How Much Life Insurance Do You Need?

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Scott and Danielle Nelson

Unpredictable investments and job markets are tough on retirement planning. They also complicate the issue of how much life insurance is right for you. Use our formula to cut through the confusion.

Standard formulas — such as buying coverage equal to eight to ten times your annual income — are inadequate shortcuts. Online calculators are apt to tell you to raise your coverage by $1 million even if you already have insurance. The truth is that life insurance is a personal affair. Two couples may earn equal salaries, but it’s silly to say that someone with four young children should have the same coverage as those with empty nests, no mortgage and a substantial retirement fund.

Moderate inflation and a recovering stock market may tempt you to low-ball your life-insurance needs. But other financial realities, such as puny yields on reinvested lump-sum benefits, may require that you have more coverage, not less. And you’ll likely experience life events that call for changes in your insurance: marriage, parenthood, homeownership, college expenses and retirement. Instead of relying on rules of thumb, you’re better off taking a systematic approach to figuring your life-insurance needs. That’s easier than it sounds, as you’ll see from the following process, because it truly is an art as well as a science.

A simple strategy. The purpose of life insurance is to allow your family members to pay the bills and live their lives as planned despite your absence. That’s why some experts and most online calculators sponsored by the insurance industry seek to figure the chunk of investment capital it would take to replace all of your income for 20 years or longer, held securely in Treasury or municipal bonds and certificates of deposit.

With savings yields low and the prospect of longer life expectancy in retirement, this approach tends to aim high, especially if you assume raises and promotions. Some people are extremely minimalist with insurance. But in reality there is an overabundance of people who end up justifying more insurance is reasonable.

There is a simple strategy to calculate how much coverage to buy and to form a plan that’s easy to update. The idea is to assess whether you need extra coverage or different policies only after you project your life-insurance needs as the sum of four categories.

Final expenses. A funeral, burial and related expenses tend to cost $20,000 to $30,000. Your beneficiaries may be able to get the tax-free proceeds from insurance faster than if they waited for momey from your estate. Use $25,000 as a ballpark number.

Mortgages and other debts. Total your mortgage balance, car loans, student loans and any other debts that would be a heavy burden on your survivors. They may choose not to retire the mortgage, especially if the interest rate is low, but the money should be available so that they won’t face the prospect of being forced to sell.

Education expenses. This calculation can be tricky because you need to consider the cost of college at the time your children enroll. There is a simple solution. College costs have been rising by about 5% a year, which is the same rate you can conservatively expect life-insurance proceeds to grow over time. It’s recommended to research current costs for colleges you’re considering, deciding whether you want the insurance to cover all or a portion of the tab, and adding the amount in today’s dollars to your life-insurance calculation.

Income replacement. Once you cover funeral expenses, debts and education, your family won’t need to replace 100% of your income — and that’s where the art part of the calculation is figured. It’s recommended to cover 50% of current pretax earnings until retirement. You can translate this into a target lump-sum benefit by dividing it by 0.05. For example, if you earn $100,000, divide $50,000 by 0.05, which works out to $1 million. That assumes the insurance benefits will earn 5% a year over the long haul, a conservative figure.

Add all four categories to estimate how much life insurance is appropriate, then tweak the number to reflect personal circumstances. You might increase it if you don’t have a pension, but you could decrease your coverage if your spouse earns a substantial salary. If you or a family member has a troublesome medical history, add $100,000 or even $250,000. If you’re the one with the medical condition, you’ll find it tough to buy additional coverage later at a price you can afford.

For most families, this exercise will work out to an amount in the high six-figures, possibly even $1 million or more. But don’t be frightened. With term insurance, boosting your death benefit by hundreds of thousands of dollars should cost just a few hundred dollars a year.

For example, a healthy 40-year-old male nonsmoker might be considering a 20-year, $500,000 term policy for $360 per year. But he could buy $850,000 of coverage for $576, or a $1-million policy for $645. Women pay less — just $311 per year for $500,000 in coverage and $558 for $1 million. It’s not as easy as it used to be to qualify for the absolute lowest rates. You can contact EHB Insurance Group for the best rates.

The time factor. Also consider how many years you’ll need insurance. If you’re in fine physical shape, you can buy a new policy and lock in the price for 20 years. Because prices for term have been dropping steadily, you may not pay much more to extend your coverage if you reapply in, say, five years.

Some term policies come with the right to convert to permanent life insurance, which you can keep for the rest of your life regardless of health. Premiums will be higher than for term at the beginning, but they usually remain level indefinitely. The best reason to consider whole-life or universal-life insurance isn’t the accumulating cash value, although that’s part of the structure. The real issue is whether you’ll need coverage beyond 20 or 30 years — or after age 65, when term gets expensive. You might want permanent insurance, for example, if you need to protect children with special needs who will always rely on you (or your estate) for support, or if you want to leave money to a school, charity or your children and you don’t expect to afford it any other way.

You need more life insurance if you…

Tie the Knot – Your new spouse might depend on you even if he or she earns as much or more than you do.

Have a Child – It takes a lot of money to raise a child–and it doesn’t get any less expensive if you’re not around.

Buy Your Dream House – When you settle into your family’s permanent home, guard against its loss in case tragedy strikes.

Are About to Retire – No more insurance from work. If you die, your spouse could lose pension and some Social Security income.

Term vs. Permanent:  the best of both

Term insurance is popular because almost everyone can afford plenty of it. Some young people buy the amount of permanent insurance that fits their budget, rather than the protection they need. That’s not smart.

But it can make sense to combine term and permanent insurance with multiple policies or by buying a convertible-term policy and making a series of conversions over the years. One advantage of a convertible-term policy is that insurers don’t require a new medical exam when you make the conversions. That essentially gives you a pass if you gain weight, develop high blood pressure or even survive a bout with cancer.

Example: a 27-year-old male starts by paying $317 per year for $500,000 of term insurance, and then gradually converts it to whole life $100,000 at a time. If he shifts $100,000 to whole-life at age 28, his annual premium would jump to $1,300. If he shifts to another $100,000 at age 31, his annual premium would rise to $2,600. His premium would gradually increase whenever he shifts money to the whole-life policy, topping out at $7,200 per year at age 40, for the entire $500,000 of whole-life insurance.

As long as the insurer remains strong and solvent, the policy’s cash value will rise every year, as will the death benefit. By age 65, in this example, the benefit is projected to be $990,000 and the cash value $475,000, which can be borrowed, withdrawn or tapped to keep the policy in force without paying additional premiums. This kind of flexibility is extremely attractive to many people.




Pitfalls of Medicare Advantage Plans

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Couple distinquishedMedicare Advantage plans may sound enticing. Many offer $0 premiums, but the devil is in the details. You will find that most plans have unexpected out-of-pocket expenses when you need medical attention and only want to cover you when you are healthy.

Also known as Part C, these plans, which private insurers provide as an alternative to traditional Medicare, must provide coverage required by Medicare at the same overall cost level. However, what they pay can differ depending upon your overall health.

Coverage Choices When You Qualify for Medicare…

When choosing medical coverage as a senior citizen 65 years old and over, you can make one of three choices:

  1. Traditional Medicare, which has co-pays and deductibles.
  2. Traditional Medicare with Medigap (a private supplemental policy) that covers Medicare’s co-pays and deductibles.
  3. Medicare Advantage, private insurance that varies greatly depending on the policy you choose.

Most Comprehensive Coverage…

The most comprehensive coverage, which will likely result in the fewest unexpected out-of-pocket expenses, is a traditional Medicare plan paired with a Medigap policy. Medigap policies can vary, and the most comprehensive coverage is offered through Medigap Plan F, which is sold by different insurers but must offer Medicare-specified coverage.

With Medigap Plan F, all co-pays and deductibles are covered, and you even get some coverage when you travel outside the country. With this combination, you can go to any doctor who accepts Medicare. Be aware that with traditional Medicare and Medigap, you will also need Part D prescription drug coverage.

The Devil Is in the Details…

Medicare Advantage plans do not offer this level of choice. Most plans require you to go to their network of doctors and other health providers. Since Medicare Advantage plans can’t cherry-pick their customers because they must accept any Medicare eligible enrollee.

Here’s a story of how many Medicare Advantage enrollees do not discover the limitations of their Medicare Advantage plans until they require medical attention:

Even though Joanne saw her Medicare Advantage premiums increase significantly over the years, she didn’t have any real motivation to disenroll until after she fractured her hip and required skilled care in a nursing facility. After a few days, the nursing home administrator told her that if she stayed there, she would have to pay for everything out of her own pocket. Why? Because a utilization review nurse at her Medicare Advantage plan, who had never seen or examined her, decided that the care she was receiving was no longer ‘medically necessary.’ Because there are no commonly used criteria as to what constitutes medical necessity, insurers have wide discretion in determining what they will pay for and when they will stop paying for services like skilled nursing care by decreeing it custodial.

You can see how a Medicare Advantage Plan cherry-picks its patients by carefully reviewing the co-pays in the summary of benefits for every plan you are considering. To give you an example of the types of co-pays you may find, here are some details pertaining to in-network services from a popular Medicare advantage plan in Florida:

  • Ambulance – $300 [per service]
  • Hospital stay – $175 per day for first 10 days [per stay]
  • Diabetes supplies – up to 20% co-pay [per order]
  • Diagnostic radiology – up to $125 co-pay [per service]
  • Lab Services – up to $100 co-pay [per service]
  • Outpatient x-rays – up to $100 co-pay [per service]
  • Therapeutic radiology – $35 or up to 20% co-pay [depending on the service]
  • Renal dialysis – 20% of the cost [per service]

As this short list of co-pays demonstrates, out-of-pocket costs will quickly build up over the year if you need medical attention. The Medicare Advantage plan may offer a $0 premium, but the out-of-pocket surprises may not be worth that initial savings if you need medical attention.

Switching Back to Traditional Medicare…

While you can save money with Medicare Advantage when you are healthy, if you need medical attention in the middle of the year, you are stuck with whatever costs you incur until you can switch plans during the next open season for Medicare. At that time you can switch to traditional Medicare with a Medigap, but Medigap can then charge you a higher rate, or decline you for health reasons, than if you had initially enrolled in a Medigap policy when you first qualified for Medicare.

Most Medigap policies are issue-age-rated policies or attained-age rated policies, which means that when you sign up later in life you will pay more per month than if you had started with the Medigap policy at age 65. You may be able to find a policy that has no age rating, but those are very rare. if available at all.

Doctor’s Experience with Medicare Advantage Plans…

In 2012, Dr. Brent Schillinger, former president of the Palm Beach County Medical Society Services Foundation pointed out a host of potential problems he encountered with Medicare Advantage plans as a physician. Here’s how he describes them:

  • Care can actually end up costing more, to the patient and the federal budget, than it would under original Medicare, particularly if one suffers from a very serious medical problem.
  • Some private plans are not financially stable and may suddenly cease coverage. This happened in Florida in 2014 when a popular MA plan called Physicians United Plan was declared insolvent, and people were called by doctors who canceled their appointments.
  • One may have difficulty getting emergency or urgent care due to rationing.
  • The plans only cover certain doctors, often drop providers without cause, breaking the continuity of care.
  • Members have to follow plan rules to get covered care.
  • There are always restrictions when choosing doctors, hospitals and other providers, which is another form of rationing that keeps profits up for the insurance company but may limit patient choice.
  • It can be difficult to get care away from home.
  • The extra benefits offered can turn out to be less than promised.
  • [Plans that include coverage for Part D prescription drug costs] may ration certain high-cost medications.

The Bottom Line…

Talk with a professional Medicare insurance advisor if you are thinking of enrollment in a Medicare Advantage plan. Be sure to read the fine print, and get a comprehensive list of all co-pays and deductibles before choosing one.

Also, be sure to find out if all your doctors accept the plan and all the medications you take [if it’s a plan that also wraps in Part D prescription drug coverage] will be covered. If the plan does not cover your current physicians, be sure that its’ doctors are acceptable to you and are taking new patients covered by the plan.


A New Era of ‘Work Until You Drop’ For Boomers

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Boomer at workWhen Paula Symons joined the U.S. workforce in 1972, typewriters in her office clacked nonstop, people answered the telephones and the hot new technology revolutionizing communication was the fax machine. Remember?

Symons, fresh out of college, entered this brave new world thinking she would do pretty much what her parents’ generation did: work for just one or two companies over about 45 years before bidding farewell to co-workers at a retirement party and heading off into her sunset years with a pension.

Forty years into that run, the 60-year-old communications specialist for a Wisconsin-based insurance company has worked more than a half-dozen jobs. She’s been laid off, downsized and has seen the pension disappear with only a few thousand dollars accrued when it was frozen.

So, five years from the age when people once retired, she laughs when she describes her future plans.

“I’ll probably just work until I drop,” she says, a sentiment expressed, with varying degrees of humor, by numerous members of her age group.

Like 78 million other U.S. baby boomers, Symons and her husband had the misfortune of approaching retirement age at a time when stock market crashes diminished their 401(k) nest eggs, companies began eliminating defined benefit pensions in record numbers and previously unimagined technical advances all but eliminated entire job descriptions from travel agent to telephone operator.

At the same time, companies began moving other jobs overseas, to be filled by people willing to work for far less and still able to connect to the U.S. market in real time.

“The paradigm has truly shifted. Now when you’re looking for a job you’re competing in a world where the competition isn’t just the guy down the street, but the guy sitting in a cafe in Hong Kong or Mumbai,” says Bill Vick, a Dallas-based executive recruiter who started in an effort to help baby boomers who want to stay in the workforce.

Not only has the paradigm shifted, but as the generation whose mantra used to be, “Don’t trust anyone over 30,” finds itself now being looked on with distrust by younger Generation X managers who question whether boomers have the high-tech skills or even the stamina to do what needs to be done.

“I always have the feeling that I have to prove my value all the time. That I’m not some old relic who doesn’t understand social media or can’t learn some new technique,” says Symons, who is active on Twitter and Facebook, loves every new time-saving software app that comes down the pike, and laughs at the idea of ever sending another fax.

“Ahh, that’s just so archaic,” she says.

Meanwhile, as companies have downsized, boomers have been hurt to some degree by their own sheer numbers, says Ed Lawler of the University of Southern California’s Marshall School of Business.

The oldest ones, Lawler says, aren’t retiring, and more and more the youngest members of the generation ahead of them aren’t either. It’s no longer uncommon, he says, for people to work until 70+.

“People who would have normally been out of the workforce are still there, taking jobs that would have gone to what we now call the unemployed,” he said.

John Stewart of Springfield, Mo., sees himself becoming part of that new generation that never stops working.

“No, I don’t see myself retiring,” says Stewart, who is media director for a large church. “I think I would be bored if I just all of a sudden quit everything and did whatever it is retired people do.”

Then there are the financial considerations. Like many boomers, the 60-year-old acknowledges he didn’t put enough aside when he was younger.

For more than 30 years, Stewart ran his own photography business, doing everything from studio portraits to illustrating annual reports for hospitals and other large corporations to freelancing for national magazines and newspapers.

As the news media began to struggle, the magazine and newspaper work dried up. As the economy tanked, his large corporate clients began to use cheaper stock photos purchased online rather than hire him to take new ones. Eventually he took his current job, producing videos of pastors’ sermons and photos for church publications. He says he is glad to be one boomer to make a late career change and keep working.

“There were times when the money was really rolling in,” he says of his old business. “But somehow retirement wasn’t really in the forefront of my thinking then, so saving for it wasn’t an automatic thing.”

Steve Wyard, of Los Angeles, says he and his wife have planned carefully for retirement.

He’s worked for 30 years for a company that sells and services commercial washers and dryers, and she’s been with a health maintenance organization for even longer. They’ve invested cautiously, lived in the same house for decades and meticulously paid down the mortgage.

Plus he’s one of the few boomers who figures that, no matter what technology comes along, his job won’t go away.

“Everyone has to do the laundry,” he says.

Still, he and his wife have two sons, 19 and 21, to put through college, and Wyard, 61, sees that pushing back retirement for several years.

Until then he plans to keep working, which is what every physically able boomer should consider doing, says USC’s Lawler.

Union membership, which has been declining for years, now includes only about 10 percent of all eligible U.S. employees, according to the Bureau of Labor Statistics. Meanwhile, the number of defined benefit retirement funds offered by private enterprise have fallen from about one in three employers in 1990 to about one in five in 2005.

With unions no longer in a strong position to fight for benefits like pensions, with jobs disappearing or going overseas, and with Gen Xers and even younger Millennial Generation members coveting their jobs, Lawler warns this is no time for boomers to quit and allow the skills they’ve spent a lifetime building to atrophy.

“My advice is don’t retire,” he says. “If you like your job at all, hold onto it. Because getting back in during this era is essentially impossible.”