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Weekly UpdatesNobody can predict the future. But there are things that people can do to help protect themselves from work-limiting illnesses or injuries, or to provide for their families after their deaths. Investing in insurance, such as life insurance or disability insurance, can help individuals better prepare for the future, and also can help businesses keep the doors open after suffering a catastrophic loss.
"While disability and life insurance can be purchased by individuals as a form of income replacement, businesses also use these products as well," explained Lon Wilson, president and owner of The Wilson Agency. "Individuals may buy a product like life insurance because they care what happens to their loved ones after they are gone, and they want to make good on obligations they made while alive. Businesses may buy life insurance to insure key people in their organizations in order to generate income while offsetting potential losses."
INDIVIDUAL LIFE INSURANCE
Though it's not a subject that many people want to talk about, the fact is, everybody dies. And when a person passes away, especially if it's unexpected or they have a young family, this can be especially difficult for the people who are left behind. "Life insurance is purchased by individuals for several reasons," explained Linda Hulbert of New York Life. "The primary reason is to protect a person's family from the loss of one of their members; it can also be used to pay business and personal debt."
Hulbert, who lost her husband at the age of 40, entered the life insurance field as a result of this experience. "When a person dies, oftentimes families are left destitute, trying to figure out how to pay off debts like a mortgage," she explained. "Life insurance helps to provide for the surviving spouse and children; it protects the people you love."
"If a person buys $1 million in life insurance, when they pass away, that $1 million in cash can be invested by their family to generate a lifetime income of $50,000 to $80,000 a year," said Wilson. "This is especially important in families where there is a primary wage earner whose death will cause a significant impact on the family's standard of living."
In addition to helping protect a person's family after that person dies, life insurance can also be used by individuals as a savings plan toward retirement or as an estate-planning tool. "Rather than liquidate hard assets, some people buy life insurance to pay federal estate taxes," said Wilson.
Though most major companies offer their employees health insurance, life insurance is not always a part of the package. "Sometimes employers do use these types of benefits to attract, recruit and retain employees," said Sherri Orr, ancillary consultant, Mercer Health and Benefits. "When companies are competing against each other for the best employees, offering a comprehensive benefits package can set employers apart from others."
These packages, bought as part of a group life insurance program, can range from a minimal $10,000 benefit to two times a person's annual salary. "Employees are eligible for a significant amount of life insurance at no cost to them, just by working for a particular employer," said Orr.
If life insurance is offered as part of an employer's compensation plan, it is always easier to obtain than an individual plan. "The big difference between individual coverage and group coverage is that individual coverage can be more expensive, depending on a person's age and their current health conditions," said Orr. "In a group plan, often all a person has to do is sign up during the eligibility period; in an individual plan, they may need to answer health questions and undergo a medical exam."
PROTECTING BUSINESS ASSETS
While many businesses may provide life insurance as part of an employee's benefits package, other may also insure key employees whose futures are linked to a company's success.
"Say a company has taken out a large loan or line of credit from a bank," said Wilson. "If something happens to their president, it may have a financial impact on the business and its ability to repay the loan. For this reason, sometimes banks require a company to carry life insurance on its key members.
"A business might also want to insure its 'rainmakers,' who they depend on to make and retain customers," he added. "If something happens to that person and they lose those customers, they need a way to generate income to offset that loss."
Companies also use life insurance as a way to fund buy/sell agreements, so that if one partner dies, the other business partner can purchase the business. "Rather than a company's shares going to the deceased person's spouse or estate, a corporation or individual can buy those shares in the event of his death," said Wilson. A business might also use life insurance to fund deferred compensation agreements in the case of an employee's premature death.
DISABILITY INSURANCE
Just as life insurance can be used to protect a surviving family from loss of income, disability insurance can be used to protect a person and his or her family when that person is no longer able to work.
"Disability insurance is for anyone who doesn't have the financial resources to continue to cover their monthly expenses as a result of not being able to work," said Wilson. "While a lot of employers do provide group disability coverage, it can also be bought individually."
"Disability insurance is one of the most overlooked, and most important pieces of a financial plan," added Hulbert. "People are far more likely to lose their homes and other assets to disability than they are to die. If you can't work, where is your income going to come from?"
According to Hulbert, a standard disability policy provides about 60 percent of a person's previous income, though it is very important to understand exactly what type of disability insurance a person has, and what it covers. "In a group disability plan, any benefit you get is taxable, so while you may be making 60 percent of your wages, you may only end up with 40 percent to 45 percent of your earnings," she said.
"Some people chose to participate in a group disability plan, and get a private disability plan on top of that," she added. "Again, it's important to understand the terms and conditions of the contract-often these policies are cheaper if you get in early, and the cost stays the same over time."
Depending on a person's age, health and occupation, they may not be eligible to buy disability insurance. "For some occupations, such as fishing, disability policies aren't affordable, or aren't even available," said Hulbert. "Insurance companies also won't sell a private policy on top of a group policy if the amount of disability exceeds what the person earns. There's no incentive to go back to work."
As times have changed, so have the ways in which these policies are managed. "These contracts used to be very rich, and companies didn't manage them well-they just paid claims," said Orr. "Now the trend is moving toward managing claims; providing early intervention and getting employees rehabilitated, retrained and back to work."
Because there are vast differences in disability plans, it's important to speak with an expert on the subject. "It's important to know the definition of disability, what makes you disabled, how long the policy will pay, and how long before it begins paying out," said Hulbert. Disability insurance can range anywhere from two- and five-year coverage to coverage until a person reaches age 65.
ASK AN EXPERT
No matter what type of insurance a person is looking for, they should work with a professional who can help them make the right decisions. "It pays to talk to someone who knows the life insurance and disability marketplace," said Hulbert. "Otherwise, there's no way of knowing how policies differ from each other, and what would work best for a specific individual."
"It's important to approach insurance from a financial planning perspective, so that you can tailor the policies to whatever a person's particular needs are," agreed Wilson. "You need to review their assets, debt obligations and even understand a person's values in order to utilize life insurance, disability, long-term care insurance products and financial products so that they will best work for the client.
"All that insurance is is a transfer of risk," he added, "and everyone has a different risk tolerance."
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