Other Types of Life Insurance

Survivorship life insurance (also referred to as last-to-die or second-to-die) is a unique type of contract that insures the lives of two people. It pays a death benefit upon the death of the second insured. Therefore, it is typically less expensive than two individual policies. Survivorship life is often used for estate planning, where it may be possible to potentially leverage today's dollars -- via insurance premiums -- into a potentially significant death benefit that can be used to fund estate taxes, create wealth for future generations, or benefit a charity. These policies may be available if one insured is medically "uninsurable."

First-to-die life insurance insures the life of at least two people and pays a benefit upon the death of the first insured. This policy is useful for covering a mortgage or other large debt obligation where there is more than one debtor. In addition, it can be an ideal tool for funding a buy-sell agreement within a closely held business.

How Much Insurance Do I Need?

A popular approach to buying insurance is based on income replacement. In this approach, a formula of between five and ten times your annual salary is often used to calculate how much coverage you need. Another approach is to purchase insurance based on your individual needs and preferences. The first step is to determine your unique income replacement needs.

Currently, a large portion of your income goes to taxes (insurance benefits are generally income tax free) and to support your own lifestyle. Start off by determining your net earnings after taxes. Then add up all your personal expenses such as food, clothing, magazine subscriptions, club memberships, transportation expenses, etc. The remainder represents annual income that your insurance will need to replace. You'll want a death benefit amount which, when invested, will provide income annually to cover this amount. Then, you should add to that the amounts needed to fund one-time expenses such as college tuition for your children or paying down mortgage or debt.

Income replacement for nonworking spouses is an important and often overlooked insurance need. Coverage should provide for your costs for day care, housekeeping, or nursing care. Add to this any net earnings from part-time employment.

Finally, estimate your own "final expenses" such as estate taxes, uninsured medical costs, and funeral costs.

Types of Insurance

Term insurance is the most basic, and generally least expensive, form of life insurance for people under age 50. A term policy is written for a specific period of time, typically 1 to 10 years, and may be renewable at the end of each term. Also, the premiums increase at the end of each term and can become prohibitively expensive for older individuals. A level term policy locks in the annual premium for periods of up to 30 years.

Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value. In this sense, it is "pure" insurance without any investment options. Benefits are paid only if you die during the policy's term. After the term ends, your coverage expires unless you choose to renew the policy. When buying term insurance, you might look for a policy that is renewable up to age 70 and convertible to permanent insurance without a medical exam.

Whole Life combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90% of your policy's cash value tax-free.

Universal Life is similar to whole life with the added benefit of potentially higher earnings on the savings component. Universal life policies are also highly flexible in regard to premiums and face value. Premiums can be increased, decreased or deferred, and cash values can be withdrawn. You may also have the option to change face values. Universal life policies typically offer a guaranteed return on cash value, usually at least 4%. You'll receive an annual statement that details cash value, total protection, earnings, and fees.

Drawbacks to this type of insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.

Variable Life generally offers fixed premiums and control over your policy's cash value. Your cash value is invested in your choice of stock, bond, or money market funding options. Cash values and death benefits can rise and fall based on the performance of your investment choices. Although death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain invested in the insurance contract.

Universal Variable Life insurance is the most aggressive type of policy. Like variable life, you control your investment in mutual funds. However, there are no guarantees on universal variable policies beyond the original face value death benefit. These policies are probably best suited to affluent buyers who can afford the risks involved.

Key Terms and Definitions

• Face Value -- The original death benefit amount.
• Convertibility -- Option to convert from one type of policy (term) to another (whole life), usually without a physical examination.
• Cash Value -- The savings portion of a policy that can be borrowed against or cashed in.
• Premiums -- Monthly, quarterly, or yearly payments required to maintain coverage.
• Beneficiary -- The individual(s) or entity (e.g., trust) that is designated as benefit recipient.
• Paid Up -- A policy requiring no further premium payments due to prepayment or

How Much Disability Income Insurance Do You Need?

The key to determining your disability income insurance needs is to assess exactly how much money you would be required to spend during each week or each month that you would be unable to earn your normal pay. For example, if you would need 80% of your pretax earnings, but your group policy would only pay an amount equal to 60%, then you would in all likelihood need additional disability income insurance coverage.

Finally, keep in mind that disability income insurance coverage varies in availability based on your occupation. Some higher-risk jobs may not be covered. Others may offer only limited coverage. That's why it's important to seek the assistance of a qualified insurance professional. He or she can help you assess your disability income insurance needs and find a policy that's most appropriate for you.

Who Needs Disability Income Insurance?

For all practical purposes, if you need the income you earn at work, you probably also need disability income insurance. Consider this: Almost one third of Americans between the ages of 35 and 65 sill experience a disability of at least 90 days at some point during their working lives. Among those most likely to benefit from disability income insurance are:

Small-business owners and the self-employed. People in this group may be most at risk of financial hardship arising from a disability, since most don't have group coverage and time out of work generally means that income stops flowing. Small-business owners may want to consider purchasing group coverage for themselves and their employees. Offering group disability income insurance coverage does more than simply enhance the financial security of current employees -- the benefit can also help to attract new employees.

High-income professionals. These individuals typically would not receive enough income from a group policy to cover their usual spending needs and to maintain their preferred lifestyle.

Primary "breadwinners." Regardless of whether an individual already has some group coverage, it's important not to be lulled into a false sense of security. Quite often, group coverage just doesn't provide enough money -- even for those with relatively modest spending needs.

Putting Policies in Perspective

For most people, there are two main forms of disability income insurance to consider: employer-sponsored policies and private insurance policies. Employer-sponsored policies (called "group" policies) are relatively inexpensive to purchase and generally remain in effect for as long as the individual continues to work for the company. However, there are often significant limits on the benefits provided by group policies, so it's important to determine whether the coverage is enough to address your potential spending needs. (Government-sponsored disability income insurance programs and policies also exist, but they generally have strict eligibility requirements and therefore don't apply to many people.)

Private insurance policies are paid for by individuals and provide coverage when group policies don't apply or don't provide enough income. On the surface, a private policy is usually more expensive to purchase than a group policy. However, a private policy's potential to provide much greater benefits over time may make it a more prudent long-term choice. And considering that group policies often end up providing inadequate benefits, even those workers with group coverage should consider purchasing a private policy in order to fill the income gaps frequently associated with group-only coverage.

Keep in mind that some people may be eligible for disability benefits through other sources -- such as worker's compensation programs, Veterans Administration pension programs, state vocational rehabilitation programs, and Social Security, among others -- but coverage and availability vary significantly.

The Most Important Insurance Policy of All?

n fact, some may argue that disability income insurance is the most important type of insurance policy you can purchase -- more important than homeowner's, health, auto, or even (in certain cases) life insurance. That's because disability income insurance protects one of your most important and valuable assets: your ability to earn income. After all, it is your ability to earn income that allows you to have a car, a home, and a particular lifestyle, as well as to purchase the various insurance policies that safeguard your net worth and the financial well-being of your loved ones.

Why Disability Income Insurance?

If you were unable to work for an extended period of time due to an injury or illness, how long would you be able to pay your bills and meet your day-to-day expenses? Do you know how much income you would receive from outside sources -- and for how long?

A long-term illness or injury could wreak havoc on even the soundest financial plan and can occur at any time. With that in mind, your best defense against such a financial catastrophe may be the purchase of a disability income insurance policy with enough coverage to compensate for your lost wages.

Disability income insurance replaces part of your income if you become unable to work due to an injury or illness. It provides you with cash that you can use for paying your mortgage or rent, buying groceries, and meeting your daily living expenses. Even if you don't have an immediate need for disability income insurance, it also gives you some peace of mind that comes from knowing that you have a financial plan already in place.

Buying Life Insurance: What Kind and How Much?

Conventional wisdom says that life insurance is sold, not purchased. In other words, some people are reluctant to discuss the importance of owning life insurance, and others are simply unaware of the need to have life insurance. Although many large companies provide life insurance as part of their benefits package, this coverage may be insufficient.

Who needs life insurance? If there are individuals who depend on you for financial support, or if you work at home providing your family with such services as child care, cooking, and cleaning, you need life insurance. Older couples also may need life insurance to protect a surviving spouse against the possibility of the couple's retirement savings being depleted by unexpected medical expenses. And individuals with substantial assets may need life insurance to help reduce the effects of estate taxes or to transfer wealth to future generations.

Your Attention, Please: Insurance CIOs Must Focus on Core Capabilities and Minimize Distractions

In today's tech-centric world, an insurance CIO is confronted with a multitude of proven solutions for improving the business via technology. Add to that the myriad "shiny objects" that appear in the foreground to tempt distraction. Amid all this, it's no surprise that CIOs struggle to sort through priorities, solution alternatives and even job responsibilities.

While every company has unique needs, there are a few areas of focus that just about every CIO should be thinking about:

Related Resources

• Business Analytics for Insurance Risk
• Business Analytics for Insurance Claims
• Cloud Computing for the Enterprise

Leveraging Data

Improving data management and analytics is an absolute must for most carriers, particularly in the P&C and health payer segments. When analyzed and correlated meaningfully, data becomes information to help functional leaders and CIOs collaborate on priorities for technology initiatives. Opportunities abound in the areas of market share growth, retention, risk selection, pricing, product development, service delivery and reducing operational expenses. IT's role is to unlock and organize data and make it available to the business in a flexible manner. Business leaders in turn must put that data to work, and must navigate land mines such as legislation that might preclude, for example, community rating and other techniques designed to manage P&C risk and pricing.

Implementation and Management Practices

Fewer companies are building their own systems. More are buying and integrating packaged systems. But whether you are building or buying, your implementation practices should be evolving. For example, agile principles are changing the way systems are specified, selected and implemented. In the agile approach, business and IT counterparts come together in a highly collaborative setting with incremental objectives and short time frames for completing them. A common frame of reference is developed quickly, and there is a priority on working together in person. Good ideas get pursued more quickly.

Likewise, missteps are identified before major damage can occur. Course corrections are much easier and less costly. You don't have to adopt every practice of the agile approach, but understanding the principles will help you evolve toward reduced implementation times and improved business outcomes.

Shiny Objects

I know of one entrepreneurial CEO who is famous for falling victim to evangelists on long plane rides and then rushing back to his CIO to extol the virtues of the latest gizmo or silver-bullet methodology. And then the CIO has to tamp down the excitement, taking valuable energy away from the real business at hand.

Today, for example, cloud computing is very shiny. The principles are indeed important (though not new), but the hype is deafening. Bottom line: If you are operating any commodity systems or infrastructure, there is probably a provider out there that can host it for you less expensively. The truly valuable promise of cloud is that far more robust systems are now available remotely and reliably, and seamless integration with existing systems is relatively simple. Numerous industry-specific (policy admin, billing, etc.) vendors offer hosted solutions that are easy to ramp up and integrate.

Another very shiny object today is social networking. How many resources are being squandered trying to figure out what to do with it? Before committing resources, be clear about expected outcomes and benefits. How would using social networking improve your customer/agent/employee experience, and how would it benefit your market presence? If the answers are all qualitative, there's a problem.

Fundamentals

The economic downturn ironically has led to simpler decision-making. Some projects are simply off the table. New projects are scarce. Compliance and security projects are marching on. Budgets are flat or shrinking. But the fundamentals of successful IT projects are the same. A recent roundtable of CIOs identified those fundamentals as leadership, clear objectives, having the right team, open communication and relentless oversight. A CIO is responsible for installing and maintaining those fundamentals.

Our industry is steadily becoming more dynamic in applying technology. Our CIOs and solution providers are leading that charge. We are thus faced with an ever-growing number of options and alternatives to enable the business. Those technologies and management practices that serve core operational needs and satisfy customers are the ones that truly warrant a CIO's attention.

Insurance Update: Coverage Options Expand

In the midst of all the troubling news about insurance and insurance companies, there’s a ray of sunshine: disability insurance is no longer playing hard to get. Of course, that’s because sales are down substantially in most categories, according to John Ryan of Ryan Insurance Strategy Consultants in Greenwood Village, Colorado. "In the physician and dental markets, things are status quo, but in all other areas sales are down significantly: 30% to 35%," Ryan says.

Such a drastic drop in sales has led to a concerted effort within the disability niche to write new business. This has led to easier underwriting, a drop in price, and more benefits for less money. "Except for the economy," says Ryan, "things are looking great—all the disability companies are making enhancements now," probably because sales have been down so much. The second half of 2008, all of 2009, and even projections for 2010 have led to strong efforts to promote new business in the field.

Underwriting has been relaxing gradually since 2005, Ryan explains, and now with higher benefit limits as a percentage of earnings, "good times are back in the disability area."

Companies offer two basic types of policies: one with a guaranteed price and one that’s guaranteed renewable. Guaranteed renewable policies, which can’t be canceled but don’t carry a price guarantee, run about 35% cheaper for those who don’t worry about future rate increases, or who are willing to bet against them. Women, Ryan points out, pay 30% more than men for policies, so a guaranteed renewable policy is usually good for them. Guaranteed renewable would also be good for older clients, he explains, because it’s less likely that a rate increase would have as much of an impact on someone who’s 50 as on someone who’s 30." Guaranteed renewable policies present a way to get quality coverage at a deep discount. Not many companies offer them, he says, adding that Standard Insurance of Oregon offers "the best guaranteed renewable product in the business right now."

Good News, Bad News
Other currently popular types of disability protection include retirement protection, for which the disability policy insures retirement plan contributions. That’s a frequent choice, Ryan says, particularly among medical professionals. Another is overhead expense disability insurance, useful for both medical professionals and business owners. The policy covers both household expenses and the overhead of a business or practice. If an owner is not coming back, he needs a way to keep the business healthy until he can sell it. Even if he is, this coverage will keep things going till he’s able to return.

The news isn’t all good, of course. Ryan says that disability policies that offer a lifetime benefit payout, as opposed to one that stops at age 65 or 70, is far preferable. But he believes that option is on its way out. He explains that Guardian and its subsidiary Berkshire, as well as MetLife, have been the strongest remaining companies offering a lifetime benefit payout. Berkshire and Guardian have already had substantial rate increases—about 30%, Ryan says, for the lifetime extension—and MetLife "is in the process of doing the same." "People can still get a real value," he continues, from MetLife if they want lifetime benefits, "but they have to do it quick, because in about half the states the [increased] rates are already filed." The window, he adds, will be closed by January 1, if not sooner. "And it won’t be long before both drop their lifetime feature," he warns. "I would say by 2012 it won’t be available anymore."

Insurance & Technology's 2009 Elite 8 Strive to Lead Their Companies Beyond the Financial Crisis

If the familiar adadge, "What doesn't kill us makes us stronger," is true, then the executives who comprise Insurance & Technology's 2009 Elite 8 outstanding insurance technology leaders must have incredible powers. The past year has presented an array of trials and tests that have challenged the management of all financial institutions, big and small, and insurance IT organizations have been on the front lines as carriers simultaneously seek to improve governance and compliance, find efficiencies and cost savings, enhance distribution, and strengthen customer relationships (and profitability).

But while many executives might find managing IT in the new highly scrutinized world of financial services to be extremely daunting, I&T's Elite 8 leaders are rising to the challenge with enthusiasm and determination. Rather than complain about how hard it is to deal with tight budgets, an unsettled regulatory environment and untested new channels, the executives profiled in this special issue welcome the opportunity to solve problems, deliver effective solutions and stretch the talents of their workforces.

In fact, at a time when many in financial services are scaling back, not only are these executives leading aggressive initiatives in emerging channels, including mobile and social networks, they also are staying on course with ambitious projects such as replacing core systems, developing service-oriented architectures and reinventing corporate governance. It hasn't been business as usual, the Elite 8 honorees emphasize, but it hasn't been cause for siege mentality, either. Why? It's true that insurance has been spared some of the pain and loss that's occurred in banking and capital markets, but it is more likely that the ability of the Elite 8 honorees (and their teams) to get business buy-in for these kinds of big-picture initiatives stems from the fact that they've already inculcated and applied the right lessons about alignment, deliverables and teamwork.

The 2009 Elite 8 will be recognized at I&T's upcoming 11th Annual Executive Summit (Nov. 1-4, The Wigwam Golf Resort & Spa, Phoenix), where we will examine strategies and best practices that are helping insurance companies to look beyond the financial crisis to the challenges and opportunities they face in the new world of financial services. In this environment, it inspires confidence to know that there is real muscle and prowess among the senior ranks of insurance IT.