Brian Gruss Licensed Insurance Planner

Five Reasons Why Most People Refuse to Buy Disability Insurance

Everyone has their reasons for not buying disability income (DI) insurance. Below are five of the most common. But do you know the facts?

Reason 1: I can always get coverage in the future.

Fact: True, but people usually develop health problems as they grow older, and premiums increase with age.

Reason 2: My family and friends will support me. Or I will pay my bills with savings.

Fact: While your family and friends would love to help you, are they in a financial position to do so? And do you really want to be a burden on someone else? And, unless you’re independently wealthy your savings probably will not last long. Just one year of disability could easily wipe out several years of hard-earned savings.

Reason 3: I have group disability coverage through my job.

Fact: Even if your employer is among the few that’s not cutting back on benefits, group disability insurance typically covers just 60% of gross income, and benefits are usually fully taxable. Can you afford more than a 40% pay cut? Also, what happens if you change jobs?

Reason 4: I cannot afford it. I’ll purchase a policy later when I have the money.

Fact: The average premium is typically only 1 to 3% of your gross earnings. Plus, the longer you wait, the higher your premiums will be. If you cannot afford 1 to 3% of earnings, how will you afford to pay your bills in the event of a disability?

Reason 5: It’ll never happen to me.

Fact: If you’re under age 35, chances are one in three that you will be disabled for at least six months during the course of your career.¹ Also, consider that more and more people are living with disabilities today that would’ve killed them in years past.

Your ability to work and earn an income is by far your largest asset. Consider the benefits of a disability income policy to help protect your earned income should a sickness or injury force you out of work.

¹ 1985 Commissioners’ Individual Disability A Table, Society of Actuaries

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Study Reveals Financial Impact of a Spouse’s Premature Death

The average financial recovery time for a widow or widower is four to five years after the death of a spouse according to a recent study.  The MetLife study, entitled “Financial Impact of Premature Death,” examines the financial impact associated with the premature death of a spouse.  Results of the survey indicate most Americans remain underinsured and are often required to make significant life changes when confronted with a spouse’s death.

During early August 2003, approximately 1,000 widows and widowers were surveyed to compile the data for the study.  Each of the participants had lost a spouse within a period of 6 months to 5 years prior to the survey. The deceased spouse was between 30 to 55 years old at the time of death.

Here are some of the survey’s findings:

-More than one-third of the surviving spouses received no life insurance proceeds.

-Two-thirds of the spouses reported the death of a spouse had a “major” or “devastating” financial impact on their lives.

-Two-thirds of spouses that received insurance proceeds, received less than 3 times the annual income of the deceased spouse.  (Typical recommendations call for insurance replacement equal to 7 to 10 times the deceased spouse’s annual income)

-One-fourth of beneficiaries received benefits that replaced less than one year of the deceased’s annual income.

-Less than half of spouses who received insurance proceeds felt the coverage was “adequate.”

-Almost half of surviving spouses stated their financial situation was “somewhat worse” or “much worse” after 3-5 years had passed since their spouse’s death.

-Nearly half of deceased spouses lacked a will.

A summary of the study can be found online at www.metlife.com at the MetLife Research Center.

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College Funding with Permanent Life Insurance

If you own a cash value life insurance policy-universal, whole, or variable-you may be sitting on a potential gold mine for funding your children’s college education.  Why?

When you consider buying life insurance, the main reason must always be to protect your family’s lifestyle and cover their future needs.  In other words, life insurance must always be purchased because there is a need.  But there are additional features that may let you use this same life insurance for living needs, too.  Permanent life insurance-life insurance that builds cash value-can help you accomplish many goals:

·        It lets you accumulate significant cash without current taxation.[1]

·        Depending on the type of policy, you can pay additional premiums and further enhance this cash accumulation feature and the associated tax benefits.

·        There is a “borrowing” feature that lets you take out potentially large amounts of money without paying taxes.  When you pay the money back, you are repaying yourself rather than a bank.[2]

·        You may never have to pay the money you borrow back, if the policy is adequately funded.[3]

You can borrow from your life insurance policy cash value for just about any reason.  Of course, you need to pay enough in premiums to keep the life insurance policy “in force” and borrowing may mean paying more premiums to keep your policy cash value at a suggested level.  But, as long as you manage the money you borrow and keep making any necessary premium payments to the insurance company, you may be able to borrow much of the cost of your children’s college education and still keep your insurance.

Even better, if you have a sufficiently high cash value, and you keep making any necessary premium payments, you may never need to pay back the money you borrowed.  This is a fairly sophisticated approach though, so always consult with your insurance and tax advisors before you take any policy loans.

Of course, nothing is a free ride.  If you do not maintain a sufficient cash value and/or pay enough in premiums, your policy could “lapse”-it could fall apart because there is not enough cash value or cash inflow to provide the agreed upon life insurance benefit.  In this case, you might be able to reduce the policy value (face amount paid at your death) so there is enough money.  If you don’t take the right steps to keep your life insurance policy “in force”-paying premiums, paying back loans and/or maintaining enough cash value to cover the policy costs-you could lose your life insurance.  If this happens, you may have a very nasty tax problem.  Generally, if you allow an insurance policy to “lapse,” you will owe tax on any cash value above the actual amount you paid in premiums, and any unpaid loans get added to this cash value.

So, if you’re looking for additional cash to pay for that college education (or many other expenses), you may need to look no farther than your own life insurance policy.

[1] Check with your tax advisor to ensure your policy will not be subject to current taxation on cash value growth.

[2] Please check with your insurance and tax advisor to make sure your loan meets certain guidelines.  Loan interest rates may apply.

[3] Check with your insurance advisor to ensure your policy is properly structured.  If your policy lapses with an outstanding loan, loan proceeds may be subject to taxation.

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