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James A. Daniel, CFP®
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Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and in the U.S., which it
awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

 

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tafThe Advisory Firm Newsletter:  July 2011

INSURANCE: How much is enough?

 

I realize insurance isn't the most interesting topic for a newsletter, but as part of a complete financial plan everyone should understand the basics regarding the various forms of personal coverage. While I won't attempt to answer the question of "how much" , hopefully the information below will allow you to better make that decision.

Bonus Link: As a bonus for those that read through the insurance primer, I have included a link at the bottom that will put a smile on your face and a tear in your eye!

 

Life, Disability and Long Term Care Insurance

The 3 major forms of personal insurance coverage are Life, Disability and Long Term Care. While the first two are generally offered through employer group plans, all 3 are readily available from Insurance companies on an individual basis. Below is a brief primer on what to consider when figuring how much is enough.........

Life Insurance

Here is a brief description of the various "types" of life insurance coverage:

1. Term Life: you can think of this as "renting" insurance. A term policy doesn't build cash value but provides a fairly high benefit during the term period. Usually can be bought for a certain period of time such as 10, 15, 20 or even 30 year term during which time you are covered for the benefit.

2. Whole Life: Generally considered a "permanent" form of life insurance where you make premium payments for life. A cash value builds up in these policies and you have the option of accepting a "paid up" benefit if you choose to stop making monthly premium payments at some point.

3. Universal Life: Similar to whole life in that it is permanent form of coverage, but usually higher benefit amounts with the flexibility of putting a larger lump sum single premium payment or paying premiums for a fixed period of time such as 20 years. Cash value is generally invested by the insurance company which promises a certain minimum rate of return.

4. Variable Universal Life: Similar to Universal accept the policy holder is responsible for investing their own cash value in a portfolio of funds in the "separate account". Cash values are not guaranteed and the policy owner assumes investing risk.

So, how much and what type of coverage is right for you? Well, only your financial planner can determine an exact level of coverage, but a good rule of thumb is 10 times income during your high liability working years**. Most commonly folks will get basic group coverage through their employer and then seek out supplemental life coverage on their own. Why seek out coverage outside your employer? Group Life coverage is generally not portable, meaning if you leave that job your life coverage goes away. There is never any guarantee you can get outside coverage, but the best time to apply is when you don't need it!

**Not a recommendation.

Disability Insurance:

Disability insurance is basically insurance for your paycheck. If you are ill or injured for an extended period of time and miss work, disability insurance would cover a portion of your income. Many of you are familiar with this coverage through your employer. You may have STD (short term disability) and LTD (long term disability) coverage of up to 60% of your salary. The Short Term kicks in after a waiting period of 2 to 4 weeks and lasts in most cases for 3 months the Longer term generally kicks in after a 3 month waiting period and will go to age 65 depending on policy specifics. Much like group life coverage, you need to evaluate your group coverage to determine if 60% of your salary would cover your cashflow needs if disabled. If not then shopping for an individual LTD policy to supplement your group coverage might be a good idea.

One of the most confusing aspects of disability coverage is how it is defined by the insurer. Some cover your ability to work in your occupation, and some define disability as the ability to work in any occupation. Big difference there, so be aware when shopping for coverage. Here are some helpful policy terms and definitions:

- own occupation: considered disabled if unable to perform the duties of policy owner occupation. This is the most sought after definition and usually has a time period such as 5-year Own Occupation, where the insurer will pay benefits for a minimum of 5 years and then reevaluate to determine if you can perform another occupation which would reduce your monthly benefit.

- modified own occ: same as above but if you do go out and get another job outside your former occupation the insurer will quit paying.

- any occupation: considered disabled and paid benefits if unable to work "any" occupation for which person is reasonably suited by education, training and experience.

Here are a couple of other insurance terms you need to know along with the definitions:

Noncancellable: simply means that once you issued the policy the insurer cannot take it away and cannot change the premium from what is stated in the contract.

Guaranteed Renewable: similar to above in that once issued you have the right to keep coverage as long as you make the premium payments, however the insurer could potentially raise future rates as long as they make the change on the entire policy class.

*Keep in mind that disability insurance is there to insure your income. If you are not working you won't be able to get coverage.

 

LONG TERM CARE:

Long Term Care insurance is designed to pay a daily or monthly benefit if you need assistance with Activities of Daily Living (ADL's) or with Cognitive Impairment. While we immediately think of nursing homes, LTC insurance will cover a variety of levels of care: Home Care, Assisted Living, Custodial Care, Intermediate Care and Skilled Nursing Care. Insurance companies all differ in what they cover and the requirements for benefits, so it is very important to know what the policy details are before buying.

As mentioned above LTC insurance is designed to help offset the cost of nursing care. Many get confused and expect Medicare to pay, which it only will if you are discharged from a hospital directly to a nursing home. At which time it will cover you for approximately 90 days. After that you are on your own. By having a LTC policy you offset that risk to an insurance company for a certain length of time. (policies have typical benefit periods of 3 to 10 years, obviously the longer the benefit period the more expensive it will be)

Long Term Care insurance has seen quite a few changes over the past year, including several insurers dropping out of the space and/or raising rates on both new and existing policy holders. On the positive side many carriers have come out with new products such as a hybrid whole life policy that contains a linked-benefit type LTC rider. You have the option now of doing 1035 tax free exchanges from an annuity or cash value life policy into this new type vehicle.

Once again not every form of insurance works for everyone. Each person has unique circumstances which determine if a certain type of coverage is beneficial. The best advice would be to have your financial planner take a look at your overall financial situation and make recommendations on the type of coverage needed.

 

 

Outside the Financial World:

Like most of you I have hit overload and maximum frustration with politics and the World Economy. Sometimes you need something to provide a reset and put things in perspective. On Thursday, my family ventured down to the ballpark to see the Braves play. I am a Braves fan, but the real reason we were there was in support of a neighborhood girl performing the National Anthem. I hope that Yahoo keeps this link up for awhile:

Lily Anderson sings National Anthem.

Read the story and take a listen. It will make your day.

 

 

© 2011 The Advisory Firm. All Rights Reserved.


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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.