Life Insurance for Lollygaggers

Life insurance is not a topic that the vast majority of people want to think about, but it’s an essential piece of the financial planning puzzle. Purchasing a life insurance policy can significantly ease the way for your heirs. While there are umpteen types of life insurance products on the market, there is generally only one kind that I advocate, where you are not being sold something with bells and whistles that you don’t need, and that is a term life insurance policy.

What is term life insurance? Term life insurance is exactly what it sounds like, a policy that you purchase for a certain period of time, commonly 10, 15, 20 or 30 years. There are several types of term – for example where the premiums start low but increase annually (annual renewable term) or where you pay higher premiums for the chance of outliving your policy and being refunded some of the premiums at the end of the term (return premium term). But the type that I’ve found to be most appropriate for most people is level premium term, where the premiums are fixed over the life of the policy. When any of these terms expire, the policyholder can restart coverage at a higher rate or give up coverage altogether. In essence, you are renting a life insurance policy instead of owning it, meaning there are no accumulated cash benefits that need to be paid out at the end of the term.

Life insurance policies that do have the benefit of a guaranteed payout are called permanent life insurance, and this is like being a homeowner instead of a renter. Permanent life insurance comes in several basic types, whole life, universal life, and variable universal life, and all build up a cash value and last for your lifetime.

On first glance permanent life insurance sure sounds better than term life insurance. Why rent when you can build equity as an owner? Well, permanent life insurance definitely has a place in complex estate plans or charitable giving strategies, but for most of the population, term is the best option. This is because term is by far the least expensive option as you get the most death benefit per dollar paid. While term does not bank your cash in an investment account, the money that you are not spending on more expensive permanent life insurance premiums can be invested more competitively, which means you should expect higher returns. Furthermore, in most cases I think of life insurance as an income replacement strategy, and so I advise clients to match their term policies as closely as possible to their retirement dates. Once their income turns off, so does their life insurance policy. As that point, clients should have pension, portfolio, or other supplemental income to provide for their needs comfortably in retirement.

For people with children and/or mortgages, term life insurance is a necessary consideration. To throw out some ballpark numbers – if you are in your late 30s or early 40s you should be able to get a policy for between $10-80 a month that will give you between $100,000 and $1 million in coverage. That’s a small price to pay for a big relief should the need arise.

The Medicare Roundup

Medicare is a federal health insurance program that was established in the 1960s for individuals age 65 or older and for individuals under age 65 with kidney failure, ALS or certain other disabilities. It is funded by the taxes that workers pay to Social Security and Medicare, by the premiums that Medicare beneficiaries pay for their coverage, and by the federal budget.

Medicare has four parts: A, B, C and D. Part A and Part B are considered Original Medicare as they are provided directly through the federal government and Part C and Part D are not considered Original Medicare as they are not provided directly by the federal government.

Part A covers hospital insurance. This includes inpatient hospital care, skilled nursing, hospice care and home health services. This does not include long-term care. You don’t have to pay a premium for Part A coverage as long as you, your spouse, or your ex-spouse worked full time for at least 40 calendar quarters (10 years) and paid Social Security taxes, or if you, your spouse, or your ex-spouse are eligible for Railroad Retirement or Civil Service benefits. You do have to pay a premium if you worked and paid Social Security taxes for less time. If you qualify through your spouse or ex-spouse, you need to have been married for at least 10 years. Most Medicare beneficiaries qualify for this premium-free coverage.

Part B covers medical insurance. This includes outpatient medical care such as doctor visits, tests, preventative care, mental health care, medical equipment like wheelchairs and walkers, and some ambulance and home health services. You have to pay a premium for Part B coverage to the Social Security Administration. If you’re already receiving Social Security, the premiums are deducted from your Social Security benefit, otherwise Social Security bills you directly. The premium starts at a standard amount and increases for people with higher incomes. Each year the premium increases but current Medicare beneficiaries whose premiums are deducted from their Social Security benefit generally avoid the increase due to a hold harmless provision.

Part C is something of a misnomer as it doesn’t refer to a subsection of medical care like the other Parts. Instead, Part C refers to Medicare Advantage Plans, which are plans offered by private companies that have contracted with Medicare. Medicare Advantage Plans are required to provide all Part A and Part B benefits, but can do so with different rules, costs and restrictions. For example, with Medicare you can go to almost any hospital or doctor’s office whereas with Medicare Advantage Plans you can be limited to network providers. Many Medicare Advantage Plans replace Part A, Part B, Part D and Medigap coverages (more on Part D and Medigap below), as well as offering coverage for vision, dental and hearing services. You pay an additional premium for these plans on top of your Part B premium (and your Part A premium if you have one).

Part D covers prescription drugs and is offered by private companies. You can get Part D as a stand-alone private drug plan (known as a PDP) or as a part of a Medicare Advantage Plan with drug coverage (known as a MAPD). However, neither Medicare nor Medicare Advantage Plans cover prescription drug copayments or deductibles. As with Part B, the premium increases for people with higher incomes.

Medigap is supplemental insurance coverage offered by private companies that is designed to fill the gaps in expenses not covered by Medicare. Medigap covers Part A and Part B copayments, coinsurances and deductibles.

Depending on if you are employed or retired, there are different timelines for enrolling in Part A and Part B. However, once you are enrolled in Part A and Part B, there are several paths to getting enough coverage to address your long-term medical needs. If you just enroll in Part A and Part B, you would likely incur substantial out-of-pocket costs. To avoid this, you can enroll in Part A and Part B and supplement these benefits with Part D and/or Medigap coverages. Or if you have employer, retiree, or Veterans’ Administration (VA) medical benefits available to you, these programs can help defray costs. Or you can follow in the footsteps of 1/3 of Medicare beneficiaries and get your benefits through a Medicare Advantage Plan.