Last week I went to the dentist, which in a perverse sort of way got me thinking about insurance -- maybe because getting insurance is about as much fun as going to the dentist. But like going to the dentist, it’s something we need to do.
So of course we all have health insurance (or we'd better!). If we own a car we have car insurance. If we own a home we have home insurance, and if we rent we might have renter's insurance, at least if we own clothing, jewelry
or electronics that are worth anything.
long-term care insurance, or life insurance? Personally, I have long-term care
insurance; I do not have life insurance. I gave up life insurance when I
retired, about the same time my dependents went off to college and started work.
But there are
other reasons to have life insurance, so I arranged to consult with Brett
Wilson, vice president of Ethos, a new company that avoids traditional insurance agents to provide "easy access to modern, simple and ethical life insurance." Wilson himself, with
an MS in management from Stanford University, has a decade-plus experience in
the insurance industry.
I started off
by admitting that I have no life insurance and asking why I would need it.
If you don’t have
any financial dependents, and don’t have any debts that loved ones would have
to assume -- and you also have funds set aside for funeral expenses -- then it isn’t
necessary to purchase a life insurance policy. But if you do have dependents –
for example, a spouse who is not eligible to continue receiving your pension,
or a child who depends on you for college tuition – then you should strongly
consider life insurance.
Okay, so what kinds
of life insurance are there? I’ve heard of term insurance, but I know there are
There are two
broad categories of life insurance: term life insurance and permanent life
insurance. The main objective of term insurance is to provide protection for a
specific period of time – presumably the time when you are financially responsible
for anyone else such as a spouse or children. The main objective of permanent life
insurance is the accumulation of capital, and it generally requires higher
premiums than term life insurance. Examples of permanent insurance are whole
life and universal life insurance.
Most of us
who are retired no longer have dependents. But I’ve heard that some life insurance can provide long-term care payments. Is that true?
First of all, to explain, typical stand-alone long-term
care insurance policies provide benefits only when the insured needs
long-term care. Benefits are provided for services assisting them with activities
of daily living like bathing, dressing and eating. To qualify, policyholders
have to meet certain criteria such as the inability to perform two or more
daily activities, or be diagnosed with cognitive impairment. These services
can generally be used at home or in an assisted living environment. The downside
to long-term care policies is that they are only accessible when
the insured suffers from a qualifying condition. If long-term care services are
not needed, benefits are not payable.
Some life insurance
policies combine the death benefit of a life insurance policy with “living
benefits” to provide the insured with care while still living. They are
sometimes referred to as “combo policies.” These policies (or attached riders) allow for the acceleration of the death benefit related to
specific qualifying conditions such as long-term care or terminal illness. The
insured can request that a portion of the death benefit be made available for
medical bills or long-term care. Accelerating the death
benefit will of course reduce the amount payable at the time of death.
Is there any role
for life insurance in estate planning?
Yes, there can
be. Death benefits paid from life insurance policies are generally not
subject to federal income tax and, in many cases, state inheritance taxes.
There may also be tax benefits associated with the investment component of
permanent life insurance policies, although they can be complex. It's a good idea to seek the advice of a tax expert when thinking about this.
So if I need, or
want, life insurance, how much should I get?
It depends on
your financial circumstances. You can compare your current debts and financial
obligations against your assets and aim for life insurance to cover the
difference. So ask yourself if your spouse or partner could assume any debt
payments (like a mortgage) and living expenses in your absence. If they have
their own income, how long would that sustain them in the event of your death? Have
you already put away money for your own funeral costs? Again, you want to cover
with life insurance what you can’t cover with the assets you leave behind.
question. If we buy life insurance now, how can we be assured that 10 or 20 years
from now, when we die, that the company will still be around and able and
willing to pay benefits?
Ethos partners with industry giants including Legal & General America as carriers, as well as reinsurance companies like RGA, to make sure the financial assets are sufficient to pay benefits for many years into the future.
So, I'm convinced that life insurance can
be complicated, but it can also be important. Right now, Wilson told me, some 70% of families in the U. S.
would go bankrupt within three months if their primary breadwinner died. As a
result, more and more people end up relying on crowdsourcing tools
like GoFundMe, just to raise money for funeral costs. I, for one, would not want to leave my partner or loved ones with that burden.
I'm not promoting Ethos. I have not dealt with them. And I probably will not get life insurance, mostly because I already have long-term-care insurance. But this is all something to think about, to discuss with your loved ones and perhaps your financial adviser. And I have to say, if I had it to do over, I might just go another way.