May, 2011
By Michael Kalscheur, CFP®
Senior Financial Consultant, Castle Wealth Advisors, LLC

When most people think about insurance, they think of an insurance agent. My mind always envisions Ned Ryerson from Groundhog Day. If you don’t remember him, click here to see a clip from the movie:

However, don’t let the stereotypical insurance agent image scare you away from reviewing and understanding a very important part of your overall financial picture. We have written about Property & Casualty Insurance (i.e. Home, Auto and Umbrella) before, so this month we’ll focus on three other important areas of insurance: Disability Insurance, Health Insurance and Life Insurance.

Disability Insurance – For most people, our biggest asset is not our 401(k), our home or even our business; it is our annual earnings. Our experience, knowledge and future working years have immense value. If an accident or illness limits or eliminates our ability to work and take advantage of this value, it would have catastrophic results for us and our families.

Most people in their 20s and 30s don’t think about being injured and not being able to work, but the statistics show that there is a 20% chance that a person will be disabled for at least a year by the age 65.

Enter disability insurance, which protects your lifetime earning ability. There are some important things to remember about disability insurance:

  • Your employer may not provide disability insurance at all. In 2009, less than half of all U.S. companies provided long-term disability insurance.
  • Even if your employer does provide it, coverage may be inadequate. Most disability policies only cover 60% of base salary, and also have monthly caps. That means an executive making $225,000 per year ($150,000 salary and $75,000 bonus) may only have $90,000 of disability coverage, or even less if there is a monthly cap.
  • How you pay for disability affects how the benefits are taxed. If you pay for your own disability insurance policy, and you use after-tax dollars, the benefit payments are tax-free. However, if you pay the premium with pre-tax dollars, the benefits are fully taxable. There is a big difference between $90,000 taxable income vs. $90,000 tax-free.
  • The fine print can bite you. One important difference is known as “own occ.” vs. “any occ.” The first policy pays benefits if you are not able to do the specific job you have been trained to do (own occupation), while the latter policy only protects against not being able to work at all (any occupation). For example, there is a significant difference being an orthopedic surgeon vs. a pediatrician. If an auto accident leaves you unable to be a surgeon, but you can be a pediatrician, the “any occ.” policy would not pay a benefit and you are left with a 50% pay cut.
  • There are ways to save on the cost of a disability policy. With auto insurance you can lower your premium by taking a larger deductible. With disability insurance your deductible is called the “elimination period.” This is the time between the date of disability and the first payment. Increasing this from 30 days to 90 days, or even 180 days, can save significant dollars. Also, joining together with other people under a group plan (3+ people) can save 10% - 15%.

Health Insurance - There has been much discussion over the government healthcare program that was signed into law last year: The Patient Protection and Affordable Care Act (aka Obamacare). This new law makes substantial changes in how healthcare is funded and who is covered. However, most of the significant changes would be phased in over several years. We could devote the entire article just to this topic, so here are just some of the highlights:

  • Pre-existing conditions will not affect eligibility or policy pricing.
  • Medicaid eligibility is expanded to cover more people, with people earning up to 400% of poverty level receiving subsidies on a sliding scale.
  • Creation of Healthcare Exchanges, where people and companies can purchase insurance.
  • Starting 1/1/2013, a surtax on investment income of 3.8% will apply to individuals earning more than $200,000 ($250,000 for couples).
  • If you do not purchase insurance, you will have to pay a fine/tax (the constitutionality of this is currently being fought over in the courts).

Until the dust settles, you still need to do something about health insurance. If your employer provides health insurance (less than 60% do), you may have only one option, and chances are you will be paying part of the premium, a deductible, or both.

If you have more than one employer option, or you are on your own for health insurance, consider these tips:

  • Shop around for coverage- Different companies can have significantly different prices, even on the same coverage, so get quotes from multiple agents and websites. If you are in good health, you may be able to find coverage for less than what your employer provides.
  • Take advantage of pre-tax savings – Ask your employer about Section 125 or Cafeteria Plan options where you can have money taken out of your paycheck pre-tax to pay for out-of-pocket expenses. Healthcare Savings Accounts (HSA’s) also qualify for pre-tax treatment.
  • Consider a larger deductible – Like any insurance, the larger the deductible the less risk the insurance company has and the lower the premium.
  • Consider all costs, not just the monthly premium – Deductibles and/or copayments can add significant costs to any policy. Always calculate a “worst case scenario” when comparing insurance policies and make sure you have savings set aside to cover everything.
  • Shop around for services too – Do you need to go to the ER for your hurt arm, or can you save some money and have an X-ray at the urgent care center? If the surgery is not urgent, does the local hospital provide the best service or are you better off going out of town to a specialist? We ask for how much things cost ahead of time for everything else in our lives – why should healthcare be any different?

Life Insurance – There is an old rule of thumb in life insurance: buy 10x your annual salary in life insurance. This actually makes sense for a breadwinner of the family who has some assets, but what about somebody just starting out, or an empty nester, or a retiree with significant assets? Nobody knows how this “rule” was started (probably a life insurance agent), but it shows how generic advice can be good, not so good, or bad.

Many people don’t like to think about life insurance because of guys like Ned, fear of their own mortality or just downright confusion about all the different kinds of policies and options. Here are three simple questions to ask when considering life insurance:

  • Term or Permanent? – Term insurance covers you for a set time period (10 years, 20 years, etc.), while permanent insurance covers you for your entire life. Remember to match your type of insurance with the type of need you have (see next bullet below). If the need is temporary, term is the way to go. If the need is permanent, such as leaving a liquid inheritance, then match your insurance accordingly. My experience is that 90% of people only have temporary needs.
  • How much is enough coverage? – Don’t go by a rule of thumb. Calculate your own particular need by taking into consideration three things - current debt, future cash needs (i.e. college for the kids) and income replacement. Net out what Social Security will provide and you have a good idea of how much coverage you need at this point in your life (the amount will change over time).
  • Is life insurance an investment? – No. Life insurance is life insurance and investments are investments. Granted, permanent insurance can have the cash value invested in mutual funds, but this is for the life of the insurance policy. Don’t be talked into funding a life insurance policy to pay for college or supplement your retirement.
  • Should I talk to an agent? – Yes, but only those that represent multiple insurance companies. Independent agents will be able to shop around with different companies and find the right company for you. This is particularly important if you smoke or take medications, as pricing can vary significantly.

Hopefully with this article we have accomplished our goal of providing some useful, actionable information on your insurance needs. If you have further questions, and want some objective advice, please don’t hesitate to contact us directly.

Michael Kalscheur, CFP®, is a Senior Financial Consultant at Castle Wealth Advisors, LLC. Castle specializes in helping families and closely-held business owners with strategies to protect and transition family assets from one generation to the next. Castle’s senior partners also work with clients throughout the country in making logical decisions to help them fulfill their personal and business financial goals. For more information visit, call 1-888-849-9559 or contact Michael directly at .