How to Insure Your Salary

IncomeProtectionCalcMany financial planners and advisors tell their clients that their ability to earn an income is their greatest asset. This can be especially true for those who are highly compensated, such as medical practitioners, business owners and executives.

Losing this ability due to sickness, injury or other misfortune can be financially devastating, even if it’s only for only a few years. Insuring against this loss is one of the foundational elements of financial planning for just about anyone who earns substantially more than the minimum wage.

Likelihood of Becoming Disabled

One of the key facts that many people are unaware of when it comes to disability is that it is far more likely to occur than premature death. Protectyourincome.com has published a table that shows that it is statistically more than twice as likely that the average 30-year old will become disabled rather than die at that age. While the odds of disability decrease over time, they always remain higher than the chance of early death, even at age 55. The financial consequences of disability can be exponentially larger than for someone who dies. (For related reading, see: Types of Social Security Benefits.)

A quick example: Joe is 35 years old. He makes $75,000 a year and is killed in a car crash. He has $500,000 of life insurance. His widow uses the money to pay the remaining medical bills and pay off the house. She deposits the remainder into the 529 plans that they established for their two kids.

Frank is also 35 years old and married with two kids. He experiences a car crash but survives. However, he is permanently mentally incapacitated and will never be able to work again.

This comparison graphically illustrates the enormous difference between the economic consequences of death and disability. Joe’s bills ended quickly, and his life insurance provided adequate compensation. But Frank’s medical bills are just beginning and may well continue for decades to come. After the initial doctor and hospital bills arrive, there may be an ongoing need for managed care of some sort, which can cost thousands of dollars per month. Life insurance will not cover this type of expense because there was no death. If Frank lives on to age 70, then the total cost of care for him could easily run into the millions. (For more, see: Are All Disabilities Treated the Same for SGA Thresholds?)

Fortunately, there is a type of insurance coverage available for those who become unable to work. Disability insurance is offered by life and disability carriers for both individuals and groups. This type of coverage pays out a monthly benefit to the insured while they are disabled in order to replace their lost income. In most cases, this type of benefit will cease at age 65, which is considered retirement age. Disability coverage is divided into two main categories. Short-term coverage is for disability periods that last for less than two years, while long-term disability insurance covers longer periods up to a lifetime.

Disability Policy Characteristics

The following characteristics can be found in most disability policies:

  • Capital Sum Benefit. Many policies will pay out a lump-sum benefit to insureds for certain events, such as the loss of an eye or a limb. This can be in addition to any monthly benefits to which the insurance may also be entitled.
  • Renewability Clause. Disability policies can offer various levels of guarantees of renewability for their coverage in a manner similar to life insurance. Guaranteed renewable policies are the most expensive. Non-cancellable policies also promise that the provisions and premiums in the policy will never change once it is issued if premiums are paid. (
  • Elimination Period. Most disability policies will not pay out until a certain period of time has elapsed, such as 90 days. This waiting period is the equivalent of the deductible for these policies.
  • Waiver of Premium. This benefit is essentially the same as with life insurance policies, where the insured can pay for an additional rider that allows them to not have to pay the policy premiums while they are disabled.

All disability policies will define the level of disability coverage that they offer. Total disability will pay a higher benefit for those who are completely unable to work, while residual disability will pay a partial benefit to those who are still capable of some level of gainful employment. Own-occupation disability is more expensive and will replace the income that was earned by the insured in their respective lines of work. Any occupation coverage only pays a benefit if the insured is unable to work any gainful employment for which they are suited by training, education or experience. True Own Occupation coverage is the best-and most expensive-type of coverage. This type of coverage will pay the difference between the actual earnings of the insured and any income that they are able to earn in a lower-paying job if they become partially disabled.

Taxation of Disability Insurance

The tax rules for disability coverage are fairly straightforward. All benefits that are paid from these policies are unconditionally tax-free as long as the policy owner did not deduct the cost of premiums paid as a medical expense. If the premiums were deducted, then the benefits are taxed as ordinary income as long as they are paid. For this reason, most planners will suggest that policy owners refrain from making this deduction, as having to pay tax on this form of income may be burdensome during a period of disability.

Small business owners who jointly own an enterprise often buy disability policies on each other in order to ensure the continuation of the business if one or more of them becomes incapacitated. These plans are often piggybacked on top of buy-sell agreements that are funded with life insurance contracts.

Accelerated Benefit Riders

Many life insurance policies now offer a form of disability protection in the form of an accelerated benefit rider. This rider will pay out a monthly benefit in the event that the insured becomes chronically ill. This benefit is usually triggered when the insured becomes unable to perform two out of the six activities of daily living (ADLs). Although this form of coverage does not exactly correlate with true disability insurance, it is becoming a popular alternative because it provides several types of benefits in one convenient package, and this benefit can last past age 65 in a permanent policy that becomes paid up.

Life Insurers and Millennials: Strange Bedfellows?

hClearly life insurers have the right idea. Go where the money is or in the case of Millennials where it will be in the future. In fact Northwestern Mutual Life Insurance Company purchased robo-advisor LearnVest during the first quarter of 2015. Northwestern Mutual is not alone in its efforts to tap and understand Millennials. Both Mass Mutual and Pacific Life are involved in efforts to court Millennials largely through education.

This seems an odd combination at best, much like an old commercial showing a couple holding hands with one wearing an Ohio State jersey and the other wearing one from Michigan. Millennials are a savvy, educated group of consumers which also carries over to their consumption of financial products and advice. Life insurance should be a priority for those in this age group who have a need for the protection. Certainly for those who are married, have kids or others whose financial well-being would be in peril if they died. Life insurance is a key element in a financial plan. (For more, see: Advising FAs: Explaining Life Insurance to a Client.)

Beyond life insurance there is likely a desire to sell a wide range of financial products to this huge group of emerging investors. It remains to be seen how Millennials will react when they begin to delve into some of the investment and annuity products offered by these insurers.

How will the insurers justify their often high cost mutual funds against low cost alternatives from the likes of Vanguard? What type of educational material can they present that justifies these higher cost products? How will they convince these inquisitive, tech savvy young consumers that purchasing high cost annuities and life insurance products with an investment component (and generally high fees and surrender charges) is a good idea? (For more, see: A Financial Advisor’s Guide to Millennial Clients.)

Back in my day many new college grads went into life insurance sales and were told to call all of their friends and relatives and sell them a policy. I suspect that this approach is not is good one with the Millennials. To their credit it appears that these insurers and others are not taking this path. (For more, see: How to Help With Millennials’ Money Habits.)
LearnVest and Northwestern Mutual

LearnVest’s education-oriented approach and fee structure are a good fit for Millennials and others. In a very smart move Northwestern Mutual will allow LearnVest to continue operating as a separate company, presumably with no responsibility to sell any financial products. This will allow Northwestern Mutual to use LearnVest to build its knowledge base on Millennials, their financial needs and how to best attract them as clients. Northwestern Mutual has a dedicated director of Millennial marketing who was quoted in a recent CNBC piece as saying: “More than half of our new clients are under age 34.” (For more, see: The Generation Y Investment Portfolio.)
Millennial Habits

According to recent research by Gallup, Inc. Millennials are more than twice as likely as all other generations (27% vs. 11%, respectively) to purchase their policies online rather than through an agent. This flies in the face of the traditional insurance company delivery method not only for life insurance but for other financial and investment products as well. (For more, see: Retirement: Which Generations are the Best Savers?)

The same Gallup research also indicated that Millennials will often follow the lead of older family members in terms of the insurance companies they choose. Gallup indicates that building strong ties with Baby Boomers and Gen X-ers is a good tactic for insurance companies looking to tap into the Millennial market. (For more, see: Financial Advisors Need to Seek Out This Group NOW.)
How Will it Work?

Based in large part on my own bias against the sales tactics used and products offered by some insurance companies and their agents and reps I was intentionally harsh earlier in this article. The efforts of Northwestern Mutual, Pacific Life, Mass Mutual and others to understand and educate Millennials is to be commended. (For more, see: How Millennials Use Tech & Social Media to Invest.)

What I am having trouble reconciling is what and how these insurers will serve Millennials and sell to them. I doubt the old sales tactics used by insurance agents will hold up. As I indicated above I’m also leery about how these insurers will justify their high cost products to this group. (For more, see: How Young Investors Can Avoid Financial Pitfalls.)

Perhaps the insurers will move in part to an advisory model where agents are paid for advice rather than only on the sale of products. Clearly life and disability insurance as well as annuities and other insurance related vehicles have their place. Life insurance companies also have a big “nut” to service based on their potential liability for policy benefits. (For more, see: How to Attract Millennial Investors.)

Are life insurers and Millennials really such strange bedfellows? Probably not. Millennials will grow older, marry, have children and other needs for life insurance and related products. Life Insurance companies I suspect will also learn a thing or two from studying Millennials and hopefully this will translate into better, lower cost products as well as perhaps a more consumer friendly delivery system. (For more, see: Retirement Planning the Millennial Way.)

How to Shop for Home Insurance

homeOwn a home? Looking to buy a home?

You’re going to need homeowners insurance to help you pay for damage to your home that requires the help of Roofing USA.There’s no getting around it, especially if you’ll be financing the purchase: Before handing you one dollar of their money, any lender will require proof that the property is insured. But for some reason, home insurance isn’t as talked-about as health, auto, or even life insurance. What do you need, and how do you find the best deal? We asked some insurance professionals to give us some of the lesser-known facts of home insurance life.

Get a CLUE

You probably know about your FICO score, but what about your home’s CLUE?

The Comprehensive Loss Underwriting Exchange (C.L.U.E. is the formal insurance acronym) is a database that holds a record of any claim made against a property. Underwriters can find the date of the insured loss, type of claim and how much the insurance company paid on the claim.

Laura Adams, senior insurance analyst at insurancequotes.com, says, “A tip for home buyers is to request that the seller provide a copy of the home’s CLUE report. It’s only available to homeowners and is free to pull every 12 months, similar to credit reports. This will help buyers understand what damage has occurred to a property.” And that’s good to know, because “a home’s claim history affects the [insurance] rate a new buyer must pay. Claims that a previous owner makes years before you buy his or her property can cause you to pay more.” Click here to get a copy of your home’s C.L.U.E. report.
Calculate the Needed Coverage

It’s a simple calculation, right? You need enough home insurance to cover the value of your home. Not so fast! You need enough insurance to rebuild your home, preferably at today’s prices. According to Adam Johnson at QuoteWizard.com, “Often shoppers make the mistake of insuring [a house just] enough to cover the mortgage, but that usually equates to 90% of your home’s value. Due to a fluctuating market, it’s always a good idea to get coverage for more than your home is worth. Purchasing replacement cost value over actual cash value is a great idea too. Replacement cost value ensures any damages will pay out enough to restore to its original condition.”

“You can rest easy knowing that you could rebuild your home after a major loss without worrying about depreciation, policy limits or insurance construction costs once you’ve repaired or replaced the damaged property,” agrees Joe Vahey, vice-president and personal lines product manager at Erie Insurance Group in Pennsylvania. “This is definitely a better option than actual cash value, which takes depreciation into account when calculating the amount of your reimbursement.”

Of course, replacement cost value policies are more expensive. In determining the amount of coverage you need, a good rule is to multiply the total square footage of your home by the cost of construction per square foot in your area. Local real estate agents, builder’s associations or insurance agents can help you find that number. Some of the factors that might affect your replacement cost include:

local construction costs
the house’s size and the type of exterior wall construction
whether some or all of it was custom built
local building codes for natural disaster-prone areas (earthquakes, hurricanes, landslides, etc.)

But be careful. Some policies might not fully cover the cost to rebuild your home to the newest building standards.
What Else Needs Insuring?

Home insurance isn’t just about replacing the home. Vahey advises considering your liability coverage, which protects you if somebody gets hurt on your property (and some instances away from your home, as well). Have at least $300,000 in coverage and possibly an umbrella policy too, which could add $1 to $5 million to your home and auto insurance policies. “Lawsuits aren’t as uncommon as you might think, and they have the potential to wipe out many people’s net worth,” he warns.

What if you live in a flood or hurricane area? Or an area with a history of earthquakes? Standard home insurance policies don’t normally cover these types of natural disasters. You’ll want riders for these. There’s also sewer and drain backup coverage you can add on, and even identity recovery coverage that reimburses you for expenses related to being a victim of identity theft.

Say your home suffers major-league damage. You can restore it to its original glory (thanks to your replacement cost value policy), but it’s going to take at least six months to a year to rebuild. Where will you live in the meantime? Loss of use coverage will reimburse you for the costs associated with staying in a hotel or renting an apartment.
Protecting Your Stuff

Home insurance doesn’t just cover your home. It also covers your personal possessions – some of them. Policies differ, but they will typically cover 50% to 70% of the amount of insurance you have on your home.

In order to know if you have enough coverage to replace your possessions, make periodic assessments of your most valuable items. According to John Bodrozic, co-founder of HomeZada.com, “Many consumers are under-insured with the contents portion of their policy, because they have not done a home inventory and added the total value to compare with what the policy is covering.”

He continues, “In addition, many items they own may not be covered, especially collectible items like art, jewelry, coins, wine, etc. The consumer needs to know the value of these collectibles and shop for the special riders above and beyond the standard policy.” (Click here for a A Quick Guide on How to Insure Jewelry).
Now Go Shopping!

Finally, contact local agents for quotes. According to Tom Austin, co-founder of Bungalow Insurance, a Philadelphia independent insurance broker, “there aren’t many online options (only about 5% of homeowners insurance was sold online), so if you want to get multiple quotes, you’ll have to see an agent.”

How many quotes? According Sarah Brown, insurance expert at Obrella.com, “Contact five or more companies so that you know what people are offering and you have leverage in negotiations. If you know how much coverage you need, they won’t be able to sell you unnecessary policies and you’ll be able to get the best price.”

Before deciding on a policy, make sure you understand your deductibles and how they work. Don’t get caught off guard when you file a claim (see Will Filing An Insurance Claim Raise Your Rates?). Deductibles for special events, such as hurricanes, could be a percentage of your home’s value, rather than a flat amount. Also check out Eight Financial Safeguards If Disaster Strikes and Hurricane Insurance Deductible Fact Sheet.