Congratulations! While you’re planning for the arrival of your first child, consider these essential topics. Even if you’re already a parent, give yourself a double check. Feel more confident that you have a plan that fits your family.
Learning Points
Evaluating Term Life Insurance
If you and your spouse/partner want to evolve your joint to-do list from “saving for baby” to an actionable plan, evaluating your life insurance coverage is an essential step. Specifically, a term life insurance policy can provide your family with financial support should you unexpectedly pass away.
YOU CAN USE A TERM LIFE INSURANCE POLICY TO TRANSFER THE RISK of your unexpected death to an insurance company, rather than your family retaining that risk.
Your term life insurance policy is active for a pre-determined number of years – referred to as the term – and at the end of the term your policy expires with no maturity value. In return, you pay a set, annual premium each year your policy is active.
If you own a term life insurance policy, that policy only pays a death benefit during the policy’s term, and it has no savings component.
Your life insurance death benefits are also not taxable if your surviving spouse is the beneficiary.
A SENSIBLE TERM LIFE INSURANCE POLICY CAN PROVIDE YOU AND YOUR FAMILY with the following:
- A predetermined death benefit amount for surviving family members in the event of the policy owner’s death.
- Liquidity and available funds to pay for debts, taxes, and the costs of estate administration.
- Beneficiaries with an inheritance that has been shifted from one generation to another in a tax-efficient manner
AS A STARTING POINT, EVALUATE HOW YOU CAN MATCH the term of your policy with your largest liabilities and ongoing expenses.
Assess how your family would comfortably pay down debt, fund lifestyle/living expenses, educational expenses, and personal savings in your analysis. You’ll also want to factor in your existing savings and life insurance.
Death Benefit Considerations
EVALUATING DIFFERENT LIFE INSURANCE DEATH BENEFIT AMOUNTS is a quantitative and qualitative process. Consider the following two hypothetical scenarios to highlight under- and over-insurance:
A WORKING, MARRIED COUPLE IN THEIR EARLY 30’s
- Three children under the age of 6
- Student loans of $125,000
- 30-year mortgage with principal balance of $500,000. There are 29 years remaining on the loan.
- A new, 10-year, $500,000 term life insurance policy for just one spouse is unlikely to provide as robust insurance coverage for this family as two, 30-year life insurance policies worth $2,000,000.
A WORKING, MARRIED COUPLE IN THEIR LATE 50’s
- Three children who have graduated from college
- Personal car loan of $12,000
- 30-year mortgage with principal balance of $125,000 with 6 years remaining.
- A new, 30-year, $1,000,000 term life insurance policy for both spouses is likely to create too much insurance coverage for this hypothetical family.
- Evaluating other life insurance options such as two, 10-year policies with $250,000 of coverage could create a more balanced solution.
Each of these scenarios highlights an example of under- or over-funded life insurance coverage.
While each scenario provides an incomplete picture of the family’s situation, here are a couple conceptual takeaways:
- There is no one-size-fits-all solution for life insurance.
- The details of your financial life, including your current income, expenses, additional assets, savings and insurance should inform your coverage amount.
- For many families, life insurance is intended to help maintain a current standard of living. In some cases, selling the family home is an option if downsizing is an acceptable outcome. For many families, such an outcome is unappealing.
It’s important to avoid simple rules of thumb, when you evaluate how much life insurance coverage you need.
As you evolve your joint to-do list from “saving for baby” to an actionable plan, you need a customized life insurance solution that truly protects your loved ones. A life insurance policy personalized to your life allows you the flexibility to build your financial resources and fund your savings priorities.
A life insurance policy can provide you and your family with a financial safety net. That safety net allows you to save for your retirement, your children’s education, or other priorities, rather than keeping large amounts of your cash readily accessible/liquid.
Individual Policy vs. Employer-Provided Group Term
As you get older, the cost of life insurance increases. Whether you’re considering a term life insurance policy with a 10-year or 30-year term, it’s helpful to evaluate policies that are not connected to your employer. The age you apply for life insurance will influence the premium on your policy.
As you shift your mindset from “saving for baby” to a detailed plan, recognize that the younger you are when you obtain a policy, the more favorable rates can be, all else being equal.
THE PREMIUM, OR PRICE, OF YOUR LIFE INSURANCE POLICY is influenced by your individual risk factors like:
- Benefit Amount: the higher the benefit, the more expensive.
- Term: the longer the term, the more expensive the policy.
- Age and Gender
- Family medical history
- Driving record
- Lifestyle and occupation
YOU CAN OBTAIN AN INDIVIDUAL TERM LIFE INSURANCE POLICY in lieu of the group life insurance offered through your employer.
As you think about your specific situation, consider that an individual policy provides you with the following:
- Portability: An individual term life insurance policy can allow you to avoid being dependent on your employer’s group life insurance policy, especially if it does not have a conversion privilege.
- Fixed Cost Potential: Depending upon the type of coverage you need, you can obtain a policy with a set annual premium – this is called a level premium. Prioritize your savings accordingly.
- Ownership and Availability: If it’s important for you to create certainty around your life insurance coverage, you own your individual term life insurance. Your employer owns the group provided insurance. If you are no longer working for your employer – through their choice or your own – your group coverage is eliminated.
- Increased Death Benefit: If you need a death benefit that exceeds the coverage limits of your employer’s basic and supplemental life insurance, an individual plan that provides adequate coverage for your family is worth evaluating.
While the insurance landscape continues to evolve, exploring level-premium term insurance is a good starting point for most couples and parents who want to take their to-do list from “saving for baby” to an actionable plan.
As you consider your specific situation during the “saving for baby” phase, consider the drawbacks and alternatives to an individual term life insurance policy:
- Static Benefit: Your financial needs might change before your policy ends. Therefore, your original coverage could be significantly more or less than you need. A group policy has some flexibility, oftentimes within specific constraints, to increase or decrease coverage amounts from year to year.
- Finite Term: Unlike whole life insurance, an individual term life insurance policy’s coverage is relatively temporary and expires after the stated term.
- Coverage based on individual risk factors: If you have a health condition that limits your ability to purchase an individual life insurance policy, a group policy might be a more cost-effective option.
- If you prefer a policy with cash value and/or investment components available through whole life insurance or universal life insurance. The premiums you pay do not create any equity position in the policy.
Oftentimes, a 20- or 30-year term policy can strike the right balance for those who need it most when you’re starting out.
Evaluating the Financial Strength of a Life Insurance Company
As you evaluate different life insurance options, look beyond the premium cost relative to the death benefit. Price is a factor, but not the only factor.
Understand the financial strength of each life insurance company you’re evaluating. As a starting point, independent ratings reports are available from agencies like A.M. Best, Moody’s, and Standard & Poor’s. Typically, the reports are available on the life insurance company’s website.
Review the reports for the life insurance subsidiary company. Not the life insurer’s parent company. Also, confirm the reports are recent.
There should be a similar consensus from each agency’s report. Pay particular attention to the long-term financial strength of the life insurance company.
You want to obtain a life insurance contract from a company with strong financial health and reliability so it can meet its long-term obligations to you and your family.
Looking Ahead
Evaluate whether an individual term life or an employer’s group term policy best fits your specific situation.
Gather quotes and conduct due diligence on potential life insurance companies. Seek out unbiased, objective perspectives and information from professionals whose interests are aligned with your own.
If you apply for an individual term life or supplemental group insurance policy, you might need to go through medical underwriting before the insurance company will approve, or decline, your coverage. While medical underwriting is not onerous, it could add extra time to the approval process.
As your life changes and you discover that you need additional death benefits, explore additional solutions that bridge any gaps.
On a practical note, once you know which policy you need and how much your annual premium(s) will cost, automate saving for this priority.
An employer program can deduct premiums automatically from your paycheck.
An individual policy might require you to set up an automatic payment. If you set up an annual, auto-pay option, you might receive a cheaper premium than if you paid quarterly or monthly.
Disability Insurance
If you want to evolve your financial to-do list from “saving for baby” to an actionable plan, evaluating your disability insurance coverage is an essential step.
A disability insurance policy can provide financial protection for you and your family if you were to become ill, experience an injury that prevented you from working or working in your specialized field.
A disability insurance policy only covers you, or whoever is the insured person. It does not provide coverage to other family members. As you consider whether this type of coverage is right for you and your family, personalizing solutions for you AND your spouse is possible.
Disability insurance is available as both a short-term policy and a long-term policy. As the names suggest, each provides coverage for different benefit periods.
The Benefit Period is the maximum length of time that the disability benefits will be paid:
- Short-term: Typically ranges from three to six months.
- Long-term: This can range from a few years to up to age 65-70. It is rare for a new LTDI policy to have a lifetime benefit period.
Given this dynamic, it’s helpful to view your disability insurance choices in terms of two distinct time periods.
Short-Term Disability Insurance Considerations
How can you protect your family from short-term interruptions in your income? Short-term disability insurance is one option. This can be attractive if this benefit is automatically provided by your employer. Frequently, an individual short-term disability insurance policy is not the most cost-effective solution for families.
As an alternative, you can self-insure this specific risk by maintaining an emergency fund. Your emergency fund should be funded enough to bridge the gap between not getting paid for a similar duration as a short-term disability policy. With this approach, you could save the monthly insurance premium costs you aren’t paying into a dedicated emergency fund.
Short-term Disability and Your Pregnancy
Start by reviewing your employer’s benefits guide for short-term disability insurance (STDI) coverage. If you have short-term disability, it’s often provided to you with no direct out of pocket cost. Depending on your benefits package, you can file a short-term disability claim and be covered for a pre-determined time period while you are on leave.
Review your benefit amount and understand how this will be applied in your specific situation. Specifically, be on the lookout for reductions to your benefit amount after a set number of weeks.
Your benefit amount is the percentage of your income that will be paid as a benefit during the disability period.
- Short-term: Usually covers ~60-70% of your gross income.
- Long-term: Usually covers ~50-70% of your gross income.
The relationship between Short-term Disability, Paid Parental Leave, and the Family and Medical Leave Act (FMLA)
Simultaneous Use: You don’t have to choose either STDI or FMLA. If your health condition qualifies for both, you can use STDI for income replacement and take FMLA leave to protect your job.
If you plan to take paid parental leave, you can take FMLA leave to protect your job, too. Your employer-sponsored short-term disability insurance policy won’t allow you to receive paid parental leave and STDI payments.
You might be able to coordinate your STDI benefit for a period of time before or after you take paid parental leave. Sometimes just knowing what to research is enough to get started. If you’re unsure about your specific situation, your HR team should be able to provide you with employer-specific resources to review in the context of your personal situation.
Long-Term Disability
A long-term disability insurance policy decision typically has more complexity. This complexity is driven by its potentially long duration. If you’re considering, or reconsidering your coverage, there are a few avenues and features to be aware of during your evaluation process.
The right long-term disability insurance policy for your family can create certainty around how much financial support you’ll receive if you need it. It should be clear under what circumstances your policy is maintained, and when you would not be eligible.
Aside from your daily living expenses, the monthly benefit amount your long-term disability insurance policy can help in the following ways:
- medical expenses related to the disability, which can be a significant financial burden if you are unable to work.
- rehabilitation costs and help to maintain the individual’s standard of living.
- A disability insurance policy can help individuals to maintain their independence and self-sufficiency.
Ultimately, a strong long-term disability solution should address how you sustain a stable stream of income for your family if you are unable to work due to illness or injury until you reach retirement age.
What are the main avenues to obtain a Disability Policy?
There are three main avenues to purchase disability insurance for your individual coverage. As you think about your specific situation, evaluate whether an individual policy, an employer-sponsored policy, or an association-related policy is available to you.
Employer-sponsored coverage is sometimes referred to as Group Disability.
There is a third avenue for purchasing disability insurance, this is commonly connected to a professional or medical association. such as the American Medical Association (AMA) or American Dental Association (ADA). These are individual policies that receive a discount. While many of the terms and general framework of disability insurance policies are relevant, association-offered policies are worthy of a separate exploration. If you are a doctor or surgeon, it’s more likely you have a policy through an association than an unaffiliated, individual policy. The same can be said for the dental profession.
Employer-Sponsored / Group Disability Insurance
Group long-term disability insurance is an employer-sponsored program to provide disability income to employees who are disabled (unable to work) beyond a period specified in the plan, usually six months.
These plans are designed to supplement the Social Security disability coverage available to employees who are eligible for SS benefits. Disability income under an employer plan usually continues for the duration of the disability, to age 65 or until death.
As you consider your employer-sponsored disability insurance options, it’s helpful to keep in mind the following:
- Cost: The cost of group disability can change from one benefit year to the next.
- No Portability: Group disability is tied to your employment. There is no portability.
- Benefit Amount: Depending on your plan, group disability benefits are usually limited to 50%-60% of your base salary only. There are sometimes supplemental options to increase this limit to 70%. This is intended to reduce moral hazard.
- Coordination: Your group benefits are coordinated with Social Security. As such, your group benefits can be reduced by the amount of Social Security benefits you receive.
Taxation of Group Benefits: An Employee’s Perspective
IF YOU ARE EVALUATING A DISABILITY INSURANCE POLICY available through your employer, you’ll want to understand how your benefits are taxed relative to an individual policy.
Any disability benefits you receive will be taxed as ordinary income if your employer pays the entire insurance premium.
If you, as an employee, pay a portion of the premium with your after-tax income, that same portion of the disability benefits are not taxed as ordinary income.
Long-Term Disability Types
Whether you are evaluating an individual, group, or association-related long-term disability insurance policy, it’s helpful to understand the different disability definitions used with respect to your “occupation”.
Here’s a quick overview:
- Any Occupation: An “any occupation” policy will only pay benefits if you cannot work in any occupation for which you are reasonably qualified based on your education, training, and experience. This is a relatively stringent definition of disability. You must be unable to work in any job that you are reasonably qualified to do based on your background, not just your current occupation.
- Own Occupation: Own-occupation disability insurance can pay benefits to policyholders who cannot perform the substantial and material duties of your specific occupation at the time of disability. There can be variations in how these benefits are paid if you are able to work in another job. Understand the exact terms of each policy to compare like policies with one another. For example, an own occupation policy may reduce benefits if you earn income from another job.
- True Own-Specialty Disability Insurance: This is for the medical community in particular. Under this definition of disability, you could collect full disability benefits if you can’t work in your medical specialty and choose to work in another career.
Depending on your policy’s definition of disability, if you find gainful employment outside of the job you had prior to your disability, your policy might not be required to pay you any benefit amount.
As you evaluate your options, keep in mind that the premiums increase as you go from any-, to own-, to “true” own-specialty occupation disability definitions.
Additional Life Insurance Terms to Know
Non-Cancellable: The insurer cannot cancel your policy, change any terms, or increase the premiums as long as the policyholder continues to pay the premiums on time.
For example, if you have a non-cancellable disability insurance policy at age 30 with a monthly premium of $200, your premium will remain $200 throughout the life of the policy.
This is beneficial when you value knowing how much your insurance premium will be each year and can afford high initial costs.
- Benefits
- Absolute premium stability. Highest level of policyholder protection.
- Predictable cost over the life of the policy.
- Drawbacks
- Typically higher initial premiums compared to guaranteed renewable policies.
Guaranteed Renewable: The insurer cannot cancel your policy if you pay the premiums. However, the insurer can increase your premiums but only on a class-wide basis, not individually.
When you need guaranteed coverage and prefer lower initial premiums. You understand and are willing to accept the risk of potential premium increases in the future.
- Benefits
- Assures continued coverage without individual cancellation.
- Typically, lower initial premiums compared to non-cancellable policies.
- Drawbacks
- Potential for premium increases over time.
- Less certainty about future costs.
Saving for Baby: The Next Step
When you know who and what are truly important, you can create incredible clarity about your spending and saving.
Clarity to confidently spend on things that matter. Clarity to avoid spending your hard-earned resources on things that aren’t aligned with what you want in life.
As your financial planner in Saint Louis, we can help you plan for the future and enjoy the present moment.
Start feeling more confident that you are making progress toward your savings priorities and planning for your first child. Once you know which pre-arrival planning items you want to tackle, set aside time on your calendars to start making progress on what you want to achieve.
Proactive and open collaboration with your financial, tax, and estate planning professionals can help you work towards your financial goals. Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.
If you’re unsure about your next step, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.