Covering Your Bases with Insurance

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A little insurance gets you a lot of assurance

When a crisis strikes — a medical emergency, a long-term disability, or the unexpected death of a spouse — the right insurance policies are what stand between you and financial disaster. Part of financial health is understanding and putting into place the essential insurance policies.

But be on guard: insurance is a commission-driven business, and so you may be offered expensive products that you don’t need.  Below is some honest, independent guidance on insurance policies you should have (or at least strongly consider having). 

Life Insurance

Life insurance is essential for the vast majority of income-earners with a family.  If your family relies on your income, you have debts that would fall to your family, or your family has financial goals that depend on your income (such as college or a down payment), then you need life insurance.  The financial and emotional stakes are high if you leave yourself and your loved ones underinsured.

Why do I need life insurance?

Here are the most common reason to buy life insurance.

Income replacement: If anyone relies on your income — kids, spouse, other dependent family member — you need life insurance. The loss of your income would be financially devastating for those family members.  For parents, the income need typically lasts until the youngest child leaves for college.

Pay off debts: When someone dies, their estate is generally responsible for their debts.  If it’s a joint debt (like a mortgage taken out by a couple) or there’s a co-signer, the survivor will be directly responsible.  In either case, if you have large debts — a mortgage, car loans, credit card debt, private student loans — buy enough life insurance so that your surviving family can pay off these debts. (Note that federal student loans are generally forgiven at death, while private student loans often aren’t.)

To fund college: A common preference for parents is to carry enough life insurance coverage to fund their children's college education. This ensures that an untimely death does not stand in the way of a good college education.

What kind of life insurance should I buy?

I generally recommend term life insurance, which is the most affordable and straightforward type of policy. You pay a fixed premium for a fixed amount of death benefit (called the face value) for a fixed term (such as over the next 20 years). Your employer may offer group life insurance, which is convenient and generally allows you to bypass a medical exam.  However, it’s a good idea to hold the bulk of your life insurance needs in individual policies, as group coverage is often too small for most families’ needs and leaves you exposed to gaps in coverage when you leave your employer.

There are also a variety of permanent life insurance policies, with whole life insurance being the most common. (You may also see variable life and universal life policies.)  Permanent life insurance provides coverage for the duration of your lifetime, instead of for a limited term. Permanent life insurance typically carries an investment component and is more expensive than term policies. There are some situations where I would recommend a permanent policy, such as estate tax planning, business succession planning, or the presence of a long-term dependent (such as a child or spouse with special needs or a disability). Otherwise, for most people term life insurance is appropriate.

How much coverage do I need?

To arrive at the appropriate amount of coverage for you, work through and add up what the death benefit would need to cover (such as family living expenses for a certain number of years, your mortgage, and college costs).  You can use an online life insurance calculator to help.  For a couple with two children living in New York City, I typically see term coverage amounts ranging anywhere from $1 million to $4 million per person — though it really depends on income, living expenses, number of children, and whether there’s a mortgage.

For how long do I need life insurance?

If your only reason for life insurance is to pay off debts, think about how many more years you have left on your loan. If you just took out a 30 year mortgage, then having some amount of coverage for 30 years is likely prudent. (Generally, the longest available term length is 30 years.) For a family, income replacement and college funding are the biggest needs and tend to last until kids are out of school, meaning a 20 or 25 year policy is sufficient for parents of young children.

Keep in mind that the longer the term, the higher the premiums. One way to save on premiums is to buy multiple policies at different term lengths so your coverage slowly declines with time as your needs decline. For example, a parent with young children with a need today of $1.5 million in coverage will likely see a dramatic decrease in need in 15 or 20 years once kids are out of the house. A $1 million policy for 15 or 20 years combined with a $500k policy for 25 or 30 years may adequately cover the family’s needs and cost less than a $1.5 million 30-year policy.

How do I buy life insurance?

Find a local independent agent who can pull quotes from a number of different insurance companies for comparison. If you have a clean bill of health and don’t have specialized insurance needs or otherwise need hand-holding, then consider a convenient online option like PolicyGenius or HavenLife.

Long-Term Disability

Long-term disability insurance provides monthly income in the event you become disabled and are unable to work. There are restrictions on what defines disability, how long before benefits are paid, and how long benefits last, but on the whole the policy is designed to provide income continuity while you’re unable to work.

Why do I need long-term disability coverage?

Based on current trends, over 25% of today’s 20-somethings will become disabled before retirement, making disability more likely than death for young professionals. Everyone with an income should consider long-term disability insurance.

Most often we think of a disability in terms of a tragic accident but, more often than not, it’s a health-related disability such as arthritis, back pain, or cancer. The average disability claim duration is just over 3 years.

Group coverage for long-term disability

Group long-term disability is an employee benefit that some employers (typically larger companies) offer. If this is available to you, take it. Some industry associations will also offer long-term disability coverage to members through a group policy.

You may have a waiting period before coverage begins, such as 30 or 60 days after the start of employment. A common level of coverage is 60% of your salary up to a certain maximum dollar amount per month. Typically there are no medical exams for group benefits, but there may be some pre-existing conditions that are not eligible for coverage. While group coverage is likely your most affordable option for LTD, be aware that you’re at the mercy of your employer as they can change or cancel the benefit as they see fit.

Some group policies can be taken with you when you leave your employer.  (Otherwise, coverage ends when your employment ends.) For those with medical issues that would make an individual policy cost-prohibitive, elect to take your coverage with you when you leave your employer (if this is an option).

If you’re responsible for paying the premiums, elect to pay with after-tax dollars if you’re able. If you go on claim and receive benefits from the policy, the benefits will be tax-free so long as premiums were paid by you with after-tax dollars. (If your employer pays the premium or you pay with pre-tax dollars, any benefits you receive while on claim will be taxable.)

What if I don't have group coverage?

If you are self-employed, your employer does not offer long-term disability coverage, or you need additional coverage, consider purchasing an individual policy. These policies will stay with you as long as you pay the premium, and the benefit will be a defined dollar amount (such as $3,000 per month), instead of a percentage of income.

The downside to these individual policies is that they can be expensive and the medical underwriting bar is high. However, don’t let this deter you from looking at quotes. You can customize these policies quite a bit to help keep it affordable.

I recommend going through an independent agent for quotes. Often an agent who sells life insurance can help you with long-term disability. You can also find a financial advisor through NAPFA or XY Planning Network who can connect you with an agent. A third option is an online independent broker like PolicyGenius, though be careful about using an online platform without thorough research as these are complicated products.

The amount of coverage you need depends on how much of your current income you need to cover your lifestyle. Generally, between 50-70% of pre-tax income is sufficient. If you live well below your means, then you can likely get by with a smaller monthly benefit. If you’re living paycheck to paycheck and barely saving, then you need a higher percentage of your income covered.

Renters Insurance

Commonly overlooked by city-dwellers, renters insurance provides coverage for loss of personal property in the event of a fire or theft, among other occurrences. It’s very affordable and there’s just no excuse. Get it today! I always prefer an independent broker for quotes — ask your friends or advisor for a referral. This search tool through Chubb will help you find a local independent contact, otherwise you can check out PolicyGenius and Lemonade for quotes as well as great educational content for understanding the ins and outs of these policies. If you’re a USAA member, they are worth a look as well.

Personal Liability Insurance

Your renters or homeowners policy will likely come with a basic (maybe $100k) amount of what’s called personal liability insurance. This covers injuries and damages caused to other people and their stuff, among a few other things (like a visitor falling down your stairs or you accidentally hitting someone on your bike). This coverage is inexpensive, so increase it to whatever max (typically $500k) your policy allows.

Once you have kids, a pool, pets, or other things that increase your risk of lawsuit, consider increasing this amount of coverage to $1 million (or an amount equal to your total assets if greater than $1 million). To increase your coverage to $1 million, you may need to purchase an umbrella liability policy, which is generally purchased in increments of $1 million. These policies sit on top of your other property and casualty policies and are used when you have a claim against you that maxes out the coverage in your underlying policies. These are affordable policies and easy to put in place.

A note about car rentals: If you don't own a car, always buy the liability coverage when you're renting a car. Credit cards often offer collision damage coverage if you use the card for the rental, which means you're often fine declining the rental car company's collision coverage. If you rent cars frequently, it may be more cost effective to get a non-owner policy and to decline the rental company's liability coverage as well. If you have car insurance, make sure you understand what is and isn't covered when you rent cars.

What I’m Reading

How Life Became an Endless, Terrible Competition
By Daniel Markovits, The Atlantic

The thesis of this Yale law professor is that our society’s embrace of meritocracy has — perhaps unexpectedly — increased rather than decreased inequality as top schools fill their ranks with children of the elite, while top firms recruit largely from those elite schools, resulting in a kind of self-reinforcing mechanism where the elites stay elite and the rest get shut out.  We’ve all heard similar critiques before, but what stands out is the author’s observation that this endless competition is making everyone (even those elites) miserable: 

But what, exactly, have the rich won? Even meritocracy’s beneficiaries now suffer on account of its demands. It ensnares the rich just as surely as it excludes the rest, as those who manage to claw their way to the top must work with crushing intensity, ruthlessly exploiting their expensive education in order to extract a return.

No one should weep for the wealthy. But the harms that meritocracy imposes on them are both real and important. Diagnosing how meritocracy hurts elites kindles hope for a cure. We are accustomed to thinking that reducing inequality requires burdening the rich. But because meritocratic inequality does not in fact serve anyone well, escaping meritocracy’s trap would benefit virtually everyone.

This is a worthwhile read as we consider our own meritocratic drive — in our careers, in our children’s education — in light of where our society stands today.

‘I’m Finally Making Money, But It Doesn’t Feel Great’
By Charlotte Cowles, The Cut

The Cut’s “Dear Charlotte” personal finance column is always a good read for insight into real people’s money problems, and this one is no exception.  What happens when you start making some real money, but the stuff you find yourself buying is making you feel like a soulless materialist?

Before I even got out of bed yesterday, I spent $450 on a warehouse sale from this brand I’ve become obsessed with. I buy clothes on Instagram constantly. It’s like now that I have all this extra money, I feel like I’ve become this whole new person I don’t recognize. How can I go back to being someone who’s fine with mismatched plates and thrift-store items, instead of this trend follower with a perfect house filled with nice shit that doesn’t matter? 

Read on for some helpful advice from Charlotte.

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