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The Insurance Hassle

Purchasing insurance is an important financial decision about protecting one's earnings and lifestyle.

The purpose of insurance is to protect people against financial disaster when they are unable to earn a living because of sickness or injury, or to give their dependents some type of income after they die. 

Many companies pay the entire insurance premium, or pay up to a certain amount of coverage. Some employers require waiting periods, where for example an employee may receive limited benefits for the first year of employment and additional benefits on each anniversary of the start date.

Disability insurance
There are also government disability insurance programs, which offers less coverage; not everyone qualifies for these programs. Five states - California, Hawaii, New Jersey, New York, and Rhode Island - have mandatory disability insurance programs for residents. Government workers and military service members have disability benefits programs to choose from.

Short-term disability. When an employee needs to be away from work for an extended period - say, for a nonwork-related disability like maternity, illness, or injury - that employee may have access to a short-term disability (STD) program, which helps provide at least partial income protection. Short-term disability insurance is a more common benefit because the chance of an employee being unable to work for a short period is higher than the chance of being permanently disabled.

An employer's STD program may not cover all employees. To become eligible, an employee may need to have worked at least 30 hours per week, and to have been working for at least 90 days continuously. Short-term disability coverage usually begins only after the individual has been out of the office for eight consecutive days.

A typical configuration for an STD plan is as follows: the employee receives 100 percent of base salary (or prior year's W-2 earnings, whichever is greater) for the first 15 days, and 66.7 percent of base salary thereafter, up to a maximum of 165 days. The plan might cover a maximum of 180 days (i.e., 26 weeks) for each period of continuous disability.

The payout percentage is less than 100 percent because insurance companies and the government want to deter workers from not returning to work after recovery.

Long-term disability. Every year, 12 percent of the adult U.S. population suffers a long-term disability, and one out of seven workers will suffer a five-year or longer disability before the age of 65. These high numbers underscore each employee's chance of having a disability.

Long-term disability insurance usually begins after the short-term disability coverage period ends. It covers a portion of salary in case an employee is out of work for an extended period because of illness. Usually there is no charge to the employee. Check with your employer about your coverage.

Long-term disability insurance can provide valuable protection. If you become unable to work, regardless of the reason, the combination of your living expenses and your lack of income could bring extreme financial hardship to your family. Disability insurance provides replacement income in the event that you can no longer work.

Life insurance
Most employers - 95 percent - offer a life insurance benefit, according to SHRM. Employers of all sizes offer such benefits, SHRM reports. Some people elect to purchase additional coverage to enable their beneficiaries to meet their full financial responsibilities in the event of the insured's death. Those expenses can include providing income to dependents, paying off outstanding debts (including mortgage payments), and paying estate taxes. The amount of coverage people elect depends on their estimated expenses.

There are two basic types of life insurance policies: whole life and term insurance. Term insurance is most common; whole life typically is the choice of people with large estates.

A whole life policy (or permanent insurance) combines life coverage with an investment fund. This type of insurance pays a fixed income on the insured's death, and part of the premium is invested by the insurance company to build more cash value. As long as the policy is kept, the cash value built up through investment is tax-free. Depending on the type of investment, the return on capital varies and is not guaranteed. The high cost of whole life policies makes them less common.

Term insurance has no investment component and lasts as long as the premiums are paid. Renewable term insurance is purchased annually. The premium is low when the purchasing individual is young, but the premium increases with age. Term insurance can be terminated or scaled down when the insured chooses, such as when a house is paid for and children are grown and on their own.

Long-term care insurance
The cost of nursing homes and home healthcare is high and rising: currently, about $50,000 per year, an amount not covered by Medicare or other private medical insurance. Many people do not anticipate these costs when saving for the future, despite the likelihood of requiring this type of care - a likelihood that increases with age. Long-term care insurance is intended to cover part of the gap.

Premiums for long-term care insurance are not inexpensive and depend on factors such as age, sex, geographic location, and policy type. The cost of such insurance is lower when the insured person is young. Planning early can help an individual prevent his or her savings from running dry after a few years in retirement.

Some companies - approximately 35 percent, according to SHRM - offer long-term care insurance as an optional employee benefit. Participating employees, as well as their spouses and parents, are usually eligible to purchase coverage. Group coverage typically brings down the premium.

Evaluating your insurance needs
For assistance in evaluating your insurance needs, consult a professional advisor, who can help you decide whether the insurance benefits offered by your employer are sufficient to meet your financial objectives, or whether you would be better served with additional coverage.

- Jessica Yang, contributor

Copyright 2000-2004 ©, Inc.

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