- Employer-based disability income insurance may not cover enough of your needs
- Advances in life insurance and long-term care policies mean greater flexibility
- Cash value life insurance can be tapped for expenses if structured properly
While most people understand the importance of life insurance, other forms of coverage have taken on new significance with the uncertainty around rising health care costs and proposed health care legislation. “Insurance can’t prevent the first tragedy, but it can help prevent the second one — the financial impact of the unexpected life event,” says Tom Maki, Vice President at RiverSource Life Insurance Company. Understanding some of the misconceptions around insurance needs is a powerful first step to protecting your assets from the unexpected. Here are some key insights to help you plan ahead.
Employer disability insurance may not be enough
One common notion is that disability insurance only covers accidents.
“But the reality is that only about 9% of RiverSource disability claims are the result of accidents, while illnesses that result in disabilities are much more common1,” Maki says. “More than 1 in 4 adults will become disabled at some point before they retire2,” Maki says.
If you experience a disability during middle age, it may coincide with your peak earning years. “Most employer disability insurance only covers up to 65% of base salary and does not cover bonuses, which leaves what we call an income gap,” Maki says. “Even if you’re able to cover basic expenses on six-tenths of your income, you may have to put saving for retirement on hold indefinitely.”
Long-term care doesn’t have to be “use it or lose it”
Close to half of retirees (45%) surveyed are not confident in their ability to pay for long-term care (LTC) — such as a nursing home or home health care — should they need it during retirement, according to the Employee Benefit Research Institute’s 2017 Retirement Confidence Survey. Contrary to popular belief, Medicare generally does not cover LTC and Medicaid only provides it to those below the poverty level.
In response to those who are wary of buying insurance they think they may never use, the industry has stepped in to provide more flexible solutions. “Stand-alone LTC with its ‘use it or lose it’ drawback is becoming a thing of the past,” Maki says. “The industry has responded to consumer concerns by creating hybrid policies such as LTC ‘riders’ attached to an individual life insurance policy at an additional cost, so if you don’t end up needing LTC, the funds pass on to heirs via an income-tax-free death benefit.”
“Stand-alone LTC with its ‘use it or lose it’ drawback is becoming a thing of the past.”
Life insurance may be used for other expenses
If structured properly, a cash value life insurance policy that provides an income-tax-free death benefit to heirs may also be used in your lifetime. “You can build a pool of money that can be accessed via loans or partial surrenders — a feature unique to cash-value life insurance,” Maki says.
These income-tax-free funds could be used to supplement your retirement income, pay for kids’ higher education costs or remodel your home for aging in place. In short, a cash value life insurance policy not only provides a death benefit for heirs, but may provide you with the flexibility and freedom to use the funds as you choose.
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Your advisor can provide a tailored solution that is right for you. “Unexpected events can derail a financial plan, which is why protecting against uncertainty is vitally important,” Maki says.