The Bogleheads' Guide to Retirement Planning (38 page)

Active-duty military, retirees, and veterans may be eligible for additional disability benefits. Some federal and state employees and railroad workers have their own programs in lieu of Social Security. A wealth of information on alternative programs is available online or from the agencies directly.

Many employers provide DI protection for eligible employees. Short-term disability (STD) coverage includes sick leave, group disability benefits, and workers’ compensation. These plans offer protection for up to 26 weeks. About half the large and midsize companies offer long-term disability (LTD) to their employees. These programs typically replace up to 60 percent of earnings, with benefits lasting for five years or up to age 65. If your employer pays the premium on disability insurance, any benefits will be taxable to you as ordinary income.

The cost of employer group DI is usually less than the cost of an individual policy. This affordability makes these programs popular. However, with the lower cost comes less favorable policy language than is available on individual policies. For example, the definition of disability is often less favorable with group policies than with individual programs. Also, most group policies are not portable if you change employers or become self-employed. You could be without coverage if your insurability status changes as a result of a job change. Additionally, group policies commonly make no provisions for partial disability. They may also limit claims for mental or nervous conditions and for drug and alcohol abuse.

Though expensive, an individual long-term disability policy is the best way to protect your income. LTD plans may protect up to 70 percent of your income. Benefits are income tax-free when premiums are paid with after-tax dollars. Most long-term disability policies have benefit periods of either two years, five years, or to age 65. These policies are not affected by job or earnings changes, and they offer more favorable definitions and terms than group plans.

Here are the key points you’ll want to consider when selecting an individual policy. The first is cost. Disability premiums typically are 1 percent to 3 percent of your income. Premiums are based on your occupation, age, sex, and other underwriting factors. Safer occupations receive the best rates, while riskier occupations pay higher premiums. Blue-collar workers and others doing manual labor often must apply to specialty companies because obtaining coverage is more difficult. Factors influencing policy costs and benefits are length of elimination period, length of benefit period, definition of disability, integration with Social Security, and optional benefits chosen.

The best definition is own-occupation, which pays if you are disabled and cannot perform the principal duties of the job you now have. It pays even if you can do some other types of work. Note that even an own-occupation definition will vary from company to company, and typically it is offered only to those in certain occupations. The next best definition is modified own-occupation, which pays if you cannot do your own job for two years, after which a less favorable definition applies. Some definitions state that you must not be able to do any work that you are reasonably fitted to do by education, training, or experience. The worst definition is one where you cannot do any meaningful work.

Renewability of your policy should be looked at carefully. Consider only those policies that are noncancelable and guaranteed renewable. This means that as long as premiums are paid, the policy cannot be canceled, nor can the premiums ever be increased.

Also called the elimination period, this is the time between occurrence of the disability and the time benefits begin. Common waiting periods are anywhere from 30 days up to a year. Of course, shorter waiting periods have higher premiums, so carefully consider your short-term disability coverage and any liquid assets you are willing to use before coverage begins.

Riders can be added to your policy to enhance your protection. These riders include, but are not limited to:

Some other factors weigh in on the cost and benefits of individual disability policies. One way to reduce the cost is to consider a policy whose benefits are integrated with Social Security. With this type of policy, if you qualify for Social Security benefits, this amount is subtracted from your DI benefit and the company pays you the balance up to the insured amount. If you do not qualify for Social Security, as often happens because of Social Security’s strict definition of disability, the policy pays the full insured amount. Either way, you are guaranteed a monthly income at least equal to the full basic benefit amount in the policy. Keep in mind that individual DI policies that are not integrated with Social Security will always pay the full benefit, in addition to any Social Security benefits you may receive.

Another way to reduce costs is to sign up for your employer’s long-term disability and then buy a supplemental individual disability income policy. The supplemental policy can increase the percentage of replacement income up to about 70 percent. The supplemental policy will usually have more liberal definitions, and since you own it, it is portable.

There are two ways to shop for life and disability coverage: do it on your own or find an agent to help with the process. Your premium will be the same regardless of whether you buy from an agent, broker, Internet provider, or directly from an insurance company. This is true for several reasons. First, regulations in many states make it illegal to rebate commissions or negotiate lower commissions to obtain business for individual coverage. Second, there are marketing costs regardless of how and where you buy your insurance. Third, all of these products are ultimately written by a licensed agent somewhere in the distribution system, and of course they are paid either a salary, a commission, or both.

How to shop for insurance is dependent on the type of insurance you are buying. Shopping for term life insurance is simple and can be done online. Shopping for disability income insurance is complex and should probably be done with the help of a knowledgeable agent who brokers insurance with a number of carriers.

Your first step for buying life insurance online is to select one or more Internet web sites that can provide term insurance quotes for a number of companies. You will be asked to provide underwriting information including health history, occupation, avocation, tobacco usage, and family history. This information will lead to a tentative rating class, such as super preferred, preferred, standard, or rated. The web sites will provide quotes based on the length of the term and the amount of protection selected.

You can compare similar policies from different companies and get a feel for which policies are competitively priced and which are not. The better companies will normally be in the same ballpark. You will also want to check on the financial stability of any company you’re considering. You can check with A. M. Best Company, Moody’s, Standard and Poor’s, Fitch Ratings, or Weiss Research. Look for a rating of at least A+ by A. M. Best or its equivalent with the other rating companies.

After selecting a policy, you begin the application process, much of which is done online. The company will set up an appointment for a nurse or paramedic to visit you. On their visit, they will take your physical measurements, collect blood and urine, and perhaps do some other tests. The home office underwriter will check with the Medical Information Bureau (MIB) to see if any pertinent information is available from previous insurance applications.

Next, the insurance company may request medical records from your doctors. They might order an inspection report to check out other risk factors, such as driving record or criminal history. When all the information is received and evaluated at the company, you are assigned a rating class and issued a policy, unless you are uninsurable.

An easier way to buy insurance is with the help of a qualified agent who brokers with a number of insurance companies. This is particularly true when you buy complex products such as disability insurance. The agent can perform a needs analysis, estimate your rating class, and pick a quality company that is competitive. If you have any smoking history or medical or other underwriting problems, agents know which companies would be most lenient with your situation. They are very familiar with the marketplace and can save you time and energy. If you are shopping for term insurance, make this clear to the agent up front, and explain that you are not interested in sales talk about permanent insurance.

Choosing a good agent can be a challenge. You want an agent who has expertise in the life and health area and who makes this their primary business. The agent should be experienced and preferably be a CLU. This designation requires a great deal of learning, and CLUs must pass a number of rigorous examinations.

A good way to find a qualified agent in the family market is to ask for recommendations from people you trust. Also, look in the Yellow Pages to find the names of agents and firms that work in your area. Bogleheads normally interview several prospective agents to discuss their needs and preferences before making a choice.

There are a number of excellent web sites where you can learn more about life and disability insurance. Information is also available from federal and state agencies.

Choosing the life and disability coverages that are best for you and building a solid insurance program are critical components to protect you and your family while you invest for your retirement. Following these simple suggestions can save time and help you select the best coverage at the best prices. Remember that your needs will change over time, so you’ll want to review your program every few years.

Insurance planning is not fun because you are addressing the risk of unpleasant outcomes, but it is always necessary. A good insurance plan works hand in hand with a good retirement plan to provide you and your loved ones with security.

Anyone who has lost their good health even for a little while believes as classical Roman poet Virgil said, “The greatest wealth is health.” Our health enables us to use our energies to earn a living for ourselves and our families and to prepare for our retirement and old age. Despite steps taken to lead healthy lives and minimize risk, the odds are high that at some point in time we will suffer illnesses or accidents that threaten our economic welfare.

Health insurance was created in the early part of the twentieth century to help protect our financial well-being from the risk of poor health. Unfortunately, health-care insurance costs have risen dramatically over the last 50 years. Finding and qualifying for affordable health-care insurance is a challenge for many people. Many Americans are shut out of the health insurance market because they either cannot qualify for it or because they cannot afford it.

This does not mean that the segment of the population without health insurance does not get health care; far from it. No one in America is denied health care when they need it. It does mean wiping out the savings of those who do not have coverage before the cost is picked up by hospitals, doctors, charities, and the government. And it does mean that people without health care insurance may not receive the high level of treatment that someone with health insurance would receive.

On the positive side, technological advances in medical procedures and the discovery of new drugs and treatments have resulted in improved longevity and quality of life. Cancer and heart disease was once a death sentence. Now those are treatable diseases. The future holds the promise of cures for many diseases and perhaps the ability to slow down or even reverse the effects of aging itself. There is also an increasing awareness that we are responsible for protecting our own health by improving our lifestyles in the areas of smoking, obesity, exercise, and stress management.

In this chapter, we’ll discuss health insurance in two segments. The first is medical insurance, and the second is long-term care insurance. We will provide tips on finding the plan and policy that fit your needs. Health insurance issues are complex and cannot be covered comprehensively in a single chapter. Additional resources are available at the end of the chapter for further research. The time you spend researching health insurance choices can make a huge difference in your final out-of-pocket costs and the quality of your care.