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.