Chapter 21: Protecting Future Money
Walter Neff : “Who'd you think I was anyway? The guy that walks into a good-looking dame's front parlor and says, ‘Good afternoon, I sell accident insurance on husbands... you got one that's been around too long? One you'd like to turn into a little hard cash?’"
– Double Indemnity (1944)
One of the not-so-great things is that our human capital is not guaranteed. Life can go off the rails and keep us from working in our chosen profession, or at all.
To provide at least some hard cash when life turns dire, you need… stay with me here… insurance.
The most important is disability insurance. As the name implies, this insurance pays if you cannot work due to a disability. The top three causes of long-term disability are cancer, injury, and back disorders. These and many others can sideline anyone at any time.
In almost every state, employers are required to provide workers compensation insurance. Workers compensation pays you a benefit if you become injured or disabled at work. Employers pay the premiums for this insurance.
Work-related injuries only account for a small percentage of disabilities. What if you become disabled outside of work?
If you have worked at least five years and you become disabled you may be eligible to receive money from the federal government (Social Security Disability Insurance), but it’s not a lot, and if you can do any job, you’ll have to take it. Social Security Disability is a safety net, but it is a challenge to make ends meet with it.
Many larger employers offer short-term and long-term disability insurance as part of their benefit packages. This is valuable. But remember that if you leave the employer you may no longer be covered.
If you are self-employed or don’t have coverage through your employer, consider buying private disability insurance, especially if you have made significant investments in your profession or have a lot of debt.
If family or others depend on your income consider buying life insurance. Life insurance pays money to a beneficiary if you die. Many larger employers provide up to $50,000 of insurance for free. They may also let you pay an extra premium out of your paycheck for a higher benefit. This type of “group” policy has some drawbacks. The premiums often increase every few years. Also, you may not be able get the amount of insurance you need and if you switch employers, you may not be able to take it with you. If you are healthy, it often makes sense to buy “individual” life insurance instead of, or on top of, group insurance.
The only kind you should buy is term insurance, specifically level term insurance. You pay a fixed premium every year for a set period, usually between ten and thirty years. If you die during this period, your beneficiary receives the death benefit. If you don’t, the benefit is that you got to live.
Term insurance is a simple product. The market is competitive, and you can readily get quotes online. For example, a thirty-year policy with a $1,000,000 benefit from a high-quality insurance company would cost a healthy thirty-year-old woman about $500 a year.  Rates for men are a bit higher because they don’t live as long. When you apply to buy a policy the insurance company will underwrite your application, meaning they will estimate the risk of you dying earlier than average. If you smoke, have known health risks, or engage in dangerous activities, you have to tell them and may have to pay higher premiums. For larger policies, the insurance company may do a basic medical exam.
How much life insurance should you buy? It depends on your situation. How dependent are your beneficiaries on your income? How much can they replace from other sources? Do they have to continue to pay down debt, such as a mortgage? Also think about how long you will need insurance. If it's to support your children, you probably don’t need it when they are grown, you’re retired, and your mortgage is paid off. Buying for shorter terms reduces the premiums.
There are a number of online calculators (such as the one from Life Happens) to help you figure out how much insurance you need. Your beneficiaries won’t have to pay income tax on life insurance benefits they receive, so the full amount will be available to cover expenses.
Insurance agents may try to convince you to buy other types of life insurance, such as whole life, universal life, indexed universal life, or variable universal life. With each of these, you pay extra money (many times the term life premium) that the insurance company invests on your behalf. You can do better investing on your own. Agents want to sell these policies because the commissions are far larger than for selling a term life policy. You may get flimflam about “permanent” insurance and “tax benefits” in the sales pitch. Don’t take the bait. If your agent gets too pushy, find another agent.
It’s important to buy your policy from a company that is likely to be around. Look for ratings of AA/Aa2 or better from Standard and Poor’s and Moody’s; though if the premium is a lot lower a company with a rating of A+ or better from A.M. Best is also okay. Here are some of the strongest companies.
Source: Company websites accessed 3/29/2020
As with annuities, you buy disability and life insurance from an insurance agent. Agents are either independent, representing a variety of companies, or captive with a single company. By law, for a given insurance policy, you pay the same premium to the insurance company regardless of who sells it to you. "Lowest price" guarantees are meaningless.
A good agent can help you compare policies from different companies and help you through the underwriting process if your health is not stellar. But be aware that agents have an incentive to 1) sell you insurance you don’t need and 2) steer you to companies they represent that pay them the highest commissions or bonuses.
For disability insurance, the largest insurers have their own captive agents—check out their websites. Life Happens has an agent locator. Also ask around for references that can help locate someone trustworthy with experience in your profession.