Insurance: Sometimes You Need It, Sometimes You Don't
What would happen if you had a serious accident while skiing that resulted in a head injury? Pretty gruesome to think about, huh? Still, nobody is immune to accidents or injury. You have a greater chance of being disabled by age 65 than dying, and if you were hurt and unable to work for a long period of time, you'd be out of luck. You'd be a little less out of luck, though, if you had disability insurance, which would provide you with an income to live on until you could work again.
Shoe Me the Money
Disability is not an old person's condition; it's the inability to work because of a physical or mental condition. More than one third of all disabilities are reported among people who are under 45 years old.
Most large companies provide disability insurance to employees who are unable to work because of a physical or mental disability. But if you work for a small company or are self-employed, you might have to buy it on your own. If you can't afford to be without a paycheck for an extended period of time, you'd better have disability insurance. By the way, if you don't work, you can't get disability insurance.
How much disability insurance you need depends on how much money you have. If you've been living paycheck to paycheck and have no money saved, you'd better have enough insurance to cover the full amount of your paycheck. If you have enough money in the bank to live off of for six months or a year, you can skimp a little.
Disability insurance becomes increasingly important as you gain dependents. If you're married and your spouse doesn't work or doesn't earn enough to support both of you, then you can't be without it. If your spouse is making enough to support both of you, then it's not as important. Once you have kids, however, you've got to have disability insurance, unless your spouse makes enough money to support the entire family for an extended period of time.
Dollars and Cents
If you don't have disability insurance through your employer, you might be able to purchase it through a professional organization in which you're eligible for membership. Groups are often able to buy insurance for less than individuals, so you should be able to get a better rate. The American Medical Association, National Education Association, Writers Guild, CLU, and ChFC Society are all professional organizations. If you need coverage, find out if you can qualify under such a group.
Make sure you know what is included in your disability coverage if you get it through work. Many people don't take the time to find out, and you can't depend on the benefits department to seek you out and tell you that you're eligible for coverage. Most companies have short-term and long-term provisions, so if you find out you need an operation and will be out of work for a couple of weeks, you'll want to know whether you're eligible for benefits.
If you need to buy your own disability insurance, go for the longest elimination period (the number of days you must be disabled before the insurance kicks in) you think you could handle. This will result in a significantly lower rate. A 90-day elimination period often is recommended, but you'd need to be able to support yourself (and your family, if applicable) for that period of time.
Also, be sure you understand how the policy defines “disabled.” Some policies require that you be hospitalized in order to receive benefits. You should look for a policy that will keep paying you as long as you're unable to perform the duties of your job.
Don't depend on government programs such as Social Security or Worker's Compen-sation to provide you with benefits in the event of a disability. If you are eligible for coverage, your benefits won't be as much as you need. Also, your chances of being injured off the job are probably as good, or better, as those of being injured at work. You need coverage in the event of any disability.
You need life insurance so that your family will have financial support if you die and thus can no longer provide for them. If you're single and without children, then you probably don't need life insurance. If you do, the amount should be only enough to cover your funeral, final expenses, and any outstanding loans. If you're married but have no kids, then you should think about life insurance if your spouse would have to drastically change his or her lifestyle if you died. If you have kids, you need life insurance.
Show Me the Money
Term life insurance is a policy in which you pay an annual premium, in exchange for a predetermined amount of money that will be paid to your beneficiaries if you die during the term that you're insured. Cash-value insurance combines a life insurance policy with a type of savings account, where you actually earn interest on part of the money you pay into the plan.
Dollars and Cents
Cash-value insurance can cost up to eight times as much as term life insurance for the same amount of coverage. Unless there are special circumstances, like if you're very wealthy and anticipate an estate-tax problem if you should die, term insurance is a better deal for young people.
How much life insurance you need varies depending on your situation, but experts say it should be for five to eight times the amount of your current salary. After you figure out about how much coverage you need, it's time to decide what kind of coverage you want. As mentioned briefly earlier in this chapter, there are two basic types of life insurance: term insurance and cash-value (sometimes called whole-life) insurance. Nearly everyone (except for those who are rolling in wealth) benefits more from term insurance than cash-value insurance when they are young. Cash-value insurance makes sense for older people, but for people in their 20s and 30s, term is probably better.
Term life insurance is the least-expensive kind of life insurance. In exchange for your annual premium, term life will give a predetermined amount of money to your beneficiaries if you die during the term in which you're insured. All you need to do is keep paying the premium. The premium, however, will keep increasing as you get older and someday might be prohibitive. It's a good idea to review your policies periodically to be sure they make sense for you.
The other kind of life insurance, cash-value insurance, combines life insurance with a sort of savings account. Your premiums not only insure that your survivors will receive money if you die, but some of the money from the premiums is also credited to an account that will increase in value as long as you keep paying premiums.
Cash-value insurance might sound like a better deal because you think you'll be getting something back from it. An agent hawking cash-value life insurance will tell you that after you pay on the policy for so many years (usually 10 or 20), your policy will be all paid up, and you won't have to make more payments. The problem is, that cash-value insurance is much more expensive to buy than term when you are young, and the only reason you might be able to stop paying premiums at a certain time is that you've already paid in a great amount of premiums. Agents love cash-value life because they get a much higher commission from selling it than they do on term policies. Don't let an agent or broker talk you into buying cash-value insurance. At this point of your life, it's not likely that you'll need it.
More on: Family Finances
Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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