by Evolution Of Wealth on March 9, 2010
The earliest life insurance policy on record was issued on June 15, 1583 in London on the life of William Gybbons. It was for a 12-month period.
Life insurance was born as annual renewable term (ART). What ART is is life insurance coverage one year at a time. What this means is the cost of the coverage is projected out but not guaranteed. You find out each year what your premium will be for that given year. Then you decide if you want to keep the coverage. Sounds a bit crazy doesn’t it.
However, if you are looking for to save money on short term coverage you should definitely consider annual renewable term insurance. What do I mean by short term? Well most life insurance companies offer term policies in increments. The most common are 5, 10, 20 and 30 years of coverage. ART is something that you should look at as an alternative to 5 or 10 year coverage.
What annual renewable term insurance can do for you in the short term is save you money and provide the ability to carry your coverage for an extra year or two at a reasonable rate. As anyone who has read their term life insurance policies (anyone?) knows, after your coverage period is up the premiums increase dramatically. This happens with ART as well but since the guaranteed coverage period is one year it happens more gradually over a period of time. In fact, a competitive ART policy only starts to see drastic increase after about 12 years (give or take).
Let’s give you an example:
I chose a life insurance company with a 99 Comdex rating. I’m running a few illustrations for a 35 year old male, in Massachusetts and I’m running them at preferred rates for $1,000,000 of coverage.
For 5-year Term life insurance, this person would pay $510 per year.
For 10-year Term life insurance, this person would pay $700 per year.
Now it gets tricky for annual renewable term insurance but the estimations for the first 11 years (the drastic increase happens in year 12) are: $295, $325, $375, $425, $465, $515, $555, $595, $645, $695 and $775.
This example seems like a bit of no-brainer. There is a bit of a risk though. The future premiums on annual renewable term insurance are not guaranteed, they are projected rates. Only the first year premium is guaranteed. The future premiums could very well increase. However, when thinking about shorter term policies an ART policy could allow you added flexibility of keeping that policy an extra year or two at a reasonable premium. That’s an option you wouldn’t get with traditional term insurance.
It can be a great way to save some money. If you have thoughts or plans to convert to a more permanent policy in the near future this will allow you to minimize the short term costs. The most competitive policies will have full convertibility options as well as the waiver of premium feature just like all other term life insurance policies.
Go ask your financial guy about annual renewable term. When he/she doesn’t know or stumbles, come back here ask your questions, contact me or get an insurance assessment.
by Evolution Of Wealth on March 6, 2010
Last week we started by looking at some sweet spots for your disability insurance policies. This week we are going to jump right into looking at some add-on features that you need to know about when evaluating your own disability insurance policy or shopping for a new and/or better policy.
1. Catastrophic Rider
I’m starting with the catastrophic rider because it is one of the more inexpensive riders to add on to your disability insurance policy that can provide a huge benefit. The catastrophic rider pays additional benefits for certain severe disabilities. Severe disability is usually defined as presumptive disability or total disability. The benefits of this rider is that you will receive a higher disability payout usually about 100% of your pre-disability income.
2. Cost of Living Adjustment Rider
This is usually referred to as the COLA rider. One of the biggest eroding factors of your wealth is inflation. A great way to offset, or fight back, is adding a cost of living adjustment rider. This rider can insure that your monthly benefit will keep pace with inflation. Most of these riders have a 3% adjustment built in. Make sure it is a compounded 3% and not a simple 3%.
I’ve also seen this adjustment work in a few different ways. For some policies it only goes in affect when you are out on a claim. In this case, you make a claim and your benefits will begin to increase 3% per year going forward. I’ve also see this adjustment be made to your benefits regardless of any claims. If your cost of living adjustment rider only kicks in when you make a claim, you are usually offered an additional rider as well. This additional rider would be a benefits increase rider that would adjust your benefit amount before any claims where made and will usually result in your premium increasing slightly each year.
3. Future Insurability Rider
This rider is sometimes referred to as the future increase option rider or FIO rider. This rider allows you to purchase additional coverage without providing further proof of medical insurability. You are, however, usually required to go through financial underwriting to make sure you qualify for the increased coverage. This is a great benefit if you plan on having substantial raises or job opportunities in your future. For example, if your goal is to rise through the rankings of your company, chances are each rise in rank will result in a nice bump in salary. To be adequately covered you need your disability insurance policy to keep pace with your salary. This is how you can lock in the ability to increase your coverage regardless of your health.
4. Social Security Insurance Rider
This is an opportunity to save some money on your disability insurance. What this rider does is offset the insurance company’s risk with any social security benefits you may receive. It decreases the price of your insurance by providing a lower base benefit. You would then add on the social security insurance rider and apply for social security disability benefit when something happens. If your social security benefit kicks in then you would receive your base benefit from your individual disability insurance policy. However, if social security denies you (as so often happens the first few times of applying) and you are considered disability under your individual disability insurance policy, this rider would step up to cover your social security disability benefit until when and if you ever qualify through social security.
5. Residual Disability Benefit Rider
This rider is sometimes referred to as the partial disability benefits rider and provides a disability benefit if, when the insured is able to return to work and as a result of the disability, continues to suffer a loss in income. The income loss is usually set to 20% or greater but I have see some as low as 15%. For most people that become disabled there will come a time when your doctor says that it’s okay for your to return to work. Unfortunately, you might not be able to jump right back into working full-time. This rider allows you to ease your way back to work while picking up the loss of income from doing so.
6. Own Occupation Rider
I only know of one company that offers disability insurance policies with built-in own occupation. For all other disability insurance companies this is an add on feature. The key to the own occupation rider is that even if you are able to return to work, if you are unable to perform the main duties and requirements of your previous occupation, you will continue to receive benefits from your disability insurance policy. These benefits are regardless of whether you are working in another occupation or not.
7. Retirement Protection Rider
This is one of the newer riders that I have seen on disability insurance policies. In fact, this is usually offered as a stand alone policy as well. Most people don’t realize that when you are unable to work, you no longer are allowed to contribute to a retirement plan. When you become disabled you can’t continue to contribute to your retirement and the money you were previously contributing is not protected. The retirement protection rider is designed to help ensure retirement funding can continue even if you are disabled. You can usually cover up to 100% of retirement contributions, including employer-matching funds. The way the retirement protection rider works is that benefits are paid into an irrevocable trust for your benefit and proceeds are distributed when you reach age 65.
Final Words
I’ve done my best to explain the main disability insurance riders or add-on features that most insurance companies make available. These riders, as well as whether they are offered or not, can vary greatly from insurance company to insurance company and/or from disability insurance policy to disability insurance policy. If you have any questions on your specific disability insurance policy then ask your financial professional. If you don’t like his/her answer, don’t have a financial professional or are looking to obtain disability insurance feel free to contact me and/or look into an insurance assessment.
