Do insurance options seem overwhelming at times? It can be tricky to navigate the many different plan types and terminologies to find the right fit for your needs. Unfortunately, most people know very little about insurance, 90% of Americans aren’t even comfortable explaining basic terms1 like premium or deductible.
Insurance needs change as we age and move through different stages of our lives. The same policy or plan that benefits you today could very well be a poor choice for you later down the road. Use this guide to help determine which policies you do and don’t need throughout your life.
Just Getting Started
During the early stages of your career, you’ll likely have graduated from college or another career readiness program. As a new worker, you might have some assets like brokerage accounts, but no dependents that rely on your income. Therefore, it’s highly unlikely that you’ll need substantial life insurance coverage. Although, you may consider it if you have any substantial debt such as student loans you wouldn’t want to pass along to your family after your death.
If you work a standard full-time job, your employer will likely include benefits such as health insurance, group life insurance, and group disability insurance. Having employer coverage will make it more affordable than buying these policies in the open marketplace.
Being on an employer-sponsored plan will help you potentially reduce your tax liability by allowing you to deduct portions of the premium for certain policies. For example, 100% of the health insurance premium that you pay will be deducted against your income.
Most employers pay the entire premium for group term life insurance up to $50,000 of coverage.2 If your employer pays for more than $50,000 worth of term life coverage, then the difference will be included in your taxable income.
Short and Long Term Disability Insurance (STD and LTD)
Disability insurance is important as it provides you with income should you become unable to work. Employers generally pay for the entire short term disability premium and these policies will pay you a percentage of your gross salary (around 80%)3 up to 6 months. Long term disability plans have longer payment time frames, which can last more than 10 years and are meant for more serious conditions like cancer.
Starting a Family
Now you’ve settled into your career a bit, have likely begun earning a significant income, and are ready to start a family. With dependents on the way or in your life already, the types of insurance you carry to protect your spouse and your family will be critical.
Some of the most important insurance decisions during this life stage will be:
Term vs Permanent (Whole Life Insurance)?
Term life insurance policies4 cover you for a certain term, which generally ranges from 10 to 30 years. These policies generally have cheaper monthly premiums than other types of life insurance. Term plans are cheaper because they don’t accumulate cash value and only last for a specific amount of time.
Whole life insurance policies last for your entire life and accumulate cash value. The cash value can be used to pay premiums or as an income reserve. For example, you can borrow against or withdraw from your cash value to pay for various expenses once the cash value builds over time. Term policies could be a better choice during this life stage since they’re cheaper and less complex, which saves you money long term.
Do You Need More Disability Insurance Coverage?
In addition to the reasons previously listed for purchasing long-term disability insurance, consider increasing your coverage if your growing household relies primarily on a single-earner.
Umbrella policies can be helpful as they provide protection beyond the limits and conditions of existing homeowners and auto policies. These can be valuable tools as they cover events like lawsuits, property damage, and bodily injury liability. For example, these policies would cover you in the event you seriously injured someone in a car accident that is determined to be your fault.
As you approach retirement and your children become self-sufficient, you’ll again need to re-assess your insurance needs. One consideration will be whether or not to keep your children on your health or auto insurance plans. Many children remain on their parents’ healthcare plans until they’re legally forced off at age 26. Be sure you help your children obtain adequate health insurance via an employer or the open market. It could also make sense to separate your auto policies at this time, which will save you money and teach your children responsibility.
Long Term Care Insurance (LTC)
The closer you get to retirement, the more seriously you should consider purchasing Long Term Care (LTC) insurance. LTC plans will pay for expenses like nursing homes, in-home aides, and other related costs. Over 50% of 65-year-olds will need LTC plans to pay for long term care services.5 Without these plans, you could risk your entire retirement savings being depleted as the average nursing home monthly fee can cost up to $8,000!6
Your Retirement Years
If you’re retired, consider the options for your whole life cash value policy that you may have opened many years ago that has built up a significant amount of cash value. You can either withdraw or borrow against the cash value to pay for miscellaneous expenses. Keep in mind that you’ll pay relatively high-interest rates up to 8%7 should you take a loan against your cash value.
One option to consider is using a 1035 exchange to convert your cash value to an annuity. An annuity can pay you a specific monthly income for the rest of your life or invested to meet your longer-term goals. This conversion is a tax-free event, but you’ll pay taxes on the monthly income that is greater than your basis. Your basis is simply the amount of cash value that you funded with after-tax premiums.
You won’t be eligible for Medicare, or government-sponsored healthcare, before age 65.8 Consider purchasing supplemental plans that will provide coverage if you decide to retire before Medicare eligibility age.
Before shopping on the public exchanges, ask your employer if they provide pre-retiree medical insurance or cover part-time employees. Some pre-retirees work for their employer part-time and are still covered through the group plan. This lets them gradually transition into retirement.
Another option is to enroll in COBRA insurance via your employer at retirement. This rule will let you stay on the employer’s plan, but you’ll pay the entire deductible and the term will last up to 18 months. If you retire at 63 ½, then this could help you close the coverage gap. Keep in mind that your spouse needs to be at least 63 ½ at your retirement to avoid gaps in his or her coverage!
Insurance might seem daunting at times, which is why knowing the basics will keep you ahead of the game. Having the right policies can help protect you from financial ruin. Determining when to use specific policies based on various factors like age, net worth, and health needs will act as an important component of your financial plan.
Need additional help with your insurance plans? Schedule a complimentary consultation with one of the financial planners at Williams Asset Management today. We can help you decide which policies might work best for you and your family.
Brian McKinney, CFP® is a Financial Advisor with Williams Asset Management. Williams Asset Management is located at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. He offers advisory services as Investment Adviser Representatives of Commonwealth Financial Network®, a Registered Investment Adviser. Fixed insurance products and services offered by Williams Asset Management. For additional information about the services of Williams Asset Management, please call (410) 740-0220 or email at Info@WilliamsAsset.com. © Williams Asset Management. For more information about Williams Asset Management, please visit www.WilliamsAssetManagement.com.
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