Leverage Your Work Life Insurance

Life throws us curveballs all the time. Most of these curveballs we navigate easily, but some end in misfortune with a death. Typically, if satisfactory planning is not completed, the bad luck may continue for months, years, or even decades in the form of lost income, medical bills, or final expenses. How does this happen?

Consider your family and how losing an income might change its standard of living. Do you have children? Look at your wishes for your children and ask yourself what will go unfunded if you were to pass away tomorrow. What about your spouse? What plans will go unfulfilled because of your loss? Don’t forget about debt on homes, cars, businesses, and other key items.

As you can see, having enough life insurance is important to a financial plan and risk management. (Click here to learn more about risk management.) People spend extended periods of time remaining underinsured for simple reasons like they don’t know enough about life insurance or they don’t want to go through the underwriting process.

Taking advantage of employer-provided life insurance is a great way to easily provide proper coverage. However, it is not the best alternative for everyone.

Will I have access?

Not all employers provide access to a life insurance benefit. In fact, the Bureau of Labor Statistics news release from March 2016 notes that fewer people have access to a life insurance benefit (55% for private industry) than to medical or retirement benefits (1.) Generally, plans cannot discriminate in terms of who has access to the plan. The insurer commonly requires that 75 percent of eligible employees participate in contributory plans. Also, life insurance benefits may be different based on earnings or employment position. However, the employer will not be able to set benefits for specific employees to prevent discrimination (2.)

How much life insurance do I need?

As with all financial planning, general rules of thumb work only in general, and general advice does not relate to individual circumstances. However, it is a good idea to start with generalities for comparison purposes.

The 10x factor

Simply take your annual income and multiply it by 10. For example, a $100,000 salary needs coverage of $1,000,000. This approach assumes that income and future obligations will be enough with this figure when, in fact, you may need significantly more or less.

A thorough calculation will consider future spending by your spouse, the educational needs of your children, health care expenses for aging parents, your current debt, your assets, the liquidity of current assets, your philanthropic wishes, and taxes.

Because of this complexity, it is a good idea to use a calculator or a professional to assess your life insurance needs. If you use the latter, make sure the insurance agent puts your best interests first and clearly explains the policy. Ask, “Could you describe the downside of this policy? May I repeat the policy terms in my own words?” Review the information for which the agent asks in assessing your needs. Did he or she inquire about each area listed above?

Remember, insurance protects you or your family from a low-probability and catastrophic event. (Click here for an understanding of Risk.) Insurance in its purest form is neither a savings vehicle nor a way to reduce taxes. In fact, insurance should be regarded as an expense to transfer risk.

Using your group policy is a great starting point, but comparing costs for more coverage is a good idea.

Cost comparison of university term

Low Load Life Insurance (4) was used as an outside proxy. The information below compares an individual policy with a group policy provided by Purdue University and is for illustrative purposes only (3.)

The chart below shows annual premiums for an added $250,000 of coverage at the ages of 35, 45, and 55. The term limits for the nonunisex nontobacco group (individual policy) provide level term coverage up to age 65, while the unisex group will see rate increases in five-year increments. For example, people age 30 through 34 pay the same premium and a rate increase occurs for the group starting at 35, then 40.

Upon an initial review, it appears that the group insurance is cheaper than buying an individual policy. However, premium increases every five years does influence the total premium paid over time.

Let’s examine the results if we assume that $250,000 of life insurance is purchased for coverage through age 65 and look at the average premium each year to account for the unisex group rate increases.

Quickly, one may see a different story in the average policy premium paid, leaving one wondering about the best strategy or maybe starting one’s career with the unisex policy and later moving to an individual policy. However, one must be careful with the latter notion, as higher ages and changing health conditions over time may result in higher premiums.

What are my next steps?

First, work with free online life insurance calculators to gain a better idea of the coverage you need. Note that the calculators will not use the same assumptions, so you will end up with a range of coverages. However, this should place you in the general area you need.

Second, what is your current state of health? The tables mentioned a best class and standard nonsmoker; the better your health, the lower your rate will be. Upon examining the state of your health, do you think you would be in the best class or the nonstandard class?

Three, start comparing your choices with premium comparisons. This stage may involve conversations with your human resources representative and insurance agent, as well as online research. Be sure you don’t buy policies that don’t meet your needs.

Still feeling overwhelmed? Give me a call at 317-805-0840 or email me at ncarmany@thewatermarkgrp.com to discuss your specific situation.

Sources:

  1. US Department of Labor. New Release Bureau of Labor Statistics. N.p.: US Department of <Labor, n.d. Print. https://www.bls.gov/news.release/archives/empsit_04012016.pdf>.
  2. GROUP TERM LIFE INSURANCE. N.p., n.d. Web. 19 June 2017. <https://www.wallstreetinstructors.com/ce/continuing_education/nonqualified/id83.htm>.
  3. “Term Life Insurance.” – Benefits. Purdue University, 2015. Web. 08 May 2016. <http://www.purdue.edu/hr/Benefits/currentEmployees/lifeAndAccidentInsurance/term.html>.
  4. “Welcome to LLIS.” The Advisor’s Insurance Advisor. Low Load Insurance Services, Inc. Web. 08 May 2016. <https://llis.com/>.

Leverage Your Employer Healthcare Insurance

Healthcare plans are important to our quality of life and remain one of the most important benefits employers provide. Healthcare keeps citizens productive. Yet, the issue remains a hotbed for politicians, business owners, workers, and citizens. We see the headlines coming out of Washington from politicians and the posts from our friends on social media. How does the issue affect business owners and workers?

Business owners need healthcare as part of a great overall benefits package to keep and attract top talent. Workers express concern about healthcare benefits as a tool to provide for and take care of their families. This piece will focus on the common differences between a high-deductible plan and a preferred provider plan.

What is the difference between a high-deductible plan (HDHP) and a preferred provider plan (PPO)?

The major difference between these types of plans is out-of-pocket costs. The PPO requires a higher monthly premium and lower deductibles. The high-deductible plan mandates a higher deductible with payment of a lower premium. Also, a high-deductible plan may allow you to set aside funds in a health savings account, health reimbursement account, or flexible spending account. Each of these instruments creates tax savings for approved medical expenses (1).

The number of employers that offer HDHP has increased to 28% in 2016 from 7% in 2006 (2.) As a means of keeping costs low in a healthcare plan, businesses gather information about costs for lab work, specialists, doctors, and other medical services that employees may use. This accounts for the increasing number of high-deductible plans.

Which plan should I choose?

To answer this question, you’ll need to consider many factors. Here are a few to start:

–    Your current state of health: Consider how much you have paid in and the cost of care. Estimate how costs may change as you move from one plan to another.

–    Future healthcare needs: Like a retirement analysis, planning for future healthcare can be done with a health savings account. As we get older, we need more healthcare, so why not save money to cover future obligations? If needs are less than expected, the funds can be used later for retirement (click here for more information).

–    Cash flow: Monthly cash flow varies from household to household. Funding a PPO alternative may be desirable when compared to the larger deductibles of an HDHP with an HSA.

Once enough accumulation has taken place in an HSA, it may be a good fit for additional asset accumulation while taking care of current healthcare needs. If it is a participant’s first year in an HDHP plan, one may jump-start an HSA account with funds from an IRA (click here for more information).

Additional resources

For many companies, healthcare benefits go beyond basic healthcare. Wellness programs help employees change habits and behavior, such as losing weight or stopping smoking. Maybe your plan provides a lifestyle coach (3.) At some universities, healthcare benefits also may be provided with special onsite facilities, with the goal of reducing time spent waiting, traveling, and interacting with medical professionals

Wrap up

As you look ahead to the next benefit enrollment period, you will be able to track your expenses for the previous year and gain a better understanding of what to expect in the future. Look at your healthcare spending the same way you look at retirement spending. The way you spend and save – and the savings vehicles you use – will likely change over time. The right plan for one household may not be the correct plan for another. Use Dinky Town healthcare calculators to compare healthcare plan costs.

If you have questions about your healthcare planning, contact your human resources representative or an advisor, send me an email at ncarmany@thewatermarkgrp.com, or call me at 317-805-0840.

Sources

  1. “HDHP vs. PPO Plans.”HDHPs vs. PPOs. Web. 18 Apr. 2016. <http://www.bcbst.com/manage-my-plan/health-accounts/ppo-plan.page>.
  2. “Employer Health Benefit Survey 2016 – Kaiser Family Foundation.” Employer Health Benefits Survey 2016. N.p., 24 Sept. 2016. Web. 12 Apr. 2017. <http://files.kff.org/attachment/2016-Employer-Health-Benefits-Survey-Release-Slides>
  3. “Employer Health Benefit Survey 2016 – Kaiser Family Foundation.” Employer Health Benefits Survey 2016. N.p., 24 Sept. 2016. Web. 12 Apr. 2017. <http://files.kff.org/attachment/2016-Employer-Health-Benefits-Survey-Release-Slides>

 

Leverage Your Employer Disability Insurance

What is disability insurance?

Disability insurance replaces income if an employee becomes ill or injured and can no longer work. Like with life insurance, individual and group (employer-sponsored) policies exist. Here we discuss the general qualities of disability policies.

Benefits of disability insurance

Disability insurance coverage may provide several benefits, including:

-Replacing most income

-Preventing the erosion of amassed assets

-Helping pay medical bills while you are not working

Importance of disability insurance

If you regularly read my blog posts or view my videos, you likely have seen a discussion of Personal Benefit Buckets. Workers must realize that the buckets do not produce equal amounts of benefit. For example, a younger worker must protect his or her capacity to produce income by working. This working potential is the largest asset owned. If this potential drops, the worker must have a replacement in line to help cover any lack of income – thus, the importance of disability insurance.

Also, the odds of a 35-year-old worker using disability insurance before life insurance before age 65 are 3.5:1 (4.) This statistic reflects the same concern of Gen X and Gen Y. In fact, 70% of Millennials and Gen Xers worry about disability as a financial concern (8.) However, only 33% of employed consumers have disability insurance (8.)

Below, the discussion continues with details about and terms of many disability policies.

DISABILITY TERMS AND CONCEPTS

Occupational vs. non-occupational

Occupational coverage applies to injuries or illnesses related to the job, while non-occupational coverage is not related to one’s work. The former may constitute coverage originating from multiple sources, like a group disability plan through the employer or an individual policy and government programs such as Workers’ Compensation or Social Security.

Non-occupational and occupational coverage should not be confused with own-occupation versus any-occupation terms. Own-occupation and any-occupation as described by MyLTDBenefits.com:

An own occupation policy typically needs the insured to be unable to perform the material and substantial duties of his or her particular occupation to be considered “totally disabled.” The disability need not render the claimant totally helpless; rather the claimant must be rendered unable to perform the material and substantial duties of his or her particular occupation…an “any occupation” standard to qualify for disability benefits. These policies typically define disability in terms of the insured’s inability to engage in any gainful occupation that the insured is reasonably suited for based on his or her education, work experience, and other individualized factors (1).

Group disability policies may start providing benefits under an own-occupation provision and later move to an any-occupation (1).

What is an elimination period?

Think of an elimination period as a deductible. This is the time period after the illness or injury during which benefits are not paid. The longer the elimination period, the lower the premium is. The period may be a few days to 30, 60, 90, or 180 days.

Depending on the time period, coordinating your emergency fund to help cover expenses during the elimination period is a great practice. There are, however, circumstances in which this may be difficult. An example is a person who has landed his or her first job but who has not yet saved enough money to cover three to six months’ worth of living expenses.

Short-term versus long-term

Disability insurance will be either a long-term policy or a short-term policy. While the classifications suggest differences in time, this comparison will review more information.

Short-term disability policies are normally provided only through employers. A few states (California, Hawaii, New Jersey, New York, and Rhode Island) require employers to provide such a benefit (2). The benefits coverage may start a few days after the illness or injury and will last only a few weeks to a few months. Because the coverage duration is short, premiums are affordable. Workers may also use sick or vacation time and emergency savings to accompany short-term policies. (Please speak with your HR department for more information.)

Long-term disability policies are more important from a planning perspective, as the duration of coverage may last from months to years. This makes such policies more expensive than a short-term disability product. The elimination period – the time during which benefits are not paid – may be anywhere from 60 to 180 days. During this period, the employee must provide the means to cover expenses. Individual long-term policies may be customized to suit the specific needs of the person.

How much coverage do I need?

Like life insurance, a host of factors influences the coverage needed for a disability policy. The general idea, however, remains the same in terms of managing risk: replace the income lost because of the inability to work. Start by gathering your monthly outlays and add retirement account contributions, philanthropic giving, and health insurance premiums. Next, evaluate coverage provided by your employer. If the employer does not provide coverage, seeking an outside policy may make sense. Third, look for ways to cover a shortfall. This may depend on other income sources available. For example, a worker who is close to retirement may not need as much coverage because of his or her access to income sources like Social Security or a pension. Online calculators exist to help discover coverage gaps.

Also, private policies are more expensive than group policies; premiums are influenced by health, age, income, and terms of the policy.

Incorporating employer disability insurance into your financial plan

Depending on the time period and coverage of a short-term disability policy, coordinating your emergency fund to help cover expenses during the elimination period is a great practice. There are, however, circumstances in which this may be difficult. As previously noted, a new young worker starting her career or a worker who has little to no savings may not be able to bridge the gap.

Another technique involves using other benefits to cover short-term needs before the long-term coverage benefit begins. For example, use vacation or sick time as a possible funding source. The benefit will be complete coverage of your salary, but taxes may be taken out.

Taxation

Taxation of disability benefits depends on who pays the premium and whether it was with pre- or post-tax dollars. Individual policies normally bought with after-tax money, making the benefits nontaxable. However, employer-sponsored group plans may be different. If the employer pays the premium or a portion of the premium that is not included in the employee’s taxable income, the benefit becomes taxable. Any portion of the premium paid by the employee with after-tax dollars will create a nontaxable portion of the matching benefit (3).

NEXT STEPS

  1. Evaluate how much coverage you need.
  2. Examine your current disability coverage and see if a shortfall exists.
  3. If a shortfall does exist, can you buy extra coverage through your employer? If so, how long will it be before your benefits enrollment period opens? Contact your HR department for more information about policy details, or contact me for planning questions.
  4. Examine outside policies, if needed.
  5. Call me at 317-805-0840 with financial planning questions and to help coordinate your work benefits.

Sources:

  1. “Own Occupation v. Any Occupation.”  com. Alan C. Olson & Associates, 2011-2016.  Web. 5 Mar. 2016.<http://getmyltdbenefits.com/own-occupation-v-any-occupation/>
  2. Walters, Chris. “Long-term Disability vs. Short-term Disability Explained – PolicyGenius.” PolicyGenius. 2014. Web. 05 Mar. 2016. <https://www.policygenius.com/blog/long-term-disability-vs-short-term-disability-explained/>.
  3. “Taxation of Disability Insurance.” Financial Planning Advice and Financial Advisors. Ameriprise Financial. Web. 05 Mar. 2016. <https://www.ameriprise.com/research-market-insights/tax-center/tax-planning/taxation-of-disability-insurance/>.
  4. “Death vs.Disability” AffordableInsuranceprotection.com. 06 Mar. 2017. <http://www.affordableinsuranceprotection.com/death_vs_disability>

Planners Financial Plan: Car Insurance

THE TEXT

My insurance agent sent me a text a few weeks ago. (We are friends and used to work together.) Like most people who are busy, I failed to reply in a timely matter.  The nature of his communication was a notice of our annual review and an opportunity to shoot the breeze to discuss life, family, and business.

A few weeks later, I noticed the bill for our car insurance sitting on my kitchen table. While visiting with Yvonne one evening, I opened the bill only to have my jaw hit the floor.  At that moment, I did not remember 2015’s premium, but I was positive it had been lower than the hefty number listed on the paper. Perhaps out of frustration, the bill found its way to the bottom of my mail pile.  The urge to examine, review, or even think about the premium upset me.  Eventually, I had to pick up the bill and review it, so I put our coverage under the microscope as well.

Basic Terms and Provisions of Auto Policies

First, here is a simple a review of policy terminology. (Your policy language may be different. Please see your agent with specific questions about your policy.)

Bodily Injury Liability: This is the medical portion of the policy and pays for expenses for cases in which you are at fault.  Often the policy will have numbers that display a “100/300.”  The numbers describe the maximum payout for a single person’s injury or the maximum payout for all occupants of the other auto (1.)

Property Damage Liability: This portion of the policy will pay for damage to the other auto in an accident for which you are deemed at fault (1.)

Medical Coverage: This portion of your auto policy will cover medical costs after an accident with your personal injury.  Coverage requirements are different for each state and benefits from insurers vary.

Comprehensive: Comprehensive coverage addresses costs pertaining to a car if it is stolen or damaged by something other than an accident (3.)

Underinsured Motorist: This helps provide coverage if the owner of the other car in an accident is uninsured or underinsured (3.)

Coverage Pricing

Below is a comparison of my coverage from 2015 to 2016 and the change in price. (My policy has added items not listed in the terms above.  Categories are listed as noted on my policy.)

2016-car-insurance-analysis

As you can see from the table, the increase is credited mainly to bodily injury, uninsured motorist bodily injury, and underinsured motorist.  After creating the table and knowing which categories increased, I was still perplexed. No one in my family had been in an accident, no claims had been filed, and we owned the same cars, which were now a year older.

The Question

Finally, I called my agent to inquire about why the premiums had increased.  First we talked about families, friends, and business. Then the time came for me to ask about the increase.  Interesting enough, a bad feeling came over me for wanting to understand.  It seemed like I was questioning his integrity (I am lucky enough to have a good agent) or implying that he was personally pulling one over on us.  So I paused for a moment, realizing this must be similar to how many couples feel when they sit down with a “financial advisor.” Still, the question would not come out.

After regaining my exposure, I did ask.  My agent took the time to explain general trends in driving and how the technology in cars has been adding to the cost of fixing them after an accident.  (Here is an article he shared with me to help explain these trends (4.) While no one can expect to be happy about seeing a premium increase, at least I now understood why.

My next question focused on ways we could better manage the premium.

Coverage

In preparation for my call, I examined my current coverage limits and even used a calculator to see what it recommends for insurance coverage. The recommendation from the Geico calculator is listed below, while my current coverage can be found in the previous table. My current coverage and what the calculator recommended are similar.*

geico-reccs-for-insurance-coverage-traverse

While knowing that I had proper coverage felt good, my issue of increased premiums had not been solved.  My agent and I explored changes in coverage and deductibles, and looked at comparable cars.  The one likely alternative would have saved me $131 with a payback that would have taken me 3.8 years to achieve.

So after all the personal analysis and discussion with my agent, Yvonne and I decided to just write the check. The payback period was too long and we felt comfortable with the coverage we have.

Why not get another quote from a competitor?

As I mentioned before, an unpleasant feeling arose when I started asking why the premium had increased.  My friend, without hesitation, acknowledged my concern, discussed how he was not happy about it either, and moved into his own search for an explanation.  He stayed calm and listened to my monologue of personal analysis.  I suspect he knew the correct answer was to stay with my current policies as is, yet he helped guide me to the correct solution with great questions.

As a learner, this is important to me.  He exercised great patience and empathy: two qualities I have yet to encounter in other agents.  So if this means paying a premium, I will write the check as long as there is personal value.

Important takeaways from this experience:

  1. Take the time to understand your car insurance policies before you have an accident.
  2. Make sure you have an agent who is willing to take the time and educate you.
  3. Some things that directly affect you are out of your control.
  4. Complete an annual review of your policies. Through this review, we discovered that my motorcycle was not insured. I thought it had been for a few years, but we did not catch the lack of coverage because a review had not been completed. (This is a story for another day.)

Sources:

  1. “How Much Car Insurance Do You Need?” Personal Finance RSS. Wall Street Journal, 17 Dec. 2008. Web. 14 Oct. 2016. <http://guides.wsj.com/personal-finance/insurance/how-much-car-insurance-do-you-need/>
  2. “Medical Payments Insurance Coverage | DMV.org.” DMV.org. Dmv.org, 2016. Web. 14 Oct. 2016. <http://www.dmv.org/insurance/medical-payments-coverage.php>
  3. “How Much Car Insurance Do You Need?” Personal Finance RSS. Wall Street Journal, 17 Dec. 2008. Web. 14 Oct. 2016. <http://guides.wsj.com/personal-finance/insurance/how-much-car-insurance-do-you-need/>
  1. http://www.cnbc.com/2016/05/27/auto-insurance-rates-rising-at-fastest-rate-in-almost-13-years.html
  2. https://www.geico.com/landingpage/coverage.htm#set8

*use of the Geico calculator is neither an endorsement nor recommendation of the company or calculator

PURDUE LIFE INSURANCE

Life throws us curveballs all the time. Most of these curveballs we navigate easily, but some end in misfortune with a death. Typically, if satisfactory planning is not completed upfront, the bad luck may continue for months, years, or even decades in the form of lost income, medical bills, or final expenses.  How does this happen?

Consider your family and how losing an income might change its standard of living.  Do you have children?  Look at your desired plans for your children and ask yourself what will go unfunded if you were to pass away tomorrow.  What about your spouse? What plans will go unfulfilled due to your loss?  Don’t forget about debt on homes, cars, businesses, and other key items.

As you can see, having enough life insurance is vital to a financial plan and risk management. (Click here to learn more about risk management.) People spend extended life insurnanceperiods of time remaining underinsured for simple reasons like they don’t know enough about life insurance or they don’t want to go through the underwriting process.

Taking advantage of your employer-provided life insurance programs is a great way to easily provide proper coverage.  However, it is not the best alternative for everyone.

What life insurance coverage may be accessible through Purdue University?

Universal Life is one form of life insurance.  The coverage is considered permanent because the policy will remain in force as long as the premiums are paid.  Additionally, the policy builds cash value on a tax-deferred basis while providing flexible premiums and benefits.   Purdue provides access to a universal life policy with long-term care provisions through Trustmark.  Due to the complex nature of this policy, a separate blog post will be completed at a later time. (1.)

Purdue also provides access to term life insurance as the second policy through Minnesota Life.  As the name suggests, the policy has a finite lifespan.  The university provides a basic employee term policy with the following characteristics (2):

– One and a half times annual salary not to exceed $500,000.

– The choice to limit employer-paid coverage to $50,000 for imputed income tax purposes.

– Extra coverage available of up to eight times annual salary, not to exceed $2,000,000. (May require proof of insurability.)

How much life insurance do I need?

Like with all financial planning, general rules of thumb work only in general, and general advice does not relate to individual circumstances.  However, it is a good idea to start with generalities for comparison purposes.

The 10x factor.

Simply take your annual income and multiple it by ten. For example, a $100,000 salary requires coverage at $1,000,000. This approach assumes that income and future obligations will be enough with this figure when, in fact, you may need significantly more or less.

A thorough calculation will consider future spending by your spouse, educational needs of your children, health care expenses for aging parents, current debt, assets, liquidity of current assets, philanthropic wishes, and taxes.

Because of this complexity, it is a good idea to use a calculator or a professional to help you assess your life insurance needs.  If the latter is used, make sure that the insurance agent puts your best interest first and clearly explains the policy. Ask things like, “Could you describe the downsides of this policy? May I repeat the policy terms in my own words?” Review the information for which the agent asks in assessing your needs. Did he or she inquire about each area listed above?

Life insurnace 2Remember, insurance is meant to protect you or your family from a low-probability and highly catastrophic event. (Click here for an understanding of Risk.) Insurance in its purist form is neither a savings vehicle nor a way to reduce taxes. In fact, insurance should be regarded as an expense to transfer risk.

Using your university policy is a great starting point, but comparing costs for more coverage is a good idea.

Cost Comparison of University Term

Low Load Life Insurance (3) was used as an outside proxy. The information below is meant only for illustrative purposes.

The chart below shows annual premiums for an additional $250,000 of coverage at the ages of 35, 45, and 55.  The term limits for the nonunisex nontobacco group (individual policy) provide level term coverage up to age 65, while the unisex group will see rate increases in five-year increments. For example, people age 30 through 34 pay the same premium and a rate increase happens for the group starting at 35, then 40.

Annual Premiums
Best Class Standard Non-Smoker Unisex Group (non-tobacco)
Age Male Female Male Female
35: 30-yr Term 263 227 483 389 123
45: 20-yr Term 337 272 604 479 201
55: 10-yr Term 452 344 839 614 555

 

Upon a first review, it appears that the group insurance is cheaper than buying an individual policy. However, seeing premium increases every five years does influence total premiums paid over time.

Let’s examine the results if we assume that $250,000 of life insurance is purchased for coverage through age 65 and look at the average premium per year to account for the unisex group rate increases.

Average Annual Premiums for Coverage Through Age 65
Best Class Standard Non-Smoker Unisex Group(non-tobacco)
Age Male Female Male Female
35: 30-yr Term 263 227 483 389 366
45: 20-yr Term 337 272 604 479 485.75
55: 10-yr Term 452 344 839 614 723

 

Quickly, one may see a different story in the average policy premium paid, leaving one wondering about the best strategy or maybe starting one’s career with the unisex policy and later moving to an individual policy.  However, one must be careful with the latter notion, higher ages and changing health conditions over time may result in higher premiums.

 

What are my next steps?

First, work with free online life insurance calculators to gain a better idea of the amount you need. Note the different calculators will not use the same assumptions, so you will end up with a range of coverage. However, this should place you in the general area you need.

 

Second, what is your current state of health? The tables mentioned a best class and standard non-smoker.  Generally, the better your health, the lower your rate will be.  Upon examining the state of your health, do you think you will be in the best class or nonstandard?

Three, start comparing your choices with premium comparisons.  This stage may involve conversations with your human resources representative and insurance agent, as well as online research. Be sure that you do not buy policies that do not meet your needs.

If you have questions, please do not hesitate to contact me at ncarmany@thewatermarkgrp.com.

 

Sources:

  1. “Universal Life Insurance.” – Benefits. Purdue University, 2015. Web. 08 May 2016. <http://www.purdue.edu/hr/Benefits/currentEmployees/employeeBenefits/voluntary/universalLife.html>.
  2. “Term Life Insurance.” – Benefits. Purdue University, 2015. Web. 08 May 2016. <http://www.purdue.edu/hr/Benefits/currentEmployees/lifeAndAccidentInsurance/term.html>.
  3. “Welcome to LLIS.” The Advisor’s Insurance Advisor. Low Load Insurance Services, Inc. Web. 08 May 2016. <https://llis.com/>.

Purdue University: Employee Long Term Care

We left the nursing home knowing Grandma was not doing well.  Often, the family visited over the next several weeks as she got better and later returned home.  Variations of the two-sentence story become a reality for more families every year.  As parents of boomers and boomers age, not only does providing extended healthcare become a concern, but a heavy burden.  Starting from the beginning makes sense when addressing this difficult topic.

What is long-term care?

Many definitions exist about the meaning of long-term care (LTC). It is the extended care needed for people who cannot live independently. Coverage includes areas such as physical illness, disability, or cognitive impairment.

General facts on long-term care.

Roughly 70% of Americans over the age of 65 will need some form of long-term care, with 40% needing in-home care.  The average duration of a nursing home stay is 2.6 years (1). Women, on average, need an extra one and a half years’ worth of care (1).Old Person Healthcare

Costs for long-term care are expensive.  Nursing home care in Indiana runs about $70,000 each year on average with in-home healthcare running $30,000 each year for 25 hours of service a week (1).

Long-term Care Policy Elements

LTC policies are complicated, with many terms and rules.  Policyholders encounter the following common terms.

Elimination period – The period of time after the illness or injury starts with no insurance benefit provided.  The industry refers to this as the deductible and periods are usually 30, 60, 90, or 180 days (depending on the policy).  As with disability insurance, the longer the elimination period, the lower the premiums paid.

Benefit amount – The daily amount paid by the insurance company, usually $50 to $350.  A lower benefit means paying a lower premium.

Age – As we get older, the higher the likelihood LTC will be needed.  Older individuals can expect to pay a higher premium.

Inflation – The cost of LTC rises about five percent each year.  The $50 to $350 daily benefit erodes quickly.  Some policies do not have an inflation provision, while others may cap the limit at three percent yearly.

Home Healthcare Choices

TIme to planAccording to Low Load Life Insurance, about 80% of people initially receive home healthcare (2). Most people prefer care in a familiar environment.  When reviewing policies, spend extra time understanding the services provided at home, the benefit received, and the duration of service.

When should I get long-term care?

The oldest people that most insurance companies will insure are from 75-79 (2).  Like life insurance, the older the insured, the higher the premium.  However, on the opposite end, lower premiums are paid, but the duration may last decades, resulting in large lifetime costs.  Understanding the health issues of a family, longevity, and when the issues arise will help provide a starting point on when to purchase LTC insurance.

How much do I need?

Expect long-term care expenses to rise for the coming decades as boomers age.  The price of healthcare will likely change by region as well.  However, one should start by examining where the care will be administered to ballpark the daily cost.  Next, review how long you want coverage and at what benefit.  Do you want more features and services?  If so, the cost will increase.  Run different scenarios with your advisor to see how much your portfolio may supplement an LTC policy.  The more cost you cover, the less in required benefit and less in premiums will be paid over a lifetime.

How can I afford it?

The numbers present a strong case why LTC insurance needs to be part of everyone’s plan; most people still worry about the cost.  Traditional long-term care policies may quote annual premiums from $3,500-$7,000, depending on the benefit.  Hefty for most, newer alternative policies recently made their way to the marketplace.  For example, combining annuities or life insurance with long-term care provisions allows a more economical alternative for covering some of the long-term care costs.  In fact, Purdue offers such a policy (click here for details.)

Long-term care planning has been and will be one of the most complicated areas of financial planning.  The need for LTC insurance starts to rise as assets are accumulated. People with limited means rely on some other type of program, such as Medicaid.  Once enough wealth has been accumulated, long-term care has been self-funded.

Pain Points

Long-term care has not been without issues over the past decade.  For example, from 2007 to 2012, ten of the top twenty insurers by sales had stopped selling new long-term care policies (3).  Reasonably, one may assume the high dropout rate may have been due to mispricings of the policies.  Not surprising, considering that 70% of people age 65 will need some form of long-term care and the fastest aging group of citizens is 65+ because of the boomers.

Additionally, we need to be reminded that insurance was meant for low probability, highly catastrophic events.  A 70% probability is not a low chance of occurrence.  Be careful what you or your planner assumes when incorporating healthcare into your financial plan.

Purdue Long Term Care Information Provided directly from Purdue’s website (4).

Guaranteed coverage for new faculty and staff, if elected within 60 days of hire

Newly hired benefits-eligible employees who meet the following qualifications will be accepted for long-term care insurance coverage during the enrollment period:

  • Ages 18-79
  • Actively at work in a benefits-eligible Purdue position for 30 days prior to the coverage effective date
  • Have a Social Security number
  • Maintain a permanent U.S. residence

Others who are eligible to apply

The following individuals may apply for inclusion in the Purdue group long-term care insurance program, subject to full underwriting approval.

  • Benefits-eligible faculty and staff who did not elect coverage during the spring 2012 open enrollment may apply at any time.
  • Spouses and same-sex domestic partners under age 80.
  • Parents, step-parents, and corresponding in-laws under age 80.
  • Children and step-children of employees between 18 and 80.
  • Siblings of employees under age 80.
  • Retirees and their surviving spouses under age 80.

Underwriting is the insurance industry’s process for determining whether to provide insurance to someone who has applied for coverage.

Simple plan design with options for flexibility

Those who decide to enroll in long-term care insurance will make the following choices:

  • Monthly benefit level ($3,000, $4,500, $6,000, or $7,500)
  • Number of years of benefit coverage (three years or five years)
  • Inflation protection option

Premiums will be based on the covered person’s age at the time coverage begins and on the options selected.

 

Sources:

  1. What You Should Know About Long Term Care. Indianapolis: Indiana Department of Insurance, 2015. Print. <http://www.in.gov/iltcp/files/What_You_Should_Know_print_proof_8-2015.pdf>
  1. Long Term Care Insurnace. Tampa: Low Load Life Insurance. Print. <https://llis.com/tools/download/54/LOW-429-Long-Term-Care-Insurance-FINAL.pdf>
  2. “Long Term Care | Insurance – Consumer Reports.” Long Term Care | Insurance – Consumer Reports. Consumer Reports. Web. 29 Apr. 2016. <http://www.consumerreports.org/cro/2012/08/long-term-care-insurance/index.htm>.
  1. “Long Term Care Insurance – Benefits – Purdue University.” Long Term Care Insurance – Benefits – Purdue University. 2015. Web. 29 Apr. 2016. <http://www.purdue.edu/hr/Benefits/currentEmployees/employeeBenefits/voluntary/ltc.html>.

Understanding Risk Characteristics

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information: ncarmany@thewatermarkgrp.com, 317-805-0840

Service Levels
1. Risk Capacity
2. Perceived Risk
3. Required Risk
4. Risk Tolerance

Risk Management

 

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information: ncarmany@thewatermarkgrp.com, 317-805-0840
Topics:
1. What is risk
2. Ways to deal with risk
3. Avoidance
4. Transfer
5. Reduction
6. Retain

Sources:

UNDERSTANDING RISK

PURDUE UNIVERSITY DISABILITY INSURANCE

Not being able to work may prove disastrous to a family’s financial well-being.  However, transferring the risk to an insurance company via disability insurance makes sense.

What is disability insurance?

Disability insurance replaces income if an employee becomes ill or injured and can no longer work.  Like life insurance, individual and group (employer-sponsored) policies exist.  Here we discuss the general qualities of disability policies.

Benefits of disability Insurance

Being covered by disability insurance may provide several benefits, including:

-Replacing most incomeDISABILITY UMBRELLA PIC

-Preventing the erosion of accumulated assets

-Helping pay for medical bills while you are not working

Below, the discussion continues, outlining important reasons for considering disability insurance.

Occupational vs. non-occupational

Occupational coverage applies to injuries or illnesses related to the job, while non-occupational coverage is not related to one’s work.  The former may constitute coverage originating from multiple sources, like a group disability plan through the employer or an individual policy and government programs such as Workers’ Compensation or Social Security.

Non-occupational and occupational coverage should not be confused with own-occupation versus any occupation terms.  Own-occupation and any-occupation as described by MyLTDBenefits.com:

An own occupation policy typically requires that the insured be unable to perform the material and substantial duties of his or her particular occupation to be considered “totally disabled.” The disability need not render the claimant totally helpless; rather the claimant must be rendered unable to perform the material and substantial duties of his or her particular occupation…

…an “any occupation” standard to qualify for disability benefits. These policies typically define disability in terms of the insured’s inability to engage in any gainful occupation that the insured is reasonably suited for based on his or her education, work experience, and other individualized factors (1).

Group disability policies may start providing benefits under an own-occupation provision and later move to an any-occupation (1).

What is an elimination period?

Think of the elimination period as a deductible. It is the time period after the illness or injury during which benefits are not paid.  The longer the elimination period, the lower the premium.  The period may be a few days to 30, 60, 90, or 180 days.

Depending on the time period, coordinating your emergency fund to help cover expenses during the elimination period is a great practice.  There are, however, circumstances in which this may be difficult. An example is a person who has landed his or her first faculty post but has not yet saved enough money to cover three to six months’ worth of living expenses.

Short-term versus long-term

Disability insurance fits into long-term policy and short-term policy classes.  While the classifications suggest differences with respect to time, this comparison will review more information.

Short-term disability policies normally are provided only through employers.  A few states (California, Hawaii, New Jersey, New York, and Rhode Island) require employers to provide such a benefit (2).  The benefits coverage may start a few days after the illness or injury and will last only a few weeks to a few months.  Because the coverage duration is short, premiums are affordable.  Workers may also use sick or vacation time and emergency savings to accompany short-term policies. (Please speak with your HR department for DISABILITY CASTmore information.)

Long-term disability policies are more important from a planning perspective, as the duration of coverage may last from months to years.  This makes such policies more expensive than a short-term disability product.  The elimination period – the time during which benefits are not paid – may be anywhere from 60 to 180 days.  During this period, the employee must provide the means to cover expenses.  Long-term policies may be customized to suit the specific needs of the person.

How much coverage do I need?

Like life insurance, a host of factors influence coverage needed for a disability.  The general idea, however, remains the same in terms of managing risk: replace the income stream lost because of the inability to work.  Start by gathering your monthly outlays and add retirement account contributions, philanthropic giving, and health insurance premiums. Next, evaluate coverage provided by your employer.  If the employer does not provide coverage, seeking an outside policy may make sense.  Third, look for ways to make up a shortfall. This may depend on other income sources available. For example, a worker who is close to retirement may not need as much coverage because of his or her access to income sources like Social Security or a pension.  Online calculators exist to help determine the coverage wanted.

Also, private policies are more expensive than group policies; premiums are influenced by health, age, income, and terms of the policy.

General provisions of Purdue coverage

Purdue provides both short- and long-term disability coverage. While all employees automatically receive coverage under the long-term policy upon hire, the optional short-term disability coverage may be provided after a year of employment for benefits-eligible clerical and service staff (3).

Short-term disability policy

As previously noted, the optional short-term policy (managed by Cigna) will be available to eligible clerical and service staff.  Here are a few of the provisions:

-The benefit will cover 65 percent of your budgeted salary for the days and weeks you remain disabled, including pregnancy.

_”You must be deemed medically unable to work by the company that administers Purdue’s STD plan, and”

-“You must satisfy a 21-calendar day elimination period (4).”

– For a list of exclusions, click here (4).

The benefit will be employee-funded with pretax premiums. The annual cost may be figured by multiplying your annual budgeted salary by .0068 (4).

Long-term disability policy

Like the short-term benefit, the long-term policy is managed by Cigna with the following provisions:

-The benefit will begin after a 90-day elimination period for regular clerical and service staff and after 180 days for all other staff and faculty.

-Partial disability benefits may be available if an employee cannot work full-time.

-If an employee becomes disabled before the age of 60, benefits will continue until full retirement age as defined by Social Security. If the stated employee becomes disabled after the age of 60, a sliding scale will determine the duration of the benefits period.  (Click here for more details.) (5).

-The benefit will be 65 percent of the budgeted salary plus 65 percent of eligible summer session earnings. Benefits may be lessened by other benefits received during the disability period.

Half of the long-term disability premium will be paid by Purdue University, while the annual cost of the employee portion will be the employee’s annual budgeted salary times .0029. The employee portion of the premiums will be used with after-tax dollars. (Click here for long-term disability exclusions.)

Incorporating into your financial plan

Depending on the time period and coverage of a short-term disability policy, coordinating your emergency fund to help cover expenses during the elimination period is a great practice.  There are, however, circumstances in which this may be difficult. As previously noted, a new faculty member starting her career or a faculty member who has little to no savings may not be able to bridge the gap.

Another technique involves using other benefits to cover any short-term needs before the long-term coverage benefit begins.  For example, use vacation or sick time as a possible funding source.  The benefit will be complete coverage of your salary, but taxes may be taken out.

Taxation

Taxation of disability benefits depends on who pays the premium and whether it was with pre- or post-tax dollars. Individual policies are normally purchased with after-tax money, making the benefits not taxable. However, employer-sponsored group plans may be different.  If the employer pays the premium or portion of the premium that is not included in the employee’s taxable income, the benefit becomes taxable. Any portion of the premium paid by the employee with after-tax dollars will create a nontaxable portion to the corresponding benefit (6).

NEXT STEPS

  1. Evaluate how much coverage is needed.
  2. Examine your current disability coverage and see if a shortfall exists.
  3. If a shortfall does exist, can you buy extra coverage through your employer? If so, how long will it be before your benefits enrollment period opens? Contact your HR department for more information about policy details, or contact me for planning questions.
  4. Examine outside policies, if needed.
  5. Call me at 317-805-0840 with financial planning questions and to help coordinate your university benefits.

Sources:

  1. “Own Occupation v. Any Occupation.”  MyLTDBenefits.com. Alan C. Olson & Associates, 2011-2016.  Web. 5 Mar. 2016.<http://getmyltdbenefits.com/own-occupation-v-any-occupation/>
  2. Walters, Chris. “Long-term Disability vs Short-term Disability Explained – PolicyGenius.” PolicyGenius. 2014. Web. 05 Mar. 2016. <https://www.policygenius.com/blog/long-term-disability-vs-short-term-disability-explained/>.
  1. “Disability Coverage – Benefits – Purdue University.” Disability Coverage – Benefits – Purdue University. Purdue University. Web. 05 Mar. 2016. <https://www.purdue.edu/hr/Benefits/currentEmployees/disability/disability.html>.
  2. “Short Term Disability.” – Benefits. Purdue University. Web. 05 Mar. 2016. <https://www.purdue.edu/hr/Benefits/currentEmployees/disability/STD.html>.
  1. “Long Term Disability.” – Benefits. Purdue University. Web. 05 Mar. 2016. <https://www.purdue.edu/hr/Benefits/currentEmployees/disability/ltd.html>.
  1. “Taxation of Disability Insurance.” Financial Planning Advice and Financial Advisors. Ameriprise Financial. Web. 05 Mar. 2016. <https://www.ameriprise.com/research-market-insights/tax-center/tax-planning/taxation-of-disability-insurance/>.