Health - Life and Disability insurance

I never understood life insurance and the different types of it until when I got pregnant. I started to read and research on the subject. Here is what I have learned and I’m sure there are more to add to it.

I don’t think a single person without any dependents depend on him/her needs insurance. And I don’t think a millionaire who has assets that cover all of his/her debts and liabilities would need life insurance as well. If you have dependents that depend on you or a millionaire who has a lot more debt/liabilities over your assets, you can get life insurance thru a few ways.

Life insurance consists of different ones: term life, whole life, universal life…over the years, the industry have evolved and made changes. I’ll just give 1 examples of each to clarify the difference between term life and whole life (universal life is somewhat similar to whole life insurance policy)

Life Insurance
Term life example:
Age 25 female, healthy, non-smoker, buys a $200,000 term life insurance policy for 30 years. Her monthly premium (that she has to pay to keep her policy active) is roughly around $18 per month or $200 per year. You have a choice of paying monthly, quarterly or yearly. The yearly amount is cheapest compare to paying monthly. The quarterly rate is cheaper than the monthly rate but more expensive than if you pay yearly. Term life insurance is similar to car insurance. If you stop paying, the coverage stops. You can no money back from all the premiums you paid to the life insurance company. However, if one dies while the policy is in effect, you will win the $200,000 like winning the lotto but who wants to win this lotto? This is the cheapest way to buy some security for your family/dependents. The older you are, the more costly the premium costs. The unhealthy you are, the more it costs you of course. We’ll talk a little about how much is enough insurance.

Whole life and Universal life insurance are similar which both have cash value at the end of the policy holder’s journey in life. Universal life insurance (there is fixed and variable universal life insurance) hasn’t been always around. Because of the evolution of insurance, this new product is introduced. Given the example of the same person as the term life example, female, age 25, healthy, non-smoker, $200,000 life insurance for 30 years, under the Whole life and Universal life insurance policy, this individual would be paying a yearly premium of over $1000.
When the policy holder dies while the policy is in effect, the dependents/beneficiaries will get $200,000 less all the expensive fees and commissions that the agent has to earn from selling you the whole life and/or universal life insurance policy. In most cases if not all, most agents will push you to buy this policy because they earn a big fat commission upfront (in the first few years of your policy). The dependents/beneficiaries will get a cash value from the insurance company. This is the premium which the policy holder paid to the insurance company and in return the insurance companies invest in different products (bonds, stocks, mutual funds etc…). This is like a FORCED SAVINGS PROGRAM for the policy holder. In addition to all of this, when someone sues you, they can’t get your money that is in your life insurance policy. And you can borrow money from your life insurance policy without paying it back (until one deceased).


Why would anyone pick Term life insurance over Whole life and Universal life? The straight forward answer is because that discipline individual wants to invest the money themselves rather than having the insurance does it for him/her. It will cut all the commissions and middle man involve.

How much insurance do you need to buy? I’m going to recommend you to read the book “The Wealthy Barber”. The author explains very well what you need. The book is about 10 years old but the basic idea is still useful. I’ll give a little high light on this. He mentioned your insurance should be enough to cover the following:
1) Eliminate all debts (settling taxes, funeral expenses, treating business partners and employees fairly)
2) Lump sum expenses (pay off mortgage, college expenses)
3) Cash flow – to support dependents, if you have non-investment income, don’t assume you’ll be able to earn a guaranteed rate of return.
4) Inflation

Don’t forget child care and additional car in the family etc… At the same time, the author said not to buy too much insurance. You have to take into consideration if the policy holder has social security benefits or pension benefits.

This is very basic explanation of life insurance. For more in depth explanation, should consult an insurance agent and read the following books. Get the facts and make your own judgment.

For Whole life and Universal life, the book “Missed Fortune” and “Missed Fortune 101” by Douglas R. Andrew

Miss fortune & Missed fortune 101 – Douglas R. Andrew
The millionaire next door by Thomas J. Stanley, PHD, William D. Danko, PHD
Smart couples finish rich by David Bach (he mentioned both disability and life insurance, I like his version on disability insurance)
The Wealthy Barber by David Chilton (I like his version of explanation on life insurance)
The Total Money Make Over by Dave Ramsey
Financial Pease revisited by Dave Ramsey

P.S. Make sure you get a physical check up each year whether you buy or don’t buy insurance


Disability Insurance – who needs it?
After hearing many disabilities in my husband’s family, we decided to look into disability insurance. I was amazed to find out the statistics of disability is 1 out of 8 people. The only conception of disability one might have on my mind before I did the research was injury through dangerous line of work such as construction, police officers, fire fighters etc…

Statistics show a lot more people are disabled because of their health problems rather than work related injuries.

Why should you need it if you are healthy and not in a dangerous line of work? That certainly fits what I want to ask but I know that sometimes accidents can happen anytime and anywhere and I do not want to lose my greatest asset of all: ME! And the dependents that depend on me – they need my income.

Most of the disability insurance covers you up to age 65 or so in addition to the disability you get from the government and then you are on your own-continue getting disability from the government. By age 65, one hopes that he/she has less responsibilities, paid off home mortgage (if they have a home) and other debts.

Insurance companies would not want to write up a disability insurance policy if you are not working to earn an income. In their own words “The insurance is to replace income that you will lose, if you become sick or hurt and cannot work. If there is no income from employment, there is no risk to share from an insurance company’s standpoint.”

Another good point David Bach mention in his book “Smart Couples Finish Rich” on page 173 is
“you want to know whether the policy will cover you in the event you’re no longer able to do the work you currently do, or whether it pays off only if you are rendered unable to do work of any kind. In the insurance industry, this is known as “owner occupation” and “any occupation” coverage. Make sure you buy an owner-occupation policy.”

If you have any occupation policy, and suppose you are an accountant, and you are able to perform your work because of your eyes or fingers. The insurance company would not cover you because they can say to you that you can be a janitor (you can work as something else other than an accountant.) However, if you have an owner-occupation coverage, the insurance company can’t do that to you. It’s more expensive but it’s much safer.

Life insurance and disability insurance is cheaper if you can buy from your work where they have group insurance. You have to ask yourself if the coverage is enough? And when you leave your job, that life and disability is no longer following you.

What is opinion on the subject of life insurance and disability insurance?