Smart Facts About Life, Disability, and Long-Term Care Insurance
There are several important terms and conditions you should know when buying life, disability, and long-term care insurance coverage.
For life insurance, a key phase you may not know is Insurable Interest.
What is Insurable Interest and why is this important? It governs who you can name as beneficiaries.
Everyone believes they can name their own beneficiaries. However, there are some limitations. For life insurance, a person has to have some kind of a financial stake or protected interest in the person that the policy covers.
Insurable Interest considers certain factors, such as the reason the policy is purchased, the amount of life insurance being applied for, who the beneficiary/beneficiaries are, and even the tax consequences of premiums paid and actual benefits paid out.
Some examples:
A mother and father want to purchase life insurance for themselves and want to name their minor children as beneficiaries. Children under 18 cannot be named, given the age factor (under 18); the parents would need to name a guardian or trust as the beneficiary. Older children would be eligible.
A business owner can purchase life insurance with the beneficiary being the business; they would need to provide a qualified beneficiary to the insurance company, because of the insurable interest question. A co-owner could be listed as a beneficiary, but other factors may still come into play, such as the insured owner’s family situation and intent. An insurer would want to know if there is a written buy-sell agreement. (See our articles in the business section of the Insurance Guru tab for more information.)
A simple example: Fred and Jim have known each other for years. If Fred and Jim are simply neighbors, Fred cannot buy a life insurance policy for Jim and name himself as the beneficiary. If, on the other hand, Fred and Jim are business partners, they have a financial interest in each other, so Fred would hypothetically be able to buy the policy if all other factors are met.
Great care and appropriate consideration of these and other factors results in properly designed and implemented life insurance, which is a great financial tool.
For disability insurance, which is also called income protection, has several different policy forms. The two most common protections are earned personal income and earned business income.
To simplify: insurers need to know your entire financial picture. This means looking at your tax returns. If there is too much unearned income in relation to your earned income, this will have a big effect on your eligibility. Why? Disability insurance covers your earned income if you are unable to keep earning, but it also considers other sources of income in determining whether to issue a policy.
Long-term care insurance can be the most difficult to qualify for, but it is an important financial resource. One additional consideration for you when considering your current health, income, and the assets you want to protect, which is often overlooked: Inflation protection. This protects your coverage so that the benefits adjust for inflation over time. This is an important benefit, especially in this economic climate.
If you qualify for coverage, and your policy does not include inflation protection, what is considered as your income and assets will be affected in a claim. Furthermore, the insurance companies make sure you are offered inflation protection, and you must formally decline this optional coverage. Without it, you can expect that the coverage may not be adequate over time as inflation increases.
For long-term care insurance, a policy with inflation protection will automatically increase benefits every year. With or without a claim!
While most agencies are not qualified or willing to keep up with the constant changes in laws, regulations, and life, disability and long-term care insurance, we stay current to give you optimum service.
Michael has over 50+ years of experience in insurance. Contact us, and we will gladly bring our knowledge and experience to develop the insurance plan that is right for you. We will work with you, as well as with your CPA and attorney as necessary. We are here to help you!