INSURANCE PLANNING
Your insurance coverage is an important component in helping to ensure that your family's financial security is protected. We've included several articles on the topics of insurance planning:
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If you have any questions or would like help assessing your
insurance coverage, please contact us at:
1-800-553-6700 or CSIC@CapitalSecurities.com
Assessing
Your Insurance Coverage
There are important reasons to reassess all your insurance coverage periodically. Over time, your insurance needs are likely to change. Insurance companies offer innovations and riders that might be applicable to your situation. Reevaluating your insurance can lead to lower premiums with coverage better suited to your situation. Keep the following points in mind when reviewing your insurance:
Life insurance - When assessing your life insurance coverage, you should first decide why you need the coverage. The primary purpose of life insurance is to ensure that your family has adequate resources to maintain their current lifestyle if you die. But life insurance can also serve other purposes, such as providing liquidity to an estate or enabling business partners to buy out a deceased partner's heirs. Make a detailed analysis of how much insurance you need, then carefully decide whether you should purchase term or cash-value insurance. See the article "The Life Insurance Decision" for more details.
Health insurance - Be sure to review all health options offered by your employer. Don't assume that your health insurance coverage from work is adequate; you may need supplemental protection. Make sure that your policy handles very large claims, with lifetime benefit ceilings of at least $500,000 to $1,000,000.
Disability insurance - Disability insurance pays you a monthly income if you are unable to work due to illness or injury, although most policies limit the percentage of your income that they will pay to 60% to 80%. See the article "The Need for Disability Insurance" for more details.
Long-term-care insurance - You should consider this insurance as you near age 60. Recent policies offer more extensive coverage than policies issued a few years ago, so check any existing policies thoroughly. See the article "Coping with Long-Term-Care Costs" for more details.
Homeowners insurance - In addition to protecting your home, most homeowners policies also cover household furnishings, personal liability for individuals hurt on your property, personal property in your possession while you are away from home, extra living expenses if your home is damaged, other people's property that you damage, damage to landscaping, and liability for fraudulent charges on your credit cards. Obtain coverage based on the cost of replacing your home, not on its market value or purchase price. Guaranteed-replacement cost coverage ensures that your coverage keeps up with inflation. Ask for a list of discounts to see if there are ways to reduce your premium, such as adding a fire alarm. Raising your deductible can keep premium costs down. Personal possessions are generally capped at 50% to 70% of your dwelling coverage, while certain items such as jewelry have specified dollar amounts. Obtain riders to increase this coverage if needed. Also cover your possessions for replacement value.
Automobile insurance - In most states, automobile owners are required to carry some insurance, usually bodily injury and property damage liability. Many people also obtain coverage for medical expenses, protection from uninsured motorists, comprehensive physical damage, and collision damage to the car. Find out what discounts are available. Raising your collision and comprehensive deductibles can significantly reduce your premiums, but don't skimp on liability coverage.
Personal liability insurance - Personal liability insurance covers you once the liability limits of your automobile and homeowners policies have been exceeded. It also covers risks not included in other policies, such as claims for libel, slander, invasion of privacy, and defamation of character. The cost is typically reasonable, so it pays to obtain large amounts, especially if you are protecting a high net worth.
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The
Life Insurance Decision
Many people avoid analyzing their life insurance needs. Hopefully, these answers to some of the most common life insurance questions will help you overcome any hesitation:
Do you really need life insurance? The most common reason for purchasing life insurance is to ensure that your family can maintain their standard of living if you die. Generally, your need will be greatest after you start a family and will decrease over time as your children grow and become independent.
But life insurance can also serve other important purposes. If a major portion of your estate consists of illiquid assets, life insurance can provide funds for your heirs to pay estate taxes without liquidating those assets. Or you may want to leave a large inheritance to heirs or to a charitable organization through life insurance proceeds. Business owners often use life insurance to buy out a deceased partner's heirs or to provide heirs with funds to pay estate taxes so that the business does not have to be sold.
How much life insurance do you need? You will hear various rules of thumb, such as five to eight times your current income. But these rules of thumb do not consider your personal preferences. You may want to provide funds to help pay for a child's college education or to help pay off a mortgage or other debts. It's best to go through a detailed analysis to determine how much insurance you need.
What kind of insurance should you purchase? There are two basic types - term and cash value. Term insurance provides protection only, since none of the premium is set aside to build cash value. If you die during the policy's term, your beneficiary receives the policy proceeds. However, you get nothing in return for a canceled policy.
Cash-value insurance accumulates, from premiums paid and investment earnings, a cash surrender value that is returned to you if you surrender the policy. Also, you can borrow the cash value through a policy loan, although outstanding loans are deducted from the insurance proceeds when you die or surrender the policy.
Carefully assess which type is preferable for you. When you are younger, term insurance tends to have lower premiums than cash-value insurance, although the premiums will increase over time. If you are insuring a need that is likely to go away, such as providing a standard of living for minor children, term insurance may be more appropriate. Those insuring a permanent need, such as providing funds to pay estate taxes, may want to consider cash-value insurance.
How do you compare individual policies? Since life insurance companies offer so many different options, it can be difficult to compare several policies. Try following these steps:
1. Only compare the same type of policies. For instance, don't compare a term policy to a variable life or whole life policy.
2. Make sure the policies contain the same options and riders.
3. If considering cash-value insurance policies, review the assumptions used in the policy illustration, which shows the policy's illustrated value at some time in the future. Keep in mind that these illustrations are hypothetical and that your value will depend on the policy's actual performance. Obtain illustrations based on three alternatives: the original illustration, one with an interest rate 2% lower than anticipated, and one with the minimum guaranteed rate.
How do you assess the insurance company's financial strength? Since you may not receive benefits for years, you should assess the insurance company's financial strength both before purchasing a policy and periodically thereafter. A good place to start is with the ratings assigned by rating organizations such as A.M. Best, Standard & Poor's, Moody's Investor Services, Duff & Phelps, and Weiss Research.
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The
Need for Disability Insurance
Have you considered how your family would cope if you were unable to work for a lengthy period due to illness or injury?
You should consider disability income insurance if your current assets won't support you until age 65. To see if this is the case, take time to review your available options. Determine how much you need monthly to pay essential expenses and what income sources you have if you couldn't work.
If you are considering disability income insurance, pay particular attention to these items:
 | Benefits from disability income insurance should
protect 60% to 80% of your income. Insurers won't cover you for
more than that because they want you to have an incentive to return to work.
Make sure that the total benefits provided by your employer-provided
insurance and individual insurance do not exceed the maximum benefit that
the insurance company will pay. Otherwise, you may pay for coverage you
won't receive. Most insurers require documentation of income and limit the
maximum monthly benefit.| Pay special attention to the definition of
disability. There are three basic types of coverage: own
occupation, any occupation, and income replacement. Own occupation pays
benefits when you can't work at your specific occupation. Many
professionals, such as doctors and lawyers, opt for this coverage. Any
occupation means that you must be unable to work at any occupation that your
training and education would be suited for. Income replacement policies pay
the difference between what you were earning before the disability and what
you are earning now. For most individuals, income replacement policies will
provide the best balance between cost and benefits. | Opt for a long waiting period before you receive
benefits. This is a good way to reduce premiums, provided you
have other resources to rely on for the short term, such as sick leave,
personal savings and investments, or short-term disability coverage. | Consider coverage that pays benefits until age
65. Disability income insurance is designed to help protect your
financial situation from a serious disability, so you should obtain coverage
for the long term. Policies for lifetime benefits are rare and expensive.
It's probably not needed, however, since presumably you would obtain Social
Security and other retirement benefits once you turn 65. | Look for a policy that provides residual
benefits. This allows you to return to work on a part-time basis
and still receive partial benefits. | Make sure the policy is either noncancelable or
guaranteed renewable. Noncancelable means you can renew the
policy every year at the same premium. Guaranteed renewable means you can
renew the policy every year, but the premium can increase as long as it is
not done so in a discriminatory manner. Either provision will ensure that
the policy can't be canceled due to medical problems. | |
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Coping
with Long-Term-Care Costs
Health insurance policies do not usually pay for nursing home care, while Medicare only pays for 100 days of care in skilled nursing homes (staffed by doctors and nurses) if admission follows a hospital stay. Medicaid currently pays two-thirds of all nursing home costs (Source: Consumer Reports, October 1997). However, the government has enacted tougher rules to qualify for assistance.
More than a million elderly individuals with extensive disabilities live at home, relying on family members for help (Source: Consumers' Research Magazine, June 1998).
What Policy Options Should You Look for?
You should generally look into this coverage when you are in your 50s or early 60s. Be sure that any policy you are considering includes the following:
| The benefit amount should be reasonable. Most policies pay no more than a
specified amount per day, so you will have to make up any difference.| Services covered should include skilled care, intermediate care, custodial
care, home health care, and adult day care. | There should be no requirement that you first be hospitalized to receive
benefits, that you first receive skilled nursing home care to receive
intermediate or custodial care, or that you first receive nursing home care
before receiving home care. | Benefits should be payable when two or three of seven activities of daily
living (ADLs) can't be performed (bathing, dressing, eating, walking,
transferring from a bed to a chair, using a bathroom, and remaining
continent) or due to cognitive impairment. | There should be specific coverage for Alzheimer's and other organic-based
mental illness. | The policy should be guaranteed renewable, meaning the policy cannot be
canceled due to age or deterioration in health. | A range of benefit periods is available. Make sure to select a period you
are comfortable with. | A range of waiting periods before benefits start is also available. The
longer you wait before benefits begin, the lower your premiums will be. | Ensure that benefits will increase with inflation. | Determine if the policy is qualified. Due to tax law changes enacted in
1996, a qualified policy allows you to deduct a certain amount of the
premium, depending on your age, as a medical expense on your tax return.
Medical expenses are deductible to the extent that your total medical
expenses exceed 7.5% of your adjusted gross income. Also, you will receive
benefits under the policy tax free. However, qualified policies typically
are more restrictive regarding when you can receive benefits. You should
decide whether a qualified or nonqualified policy is better for your
situation. | |
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Reviewing
Existing Policies
You should periodically review your existing life insurance policies. During that review, consider the following points:
| Are your policy limits still adequate? Your
insurance needs will change over the years, so it's not unusual to find
yourself with too much or too little coverage. If you have too much
insurance, don't cancel the policy without further analysis. The policy's
return may make it a worthwhile investment on its own or you may be able to
convert to a smaller paid-up policy.| Is the projected rate of return still
competitive? For cash-value insurance policies, your insurance
company can provide an in-force illustration based on current dividends and
interest rates. Even if you are not satisfied with the projected return, do
not replace the policy without careful analysis. Cash values generally
accumulate at a faster rate after the first few years and there may be tax
consequences to surrendering the policy. Keep in mind that a policy change
may incur fees and costs, and may also require a medical examination. | Is your insurance company still financially
sound? Use this review to check your insurance company's ratings
to make sure its financial strength has not deteriorated. | Is the policy owned by the appropriate party?
Changes in your estate needs may require changes in the policy's ownership.
You may want a trust to own the policy. Business owners may find it more
beneficial for the company to own the policy. Consider all tax and estate
factors before settling on who should own the policy. | Are your beneficiaries still appropriate? Changes
in your personal situation may necessitate changes in your beneficiaries. | |
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Copyright © 2000. These articles intend to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.
FR2000-0104-0146