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On this page we will explore a number of insurance products including the following:
Group Life Insurance
Group Term Insurance
Insurance Coverage For Retirees
Other Products Sold By Insurance Companies
Health Insurance (Group & Individual)
Taxation of Group & Individual Health & Disability Policies
Disability Insurance (Group & Individual)
Long-Term Care Insurance
Insurance Rating Agencies
Title insurance is insurance that protects mortgage lenders and those who purchase their home using a mortgage company protection in case of loss from disputes in title (chain of ownership) that occurred prior to the purchasing of the property by a homeowner.
In most states the purchase of Title Insurance is paid prior to or at closing and a home owner policy should be seriously considered for purchase by a new homeowner—prior to closing to protect against disputes in ownership.
NOTE: In most states the purchase of Title Insurance is required by mortgage lenders in order for the closing to proceed!
Two Major Categories:
1) Annual Renewable Term (Also called Yearly Renewable Term)
Affordable but premiums will increase every year—good if you are unemployed or as a short term fix if you can’t afford other insurance. It is purchased for one year at a time and is the least expensive term policy.
2) Level Term
A highly recommended insurance product due to low cost and high coverage amounts—Buy term and invest the difference in savings that you get if you were to buy Universal or Whole Life is a proven winning strategy. Again, be sure to “invest the difference” otherwise you could reach your elderly years and be short of cash to live on.
Term insurance provides few guarantees other than the fact that if you die during the term your beneficiary will be paid the coverage amount as long as premiums are current and you are not otherwise disqualified.
Always remember that the term will end and there is “no” cash value. Your goal would be to create your own cash value if you were to choose this type of coverage. You do this by consistently investing the difference between your term and whole life policy over the term of your policy and beyond.
You can purchase a 1 year term contract, a 5 year term contract, a ten year term policy and a 20 year term policy. Very few companies offer term policies over 20 years.
Many term policies are issued on a “convertible basis” meaning the policy can be converted to permanent insurance at a later date without proof of insurability.
Be sure that your policy has the convertible feature "at the time of purchase" and keep your premiums current in order to maintain this feature.
Types of Term Insurance:
• Yearly Renewable Term
• 5 year—10 year—15 year—20 year (Level Premium)
• Term to 65/70
• Decreasing and Increasing Term
• Reentry Term
Optional features include “renewability if you purchase a guaranteed insurability option.”
Convertibility is another option and you can choose between two ways:
1) Attained Age Method
2) Retroactive Method
Limitations of Term Insurance:
• Costly as you get older (After age 65 or 70 it is difficult to find an affordable term policy
• No Savings Component (You must make the choice to save on your own).
WHOLE LIFE INSURANCE PRODUCTS
Whole Life—provides protection for your “entire life”—expensive and high fees in the early years—not the best choice for many, but may be worth checking out. Whole life also generates a “cash value” that can be used for many things during your lifetime.
Provides permanent protection
Cash Value will equal face amount when insured attains age 100 As long as premiums are paid the policies remain in force Sometimes purchased as a low risk investment (interest rates tend to be low)
There is no FDIC or other government protection for cash value build-up
Level premium throughout the payment period
The premium component consists of a “mortality charge” (cost of paying death claims for those who die during the year), “administrative costs (operating expenses), insurer profit and “savings” (cash value).
The cash value accumulation normally occurs after the policy has been in force for a number of years. At any time during the policy, you (policyholder) may withdraw the cash surrender value and forfeit the death protection.
The cash value would be less than the stated cash value due to exit charges if you were to withdraw the cash value.
In addition you (policy owner) could borrow out the cash value at a low interest rate, and still maintain the death protection.
The option to withdraw the cash value makes whole life attractive to many who like the fact that it serves as a savings mechanism and protection against dying to soon.
In order for you to purchase life insurance on another person you must have an insurable interest in that person. An "insurable interest" in life insurance means that you stand to lose financially if a loss occurs, or to incur some other kind of harm if a loss takes place.
In "property insurance," the insurable interest must exist at the time of loss, however, in "life insurance" the insurable interest requirement must be met only at the inception of the policy, not at the time of death.
If you can afford life insurance—be sure to get it—as a large number of Americans (over 20%) have no life insurance.
If you are now not in position to purchase life insurance make it one of your short term goals to obtain life insurance in the near future.
Even if you are single with no dependents if you can afford life insurance and it has no effect on your living conditions it is worth considering and it could be wise to purchase a policy.
You can leave the proceeds to your favorite cause or family members with certain stipulations that can help you leave a positive legacy.
There is a lot of confusion among consumers of the various types of insurance products available under whole life policies.
Hopefully, the following explanations will help clear up your understanding of the types of whole life products that are currently available.
Types of Whole Life Products:
Basically one lump sum premium payment to insurer would provide coverage for the face amount.
Single Premium policies are impractical for most due to the high cost.
Single Premium policies are often
used in tax and estate planning, or when a lump sum is received, and also as an
option to provide gifts to children or other dependents.
It is also Commonly known as “Ordinary Life Insurance” and premiums are paid on a regular basis until the date of death or age 100 whichever comes first. Premiums can be paid monthly, quarterly, semi-annually, or annually.
The more frequent the payment the higher the insurer’s administrative costs and the higher your premiums would be. Provides the maximum death protection for the lowest possible premium, but unlike term insurance you must continue paying in after retirement up until death or age 100.
Also known as a “Traditional Whole Life Policy”
Modified Life-A form of whole life insurance where premiums are lower for the first few years after policy inception, typically 3 to 5 years.
The difference between the normal premium and the lower premium is the redistributed throughout the rest of the premium payments after the 3 to 5 year term ends.
Modified Life Insurance is basically Ordinary Life Insurance with a different payment arrangement. It is used by those who can’t currently afford ordinary insurance but expect to be able to afford it in the future due to pay raises or other financial windfalls.
Limited Pay Policy
The premiums are higher than that of ordinary life premiums but lower than a single premium. With this type of policy you (policy owner) can specify that you only want to pay premiums to, say age 60, or for a specific number of years, say 30 years.
A whole life insurance product that allows you (the insured) to buy death protection similar to that of term insurance, and then invest an additional amount with the insurer that is similar to the savings element in whole life policies.
The way it works is quite simple but often misunderstood. The insurer would set an minimum initial premium that must be paid to cover “mortality costs”— “administrative expenses”—and "insurer profit.”
After this premium payment is made, you (the insured) would be free to pay an additional amount of money that would be invested in your cash value build-up.
As long as there is enough money in the cash value account to fund the cost of pure death protection, you (the insured) would not have to pay any further premiums.
Interest paid on a universal life is variable, and is more competitive in times of high interest rates than that paid on traditional whole policies.
If the cash value builds to a level greater than the face amount of the policy, then the DEATH BENEFIT WOULD INCREASE ACCORDINGLY which is a similar effect of the “Buy Term and Invest the Difference Philosophy”, however you would have a “permanent insurance product.”
Keep in mind that there are many variations and policy options in terms of death benefit arrangements and premium payments and those are some of the reasons that it leads to confusion among consumers.
Some key points to remember among others is that the death benefits can rise above the face amount, there is a cash value build-up or investment aspect and there can be many other variations along the same theme.
Universal Life also have expensive and high fees in the early years and may not be the best choice for many. However, it may be worth checking out if you are considering a permanent insurance product. You would also possibly get better investment returns than pure Whole Life.
A whole life insurance product in which cash values are invested in your (policy owner’s) choice of investments such as stock funds, money market funds, bond funds, and mutual funds etcetera.
Your insurer would charge you a fixed premium in most cases, and guarantees a minimum death benefit.
Your premiums minus expenses and mortality charges would be deposited into the investment vehicles of your choice, and you (policy owner) would bear ALL of the investment risk.
If the investments provides favorable (positive) returns the cash value will grow. If the investments provide unfavorable (negative) returns the cash value will decrease and you would have a loss in the cash value account.
Always remember that the CASH VALUE of a Variable Life Policy is “never guaranteed” and the investment risks (gains or losses) rests solely with you (the policy owner).
The death benefit, however, IS GUARANTEED, assuming you (policy owner) pay all of the required premiums in a timely manner.
If you were not confused enough already the insurance industry came out with yet another insurance product to counter the growth of term policies and keep whole life products viable.
As you might expect Variable Universal Life Insurance combines the features of Variable Life Insurance with that of Universal Life Insurance.
Variable Universal Life Insurance is a whole life product that features an “increasing or decreasing” (Variable Life Portion) death benefits and flexibility of premium payments (Universal Life Portion) as the major features.
The Variable Portion of Variable Universal Life Include:
The Cash Value of a Variable Universal Policy is not guaranteed. A “minimum” death benefit is guaranteed.
You, the policyholder would choose where to invest the cash values.
The Universal Portion of Variable Universal Life Include:
You would have flexible payment options
Interest-Sensitive Whole Life
Also known as current consumption whole life (CAWL), is somewhat similar to Universal Life. The insurance company agrees to share its investment experience and profits with you (policy owner). The interest rate paid on the cash values fluctuates with the experience of the insurer, BUT there is always a guaranteed minimum.
Limitations Of Whole Life Policies:
Often expensive due to the coverage amount that is needed by most families are too high to justify the premiums in their monthly budget.
To get the amount needed they often will have to purchase term insurance for a specified period. If you are unable to afford whole life buying term and investing the difference in policy premiums may be difficult for you as well.
In that case you would buy term and invest what you could afford to invest on a monthly basis.
Due to cost may provide inadequate coverage for most families.
Slow cash value growth in the early years due to high fees.
Surrender Charges (not renewing the whole life policy) are very high, especially during the first few years of the policy.
If you were to surrender your policy the surrender charge penalties would be deducted from the cash value.
Keep in mind that the major expenses associated with policy issuance is the underwriting costs and agent commissions and they are incurred up front and the surrender charges are an attempt on the part of the insurer to recoup some or all of their costs if the policy was to lapse (you stop making payments or other lapse clauses stated in the policy).
Group Life Insurance:
* A large group of people covered by a single master contract
* Used by private and public sector employers and other organizations
* Often paid in full by employer but sometimes employee must contribute
* Lower administrative and underwriting costs and no proof of insurability needed
* Eligibility requirements set up by employer
Professional Group—This too can be an affordable and wise insurance policy. If your employer or membership group offers this type of insurance product be sure to check it out as it could be beneficial to you and your family.
Service Members Group Life Insurance (SGLI)—Provides up to $400,000 worth of coverage for active duty military personnel, Reserve or National Guard service. If you are eligible be sure to strongly consider and purchase. It is wise to get an additional policy that will cover you once you leave the military.
If you are injured or have health issues the coverage may not be available for you. The additional policy will add another measure of protection for you and your family.
Group Term Insurance:
Similar in concept to Group Life mentioned above but costs to employer and/or employees are lower and the coverage is for a specific term. The premiums paid by the employer are tax deductible as a business expense.
A covered employee may have the right to convert from group term to a regular cash value upon termination from a company. The insurer would normally grant a 31 day grace PERIOD AFTER employee withdraws from the group in which basic death benefits remain in effect.
The conversion privilege could be
beneficial to you or someone you know because no evidence of insurability is
necessary upon conversion.
Retirees & Insurance Coverage:
1) May offer Retiree a portion of the policy
2) May offer Retired Lives Reserves
3) May offer conversion to cash
value life insurance
Other Products Sold By Life Insurance Companies:
3) Flexible Premium
4) Single Premium
Annuity Payment Options:
• Pure Life annuity
• Life annuity With Guaranteed Minimum Payments
• Installment Refund annuity
• Joint & Survivor Annuity
When selecting an insurance company be sure to utilize all of the insurance rating agencies listed below, do research on the companies you are considering, use your better judgment and check with state, federal and other watchdog agencies to check out their complaint and payment history.
Your goal is to get as much assurance as possible that the company will be in existence if and when you and/or your family may need to make a claim, cash in your policy, or receive the death benefits.
Employer provided coverage is usually your best choice if your company offers participation. Otherwise search in the open market at einsurance.com and other sites to see what is affordable for you and your family situation.
Also search at the state level to see what type of coverage is a available such as medicare—medicaid—coverage for kids etcetera. Also consider COBRA if you are eligible, it is affordable for you, and it is the best option for you after looking at all of the agencies listed above.
Health insurance is needed to help you and your family pay medical bills and the cost for medical treatment is quite high and tends to outpace the rate of inflation.
Individual Health Insurance:
Medical Expense Insurance (Covers a variety of medical expenses)
Major Medical Insurance (provides broad coverage –can provide wide range or excess coverage over what Medical Expense Insurance or other group insurance policies provide)
Group Health Insurance:
Basic & Major Medical
Dental & Vision
Group disability Income
Coordination of Benefits Clause (If you have two policies or coverage with two different insurers you may be able to coordinate benefits and not have to pay out of your pocket. You should know if you have this clause and know what the provisions consist of)
Termination of Benefits (Be aware of what’s in your policy as it relates to termination of benefits)
COBRA (Consolidated Omnibus Budget Reconciliation Act could possibly extend your group health coverage)
Coverage for Elderly Employees (Employees who are 65 years and older, and who are also eligible for Medicare benefits, MUST still be covered by the employer’s group health coverage. The group plan would be the primary payor of benefits, and Medicare would be the secondary payor)
Coverage for Retirees (Medicare would be primary and company provided benefits would be secondary if offered by your company)
Taxation of Group Health Benefits:
Group Health Benefits are NOT taxable as income to the “employee”
• Premiums paid by the “employer” are tax deductible as a business expense
• “Employer” paid premiums for disability income coverage may NOT be taxed as current income to “employee”
• If a disability occurs the benefits paid out by the plan are taxable as income to “employee”
• If the “employee” pays the entire cost of the disability income coverage, the premiums are generally not tax deductible for the “employee”
• If the “employee” pays the entire cost any disability benefits received from the policy are not subject to income tax.
• If the “employer & employee” share the cost of disability income coverage, then disability benefits are partially taxable as income to the “employee”.
• Only the portion that is attributable to “employer contributions” is taxable income to disabled “employee”—the “employee contributed portion” avoids taxation.
A form of Health Insurance coverage that replaces a portion of a disabled person’s regular income while they are unable to work.
It should be considered by all who are working and particularly if you are self-employed. According to recent stats there is a 20% chance of you becoming disabled for at least one year during your work lifetime.
If you are not now in position to purchase make it one of your goals to do so as soon as practical. Benefit payments are usually not subject to income tax if premiums are paid by the individual—nor are they deductible.
If the premiums—on the other hand—are paid by the employer (group plan) the benefits are includible in the taxable income.
Also be aware that less than half of all U.S. companies pay for long-term disabilty insurance for their workers whereas the percentage was much higher in the past.
Most group policies:
* pay no more than 60% of base salary and have monthly caps
* have a disclaimer where if you get Social Security benefits your disability payment would be deducted from the amount the group policy would give you
* amount of coverage may be inadequate and you would need to purchase more coverage (individual policy)
* there is usually a 90 day "elimination period" (the time before payments would begin)
HIPAA (Health Insurance Portability and Accountability Act) allows those with pre-existing conditions who change jobs to continue coverage.
Individual Disabilty Policies
Many workers who should have disability insurance often balk at obtaining coverage because they feel the cost is too high. However premiums over the last few years have remained relatively steady due to stricter underwriting and greater competition in the industry.
In many cases you can get coverage policy of 80% of your compensation (the maximum allowed) for about 1% to 3% of your "net" compensation. You want to get at least 60% with no caps or if caps are involved try to get 70% of your net compensation.
If you have wild swings in income from year to year (per your tax return) you may receive or be offered inadequate coverage due to the underwriting guidelines being tightened over the last few years.
Be sure to read the fine print and know what your coverage will and will not cover as well as special provisions. Be particularly alert for provisions that state they will pay for "any" occupation or "just the one you are trained for." Will the policy only pay if you are fully disabled or will it pay if you are partially disabled.
Be advised that you can get many restrictions that are not favorable to you removed but it will normally cost you extra and could increase your premiums an additional 10% to 50% depending on the restrictions that you want removed.
You can reduce the cost of your premiums by delaying when payout begins (if you have a 6 month emergency fund—which is highly recommended you could extend the elimination period from 90 to 180 days and save 10% or more depending on company).
You must be patient when shopping for disability income insurance so it is wise to do your research over a period of weeks at a minimum to make sure you get a policy that is in the best interest of you and your family.
Utilize the internet, your current insurance company(s) and you can also visit nahu.org where you can have a licensed agent obtain quotes from a number of different companies.
Benefit payments are usually not subject to income tax if premiums are paid by the individual—nor are they deductible.
What is LTC (Long-Term Care) Insurance?
It is insurance that is normally bought to help you protect your assets, preserve independence and provide quality care.
With the baby boom generation now maturing many of those in the baby boom population are purchasing LTC Insurance. In some cases the children of baby boomers are purchasing LTC Insurance for their parents.
LTC provides coverage for nursing home stays and other types of routine care that are not covered by health insurance.
LTC insurance may not be needed by you if you have a low net worth (less than $100,000), however if your net worth is over $100,000 but less than 2.5 million or so you may have the need for this type of coverage.
If your net worth is greater than 2.5 million you can effectively insure yourself (self-insure), however be sure to monitor your net worth and financial situation regularly if you are close to the 2.5 million mark as health care and medical inflation could put you in a position where LTC Insurance may be needed by you.
Also keep in mind that many experts recommend between 2 and 3 million so don’t assume the 2.5 million is an accurate figure for your situation as it depends on your personal situation, the area of the country you live in and other factors. Use the 2.5 million as a guide or starting point, however keep in mind that you may need to discuss your particular situation with competent LTC insurance specialists or other professionals.
If you do need LTC insurance be sure to comparison shop and use highly rated insurance companies as you want to have a strong likelihood that they will be around if you are in need of LTC at some point in your life. You should also consider a policy with at least a three year term which is the historical average time that most people who utilize LTC need care.
Look for a daily benefit that would cover the average daily nursing-facility cost in your area and be sure to take in relocation if that is in your retirement future.
Be sure you know what your elimination period is (the time before your benefits begin) of 90 days if you feel that is appropriate for you as the premiums will be much lower( possibly 20-30% lower) if you can go 90 days using your own funds and it is not a burden.
Also inquire about inflation protection and choose a highly rated company (A.M. Best, Standard & Poors and Moody’s) that you are comfortable with and feel will be around in the future.
Also, Know that there are 5 levels of coverage:
1) Skilled Nursing (must be ordered by a physician)
2) Intermediate Nursing (must be ordered by a physician)
3) Custodial Care
4) Home Health Care
5) Adult Day Care
Documents you may need as you age...
Also, if you are over age 75 make sure that you are mentally in position to handle your finances as the normal wear and tear of aging can make reviewing your bank statement and financial portfolios more daunting.
Cognitive impairment should be a real concern as you age and you and your family should have a plan in place to deal with this "real" potential.
You should also be aware of scammer's and those who try to defraud you out of your retirement savings by offering services or financial products that do not have your best interest at heart.
As you age and your mental faculties deteriorate consider getting a durable power of attorney (springing-takes affect only when you are deemed unable to make a decision or), a health-care proxy (authorizes another family member to make medical decisions on your behalf if you can't do so).
You could also complete a HIPAA form which would allow medical providers to inform a family member about your health status and treatment.
If you have a will (you should have
one—if not you should address that need immediately) and revocable trust you
could give a co-trustee (possibly a family member) power to use the money
according to the rules of the trust. The will would inform your heir's of what
to do with assets outside of the trust after your transition.
Be sure you utilize highly rated insurance companies when selecting any and all of your insurance products.
You want to be fairly certain that your insurance provider will be there when you need them. Therefore do your research on the front end to ensure that you are selecting a strong company that will be there when you need them.
For starters you can go to A.M. Best, Duff & Phelps, Moody’s, Standard & Poor, Weiss and other rating sites to learn more about the insurer you are selecting.
A.M. Best Highest Three Ratings: A++ A+ A
Duff & Phelps Highest Three Ratings: AAA AA+ AA
Moody’s Highest Three Ratings: Aaa Aa1 Aa2
S & P Highest Three Ratings: AAA AA+ AA
Weiss Highest Three Ratings: A+ A A-
The rating companies listed above also have the “lowest three ratings” as well, however they are not included on this page.
If you are interested in the three lowest rankings of the rating agencies listed above please visit their websites.
Use severe caution when considering any company in the three lowest ratings as the potential for insufficient funds or future solvency is a real concern.
Also realize that rating companies can and do make errors in ratings—therefore use your common sense and other rationale in conjunction with the rating data you receive.
Other factors could include:
How long has the company been in existence? What is the claim payment history? Are there lawsuits pending? Are there a large number of consumer complaints against the insurer? Be sure to have all of your questions answered properly prior to purchasing "ANY" insurance product.
Also be sure to visit consumer and government websites and watch groups as an additional check. Remember it is your money that you will be paying so you want to be sure the insurer will be around in the time of need for you and your family.
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About This Article:
The above article was written by Thomas (TJ) Underwood. Thomas (TJ) Underwood is a former fee-only financial planner, a former top producing loan processor and is currently a licensed real estate broker in the state of Georgia.
He is the writer behind The Real Estate & Finance 360 Degrees Series of Books that include The Wealth Increaser, Home Buyer 411 The Smart Guide to Buying Your Home, Home Seller 411 The Smart Guide to Selling Your Home, and Managing & Improving Your Credit & Finances for this MILLENNIUM.
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He is the creator of TheWealthIncreaser.com where he regularly blogs about helping consumers improve their credit, finance and real estate pursuits in an intelligent, consistent and proactive manner.
He’s always looking for ways to make intelligent finance improvement happen for those who “sincerely desire” success in their future. He was the first financial planner to coin the phrase "financially alert mind" and he consistently writes in a style that is designed to provide consumers the ability to take control of their lives and achieve great results.
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