NerdWallet's Smart Money Podcast
Preparing for Worst-Case Scenarios: Choosing the Right Insurance Policy to Protect Your Income
Thu, 14 Nov 2024
It's open enrollment season, and a great time to explore coverage options to protect your income, such as life insurance and disability insurance. Hosts Sean Pyles and Liz Weston discuss the importance of insurance coverage, highlighting statistics around how many people are underinsured or lack adequate coverage. To dive deeper into different types of coverage, Liz welcomes Insurance Nerd Ryan Brady and John Ryan, founder and CEO of Ryan Insurance Strategy Consultants, to explain various types of insurance. In this episode, they talk about life insurance, accidental death and dismemberment insurance (AD&D) insurance, and disability insurance, and explore the nuances of employer-provided life insurance and supplemental insurance. Plus: the complexities of disability insurance, comparing short-term and long-term coverage, and the interplay between employer-provided disability insurance, individual disability insurance, workers' compensation, and Social Security. Use NerdWallet's free life insurance calculator to figure out how much life insurance you need: https://www.nerdwallet.com/article/insurance/how-much-life-insurance-do-i-need In their conversation, the Nerds discuss: life insurance, disability insurance, workplace benefits, financial needs, income protection, supplemental insurance, accidental death and dismemberment insurance (AD&D), disability coverage, short-term disability, long-term disability, employer-provided disability insurance, choosing an insurance policy, workers' compensation, Social Security, insurance complexities, income safeguards, accidental death insurance, dismemberment insurance, critical illness insurance, hospital indemnity coverage, and pre-existing conditions clauses. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [email protected]. Like what you hear? Please leave us a review and tell a friend. Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: What is the significance of open enrollment?
Hello listeners, Sean here. Today and this month, we were prizing a special series we brought you last year on open enrollment. It was such a comprehensive look at all the decisions that people have to make at this time of year that we decided to run it again. My guest was my former and now retired co-host, Liz Weston. So she's back, sort of.
Anyway, we hope you find this useful and enjoyable as we move through the holidays and open enrollment season. Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Liz Weston.
And today we have the second episode of our nerdy deep dive into open enrollment, that time of year we all look forward to when we get to think about health plans, life insurance, vision and dental, and oh, so much more.
Yes, and in this week's episode, we're going deep on insurance that's supposed to help you protect your income if something happens to you and you can't provide for yourself or your family. In other words, you are either disabled or you die. Liz, nobody wants to talk about this stuff. I know, I know, but everybody really, really needs to.
Sean, this is so incredibly important and too many people ignore it. Insurance of all kinds is meant to protect you from costs you couldn't easily pay out of pocket. But too many people who need certain types of insurance just don't have it. And others get talked into buying policies they don't need, right? Yeah. Absolutely.
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Chapter 2: Why is insurance crucial for income protection?
There's a reason life insurance salespeople don't have, shall we say, the most positive of reputations. But that doesn't mean you should stay away from the concept altogether. Now, we're not here to tell people what to do, but I think it's worth hearing the case for having some sort of financial backstop if that thing you think will never happen to you happens to you.
Yeah. So you mentioned that the main purpose of all of this is to protect income if you're unable to work.
Yes, one place where people tend to be critically underinsured is their income. How would you get by if you could no longer do your job? How would your loved ones manage if you're no longer here? Disability and life insurance can help fill the financial gaps if something bad or something worse happens to you.
So today we're going to look at all the different types of insurance that can protect your income because open enrollment is a great time to review your options.
Chapter 3: How does life insurance work and who needs it?
All right. Well, now that I've got the dialogue from Double Indemnity running through my head, we want to hear what you think too, listeners. To share your ideas, concerns, solutions around open enrollment with us, leave us a voicemail or text the Nerd Hotline at 901-730-6373. That's 901-730-NERD or email a voice memo to podcast at nerdwallet.com. So Liz, where do we start today?
We're going to start with life insurance, and our guest is fellow nerd Ryan Brady, who covers insurance. Ryan, thanks for being here. Great to be on, Liz. Thanks for having me. All right, give us a scoop. What even is life insurance? How does it work when you're getting it through an employer plan?
Life insurance is basically a safety net for anyone who depends on you financially. So if you die unexpectedly, life insurance provides money that could replace your income, pay off a mortgage, pay for your kid's college tuition, or really any other expense you want to cover.
It can also give your loved ones the funds to cover your own funeral and burial costs without them having to dip into their own savings. And that can be a chunk of change, right? Yeah, it could be a lot. I believe the current estimate for funeral and burial costs is close to $8,000. Wow. Wow. So you typically you don't buy life insurance for your own benefit. You buy it for the benefit of others.
So if you think about it, you know, our ability to earn income is really our greatest asset, at least for most of us. So we insure that asset through life insurance. That way, our loved ones can maintain their standard of living with hopefully minimal disruption. Of course, there are other reasons why some people buy life insurance, like for investing or estate planning purposes.
But generally, it's best to think of life insurance as a way to replace your income if you pass away. Now, when it comes to your job, most employers in the U.S. offer a limited amount of life insurance for employees as part of workplace benefits. This coverage is usually what's known as basic group life insurance, and it's actually pretty easy to get.
To opt in, all you typically have to do is fill out a form and maybe meet any eligibility requirements that your company has, such as working a minimum amount of hours per week. You also need to name a beneficiary, and that's going to be the person or it can be an entity like a charity to whom you want the payout from your life insurance to go when you die.
And you can actually name multiple beneficiaries and update beneficiaries as your life circumstances change. So there's a lot of flexibility there.
Okay, good. Now, at what point in your life do you want to start contemplating getting this kind of insurance? Should it be earlier in your career, mid-career?
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Chapter 4: What are the differences between basic and supplemental life insurance?
Yep, yep. We have a baby on the way. Yay! Yeah, yeah. So in about four weeks, baby Colin's going to be here. So I thought, what better time than to get life insurance? Kind of got me thinking about it. If I get flattened by a bus tomorrow, let's say, would my wife be able to pay the mortgage, pay for the groceries, pay for college expenses or something down the road, all on one income? Right.
And so the answer to that's probably not very easily. So I bit the bullet. You know, I wish I would have done it a little bit sooner, but I'm glad to have gotten life insurance.
I think a lot of people are in the same boat. They don't think about it until the first kid comes along or sometimes when they buy a house and have a mortgage with somebody else and they realize, oh, if something happens to me, they wouldn't be able to keep the house.
Exactly. That's a great point. And also the need for life insurance becomes greater as you take on more debt and other responsibilities, like you mentioned, Liz, especially if you share those responsibilities with somebody else. But even if you don't have any big shared responsibilities today, you may still need to think about getting life insurance if you're planning to in the future.
Let's say if you want to buy a house or start a family down the road. And that's because life insurance is generally cheaper the younger and healthier you are. So it may be wise to lock in a policy now while you still qualify for those lower rates. And of course, you could always buy more life insurance later if you end up needing it. It just might be a little bit more pricey.
One last thing I'll say here is that a lot of people think life insurance is expensive, and sometimes it is. But if you're relatively young and healthy, life insurance can be surprisingly affordable. According to Neuwald's analysis of life insurance rates, the average cost of a 20-year term insurance policy with a $500,000 payout is less than $20 a month for a healthy 30-year-old.
Now, we've been talking about this as a benefit of employment. Don't some employers just give you some life insurance, almost whether or not you want it? And how much is that usually?
Yeah, you're right. When it comes to basic group life insurance, most employers do offer it as a job perk, and it's usually free. So there's a good chance you already have some life insurance coverage through work if you've opted in. And unlike many individual policies, you generally don't have to take a medical exam or fill out a questionnaire.
The amount of coverage, though, is usually pretty low. Basic group life insurance is often capped at about one to two times your annual salary. So if you're making $50,000, you might have $50,000 or $100,000 of coverage.
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Chapter 5: What is accidental death and dismemberment (AD&D) insurance?
Wait, really? I feel my paranoia growing.
Really? Today's 20-year-old has a one in four chance of being disabled before retirement, which is about twice the risk of dying, according to Social Security actuaries. Workers' compensation covers only work-related illness and accidents, and a lot of disabilities aren't job-related. But what if you have decent savings already?
Well, that's great, but a 2018 Federal Reserve study found only 40% of U.S. households had liquid savings equal to three months' expenses, and less than 30% had enough for six months. On top of all that, the average Social Security disability benefit in 2023 is $1,483 monthly. That adds up to less than $18,000 a year. Yikes. That will not get you very far if you're unable to work.
So who is walking us through the vagaries of disability insurance?
I had a great conversation with John Ryan, not to be confused with our earlier guest, Ryan Brady. And John is the founder and CEO of Ryan Insurance Strategy Consultants. That's coming up in a moment. Stay with us. Hey, John, it's great to have you on Smart Money.
Thanks, Liz.
So we're going to talk about some various kinds of insurance that folks might have as options on their employer-sponsored benefit plans. And I'd like to have you help us out first on disability. So what exactly is disability insurance and why would somebody need it?
Well, disability insurance is designed to replace a person's income if they get sick or hurt and can't work. Pays the bills, keeps them in their lifestyle. Very important. Life insurance does that. If someone dies, it provides a benefit. They can invest the proceeds and live off the proceeds.
Disability insurance provides the same kind of cash flow if someone's disabled and cannot work at their job.
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Chapter 6: How does disability insurance protect your income?
And as far as the employer policy, it will offset for benefits that are received from social security. But since it's such a rare occurrence, there usually is not an offset.
And speaking of employer provided disability insurance, is this coverage portable? Does it follow you to your next job if you quit this one?
No, it does not. It is only effective when you work for your employer. And usually the work requirement is at least a 30 hour work week. If you leave your employer, you almost always lose your coverage. Hopefully you're going to work for another employer that has similar coverage.
But the lack of portability is also a reason why many will buy an individual privately owned policy as a supplement to the employer plan. And those policies are portable and can be added to.
And what should people know about buying an individual disability policy?
It's almost always underwritten. One of the beauties of employer plans, and we really like employer plans, is that it's usually no questions asked. It's a guaranteed issue. As soon as you become employed, you go down to the human resources office and sign a few papers and you're covered immediately. Now there is a preexisting conditions clause, but there's no exam, no lab work, no medicals.
Within individual policy, it's fully underwritten. So there'll be a formal application. They may request medical records. They may send a nurse to your home or your work to do your lab work. There's a medication search that they do. The underwriting for individual disability insurance is the most rigorous there is when it comes to buying a policy like this.
Even more rigorous than life insurance.
Yes.
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