The best practices for a healthy financial life, part 3: Sharing the risk

Barry Glassman
WTOP Financial Contributor

WASHINGTON — My last article, “The best practices for a healthy financial life, Part 2,” gave you the resources you need to get started on setting and achieving your financial goals.

Whether saving for retirement or buying a new home, those goals can be quickly derailed if life throws a curve ball.

That’s why having the right kind — and amount — of insurance is an important piece in any financial plan.

Some insurance is mandatory — such as automobile insurance, and more recently, health insurance, due to the Affordable Care Act.

Other types of insurance are just as important because they let you “share the risk,” should something happen to you.

Here are the types of insurance that I recommend everyone consider to protect their future income and savings.

Life Insurance

If you have a family, life insurance is a must. Basic-term life insurance is purchased for a period of time, say 20 years, and pays a death benefit to your beneficiaries should you die while the policy is in effect.

This money will help replace the income on which your family depends. It will also pay for things such as the mortgage on your home or for your children’s college education. Once you retire and no longer have these types of large obligations, then this insurance is usually no longer necessary. Bankrate.com has a terrific life insurance calculator to estimate how much life insurance coverage you should consider for your situation.

You may also want to consider permanent life insurance, which is more expensive, but has a savings component, also called a cash value which builds up over time.

The idea is that you keep this insurance your entire life, and it will pay a benefit when you die. There are a number of reasons to consider permanent life insurance, such as using it to pay federal estate taxes or to protect assets from creditors.

It’s always a good idea to consult a financial advisor or insurance professional to know what type of life insurance makes sense for you and your family.

Term life insurance is becoming less and less expensive, and some policies may not require a health screening. Insure.com is a great source to learn more about life and other types of insurance and to shop for the best policies and most affordable coverage.

PolicyGenius.com is another easy-to-use online service dedicated to educating consumers about life and disability insurance. Started by two former McKinsey consultants, the company is shaking up the insurance industry by offering sensible and accessible information online, providing comparisons of top policies without sending personal information to the insurance carriers and letting the consumer reach their own conclusion as to whether they should have this insurance.

Long-term Care Insurance

Term life insurance is becoming less expensive, but the price for long-term care insurance keeps going up. It’s not surprising when you consider that roughly half of the $2.5 trillion spent on health care in 2009 was allocated to those who are over the age of 65, according to the Office of the Actuary. At least 70 percent of people over 65 will need long term-care services during their lifetime according to the 2014 Medicare and You National Medicare Handbook.

Long-term care insurance is something that most people should seriously consider given that in 20 years, the cost to cover three years of long-term care could exceed $300,000. Genworth has an interactive map that shows the costs of long-term care across the U.S. You can also calculate future long-term care costs based on your state’s median costs by clicking on your state and selecting a timeframe, such as 20 or 30 years from now.

For instance, the annual median cost for a private, one bedroom apartment in an assisted living facility in Virginia is $47,880; it’s estimated to cost $116,217 by 2044. A private room in a nursing home in Virginia will jump from $84,315 to $204,655 in 30 years.

Typically, there are two types of long-term care policies, traditional and hybrid. Keith Eig, a long-term care insurance specialist at Greenberg, Wexler and Eig, LLC writes that the traditional policy is relatively straight forward. Premiums are paid to an insurance carrier for the life of the contract, much like term life insurance. Also like term insurance, if you don’t use it, you don’t get the money back for those premiums.

The hybrid policy has a type of “cash back” provision. A one-time deposit (typically $50,000 to $150,000) is paid up front. This deposit “funds” a pool of money to be used for long-term care in addition to a death benefit.

If the insured dies before the long-term care benefit pool is used up, then a death benefit is paid to the beneficiaries. The entire deposit could potentially be refunded to the policyholder if they cancel the policy prior to the start of the benefit withdrawals or death.

See my article, “How much does a long-term care plan cost?” Another great place to learn more about long-term care and compare policy benefits and costs is through the American Association for Long-Term Care Insurance.

Long-term Disability Insurance

Just 29 percent of Americans own disability insurance, according to the Insurance Information Institute, but one in four of today’s 20-year-olds has a chance of becoming disabled before they retire, according to the Council for Disability Awareness. That means a lot of people may be out of work and without a paycheck for a long time due to an injury or illness.

Most disability policies pay out 40 to 60 percent of your base salary. Even if you’re one of the fortunate few who has long-term disability insurance through your employer, you may still want to look into supplementing that coverage with an individual policy. Why? Many employer-based plans only provide benefits if you’re totally disabled.

If you don’t have disability insurance, or want to add to the benefits you receive through work, you can expect to pay between 1 and 3 percent of your gross salary annually for the premium. If you pay the premiums, then any benefit paid out is tax- free.

If your employer pays the premium, then your benefit is taxed, which means less money coming to you. You’ll want to check out PolicyGenius.com for more information and to receive quote comparisons for the best policies.

Let’s be honest, insuring for all of the

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