probably need the insurance. Anything short of that and the decision becomes a bit more objective. But you need to know the basics.
Things to consider:
- Most homeowner’s insurance policies do not provide coverage for earthquake damage. If it is protection you want, a separate policy is required.
- Typical deductibles are written as percentages of the loss and generally range between 10% and 15%. Differing from homeowner’s and automobile policies that set deductible as a specific dollar amount.
- The insured value of your dwelling as per your existing homeowner’s policy will be the same value used in your earthquake policy, meaning if you are underinsured on your homeowner’s policy you will be underinsured on your earthquake policy as well.
- It is very important to estimate your potential loss in the event of a catastrophic earthquake. Doing so might even assist in your decision to purchase earthquake coverage or not. Here are a few things to consider:
– Equity in your home (estimated home value minus mortgage balances)
– Replacement cost for household/personal possessions subject to loss.
– Temporary living expenses while waiting to rebuild your home.
Illustrated:
Mike and Tori bought their home in the Bay Area over 5 years ago and thought they were adequately covered when they purchased a standard homeowner’s insurance policy as required by their lender. Fortunately for them, when an earthquake hit their area there was no damage to their property but others were not so lucky. Many of their neighbors suffered major damage. Unfortunately some were not covered and had to adsorb the entire loss themselves while other had earthquake coverage.
What is Bundling?
Webster defines it as follows: “to offer together with a related product or service at a package price”. Pretty straightforward for sure and the concept seems to be nicely embraced by the insurance industry. Essentially, property and casualty insurance companies offer three basic types of coverage: homeowner’s, auto and umbrella. If you add a second policy to your coverage, you will be entitled to a discount that will spread across both of your policies.
Things to consider:
-
- Advantages
-Discounted price
-Convenience…less decision making and one stop shopping
-
- Disadvantages
-Limited choices….no flexibility must accept what is being offered
-
- Just because a “discount” is given does not mean it is a good value.
Illustrated:
Ted and Amy had their homeowner’s insurance through Company A (annual premium of $1,497) and their auto policy through Company B (annual premium $2,479) for a combined total of $3,975. A neighbor mentioned to them that he received a discount by having both policies issued by the same company. So Ted and Amy investigated. They were very wise in how they approached this. They contacted both Companies A & B and to no surprise, each was willing to offer a bundling discount if they placed the second policy through them. After an apples to apples comparison of coverage and incorporating the discount, Company A offered a bundled price of $3,275 while Company B offered a price of $3,500. Ted and Amy did two things: (1) they saved $700 a year by going through Company A and (2) they thanked their neighbor for the suggestion and he later contacted Company A and was pleased to find out that he was able to save an additional $300 in annual premium.
Auto Insurance FAQ’s
Am I Required to Have Auto Insurance?
Most states have mandated that motor vehicle owners carry some minimum level of liability insurance. This provides protection for other people and their personal property, as opposed to collision and comprehensive insurance which provides protection for you, the car owner.
Things to consider:
- The mandatory levels of liability insurance vary from state to state and are typically reflected as 15/30/5 (This happens to be the minimum for California). The first two numbers, 15/30 refer to bodily injury liability limits, on a per person basis (maximum $15,000) and on a per accident basis (maximum $30,000). The third number in 15/30/5 refers to property damage liability limits per accident. It is capped at $5,000.
- The mandated limits are “minimum” only and are not to be construed as being adequate. Adequacy is a matter that differs from person to person and is best analyzed from the standpoint of what a person is trying to protect with the coverage.
- It is important to be aware that the stated policy limits, whether they are state mandatory minimum or more substantial, are limits covered by the insurance company. If it is determined that liability exceeds that which is covered by the policy, the policyholder assumes responsibility for the balance of the liability.
Illustrated:
Steve and Belinda are California residents and have the state mandated minimum levels of liability insurance for their autos (15/30/5). They were at fault in an accident that caused both personal injury and property damage to the two victims. Both victims required varying degrees of medical treatment and their car was a total loss. The medical and related costs for each of the victims were $18,000 and $7,000 and the value of the totaled vehicle was $10,000. Steve and Belinda were unhappy when they learned they had to come up with $8,000 of their own funds to settle this matter. After it was explained that, per their policy, the maximum liability for each person was $15,000 and the maximum property damage per accident was $5,000, they understood why they were responsible for the following: $3,000 difference in medical and related costs for one of the victims; nothing for the second victim’s costs of $7,000, which were totally covered; and that the $10,000 totaled vehicle was covered by the insurance company up to the policy limit of $5,000, leaving the remaining $5,000 as their responsibility.
What is Collision Coverage?
Collision coverage can be a very important component of your auto insurance policy. It is an optional coverage and, if purchased, must also be purchased with comprehensive coverage. Collision coverage is not liability coverage, mandated by the states designed to protect others and their property. Instead, it is designed to repair or replace your car in the event that you are involved in an accident. The accident can be with another vehicle or any other object, stationary or not, and coverage is granted irrespective of who is at fault.
Things to consider:
- If you have an auto loan or lease, the lender or leasing company actually holds title to your auto. Because of this, they will normally require you to carry collision coverage to protect their interest…They require it, but you pay for it!
- Since a car can have significant value, it can represent a good portion of your financial net worth. If it is damaged or totaled, repairing or replacing it without coverage could cost you tens of thousands of dollars and have a major impact on your financial net worth.
- If your car is not worth much due to age and condition, it may not be worthwhile paying for collision coverage, since your insurance company will only pay you current market value in the event of a loss.
Illustrated:
Jen was driving her husband Ben’s sports car while he was away on a business trip. She rarely drove the car and so was not too familiar with its handling ability. That posed a problem when she swerved quickly to avoid colliding with another car. She was able to avoid the collision with the car but unable to avoid hitting the tree adjacent to the road. The damage was substantial and Jen knew that Ben would be upset having to pay thousands of dollars for repairs. To her surprise, when she told Ben about the accident, he said not to worry since they had collision insurance. Jen learned that it made no difference whether she had collided with the tree or the other car. Their insurance company would cover the costs of repairs, minus their deductible, in either case.
What is Comprehensive Coverage?
Comprehensive coverage can be a very important component of your auto insurance policy. Comprehensive coverage is not liability coverage like what is mandated by the states designed to protect others and their property. Nor is it like Collision coverage that is designed to repair or replace your car in the event you are involved in an accident with another vehicle or another object. It is insurance covering physical damage to your auto caused by incidents other than a loss covered by collision insurance. Losses caused by theft, vandalism, fire, weather, animal damage and other moving objects are all examples of incidents that would be covered with comprehensive coverage.
Things to consider:
- While collision coverage cannot be added to your auto policy without adding comprehensive coverage, comprehensive coverage can be added without adding collision coverage.
- If you have an auto loan or lease, the lender or leasing company actually holds title to your auto. Because of this, they will normally require you to carry comprehensive coverage to protect their interest…They require it, but you pay for it!
- Since a car can have significant value, it can represent a good portion of your financial net worth. If it is damaged or totaled, repairing or replacing without coverage could cost you tens of thousands of dollars and have a major impact on your financial net worth.
- If your car is not worth much due to age and condition, it may not be worthwhile paying for collision coverage, since your insurance company will only pay you current market value in the event of a loss.
Illustrated:
Peggy and Dan were driving through the hills to see a college basketball game in rural Moraga, CA, when they hit a deer. They were happy to see that the deer was uninjured as it quickly scampered away. However, they were equally unhappy when they saw the damage to their car. Fortunately for them, they did have comprehensive coverage. The repair costs of nearly $8,000, minus a small deductible, were covered by their insurance company.
What is the Difference Between Collision and Comprehensive?
Unlike liability coverage, which provides protection for damage your auto causes to other people and/or their personal property, collision and comprehensive coverage is designed to cover damage to your auto. However, they protect your auto from very different things. Collision coverage is designed to repair or replace your car in the event you are involved in an accident. The accident can be with another vehicle or any other object, whether stationary or not, and coverage is granted irrespective of who is at fault. Comprehensive coverage is designed to cover physical damage to your auto caused by incidents other than a loss covered by collision insurance.
Things To Consider:
- While collision coverage cannot be added to your auto policy without adding comprehensive coverage, comprehensive coverage can be added without adding collision coverage.
- If you have an auto loan or lease, the lender or leasing company actually holds title to your auto and as such they will normally require you to carry both collision and comprehensive coverage to protect their interest…They require it, but you pay for it!
- Since a car can have significant value, it can represent a good portion of your financial net worth. If it is damaged or totaled, repairing or replacing without coverage could cost you tens of thousands of dollars and have a major impact on your financial net worth.
- If your car is not worth much due to age and condition, it may not be worthwhile paying for collision and comprehensive coverage since your insurance company will only pay you current market value in the event of a loss.
What is a Deductible and How Does It Work?
This is the dollar amount that you, the insured, must pay out of pocket before the insurance company, the insurer, begins to cover the remaining costs.
Things to consider:
- Deductibles range from zero (often referred to as “first dollar coverage” and clearly the most expensive) to multiple thousands of dollars. However, deductibles are typically offered by insurance companies in these increments: $100, $250, $500 & $1,000.
- There is an inverse relationship between deductible and premium (cost of insurance). In other words, a policy with a $100 deductible will carry a much higher premium than one with a $1,000 deductible.
Illustrated:
When Bob purchased his auto insurance, he selected a policy with a $1,000 deductible. Selecting the higher deductible meant a lower premium, which was very appealing, even though he realized that, in the event of a claim, he would be responsible for the deductible amount of $1,000 before the insurance company began covering the loss up to the policy limit. Shortly thereafter, Bob was involved in an auto accident which caused $5,000 damage to the auto he hit. He was not surprised when he learned that his insurance company paid $4,000 on the claim, leaving him with the responsibility for paying the $1,000 deductible.
How to Determine the Correct Deductible?
Careful consideration should be given before selecting a deductible amount. Here, it is important to note that what might be adequate for one family may not be for another.
Things to consider:
- Choosing a deductible will impact your annual premium i.e., a higher deductible will reduce the dollar amount of your premium as a lower deductible will be more costly.
- If you have very limited cash reserves and choose a higher deductible ie. $1,000, you may find it difficult or even impossible to come up with your deductible portion of a claim.
- If you have substantial cash reserves such that having to come up with the deductible amount would not pose any problems, consideration of a higher deductible may make sense.
- Irrespective of your situation, you should ask for a premium quote with two or more deductible options. This will better equip you to analyze which option is best for you.
Illustrated:
Cathy and Tom are newlyweds. Tom had a very promising career ahead of him as an accountant, but at the moment, they were struggling to meet their monthly financial obligations. Their mortgage payment, property taxes and property insurance took up a substantial chunk of his take home pay and there was little flexibility in modifying that outflow. While both their mortgage payment and property taxes were fixed, they learned there was a little room for improvement in their home and auto insurance payment. After agreeing on adequate coverage for their homeowner’s and auto policies, their insurance agent presented them with two options for each policy: one with a low deductible and the other with a higher deductible. The accountant in Tom surfaced. He liked the lower premium associated with the higher deductible, but understood that, in the unlikely event of a claim, they would not be able to comfortably come up with the deductible. Thus, they chose the higher premium/lower deductible option, vowing to keep it only as long as it took them to save a large enough financial nest egg to be able to easily handle a higher deductible. They thought that could be accomplished in less than year.
What is Umbrella Insurance?
It is liability insurance that provides protection in excess of an insured’s primary homeowners and automobile insurance policy limits. Oftentimes, umbrella policies provide broader coverage than what is covered in typical homeowners and automobile policies. In cases like this, an umbrella policy acts as primary insurance for losses not covered by the other policies.
Things to consider:
- A few examples of liabilities that might be covered under an umbrella policy that may not be covered in a homeowner’s policy are libel, slander, and invasion of privacy.
- Typical Limits of Liability coverage range from $1,000,000 to $5,000,000, usually in million- dollar increments.
- If you are in need of additional coverage, it is available as a separate Excess Umbrella Insurance policy…usually placed through a specialized insurance company.
- Umbrella insurance is one of the best buys in the insurance industry. A $1,000,000 policy will normally have an annual premium of less than $200 and even less than that for each additional million.
Illustrated:
Rob and Marge have lived conservatively all their lives. Even after putting their children through college, they were still able to build a net worth of nearly $2,000,000. They felt like they were now living on Easy Street until one day, when they caused an auto accident that caused property damage and bodily injury, and resulted in a legal settlement of $1,000,000 to the injured parties. Their auto policy provided Bodily Injury Liability coverage of $500,000 and Property Damage Liability coverage of $100,000. Here’s what happened: Their insurance company paid the limits of the policy totaling $600,000 and Rob and Marge were responsible for the balance of $400,000…putting a measurable dent in their net worth. With 20/20 hindsight, they could see how investing in a $1,000,000 umbrella policy would have preserved for them a considerable portion of their life savings.
Who Needs an Umbrella Policy?
If you are concerned about losing your financial net worth as the result of a lawsuit for personal injuries and/or property damages caused by you, then you probably need an umbrella policy. Probably? Yes, probably, because you might already be covered adequately by your homeowner’s and auto policies.
Things To Consider:
- First, you need to know your net worth. Without this knowledge, it becomes a guess as to whether or not you are adequately covered.
- Calculating your net worth can be easy. It is a matter of creating a Personal Balance Sheet (assets minus liabilities = net worth). Here are a few tips:
Assets:
- Savings
- Stocks & Bonds
- Real Estate
Liabilities:
- Credit card debt
- Auto loans
- Real estate loans
- If your net worth can be protected by the coverage limits in your homeowners and auto insurance policies, there is likely no urgent need for an umbrella policy.
- The cost of umbrella insurance is relatively inexpensive for the peace of mind it can provide. A million dollar policy will likely be less than $200 per year and each additional million dollar increment will cost less than that.
- Umbrella policies oftentimes cover personal liabilities that are excluded from homeowners policies, such as the following:
- Libel
- Slander
- Invasion of privacy
Illustrated:
Tim and Christy embraced fiscal responsibility even prior to their marriage 10 years ago, a trait they both inherited from their very conservative parents. Despite sharing that philosophy, they could not agree on the need for an umbrella insurance policy. Christy thought they were adequately protected with their current coverage limits on their homeowners and automobile policies, while Tim believed that, dollar for dollar, this was the best bargain in insurance coverage. Given their personal net worth of over $1,000,000, a few premium dollars spent today could save a boatload down the road. Tim convinced Christy that for less than $200 per year, they could add an additional $1,000,000 of liability coverage to the $500,000 they already had by way of their other policies. It turned out to be a very wise decision. In an unusual lawsuit, the court held that Tim and Christy were liable for their child’s actions to the tune of $250,000. As it turned out, even though their homeowner’s policy excluded the coverage, they were saved by their umbrella policy.
What is Bundling?
Webster defines it as the following: “to offer together with a related product or service at a package price”. This is a pretty straightforward concept that the insurance industry embraces. Essentially, property and casualty insurance companies offer three basic types of coverage: homeowners, auto and umbrella. If you add a second policy to your coverage, you will be entitled to a discount that will spread across both of your policies.
Things to consider:
Advantages
– Discounted price
– Convenience…less decision making and one stop shopping
Disadvantages
– Limited choices….no flexibility and/or must accept what is being offered
– Just because a “discount” is given, does not mean it is a good value.
Illustrated:
Ted and Amy had their homeowners insurance through Company A (annual premium of $1,497) and their auto policy through Company B (annual premium $2,479) for a combined premium total of $3,975. A neighbor mentioned to them that he received a discount by having both policies issued by the same company, so Ted and Amy investigated and were very wise in their approach. They contacted both Companies A & B and to no surprise, each company was willing to offer a bundling discount if they placed the second policy through them. After an apples-to-apples comparison of coverage, and incorporating the discount, Company A offered a bundled price of $3,275, while Company B offered a bundled price of $3,500. Ted and Amy did two things: (1) they saved $700 a year by going through Company A and (2) they thanked their neighbor for his money-saving suggestion. It was no surprise when their neighbor later contacted Company A and was pleased to find out that he was also able to save an additional $300 in annual premium.
Life Insurance FAQ’s
Do I need Life Insurance?
The need for life insurance must first be established. While there are a wide variety of reasons why someone should consider the purchase of life insurance, the primary reason is indisputable. Ask yourself the question: Will your death create a financial hardship for your family or for others dependent upon you? If the answer is yes, then you need life insurance.
How Much Will Life Insurance Cost Me?
This depends on a number of variables such as age, health, gender, type of policy and the benefit amount. For instance, a healthy 35 year old male who buys a 20 year level term policy with a fixed annual premium, might pay $300 a year to secure a $500,000 death benefit. This compares to a healthy 45 year old male purchasing the same type of policy who would be paying $450 a year.
Premiums for cash-value policies are much higher. A healthy 35 year old male who would pay $300 per year for a $500,000 term policy would pay about $3,000 per year for a whole life policy…This is because a portion of the annual premiums are directed to the savings/investment portion of the policy.
Do you Have to be Health to Get Life Insurance?
The simple answer is no. However, it certainly pays to be healthy while you are shopping for life insurance. When you apply for life insurance, you are subjected to certain underwriting guidelines that seek to determine the risk of your early death. Essentially, the healthier you are perceived to be, the longer you’re expected to live. Conversely, an unhealthy person is expected to die sooner than a healthy person. Here are the typical risk categories for life insurance applicants:
Preferred Risk: You are considered to be more likely to outlive an average person in your age category… hence the “best” rate.
Standard Risk: You are considered an average risk of death in your age category….hence the average or “base” rate
Substandard Risk: You are still insurable, but with an above average risk for death in your age category, hence an increased rate
Uninsurable Risk:You are considered to have too high a probability of early death and, as such, you will not be able to purchase life insurance at any price.
What Types of Life Insurance are There?
There are two main types of life insurance: Term Insurance and Cash-Value insurance. These two types are similar in some respects, but different in many others. Here are the basics of each:
Term Insurance: A term insurance policy insures your life – Pure and simple…….In fact, it’s often referred to as “pure insurance”. You pay a premium for a designated period of time, generally between one and twenty years, and if you die, your beneficiary receives the insured amount. If you live and want to continue your coverage, the policy must be renewed.
Cash-Value Insurance:This is insurance that remains in effect, not for a specified period of years, but rather until you discontinue it, or until its benefits are paid out. In addition, part of the premium you pay is set aside for you in what amounts to a savings account that earns a dividend. This money belongs to you whether you keep the policy in force or not.
What Types of Term Policies Exist?
Essentially, there are three types, or categories, of term life insurance, each with a its own relationship between premium and death benefit. An explanation of each type and the premium/death benefit relationships follow:
Level Term: The premium and death benefit remain the same for the entire length of the term.
Annual Renewable Term: The death benefit remains the same throughout the term, but each year, the premium will increase. Initially, you can expect to pay a premium that is lower than a level term premium, but over time it will become more expensive.
Decreasing Term: The premium remains the same throughout the term, but each year the death benefit decreases until it becomes zero, at which time the policy ends.
What Types of Cash-Value Policies Exist?
Essentially, there are three types, or categories, of cash value life insurance, each with a different spin on how the cash value component of the policy is handled in terms of accumulation from premium and investment return. A brief explanation of each type follows:
Whole Life: Covers you for your entire life, as compared to a term policy which covers you for a specified period of time. The premium you pay has two components, the first of which covers the straight insurance portion of the policy (equating, in a sense, to a term policy). The second component builds cash value, including a guaranteed investment return. The cash value accumulates tax-deferred and can be borrowed against or withdrawn. Within the whole life insurance universe there are a few options:
Universal Life: A hybrid of term insurance and cash value insurance. The foundation is a term-type policy with a slightly increased premium which is directed to a cash account in the policy. This cash account earns a specific rate of interest and accumulates tax-deferred for the life of the policy.
- Traditional—Has a fixed premium, a fixed death benefit and provides a guaranteed minimum interest rate.
- Interest-sensitive—Much like traditional, it has a fixed premium and fixed death benefit, but allows for an increase in death benefit if returns on cash value rise.
- Single-Premium—One premium payment at the time of purchase that provides a fixed death benefit for life and a cash value account that grows with investment returns, accumulates tax deferred, and is available to be borrowed against.
Variable Universal Life: A hybrid of term insurance and cash value insurance. The foundation is a term-type policy with a slightly increased premium which is directed to a cash account in the policy, much like the Universal Life policy. Here is where it differs: Rather than earning a specific rate of interest, the cash account can be directed to a variety of investments, such as mutual funds. The cash value, along with the investment return, accumulates tax-deferred for the life of the policy.
Universal Life: A hybrid of term insurance and cash value insurance. The foundation is a term-type policy with a slightly increased premium which is directed to a cash account in the policy. This cash account earns a specific rate of interest and accumulates tax-deferred for the life of the policy.
- Traditional—Has a fixed premium, a fixed death benefit and provides a guaranteed minimum interest rate.
- Interest-sensitive—Much like traditional, it has a fixed premium and fixed death benefit, but allows for an increase in death benefit if returns on cash value rise.
- Single-Premium—One premium payment at the time of purchase that provides a fixed death benefit for life and a cash value account that grows with investment returns, accumulates tax deferred, and is available to be borrowed against.
Disability Insurance FAQ’s
Is Disability Insurance for Everyone?
Answer: No, but this answer has to be qualified. The need for disability insurance must be established first. While there are a wide variety of reasons why someone should consider the purchase of disability insurance, the primary reason is indisputable. If the loss of income from a disabling illness or injury would create a financial hardship for your family, you probably need to consider disability insurance. Here are a few additional questions you might ask yourself to further assess how a well thought out disability insurance program might ease any angst caused by your answers:
- How would you pay your monthly obligations?
- How long would your savings cover your monthly obligations?
- What would happen if your disability became long-term, or even permanent?
Fortunately, there are a wide variety of programs and specific policy features that could provide you with peace of mind at a very reasonable cost.
Do I Need Disability Insurance?
Answer: The need for disability insurance must first be established. While there are a wide variety of reasons why someone should consider the purchase of disability insurance, the primary reason is indisputable. If your loss of income would create a financial hardship for your family, disability insurance should be a consideration. Ask yourself the question.
How Much Will Disability Insurance Cost Me?
Answer: Your premium will depend on a number of variables some of which are optional, as indicated below:
- Type of policy selected:
- Short-Term Disability Insurance
- Long-Term Disability Insurance
- Type of disability covered:Waiting period—This can range from 0 days to a year
- Accident Only
- Accident & Sickness
- Benefit amount—This can range from $500 to $5,000 per month for Short-Term policies and up to $20,000 per month for Long-Term policies.
- Benefit period—This can range from two years to the rest of your life
- Age at purchase— Premiums are based in part on your age at time of purchase
- Occupation—Occupational risks can be a significant factor in a premium calculation
- Medical Underwriting—If you are deemed to be a medical risk at time of purchase, you can expect to pay a higher premium.
For instance, a healthy 35 year old accountant who wants a monthly disability benefit of $2,500, with a one month waiting period and a three year benefit period would pay $200 a month. If he were to choose a six month waiting period rather than one month, his premium would decrease from $200 to $150 per month…..(Please note: You will find a variety of different options, including premiums, in our “Comparison” section).
What Types of Individual Disability Insurance are There?
Answer: In the private sector, there are two main types of disability insurance: Short-Term Disability Insurance and Long-Term Disability Insurance. There are many varieties of each – Here are some basic features:
- Short-Term Disability Insurance— Short-Term Disability policies will have a waiting period of 0 to 14 days before benefits begin with a maximum benefit period of no longer than two years.
- Long-Term Disability Insurance— Long-Term Disability policies will have a waiting period of several weeks to several months before benefits begin with a maximum benefit period ranging from a couple of years to the rest of your life.
Is Individual Disability Insurance Similar to Social Security Disability Insurance (SSDI)?
Answer: Yes and no.If you are deemed disabled, and you qualify by their guidelines, each will pay a monthly amount determined by various factors.To be more specific there are three types of disability insurance that may be available to individuals: either federally- or state-sponsored, or individually purchased. An explanation of each type, along with some distinguishing characteristics follows:
- Social Security Disability Insurance (SSDI)—The US Social Security and Supplemental Security Income disability programs are the largest of several Federal programs that provide assistance to people with disabilities. Both are administered by the Social Security Administration and only individuals who have a disability and meet medical criteria may qualify for benefits under either program. Social Security Disability Insurance pays benefits to you and certain members of your family if you are “insured”, meaning that you worked long enough and paid Social Security taxes. Supplemental Security Income pays benefits based on financial need.
- State Disability Insurance— Some states provide disability benefits to qualified residents. Residents of California have access to California State Disability Insurance (SDI) which is a partial wage-replacement insurance plan for California workers. This program is state-mandated and funded through employee payroll deductions. It provides affordable, short-term benefits to eligible workers and the benefit amount is determined by the resident’s level of income over the previous 12 months.
- Individual Disability Insurance— Most individuals have some sort of disability insurance through their employer, in the form of worker’s compensation, an employer group policy or through purchasing their own policy from an insurance broker.
What are the Basic Differences Between Short-Term and Long-Term Disability Policies?
Answer: Typically, there are two factors that distinguish Short-Term and Long-Term Disability policies. Short-Term Disability policies will have a waiting period of 0 to 14 days before benefits begin, with a maximum benefit period of no longer than two years. Long-Term Disability policies will have a waiting period of several weeks to several months before benefits begin with a maximum benefit period ranging from a couple of years to the rest of your life.
Do Disability Insurance Premiums Increase Over Time?
Answer: No. The premium is “Guaranteed Renewable”, meaning as long as you pay your premium when due, your premium will remain level until age 67. This is true for both Short-Term and Long-Term disability policies. If you have a Long-Term Disability Insurance policy, it can be extended beyond age 67…That is, if you continue to work full-time and pay the increased premium, you can be covered until age 75.
Is It Best To Buy Disability Insurance When you are Younger?
Answer: If the need currently exists, the answer is yes. And, since premiums are based in part on your age at time of purchase, you will benefit here as well.
Am I Covered by Workman’s Compensation?
Answer: You could be. Here are the typical eligibility requirements for Worker’s Compensation benefits:
- The person or company you are working for must carry worker’s compensation insurance or be legally required to do so….(In California this is a statutory mandate.)
- You must be an employee (not an independent contractor) of that person or company.
- Your injury or illness must be work related.
Eligible employees receive compensation for lost wages and will have related medical expenses paid or reimbursed.