Insightful Insurance Observations Spring 2020

Last week, I was invited to be a guest lecturer on insurance for a U.C. Berkeley personal finance course. It was a great experience with insightful questions from the students.  Here are some of the issues that we discussed:

  • What are insurance company financial strength ratings? The financial strength of an insurance company is highly important because an insurance policy is a long-term commitment. Third-party agencies rate insurance companies on a regular basis and offer their ratings and analysis online for free. There are four main rating agencies: A.M. Best, Fitch, Moody’s and Standard & Poor’s. Each agency’s rating system varies in its stringency and methodology. You can find more information with links on my website (here).
  • What happens if my insurance company becomes insolvent? Life and health insurance guaranty associations were created to protect state residents who are policyholders and beneficiaries of policies issued by a life or health insurance company that has gone out of business. All 50 states, the District of Columbia, and Puerto Rico have a life and health insurance guaranty association. All insurance companies (with limited exceptions) licensed to write life and health insurance or annuities in a state are required to be members of the state’s life and health insurance guaranty association. If a member company becomes insolvent (goes out of business), the state guaranty association obtains money to continue coverage and pay claims from member insurance companies writing the same line or lines of insurance as the insolvent company. Learn more and find links to your state’s life and health insurance guarantee association (here).
  • Disability insurance is possibly the most overlooked component of a sound financial plan. Without income replacement, there is no way to fulfill financial planning goals in the event of a disability.  Almost everyone considers life insurance to accomplish planning goals in the event of an early death, yet the odds of a disability are higher than the odds of death during working years. The odds of a disability lasting 90 days or more: age 30 (51%), age 40 (45%) and age 50 (34%). Here’s Ten Things That You Need To Know About Disability Insurance.
  • Group disability insurance coverage can usually be supplemented by individual disability insurance. Group disability insurance coverage is usually 50-60% of salary with a monthly maximum and is paid on a pre-tax basis. Individual disability insurance coverage is 60-70% of total compensation (including salary, bonuses, stock options, etc.) and benefits are income tax free.
  • Insurance is for protecting against a risk. Anytime insurance is purchased for another reason such as building a cash value or tax deferral, you incurring extra costs. The important point is to purchase the minimum amount of coverage necessary to fully protect your risk. For example, the premiums on a whole life insurance policy can be ten times higher than a term life insurance policy. 
  • Permanent (cash value) life insurance policies require monitoring. This includes whole life, universal life, indexed life and variable life. Life insurance policy performance is based upon these general components: Funding (premiums), Earnings (interest, dividends, yields), Mortality cost (cost of insurance) and Expense charges. Life insurance policies can become underfunded resulting in policies requiring higher premiums or lapsing prior to maturity date. Learn about Why Would My Life Insurance Policy Underperform.
  • To monitor in-force permanent (cash value) life insurance policies, you should request in-force illustrations every 2-3 years. You can download life insurance annual review packets which include in-force illustration request letters when you join the Get Ready Financial Preparedness Club (here) - registration is free. 
  • What’s going on with Long Term Care Insurance. In a future edition, I’ll feature an in-depth look at the LTC insurance outlook. If you have an LTC policy and your policy was issued 10 or more years ago, you most likely have had a substantial premium increase. If you have a premium increase, keep in mind that premium increases need to be approved by your State’s Department of Insurance. The DOI will review rate increases to see if they are justified - if the insurance company needs the additional premium in order to stay solvent.  If you receive a premium increase, you have options including changing the daily/monthly benefit, benefit period, inflation rider and possibly more depending on your policy. Once you’ve made a change, it cannot be undone. On a related note, here’s an update on the insurance company with the most LTC policyholders: Genworth Posts Capitalization Update. 

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