Is Disability Insurance Too Expensive?

How Long Could You Afford To Live Without A Paycheck?

You rely on your income to fund every aspect of your life. If you are like one of the millions of Americans who unexpectedly becomes unable to work each year due to illness or injury, the last thing you want to worry about is how to continue paying your bills without an income.

A common misconception about disability income insurance is that its sole purpose is to cover against catastrophic events resulting from accidents.

In fact, illnesses like cancer, depression, and multiple sclerosis far more often impact your ability to work and support yourself and your family.  Individual disability income insurance is designed to protect your income if you cannot work due to illness or injury. 

Did you know?

90% of disabilities are caused by illness

10% of disabilities are due to injuries

1 in 4 of today’s 20-year-olds will become disabled before retiring

Why you need disability income protection before you’re sick or injured

Apply While You’re Healthy. You get the most favorable terms by buying individual disability income insurance before you need it. Once you’re too sick or injured to work, you usually can’t get the protection you need.

Lock in Pricing. Once you have your non- cancellable and guaranteed renewable policy, the amount you pay each month is guaranteed, and the insurance company can never cancel your coverage as long as you make your payments on time.  

Secure Coverage While on the Path to Your Career. If you’re studying to become a professional such as a doctor, dentist, or a lawyer, you can apply for insurance before you graduate, with options to increase coverage as your income grows.

Customize Your Coverage. You can select options to customize your protection. These options can let you increase coverage as your income grows and help keep pace with the cost of living. You can even buy coverage to help you replace your retirement plan contributions or protect your ability to repay student loans during a period that you can’t work due to sickness or injury.

College Savings Alternatives

Most people have heard or invested in small 529 plans for their children's college expenses. most don't know though that there are penalties and ramifications even if you use the money for college such as 10% penalty if not used for college expenses and negative impact on financial aid eligibility.

Here are some alternatives that could help you depending on what youre trying to accomplish.

• Coverdell education savings accounts are more flexible than 529s in that they can be used for K-12 schooling, as well as higher education, But they have income limitations and restrict contribution amounts—up to $2,000 a year from all contributors for a single beneficiary. Also, contributions aren’t allowed after the beneficiary turns 18.

The Coverdell account custodian—usually a parent—controls the account, and the beneficiary may take control at the age of majority (in most places, that’s 18), depending on the plan. Earnings grow tax-free, and there’s no federal tax when you take out money for qualified educational expenses. The account must be closed before the beneficiary turns 30. The money can be moved to a 529 for the same beneficiary, a 529 or Coverdell for a relative, or a regular brokerage account, in which case taxes and perhaps penalties are likely to be owed, unless the beneficiary has special needs.

• Roth IRAs are designed to be retirement-savings vehicles, which means that if the child doesn’t go to college, the account owner can have the flexibility of using the money for retirement. Savers can contribute up to $5,500 a year (or $6,500 if over age 50) to a Roth as long as their incomes are within certain limits, and there is no penalty for withdrawals before age 59½ if the money is used for qualified higher-education expenses. However, the account owner may have to pay income tax on the earnings portion of any withdrawal. Note that the entire withdrawal—principal and earnings—may be considered income for financial-aid purposes and will likely affect your aid application for the following year.

• Cash Value Life Insurance is a type of life insurance policy that pays out upon the policyholder's death, and also accumulates value during the policyholder's lifetime. The policyholder can use the cash value as a tax-sheltered investment (the interest and earnings on the policy are not taxable), as a fund from which to borrow and as a means to pay policy premiums later in life, or they can pass it on to their heirs. 

Cash-value life insurance is designed as a permanent form of life insurance that includes a death benefit component and a savings component. Most cash-value life insurance policies require a fixed level premium payment, a portion of which is applied to insurance costs with the balance deposited into a cash-value account. The cash-value account earns a modest rate of interest which is allowed to accumulate tax-free. 

Owners of a cash-value life insurance policy can benefit from savings that accumulate in the cash-value account. Cash-value savings can be accessed in a number of ways. With some types of policies, the cash value can be withdrawn. Withdrawals are tax-free to the extent they don’t exceed the total amount of premiums deposited into the policy. However, withdrawals can have the effect of decreasing the death benefit amount.

We recommend understanding the different features and benefits of the various education savings options, including contribution amounts, control of decision-making and ownership, tax considerations, flexibility with unused balances and financial-aid considerations

Retirement The True Expense of Bad Habits

For some Americans, going out to dinner or buying that new gadget, is planned and budgeted for. For others, it's just another day. 

When it comes to planning for later in life the second unprepared group is growing at an alarming rate. 

And when it comes to dealing with current debt for many Americans this is a daunting task. From increasing payment amounts to declining credit scores which limit options for paying debt off a lot of us just decide to ignore the issue and live for today. Many have trouble starting new things or making changes to current lifestyle so they dont deal with budgeting. as in this case:

The average household spends an average of $3,008 per year on dining out, the Bureau of Labor Statistics reports. A $15 lunch is $3600 a year.  $3600/yr over the next 20 years at an average 5% return would yield you $133589 and thats without yearly inflation increase of your savings.

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Surviving in non ideal situations (ie. tons of debt) through budgeting will help you thrive when those situations become ideal.

For those with the means to spend an exorbitant amount on food, clothing, gadgets, vehicles this epidemic might not register as an issue. Average Americans can't affordcostly habits especially at the expense of being unprepared for an emergency, or, worse, having to work past retirement age.

Whole Life vs. Indexed Universal Life (IUL)

Whole Life vs Indexed Universal Life

When shopping for a life insurance policy, consumers have a large number of choices.

From term life insurance that can be purchased for a few dollars per month to whole life insurance that covers you until the day you pass on, there is no shortage of options to consider.

If you are most interested in permanent life insurance, you’ll turn your attention to these two options:

  • Whole life insurance
  • Index universal life insurance (IUL)

On the surface, it appears that these two types of policies are one in the same. However, as you learn more, you’ll find that there are a variety of key differences that will help you make an informed decision.

 

Benefits of Whole Life Insurance

The first thing you need to understand are the many benefits that make whole life insurance so popular. Here are four points of consideration:

  • Guaranteed death benefit as long as you continue to pay your policy premium
  • Fixed premium that does not increase as you age
  • Option to borrow against the cash value of the policy
  • Opportunity to earn dividends, depending on the company you purchase from

These are just some of the many reasons why consumers turn their attention to whole life insurance, as opposed to a cheaper term life policy.

Benefits of Index Universal Life

Unlike whole life insurance, a type of coverage that has been in existence for many years, index universal life is a relatively new policy option. Here are some of the reasons why this coverage is attracting a larger number of buyers with each passing day:

  • Guaranteed death benefit
  • Guaranteed cash value growth
  • Option to borrow money later in life
  • Ability to earn a high level of interest

Despite the many similarities with whole life insurance, here’s something you need to know: index universal life is the riskier of the two investments, with the potential for the entire program to implode if cash values are depleted by the cost of insurance.

Cap, Floor, Participation… Let’s Get Technical

So there are many features to an Indexed Universal Life Insurance, and it can be a very hard product to truly understand.

Cap

A maximum rate of return that you can earn on your index. Common caps are 10-14%. Let’s say your cap is 12%, This means if the index does 20% you will be “capped” at 12%. 

Floor

The minimum rate of return you will gain. Most of the products offer a 0% floor, which means you will not lose money.

Participation Rate

This number determines how much participation you get from the index you picked. Common participation rates are 100%, which mean you get 100% of the index, after the cap set.

Cost of Insurance

So the real problem with Universal life policies is the cost of insurance. The cost of insurance is how much you need to pay to keep your death benefit and policy active. As you age the cost of insurance goes up along, so the policy’s cash value is used to pay for a rising cost of insurance.

You have to be very careful if you used an Index UL as a retirement and you took out to much money.

Biggest Problems With A Whole Life

Very little cash early

Most whole life insurance products Do Not build cash value early. Your vanilla whole life will take years to build any significant cash value to access.

Conservative rates of return

The largest drawback is that the cash value will not illustrate as attractively as an IUL. In reality, a whole life is a much more conservative product, but it has guarantees.

Dividends Can Fluctuate

Most top whole life policies are dividend paying policies. These types of policies have a non-guaranteed dividend that can fluctuate with interest rates and performance of the company offering the policy. So picking a very very strong company has to be one of the most important choices in choosing a whole life insurance.

Biggest Problems with Index Universal Life

As noted above, buying an index universal life insurance policy could be risky if a policy is not properly designed. Here are some of the many things you need to be aware of:

  • Your premium could increase over time
  • Earnings are based on equity performance (so there is no guarantee)

With index universal life insurance, many consumers are attracted to the potential to receive high returns. While this is a good thing, it could lead to a situation in which you fail to fund the cash value of your policy. Subsequently, your policy could lapse later in your life when returns aren’t as high, thus leaving you with no coverage.

Overfund Your IUL

However, a properly overfunded Index Universal Life could be a fantastic product for many differently people.

What is overfunding? 

Overfunding is increasing the premium and cash values without increasing the death benefit. It adds straight cash value which grows very rapidly. 

If you have an IUL illustration and you are not sure if it is overfunded, then contact us and we can review the policy for you, and show you how to get more cash.

The Final Verdict

You need to consider each and every type of life insurance policy before making a purchase. The debate of Whole Life vs Indexed Universal Life is highly dependent on each individual. This is the only way to be 100 percent confident that you are making the right decision.

In the end, a detailed comparison of whole life insurance and index universal life insurance will help you understand how to best move forward.