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.

Related posts:

1. Whole Life Insurance is Stackable
2. Life Insurance Breakpoints
3. Life Insurance Secret

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.

Related posts:

1. Pricing Your Disability Insurance
2. 7 Ways Your Group Disability Will Fail
3. When a Variable Annuity Can Work

One of the biggest selling points for Universal Life insurance policies today are their secondary guarantees. Have you ever heard of them?  What’s been happening with Universal life insurance policies is that they are very reliant on interest rates.  How are interest rates today?  Lower than anyone ever thought they would be, even the life insurance companies, but especially the agents selling you the policy.  Well, truthfully, I don’t think the agents really cared, but that’s a whole other can of worms.

If we look back at the history and structure of a Universal Life insurance policy you can begin to understand how much they rely on the return the cash value of the policy receives.  If you think of your Universal Life insurance policy as a bucket you need water in that bucket in order to keep your policy.

The life insurance companies got smarter again. They realized that consumers where having problems with their Universal Life insurance policies as interest rates fell.  They can’t have people upset with them because that means people will buy less life insurance.  So how did they fix this?  The created secondary guarantees for Universal life insurance policies.

Universal Life insurance policies were born out of the ‘buy term and invest the difference’ concept. Life insurance companies knew they needed to compete with that concept so they created a life insurance policy that allowed you to ‘buy term and invest the difference’ within the policy.  This internal structure also created a lot of flexibility for the life insurance policy as well.  That’s how they where sold throughout the 80s and 90s, as flexible life insurance.

This flexibility meant that you life could happen and you could still keep your life insurance policy. If you miss a premium payment, they just take the money out of the cash value.  If you want to increase or decrease your life insurance coverage you no longer had to get a whole new policy, they just adjusted your current policy.  If you didn’t want to pay for your life insurance for the rest of your life, you could now pay more in the early years so that you didn’t have to pay later on and your life insurance would still be there for you.

These were just some of the great benefits that the flexibility of Universal Life insurance provided for the policyholders.  However, with extra flexibility comes more places that mistakes can be made. This is where your life insurance person becomes that much more important.  Most of the life insurance agents didn’t understand how Universal Life insurance policies worked.  In fact, most still don’t.  Insurance agents were selling the policies the way people wanted them regardless if it was best for the person.  They gave people what they wanted.

What happened was Universal Life insurance policies were too lean. What I mean is that they became too dependent on the returns the cash value got.  If the returns dropped (as they did) the policies need more money.  No one likes being told they had to payment, so it was time for the life insurance companies to step up.  The stepped up with secondary guarantees.

Most Universal Life insurance policies sold today are sold with a secondary guarantee. What the secondary guarantee says is something along the lines of, if you continue to pay at least $X amount of premium, this life insurance policy is guarantee by the good faith and claims paying ability of ABC Insurance Co. regardless of the cash value in the policy.  The key is the ‘regardless of the cash value’ in the life insurance policy.  This meant that if your Universal Life insurance policy ran out of cash value, you could still keep the policy in force and your premium stayed the same.

Great.  Now you don’t have a life insurance policy that is as reliant on the cash value within it.  Now you can save policyholders and insurance agents from themselves.

What people don’t understand is that these secondary guarantees are basically minimum premiums. If you fall below that minimum premium (i.e. miss a premium payment), this secondary guarantee will most likely go away.  Most life insurance policies won’t let you re-instate a lost secondary guarantee or if they do it will be a higher premium than it originally was.  You’ve now lost that flexibility that was the huge selling (or buying) point of Universal Life insurance.

Today’s Universal Life insurance policies are glorified permanent term insurance. People pay the secondary guaranteed premium which usually means the policy will have little or  no cash value build up.  The secondary guaranteed premiums are the minimum to keep the policy in force so they are not set to help you build cash values in any way.  They become term insurance, policies that will cover you for a set period of time (in this case permanently) with little to no walk away value.  Just make sure you don’t miss a premium, because as with term insurance, you just might lose your permanent policy.

If you read this policy and are wondering what kind of Universal Life insurance policy you have, I completely understand.  Pick up the phone and ask your financial planner and/or life insurance guy.  What did they say?  If their answer doesn’t sound quite right or you still have questions, contact me.  Or better yet, just get an insurance assessment.

Related posts:

1. Universal Life Failure Part II
2. Life Insurance Secret
3. Whole Life Insurance is Stackable

Has anyone ever asked you what your definition of financial planning is?

There is no right or wrong answer.  In fact, I think I’ll pose this question on FiLife.com and see what we get.  Feel free to share your definition or your thoughts in the comments below as well.  In the meantime, I’ll share my definition with you.

For me, financial planning is maximizing choice and minimizing risk  and loss.

Maximizing Choice – the fun things in life

• Retirement
• Education
• Vacation
• Other funding goals (new home, second house, new car, etc.)

Minimizing Risk & Loss – the things people don’t like to talk about and we can’t control

• Taxes
• Inflation
• the Economy
• Death
• Disability
• Long Term Illness

What do you think of my definition?  How does it vary from your own?

Related posts:

1. Carnival of Financial Planning #112
2. What's in a Number?
3. RMA: Income Planning Program

Price is only an issue in the absence of value.  The problem with disability insurance is determining value.  To understand this we first need to look at how disability insurance policies are priced.  We want to make sure we are getting the most bang for the buck and see if we can find some sweet spots from a pricing standpoint.

Occupation

The basis of all disability policies is to protect your income if/when you are unable to work.  Your occupation is the core measurement of risk from an insurance company’s point of view.  Occupation classes usually use a scale from from 5 to 1, 5 being the less riskier jobs to 1 being more risky.  Then they will sometimes add on an A and B for even riskier hands on occupation classes.  Obviously, the lower risk occupations become more cost efficient to protect.  For instance an office job is a lot safer from an insurance companies prospective than a job which requires substantial field work.  An office job might be a 4 or a 5 occ class while field work might be a 1 or a 2 occ class.  This makes the duties of your occupation even more important than the title itself.

An example of this is an engineer.  There are various different types of engineers that range from doing design from the comfort of their office to traveling and on-site field work.  I’ve seen engineer occupation classes range from a 2 all the way up to a 5 occ class.  This can really change things from a pricing standpoint as well as what companies will be most competitive for this particular person’s situation.

Income Protection

The first real decision that someone looking for disability has to make is how much of their income are they going to protect.  Under most circumstances the maximum coverage you can obtain for income protection is protecting 60-70% of your income.  This is an area where most people’s group disability fails (if you even have group coverage).  When your group disability falls short, the best thing you can do is put and individual supplemental disability insurance policy in place to help protect your short fall.  (Make sure not to mistake this for Aflac which is supplemental insurance and something totally different)

Why wouldn’t you want to cover as much of your income as possible?  A disability insurance assessment is a great way to determine whether you are or not.

Elimination Period

The next decision you’ll need to make when looking for disability insurance is when it will kick in.  For those more familiar with health insurance, which refers to it as a deductible, this is different because it doesn’t measure the money you will have to front but instead measures the time for which you have been disabled.

The most common elimination periods are measured in days: 0, 30, 60, 90, 180 and 360.  The sweet spot for most disability insurance polices is 90 days.  The reason for this is that there is usually a decent increase in premium to shorten your elimination period less than 90 days and little savings by increasing your elimination period beyond 90 days.  The best place to start here is 90 days.

Coverage Period

Coverage period is the length of time for which a disability insurance policy will pay benefits.  The most common coverage periods use to be: 2 years, 5 years, 10 years and to age 65.  Today there are more policies that have added: to age 67, to age 70 and even lifetime graded benefits.  The reality is that people are working longer today.

The sweet spot for coverage period is usually to age 65 or to age 67 if you are offered it.  I say if because some higher risk occupation classes have limited coverage periods.  If you are comparing policies age 65 is your best place to start.

Riders

Riders are add-ons to your disability policy that provide extra benefits for you as a policy holder.  However, they are not free.  Stay tuned for next week when I’ll cover the 7 disability insurance riders you need to know about.

Related posts:

1. 7 Disability Insurance Add-on Features
2. 7 Ways Your Group Disability Will Fail
3. Hidden Gem of Life Insurance Policies

I was reading a post over a Clarifinancial titled, Can You Own More Than One Life Insurance Policy?

His post got me thinking about the changes that have come about in the the life insurance industry.

Due the their cost structure, Universal Life insurance policies have often been touted as the most flexible life insurance policies.  I’m hear to tell you times have changed.  The new Whole Life insurance policies that have been rolled out with the updated CSO tables are more flexible.  Yes, you heard me right, more flexible than even the Universal Life insurance policies.

One of the ways they have become more flexible is the ability to stack life insurance policies.  What I mean by this is if you have the need to increase your insurance with the new Whole Life insurance policies you are able to do so without getting another policy. Universal Life insurance policies have been able to do this since they came out due to the core cost structure.  At it’s core a Universal Life insurance policy is annual renewable term insurance.  This means that each year the cost of insurance within the policy goes up.  It also makes it easy to increase the face amount of the policy because the cost of insurance is determined per $1,000 of coverage.

You use to have to get a whole new policy anytime you wanted to increase the coverage amount of your Whole Life insurance.  What this would mean is redundancy in some of the charges that occur to you.  Such is the case with term life insurance.  In order to increase coverage you need to take out a new term insurance policy.  This means selecting the length and amount of coverage.  This also means a new policy fee.  By stacking policies or adding to existing coverage on the same life insurance policy, you might very well be able to save yourself between $50-$100 or more per year.  Not too shabby.

With older Whole Life Insurance policies, you use to have to take out a new policy if you wanted to increase your coverage.  This often meant that, and it is not unusual to find, people might end up with 5 or 10 whole life insurance policies.  In the old days, you would buy extra life insurance when you insurance guy came around.  Buy $10,000 here, $5,000 there, an other $10,000, maybe even a $25,000 life insurance policy.  All of a sudden these policies and fees start adding up.

Life insurance agents figured this out and started showing people how they could consolidate their old dozen or so Whole Life insurance policies into one Universal Life insurance policy.  Between consolidated fees and rolling over the cash value, people are able to increase their life insurance coverage with little or no out of pocket expense.  It’s hard to believe it but it’s true.  People are living longer today and the cost of insurance is less than it use to be.

Life insurance companies got smarter as well. They knew that they needed to compete with the flexibility of Universal Life insurance policies.  They have definitely stepped up to the plate.  The new Whole Life insurance policies usually will allow at least three ways to increase your coverage amount without getting a new policy.

1. Increase the face amount of your Whole Life insurance policy
2. Add on (or increase) term life insurance attached to your policy
3. Add on (or increase) supplemental life insurance attached to your policy

All of this without adding on redundant fees.  Keep in mind that anytime you want to increase your life insurance coverage and/or get a new policy you are almost always required to go through underwriting.  As I always find, no one wants to increase their coverage more than someone who just got bad medical news.  By then it is usually too late.

If you have multiple life insurance policies or are looking to increase your life insurance coverage you should talk with a qualified life insurance professional to go over your options with you.  They should be able to do an insurance assessment to determine your best course of action.

Related posts:

1. Hidden Gem of Life Insurance Policies
2. Life Insurance Breakpoints
3. Universal Life Failure Part II

This is the special Samurai Alexa Ranking Challenge Edition!

In honor of this challenge I am listing out the latest post from each of the participants.  I highly recommend everyone on this list if you are looking for some great personal finance reading on the web.  Make sure to check out the original challenge and also the updates to see the progress everyone is making.  Enjoy…

• Announcement: Blueprint For How To Make Money With A Blog E-book Is Now Available! from @moneymatters
• The Government Is Sexist And Nobody Seems To Care from @financialsamura
• Carnival of Personal Finance #245 – “Dollar Doodles” edition. from @budgetsaresexy
• New Credit Card Rules Taking Effect from @freefrombroke
• Potential Benefits Of Going Through The “Great Recession” While Young from 20sMoney
• Are Credit Card Companies Profiting From Tragedy from Credit Card Chaser
• America Saves Week from @leanlifecoach
• Is Bulk Better? from @suburbandollar
• How to Be a Financial Trim Trab from @fiscalfizzle
  
• Passive Income from Planting Dollars
• How long are you going to live? from @MBAbriefs
• Get out of debt to unleash your inner money maker from @Monevator
• Money Stories: Financially Independent from @danialpacker
• Meet Mrs Accountability from @enemyofdebt
• Why Does Everyone Hate Financial Planners from @mjtm
• A Teller Deposited Too Much Money, Can I Keep it? from @ultmoneyblog
• How Athletes Are Different From You And Me from Blog Income For Life
• New Credit Card Protections Take Effect from @moneyfunk
• To Improve Performance:  Spend Time, Not Money from @wellheeledblog
• Sunday Morning Click – Tax Return Edition from @deliverawaydebt
• Fresh Perspective Interview with Tom Drake from @clarifinancial
• I Am Debt Free, My Mortgage Countdown #1 – Equilibrium from @money_reasons
• The Butterfly Effect, Bees and Money from @downturnliving
• Empathy is all I wanted from @cjbowker
• Our Tax Return Plans from @elle_cm
• Taxing Financial Transactions: Good Idea or Not? from The Amateur Financier
  
• Can Shrinking Yields Be a Good Sign? from @finengr
• My Next Step from Little House in the Valley
• FF Link Roundup – February 2010 from @foreignersfinan
• No Longer An Investing Virgin: My foray into the stock market from Chasing Prosperity
• Tax Refunds: Does Size Matter? from My Money Minute
• Do You Have to Give Up Convenience in Order to Save Money from @rainydaysaver
• Step-by-step Guide on How to Save Money on Your Cell Phone Contract from @youngandthrify
• Getting a BIG Tax Refund was keeping us in debt from Stay at Home Mom CFO
• No, You Don’t Need a Large Emergency Fund – Convince me That I am Wrong from @anastasia_a
  

Related posts:

1. Sunday Link [Turkey] Rodeo 10
2. Sunday Link Rodeo 18
3. Sunday Link Rodeo 17

I don’t know about you but when I decide to go out to eat, where I go depends on what mood I’m in.

• Burger – I’m probably heading to a bar or pub.
• Fish - I’m going to a seafood place
• Steak - Has to be a steakhouse they almost always have the best cuts of beef.
• Pasta - Italian, what can I say?
• Sushi - You have to go to a specialty place for this.  I don’t mess around with raw fish.

What I do know is that if I want Chinese food I’m not going to the Italian restaurant and if I want sushi, I’m definitely not going to a pub.

Sometimes when I’m going out for eat I can’t decide what I’m in the mood for.  I have a couple of restaurants that I frequent just for these occasions.  I know that I’ll get some good food at these place but they don’t specialize in a certain type of food.  These restaurants won’t necessarily satisfy a craving I have but they will fill me up.  By understanding this it really saves me from being disappointed.

Are you a fan of buffets?

What I notice about buffets is that I’m definitely going to get full but I’m really not going to have any really good food.  It depends on what you value, quality or quantity.  Buffets help you find instant gratification but they don’t give you any real quality of food.

Your Financial Planner

Is he your financial buffet?  From my experience, most financial planners specialize in certain areas.

• Investments - wealth managers that charge a percentage of assets under management
• Life, disability & LTC insurance – insurance specialists that are paid on commissions
• Auto, homeowners & liability insurance – property and casualty firms that are paid on commissions
• Holistic plan – financial planner that looks at your full financial picture, could be compensated a few different ways
• Taxes – an accountant that is usually paid by the hour or a flat fee
• Wills & Trusts – an attorney that is usually paid by the hour or a flat fee

Just as there are more types of food than I listed there are a lot more financial areas that you have, and will continue to have to, make decisions about.  Unfortunately, the easiest solution (a buffet) isn’t always the best.  If you are looking to have quality service and quality advice you just might need to deal with a few different specialists in the areas of your finances that need the most attention.

Your financial planner might be a buffet. They have a ton to offer but none of it is really any good.  They will fill you up with a bunch of crap though.  Is that what you want?

Related posts:

1. Your Ideal Financial Planner

Have you ever heard of bands in regards to life insurance?

Well it’s true.  There are premium bands that almost all life insurance companies use.  This creates pricing issues that you might never be aware of.  A good insurance professional should be aware of this but not always.  They make mistakes.  These bands will vary by the type of policy as well.  I will tell you that they are most prevalent in term insurance policies.  If you have or plan on purchasing term insurance it is something you need to be at least aware of because your agent might not be.

What life insurance companies do is they band premiums by policy size.

An example of banding would be:

• band 1: $100,000-$249,99
• band 2: $250,000-$499,999
• band 3: $500,000-$999,999
• band 4: $1 million and above

What this means is that the premium per $1,000 of coverage decreases as the amount of coverage purchased moves into the higher bands.  The way in which life insurance companies band premiums may vary as this is just an example.

Premium bands are like break points.

Most people are more familiar with mutual funds.  Think of premium bands as break points.  With ‘load’ funds you, the consumer, pays a sales charge usually at purchase.  The most popular and widely used ‘load’ funds are called “A” shares.  These have the highest upfront load with the lowest annual expenses.  The typical upfront load for “A” shares is 5.75% of the purchase price.  As you buy or own larger quantities of “A” shares within a mutual fund family you get a discount, or reduced load.

Life insurance companies work much the same way.  As you purchase larger amounts of insurance you qualify for reduced.  However, life insurance is not as clear cut as mutual funds in that premiums within each band vary by gender (male/ female/ unisex), issue classification, issue age and policy year.

What does this all mean?

What this means is that if you are nearing a band then it will most likely be cheaper to purchase a larger amount of insurance.  From the example of bands above, it is probably cheaper to purchase $100,000 of coverage rather than $87,000.  It is probably cheaper to purchase $250,000 of coverage than $229,000.

Consumer Awareness

This can be important to be aware of depending on who you are working with to place the insurance.  Let’s say you go through a calculator to determine your amount of coverage.  If the number you come up with is not a round number, such as $962,000.  When you decide on a company which to apply to for your life insurance it is important to understand where their bands are.  If they have a band at $1 million of coverage then it will most likely be cheaper for you to purchase $1 million of coverage.

The Problem

When shopping for insurance online, it is probably best to round your coverage amounts up so as to try and catch the next band.  If you put in a non-round number for your amount of coverage you will most likely get a quote that is that exact number even if it is more expensive coverage.  Unfortunately, not all quoting systems account for premium banding.  This means that the person running the quote, or the agent, needs to check to see if the insurance can be cheaper for you.

Related posts:

1. Hidden Gem of Life Insurance Policies
2. Whole Life Insurance is Stackable
3. Life Insurance Audit

Most people don’t even think about disability.  It’s sort of the ninja of personal finance.  It silently hurts you.  The reason I say this is because there is no announcement in the newspaper and there are no big events held.  Something bad happens and you end up in near seclusion as you try to recover.  Usually the only people that are around to help and support you are your family and friends.  Unless you are one of those people you never realize what someone has to deal with when they become disabled.

Maybe you are one of the lucky one’s that has group disability coverage through work.  You really, truly want to believe that your coverage will be there to help you if something were to happen.  Well here’s 5 ways that group disability coverage will fail you.

1. It covers 60% of your income. Most group disability insurance covers up to 60% of your income.  Can you live with that big of a pay cut?  Don’t forget to add on the extra medical bills from the accident that caused the disability.  Then there are the medical bills from the rehabilitation.  Well we can ignore those for now.  Make a list of your five biggest bills (mortgage, car payment, taxes, etc.).  Now which two aren’t you going to pay?
2. You’re employer is nice enough to pay for it. Isn’t that nice of your employer to pay for your group disability insurance?  I would think so too at first.  From an IRS standpoint though, if your employer pays for the coverage that means you don’t pay taxes on that money.  Now if you were to become disabled, since there were not taxes paid yet, the benefits are now taxable.  This means that if you are in a 15% effective tax rate, then your 60% coverage just got cut down to about 50%.
3. You make bonuses and/or commissions. There are a lot of people out there who have a large part of their income tied to bonuses and/or commissions.  Did you know that most group disability insurance doesn’t cover these at all?  Usually they only cover base salary.  This means that if you have a $100,000 base salary plus an extra $50,000 through bonuses and/or commissions, then when you factor in #1 & #2 above you are now down to about 33% coverage.  The pay cut just keeps getting bigger.
4. There is also a cap. Most group coverage will cap your monthly coverage amount.  The most common cap is between $5,000-$6,000 per month.  To give you an idea, each $1,000 of month coverage, covers $20,000 of salary at 60%.  So a $5,000 cap will cover the first $100,000 and a $6,000 cap will cover the first $120,000.  If you make more than that, you are taking an even bigger pay cut.
5. There is a social security offset. Most group disability insurance will offset your benefit by the amount you receive from social security.  If you’ve been reading this thinking that you’ll have some extra money on top of your disability benefit, don’t count on it.  Some companies won’t even pay you the social security portion until your coverage has been denied by social security (which will most likely happen when you apply anyways).
6. You can go work somewhere else. With disability insurance there is a feature called own-occupation.  This means that you are unable to perform the duties of your specific occupation even if you are able to work in an other occupation.  Good group disability coverage will cover your own-occupation for a period of 2 years after that if you can work anywhere (yes, even McDonald’s) then you receive no more benefits.  Notice I said ‘good’ coverage, a lot of policies don’t even have the own-occupation benefit.
7. You can’t contribute to your 401k when you aren’t working. No one ever thinks of this.  If you are not working you cannot contribute to your company 401k.  I have yet to see any type of group coverage that will account or help with this in any way.  Most individual disability insurance policies will have a rider or stand alone feature that will continue to contribute to your retirement for you if you were to become disable (yes, this costs extra).

If you ever get a financial plan done it should include an analysis of your disability coverage.  A lot of times and individual disability insurance policy is needed to supplement your group coverage in order to provide adequate protection for you and your loves ones.  If you are unsure about your coverage you should consult a financial professional or get an insurance assessment.

Related posts:

1. Pricing Your Disability Insurance
2. 7 Disability Insurance Add-on Features
3. What Is Your Greatest Asset?