Seeing why most working people need disability coverage
Making the most of your health
During your working years, especially your earlier working years, your future income earning ability is probably your most valuable asset. Consider that the typical person in his 20s and 30s has many years (decades, in fact) ahead of him to earn money to feed and clothe himself and make other expenditures (for example, transportation, taxes, medical bills, and vacations) and save for the future. Unless you’re independently wealthy (or have a deep-pocketed relative ready to provide long-term care for you if you hit hard times), you should carry the proper types and amounts of insurance to protect yourself and your family if something occurs to you that would affect your ability to earn a living. In this chapter, the focus is on protecting income you’re earning while employed.
Insurance isn’t free, of course. Like other companies, insurance companies are in business to turn a profit. So you want to make sure you obtain proper insurance protection at a competitive price and buy only the coverage you need.
This chapter dives into the details regarding life and disability insurance you may need. It also discusses your employment income and how best to protect it. And it covers the importance of making the most of your health to minimize the chances of future insurance claims. If your health isn’t good as you enter retirement, you’re going to have more issues to face than just those dealing with your personal finances. So getting your health in order is important.
Assessing Your Need for Life Insurance
Needing insurance is kind of like needing a parachute: If you don’t have it the first time you need it, chances are you won’t need it again. Regarding your need for life insurance, of course, you don’t get second chances (unless you’re considering near-death experiences, and the life insurer doesn’t pay out for those). So if you “need” life insurance, you should get it as soon as possible.
The following sections explain what life insurance can do for you. We also help you determine whether you need insurance, and if you do, how much you should consider buying.
Understanding the purpose of life insurance
The primary reason to consider buying life insurance is to provide financially for those who are dependent on your employment income. However, just because you have a job, earn employment income, and have dependents (children, a spouse, and so on) doesn’t mean that you need life insurance.
How do you know whether you need life insurance coverage? Your current financial situation is an important factor in determining your need. If you haven’t already assessed your retirement plan and tallied your assets and liabilities, be sure to read Book 1, Chapter 6.
If you’re still working, aren’t financially independent, and need your current and future employment income to keep up your current lifestyle — and you’re saving toward your financial goals — life insurance probably is a good choice. If others depend on your employment income, you generally should get term life insurance coverage (discussed in the later section “Figuring out what type to buy”).
On the other hand, you may find that even though you’re still working, you’ve achieved financial independence. In other words, you’ve accumulated enough assets to be able to actually retire and no longer need to earn employment income.
For example, consider one extreme: Microsoft founder Bill Gates has dependents and he doesn’t need life insurance to protect his current income. That’s because he has billions in investments and other assets to provide for his dependents. Of course, the rest of us aren’t Bill Gates! But the crucial point is that if you’ve accumulated significant enough assets compared to your annual living expenses, you may not need life insurance.
Determining your life insurance need
Each person’s circumstances vary tremendously, so this section doesn’t tell you specifically how much life insurance to get. Instead, it shows you the factors you need to look at to determine that amount. You’re not about to get a bunch of general rules like getting ten times your annual income in coverage, especially for those approaching or already in their senior years. The reason? Each person’s circumstances can vary tremendously among many factors, such as
Your assets: Generally speaking, the more you have relative to your income and obligations, the less life insurance you need.
Your debts: Of course, not all debts are created equal. Debts on real estate or small businesses tend to have lower interest rates, and the interest is often tax-deductible. But the more of this type of debt you have, the more life insurance you may need. On the other hand, consumer debt — such as credit card and auto loan debt — tends to be at higher interest rates, and the interest generally isn’t tax-deductible. But again, the more of this debt you have, the more life insurance you’re likely to need.
Your health and the health of your family members: If you have major medical problems or have a family member who’s ill or who has special needs, you may need more coverage.
The number of children you need to put through college: A four-year college education, especially at private schools, is a major expense. So if you have kids to put through school — and they may attend costly schools — you could be talking some really big bucks. And you face even bigger bucks if you want to help them through graduate or professional school after college.
Whether you’ll have elderly parents to assist: Of course, this factor is difficult to predict, but you should have some sense of your parents’ physical and financial health. If you don’t, try to broach the topic in a sensitive fashion with them.
After completing your retirement planning (see Book 1, Chapter 6), you should have the current financial information you need to begin your calculations for how much life insurance you need. Here’s a quick and simple way to determine how much life insurance to consider buying:
Determine your annual after-tax income (from working, not investments).
You can find this number on your tax return or W-2 form from the past year. (The reason you work with after-tax income is because life insurance death benefit payouts aren’t taxed.)
Determine the amount of money you need to replace your income for the appropriate number of years.
You can find this amount by simply using the information in Table 1-1.
Consider your overall financial situation and whether you need to replace all your income over the time period you chose in Step 2.
High-income earners who live well beneath their means may not want or need to replace all their income. If you’re in this category and determine that you don’t need to replace all your income, apply an appropriate percentage.
Before you rush out to buy life insurance, make sure you first assess how much coverage you may have through your employer and through Social Security. The amount of coverage you have could reduce the amount you need to purchase independently. Employer-based life insurance coverage is an easier issue to deal with compared to Social Security survivor’s benefits.
Employer-based life insurance
Some employers offer life insurance coverage. If it’s free, by all means factor it into your calculations for how much additional coverage you may need. (Refer to the preceding section, “Determining your life insurance need,” for more on calculating the coverage you need.)
For example, if your employer gives you $50,000 in life insurance without cost — and using Table 1-1 you calculated you should have $300,000 of coverage — simply subtract the $50,000 your employer provides to come up with $250,000 of life insurance you need to get on your own.
Keep in mind, however, if you leave the employer, you’ll most likely lose the provided insurance coverage. At that time, if your needs haven’t changed, you’ll need to replace the employer coverage.
If you have to pay out of your own pocket for employer-based life insurance, you can probably pay less elsewhere. That’s because group life plans tend to cost more than the least expensive individual life insurance plans.
Here’s one important caveat: You must be in good health to get life insurance on your own (at a competitive price, if at all). If you have health problems, group coverage may be your best bet.
Social Security survivor’s benefits
Social Security can provide survivor’s benefits to your spouse and children. However, if your surviving spouse is working and earning even a modest amount of money, she’s going to receive few to no survivor’s benefits.
Prior to reaching Social Security’s full retirement age, or FRA, your survivor’s benefits get reduced by $1 for every $2 you earn above $16,920 (the limit for 2017). This income threshold is higher if you reach FRA during the year. For example, for those reaching FRA during 2015, their Social Security benefits are reduced by $1 for each $3 they earn above $44,880 until the month in which they reach FRA. (Check out Book 4, Chapter 4 for more on FRA and Social Security benefits.)
If you or your spouse anticipate earning a low enough income to qualify for Social Security survivor’s benefits, you may want to factor them into the amount of life insurance you calculate in Table 1-1. For example, suppose that your annual after-tax income is $30,000 and Social Security provides a survivor’s benefit of $12,000 annually. You calculate the annual amount of life insurance needed to replace like this: $30,000 – $12,000 = $18,000.
Contact the Social Security Administration (SSA) to request Form 7004, which gives you an estimate of your Social Security benefits. To contact the SSA, call 800-772-1213 or visit www.ssa.gov. You also can set up a “my Social Security” account on the Social Security website that lets you obtain updated benefits estimates, verify your earnings, and take other actions.
Figuring out what type to buy
When looking to buy life insurance, you basically have two choices: term life insurance and cash-value insurance. The following sections outline these two options and their differences and help you determine which may be better for your circumstance.
Term life insurance
Term life insurance is pure life insurance protection. It’s 100 percent life insurance protection with nothing else, and, frankly, in our opinion, it’s the way to go for the vast majority of people. Agents typically sell term life insurance as temporary coverage.
Remember that the cost of life insurance increases as you get older. You can purchase term life insurance so that your premium steps up annually or after 5, 10, 15, or 20 years. The less frequently your premium adjusts, the higher the initial premium and its incremental increases will be.
The advantage of a premium that locks in for, say, 10 or 20 years is that you have the security of knowing how much you’ll be paying over that time period. You also don’t need to go through medical evaluations as frequently to qualify for the lowest rate possible. Policies that adjust the premium every five to ten years offer a happy medium between price and predictability.
The disadvantage of a term life insurance policy with a long-term rate lock is that you pay more in the early years than you do on a policy that adjusts more frequently. Also, your life insurance needs are likely to change over time. So you may throw money away when you dump a policy with a long-term premium guarantee before its rate is set to change.
Be sure that you get a policy that’s guaranteed renewable. This feature assures that the policy can’t be canceled because of poor health. Unless you expect that your life insurance needs will disappear when the policy is up for renewal, be sure to buy a life insurance policy with the guaranteed renewable feature.
Permanent coverage
Whole life insurance combines life insurance protection with a guaranteed rate of return backed by the insurance company, and usually pays dividends based on the profits of the insurance company. Variable life insurance combines a life insurance policy with an underlying investment account. For a given level of coverage, permanent coverage costs substantially more than term coverage, and some of this extra money goes into a low-interest investment account for you. This coverage appeals to people who don’t like to feel that they’re wasting money on an insurance policy they hope to never use.
The reality is that people who buy term insurance generally hold it as long as they have people financially dependent on them (which usually isn’t a permanent situation). People who buy permanent insurance are more likely to hold onto their coverage until they die.
Insurance agents often pitch cash-value life insurance over term life insurance. Cash-value life insurance costs much more and provides fatter profits for insurance companies and commissions to the agents who sell it. So don’t be swayed to purchase this type unless you really need it.
Cash-value life insurance can serve a purpose if you have a substantial net worth that would cause you to be subject to estate taxes. Under current tax law (which could, of course, change), in 2017, you can leave up to $5.49 million — free of federal estate taxes — to your heirs. Buying a cash-value policy and placing it in an irrevocable life insurance trust allows the policy’s death benefits to pass to your heirs free of federal estate taxes.
Choosing where to buy life insurance
If you’re going to purchase life insurance, you need to know where to go. You can look at the following two places:
Your local insurance agent’s office: Many local insurance agents sell life insurance, and you certainly can obtain quotes and a policy through them. As with any major purchase, it’s a good idea to shop around. Don’t get quotes from just one agent. Contact at least three. It costs you nothing to ask for a quote, and you’ll probably be surprised at the differences in premiums.
As discussed earlier in this chapter, many agents prefer to sell cash-value policies because of the fatter commissions on those policies. So don’t be persuaded to purchase that type of policy if you don’t really think it’s right for you.
An insurance agency quote service: The best of these services provide proposals from the highest-rated, lowest-cost companies available. Like other agencies, the services receive a commission if you buy a policy from them, but you’re under no obligation to do so.
To get a quote, these services ask you your date of birth, whether you smoke, some basic health questions, and how much coverage you want. Services that are worth considering include
Protecting Your Employment Income: Disability Insurance
Long-term disability (LTD) insurance replaces a portion of your lost income in the event that a disability prevents you from working either permanently or temporarily for an extended period of time. For example, you may be in an accident or develop a medical condition that keeps you from working for six months or longer. During your working years, your future income earning ability is likely your most valuable asset — far more valuable than a car or even your home. Your ability to produce income should be protected or insured.
Even if you don’t have dependents, you probably still need disability coverage. After all, aren’t you dependent on your income?
The following sections point out why you should have disability insurance and help you determine the type of coverage you need to protect your income.
Why most people lack disability insurance and why you need it
Most folks lack long-term disability insurance. The two main reasons people don’t obtain this important type of insurance are as follows:
Their company doesn’t offer it. Just three in ten workers are offered access to an LTD plan. Only 19 percent of those working for smaller employers — those employers with fewer than 100 employees — have access to an LTD plan. And just 6 percent of part-time workers have access to LTD insurance.
They don’t enroll. Even among those in the minority who have access to LTD, many people don’t enroll. A common reason folks bypass coverage is that they believe their chances of disability are rare. Another perception is that only old people become disabled. Both of these perceptions are wrong.
Why should you spend money and buy LTD? The answers are simple. If you want to protect your future employment income, an LTD plan is one of the best ways to do so. Here are some reasons you should get LTD:
Life is uncertain. You can’t know when and what type of disability you may suffer. That’s because many disabilities are caused by medical problems (arthritis, cerebral palsy, diabetes, glaucoma, multiple sclerosis, muscular dystrophy, stroke, and so on) and accidents (head injuries, spinal injury, loss of limb, and so on). Although older folks are at greater risk for more severe medical problems, plenty of people in their 20s, 30s, and 40s suffer accidents or major medical problems leading to disability.
Most applicants for Social Security disability benefits coverage are turned down. You can receive payments only if your disability will result in death or if you aren’t able to perform any substantial, gainful activity for more than a year.
Even if you do qualify, your state’s disability plan and Social Security insurance programs won’t provide you with sufficient coverage. Many people are mistaken in thinking that their state’s disability plan and the Social Security disability insurance program will take care of them if they become disabled. Unfortunately, those programs don’t provide adequate coverage. State programs typically pay benefits for only one year or less, which isn’t going to cut it if you truly suffer a long-term disability that lasts for years. Although one year of coverage is better than none, the premiums for such short-term coverage often are higher per dollar of benefit than through the best private insurer programs.
Similarly, although Social Security disability benefits can be paid long term, remember that these payments are intended to provide for only basic subsistence living expenses. Those earning more than $20,000 per year find that less than half of their income is replaced by Social Security disability payments. Basically, the higher your annual income was while working, the smaller the percentage of that number will be made up by your Social Security benefits.
Workers’ compensation, if you have coverage through your employer, won’t pay benefits at all if you get injured or become sick away from your job. Such narrow coverage that pays benefits only under a limited set of circumstances isn’t the comprehensive insurance you need.
Identifying needed disability coverage
Unless you’re already financially independent, you need long-term disability insurance during your working years. Generally speaking, you should have LTD coverage that provides a benefit of approximately 60 percent of your gross income. Because disability benefits payments are tax-free if you pay the premium, they should replace your current after-tax earnings.
If you earn a high income and spend far less than that, you may be fine purchasing a monthly benefit amount less than 60 percent of your income.
We recommend that your disability policy contain the following:
An “own occupation” definition of disability: This definition allows you to collect benefits if you can’t perform your regular occupation. For example, if you work as an accountant, your disability policy shouldn’t require you to take a job as a brick layer or retail worker if you no longer can perform the duties of an accountant.
A noncancelable and guaranteed renewable clause: This clause guarantees that your policy can’t be canceled if you develop health problems. If you purchase a policy that requires periodic physical exams, you could lose your coverage when you’re most likely to need it.
A financially appropriate benefit period: Obtain a policy that pays benefits until an age at which you would become financially self-sufficient. For most people, that would require obtaining a policy that pays benefits to age 65 or 67 (when Social Security retirement benefits begin).
If you’re close to being financially independent and expect to accomplish that or retire before your mid-60s, consider a policy that pays benefits for five years.
A high deductible/waiting period: The waiting period is the “deductible” on disability insurance. It’s the time between your disability and when you can begin collecting benefits. It’s recommended that you take the longest waiting period that your financial circumstances allow, because doing so will greatly reduce your policy’s premiums. A waiting period of at least 90 or 180 days is recommended.
Residual benefits: This feature pays you a partial benefit if you have a disability that prevents you from working full time.
Cost-of-living adjustments: This provision automatically increases your benefit payment after you’re disabled by a set percentage or in step with inflation.
Shopping for disability coverage
After you understand the importance of having good disability insurance, hopefully you’ll be motivated to close the deal and buy it. Here are some ways to shop and compare so you end up with good coverage at a competitive price:
Check with your employer. Group disability plans can greatly accelerate your shopping process and generally offer decent value. Unlike with life insurance plans, group disability plans tend to offer more bang for your buck.
Peruse professional associations. For many self-employed people, if you find the associations that exist for your occupation or profession, you may well discover a fine disability plan. Just be sure to compare their offerings to whatever individual policy proposals you find.
Avail yourself of agents. Get referrals to insurance agents in your area who specialize in disability insurance. Using the policy guidelines in the preceding section, “Identifying needed disability coverage,” solicit and evaluate proposals.
The insurance company you choose should have strong financial health with the leading credit rating agencies.
Investing In and Protecting Your Health
Your health is one of the most important components of a quality life. So as you enter your senior years, if you’re not healthy, squaring away your personal finances can be much more difficult. After all, if you’re facing serious health issues and costly doctor and hospital bills, your finances probably won’t be as healthy either.
To make wise choices about your health — so you’re in good shape to deal with your finances during your senior years — you need to make sure you’re informed. The good news is that knowledge and information about healthy living is readily available so you can make smart, health-conscious choices.
The following sections give you an overview and pointers about what you can do to ensure that your health is in order now and in the years ahead. With your good health in check, you can then enjoy retirement and be in a better financial situation. These sections rely on Dr. Mehmet Oz and Dr. Michael Roizen for some help. They’ve coauthored numerous personal health books that are helpful for seniors.
Take care of your ticker
One of the most important aspects of healthy living is ensuring that your heart is in tiptop shape. You can start by choosing to eat the following foods, which have heart-healthy and anti-inflammatory properties:
Alcohol: You must be careful with the amount (and type) of alcohol you drink. Women can drink one drink per day while men can partake of two. The benefits of alcohol? It raises levels of healthy HDL cholesterol and also helps you to wind down so your blood pressure can do the same. (Just be sure not to drink too close to bedtime, because alcohol can disrupt sleep in some folks.) The best alcohol to choose is red wine with its abundant antioxidants.
Dark chocolate: Eating dark (not milk) chocolate may lower blood pressure, increase good HDL cholesterol, and lower nasty LDL cholesterol. Interesting fact: The Kuna Indians (who live near Panama) drink more than five cups of flavonoid-rich cocoa a day. They have little age-related hypertension.
Extra-virgin olive oil: Extra-virgin olive oil contains healthy phytonutrients and monounsaturated fats, which boost good HDL cholesterol. The docs recommend that about 25 percent of your diet come from healthy fats (for example, olive oil, avocados, and nuts).
Fish: Fatty fish, such as mahi-mahi, catfish, flounder, tilapia, whitefish, and wild, line-caught salmon, are rich in omega-3 fatty acids that reduce triglycerides in your blood. High triglycerides can cause plaque buildup in your arteries. Omega-3s also help reduce the risk of arrhythmia (irregular heartbeat) after a heart attack, decrease blood pressure, and make platelets less sticky, which reduces clotting. The docs recommend three portions of fatty fish per week.
Fruits and veggies: Many fruits and vegetables — for example, red grapes, cranberries, tomatoes, and onions — contain powerful antioxidants called flavonoids and carotenoids.
Garlic: A clove a day is believed to be beneficial to help thin your blood and lower blood pressure. You can take 400 milligrams in pill form (called allicin) if you don’t care for the taste of garlic or its effects on your breath.
Magnesium-rich foods: Whole-grain breads and cereals, soybeans, lima beans, avocado, beets, and raisins help lower blood pressure and reduce arrhythmias by expanding the arteries. Strive to get 400 milligrams of magnesium each day from your food.
Exercise (and sweat)
Exercise makes you feel (and look) better. To keep your heart healthy, try to walk about 30 minutes daily and get at least one hour of sweaty activity, such as an aerobics class (ideally you’d break that hour into three 20-minute sessions).You should get your heart pumping up to about 80 percent of its age-adjusted maximum (220 minus your age) for extended periods of time, according to the docs.
If you like to jog, keep the following pointer in mind: Besides having to dodge SUV-driving lunatics yammering on cellphones, running on hard asphalt isn’t good for your body. The older you get, the more careful you should be about the stresses and strains you’re placing on your joints. You should go for low-impact activities, such as swimming, cycling, or using an elliptical trainer to elevate your heart rate without stressing your joints.
Exercise also has other benefits. As you age, your sense of (and ability to) balance slowly declines. Falls are one of the leading causes of injury and death among the elderly. More than one in three adults age 65 and older fall each year in the United States. Among older adults, falls are the leading cause of injury deaths. They’re also the most common cause of nonfatal injuries and traumatic hospital admissions.
Naturally, many people who fall develop a fear of falling. This fear may cause them to limit their activities, leading to reduced mobility and physical fitness and increased risk of falling.
To improve your balance and develop some strength, try the following activities:
Crunches: Performing crunches on an unstable surface, such as on a stability ball, forces your body to balance.
Light weight lifting: Use dumbbells instead of weight machines, because dumbbells force you to balance the weights better.
Standing exercises on one leg at a time: Doing these exercises helps you develop better balance.
Step-type moves: Activities such as lunges or step-up moves require you to balance your weight.
Hydrate with good-quality H2O
You want to drink plenty of water to realize a variety of health benefits, especially for your digestion and intestines. Drinking water, preferably filtered, lubricates everything, allowing food to more easily slide through your system. It also quells hunger and fights bad breath. Furthermore, you need to regularly drink water as you age because your body’s ability to detect thirst weakens as you get older.
The more active and larger you are, the more water you’ll need to drink. The best indicator for whether you’re drinking enough water is the color of your urine; drink enough water that your urine is light yellow. (Note: If you take vitamins, they may turn your urine bright yellow even if you are drinking enough water.)
For Dummies author Eric Tyson’s website (www.erictyson.com) has a summary of research on bottled water quality and demonstrates how most bottled waters are a waste of money. Your most effective and healthy avenue is to install a water filtration system at home to improve the virtually free tap water you’re already receiving.
Include fiber in your diet
If you’re eating healthy foods like fruits, vegetables, whole grains, oats, and beans, you’ll also be eating valuable fiber. (Some cereals have a decent amount of fiber as well.) The combination of fiber and water helps move food easily through your system without putting too much pressure on your intestines. Doctors recommend that men get 35 grams a day and women 25 grams.
The other often-overlooked benefit of eating fiber-rich foods and being well hydrated is that the combination makes you feel full. Eating too much in general and eating too much of the wrong foods leads to obesity, heart disease, diabetes, and a variety of related problems.
Manage your stress
Stress does horrible things to your body. You can’t eliminate all stress, of course (and, besides, doing so would make life dull). However, you can do plenty to minimize it and turn it to your advantage. You can make the following health-conscious choices to keep stress under control:
Identify the sources of your stress. You can’t manage stress if you’re not clear on the real sources.
Focus on the moment. Spend time every day thinking about the here and now and not brooding over yesterday or worrying about tomorrow. Also, notice the things that most people tend to ignore — like breathing, bodily sensations, and emotions.
Take good care of your health. Make sure you have the other aspects of your life in order, such as getting enough sleep, eating well, and exercising. When you don’t, you’re more vulnerable to the stress.
Get moving. Exercise is one of the best stress (and depression) busters ever invented. See the earlier section “Exercise (and sweat)” for more information.
Do the opposite. Whenever people feel negative emotions, such as fear or anxiety, they tend to avoid them and withdraw. If you try experiencing the opposite emotions, you can start to feel better. So, for example, if you’re upset with someone, try to be empathetic instead of lashing out.
Focus on and relax your muscles. Tense and then relax the muscles in one part of your body (such as your legs, your arms, your face, and so on) at a time. Doing so reduces stress that you’re storing in your body.
Take some deep breaths. Take ten deep breaths in the morning and another ten at night — and as many as needed in between for stress relief. Find a position that helps you relax. For example, lie on the floor, flat on your back, with one hand on your chest, and another on your stomach. Breathe in deeply and slowly, picturing your lungs filling with air. When your lungs feel full, slowly breathe out.
Get your calcium
Most people don’t get enough calcium for optimal bone density. Most folks need about 1,500 milligrams daily from foods or supplements. So to reach your optimal health, make sure you’re taking in calcium. Foods plentiful in calcium include whole grains, leafy green vegetables, and nuts. It’s also often helpful to get some calcium from chewable calcium-citrate tablets.
Along with your calcium, take 1,000 international units (1,200 for women over age 65) of vitamin D daily. Doing so helps your body absorb the calcium you take in. In addition, if you aren’t getting it in your diet, you want to add 400 milligrams of magnesium daily to prevent the constipation that calcium can cause. See the list of foods that are particularly high in magnesium in the earlier section “Take care of your ticker.”
Evaluating your need for life insurance
If you’re still working, aren’t financially independent, and need your current and future employment income to keep up your current lifestyle — and you’re saving toward your financial goals — life insurance probably is a good choice. If others depend on your employment income, you generally should get term life insurance coverage (discussed in the later section “
If you have to pay out of your own pocket for employer-based life insurance, you can probably pay less elsewhere. That’s because group life plans tend to cost more than the least expensive individual life insurance plans.
The disadvantage of a term life insurance policy with a long-term rate lock is that you pay more in the early years than you do on a policy that adjusts more frequently. Also, your life insurance needs are likely to change over time. So you may throw money away when you dump a policy with a long-term premium guarantee before its rate is set to change.