Insurance Through the Ages: What Coverage Do I Need Now?

Victor Colella: The best coverage for a homeowner’s policy? Look for the words “open perils,” which means everything’s covered unless specifically excluded—instead of the reverse, saying “We’re going to cover these specific things, and anything not included here.” Now, it costs a little bit more, but should something ever happen I think its money well spent.

Victor Colella: Hi, everyone, this is Victor Colella, and I’m a financial planner here at Adviser Investments. Welcome to another Adviser You Can Talk To Podcast. Today, I’m joined by two esteemed colleagues of mine who I have the pleasure of working with on a regular basis. Chris Hagan is on my right, and he’s a vice president and partner here at Adviser Investments.

Chris Hagan:  Thanks, Victor. Thanks for having me.

Victor Colella: On my left I have Andrew Busa, who you all know and perhaps are tired of by now…

Andrew Busa: Yeah, hopefully.

Victor Colella: …from prior episodes, and he’s a financial planner here in our central planning group.

Andrew Busa: Good to be here.

Victor Colella: Today it’s all about insurance. I can feel the excitement in the room just at the mention of insurance, but this is actually a topic we’ve wanted to cover for a while.

There’s a lot here, so we decided to take a different approach. When we thought about insurance, we realized that based upon your age, your insurance needs and the risks that you face can vary dramatically.

The way that we’re going to approach our conversation today is we’re going to break our listeners into three age groups. The first is your 20s, early in your career. The second is your 30s, 40s and 50s, which we’ll basically say is the beefy part of your working career, and then your 60s and beyond, the pre-retirement and retirement years.

Victor Colella: For each age group, we’re going to talk about the types of risks that you face. Then, the types of insurance you may use to cover those risks and then a little bit of additional detail on those types of insurance as we go.

I have a couple of disclaimers though.

First, we’re not going to cover medical insurance today. It’s an entire can of worms that will be its own podcast, and we can’t be here for three hours.

The second is that we don’t sell insurance at Adviser Investments. We don’t get paid to sell insurance, but we do talk about it a lot with our clients. You should be thinking about it because a financial plan is only as good as its weakest link. If you’re only planning for the best-case scenario to occur, inevitably when the best case doesn’t play out, you may find yourself out of luck.

Victor Colella: Let’s jump into our first age group: Insurance in your 20s. Now, for each of these age groups, Chris, Andrew and I came up with a tagline. Our tagline for your 20s is, “You are your biggest asset.” And just one thing here is you may not be in your 20s, but if you have nieces, nephews, children, cousins, some guy you met on the street, if you think they’d find this valuable it may be something good to talk to them about it. If you’re not in your 20s, be patient, we’ll certainly get to your age group.

In your 20s there are a couple of things that you’re protecting. One, future earnings. Future earnings are what we’re talking about when we say that your biggest asset is you.

The second one that we’ll talk some about is that for the first time in your life you’re starting to accumulate assets, cars, perhaps a house. You’re renting, out on your own probably.

Also, you may have some debt to cover. What do I mean when I’m talking about how to cover earnings? What type of insurance?

Andrew Busa: The first one you mentioned there, Victor, is future earnings. This is where we talk about disability insurance with clients.

It’s generally divided into two big categories. You have short-term disability and your long-term disability, and they’re both important. The one that we really focus on more with younger clients is long-term disability. This is the nasty one. This is what happens if you are out of work for an extended period of time and you don’t have your salary any more. Can you still sustain yourself? This is the one that we want to make sure that folks are covered for.

Andrew Busa: A lot of people get this insurance through their employer. You can also purchase a private policy.

There are going to be different definitions of disability. You have one occupation. That’s going to be the best definition. Now, for short-term disability it is possible to self-insure this risk. If your emergency fund is well built up and well-funded, you can self-insure. We want to make sure that long-term disability is covered. That’s the future earnings that we want to protect.

Victor Colella: What we mean by self-insure means that sometimes these long-term disability policies will say, “We won’t cover you until you’ve been disabled for 180 days.”

Andrew Busa: Right, that’s the elimination period.

Victor Colella: Yes. That’s what they call the “elimination period” in the policy. If you’re out of work for 180 days, you still need to eat and buy clothes and food and pay the rent. That’s when we talk about either emergency fund or short-term disability to bridge that gap.

Chris Hagan:  Another one to think about is rental insurance. This is when you’re in your 20s. You might not own a home yet. Don’t overlook this one, right? It’s really cheap. You also can endorse specific valuables: Jewelry, musical instruments, etc.

Also, another one to think about is auto policy. Make sure it’s high quality. Reassess it occasionally, probably just annually is probably good enough. When you’re in your 20s, your insurance is going to be probably higher than you think? You’re probably living in the city and don’t have a parking space.

I remember when I was in my 20s. A nice way for me to save some money was to get rid of my car. It was a great way for me to not have that extra spending on the auto insurance, and I didn’t have to pay for a parking space.

Things to look out for? Make sure that your liability coverage is high enough. Also, don’t be afraid to shop around. Explore different premium options.

Victor Colella: Our next age group is your 30s, 40s and 50s. Our tagline for this age group, and for those of you who have gone through it or are in it, you can probably relate. Our tagline is, “It gets complicated.”

Your financial situation is a lot more complex. You may have accumulated some wealth by this time, but really the big one that drives a lot of your insurance needs is that you may be growing your family. You have husbands, wives, partners, kids, maybe. There are a lot of insurance needs—perhaps the most insurance need here in this area. You’re protecting your prime-earning years, just like in your 20s, so your future income.

Victor Colella: You’re protecting your family. If you’re perhaps the primary breadwinner, or even if you aren’t, there’s probably a need to leave something. If something were to happen to you want to provide for the rest of your family that’s left. If you’re saving for college for your kids, you may want that to continue that whether you’re around or not. Then, of course, you have more home and property. Your net worth is growing, which gives you a little bit more to protect from a liability standpoint. There’s a lot here. Where do we start?

Chris Hagan:  I think an easy place to start is just thinking about your insurance kind of like your cable package, right? You can bundle to get a discounted rate off on your home, your auto and your umbrella.

Victor Colella: I think this is a good time for us to pause and talk for a moment about umbrella liability, which you just mentioned, Chris.

Umbrella liability isn’t something we talked about during the first age group because as you get older you accumulate more assets and perhaps become a larger target for liability claims. Liability coverage is additional liability above and beyond your homeowner’s and auto policy.

All homeowner’s and auto policies have some underlying amount of liability coverage for claims from a car accident, for example, for auto coverage, where you’ll get sued for damages. In the case of your homeowner’s insurance, it could be that someone broke their leg on your property and is suing you for medical bills. Your umbrella liability kicks in after your underlying homeowner’s and auto policies have already paid.

Victor Colella: Typically, these policies have an amount of required underlying coverage—maybe $200,000 in your homeowner’s is required before the umbrella policy will pay.

There are some opportunities for planning here where you can decrease. Let’s say you have $300,000 of underlying coverage in your homeowner’s policy. You can back that off to 200 and instead count on the umbrella for anything above 200. That could save you a few bucks. Some of our clients also have to increase their underlying liability coverages to meet the requirements of the umbrella policy. It could go either way.

Now that we’ve talked about liability a little bit, what’s next? I think homeowners is probably a good lead-in.

Andrew Busa: When I think about homeowners, of course we’re lucky enough to have clients out in California who did have the right level of insurance after they, unfortunately, lost their homes due to a fire. They did tell us stories about neighbors or friends that unfortunately didn’t have the right level of insurance.

Can you imagine going through the trauma of losing your house and then finding out that you don’t even have enough insurance to cover that full rebuild of your home?

Victor Colella: For example, flood: You can’t assume that it’s just going to be covered on anything that happens to your home. Most homeowner’s policies specifically exclude flood. If you want flood coverage, you have to go out and get it separately.

Along those lines, there are a couple, like we did for disability, there are a couple of things to look for. For the best coverage for a homeowner’s policy, look for the words “open perils,” which means everything’s covered unless specifically excluded. Instead of the reverse, saying “We’re going to cover these specific things and anything not included here.” It costs a little bit more, but should something ever happen I think it’s money well spent.

Victor Colella: We talked about bundling. We talked about liability. Typically, your homeowner’s and your liability coverage can be bundled together, and you can get a discount on one or the other. I think that’s probably a good transition. We talked about family. You’re living in a house now. We’ve talked about homeowner’s coverage. We haven’t really talked about life insurance yet, so this is often the first time that people are thinking about buying life insurance because one of those key triggers is when you become a parent.

Chris Hagan:  That certainly happened for us. When you think about life insurance, a great quote that I heard from a friend of mine who works in the industry is that life insurance isn’t for the people that die: It’s for the people that survive. When we had kids, our first daughter, of course that’s the time when you think about now it’s time to get life insurance.

Next up, I think you have the nice acronym LIFE that you talk about when we think about, how much do you need.

Victor Colella: There are a couple decisions you’ll have to make when you start down the life insurance path. The first one is usually how much. We use with our clients. L-I-F-E.

First of all, it’s conveniently easy to remember when it comes to life insurance.

L stands for what liabilities do you want to cover. If you or your spouse passes away, do you want to pay off part or all of the mortgage or other liabilities that you may have?

I is income. What future income do you want to replace should something happen to you or your spouse?

F is funeral expenses, and E is education. Some people say “Well, I want to automatically fund my kids’ college should I pass away, so that my spouse remaining doesn’t have to think about saving for college.” That’s a good place to start.

Victor Colella: There’s a lot that goes into this. Another decision you may have to make is, should I be looking at term insurance or permanent insurance? I like to say this, “Do you want to rent the insurance coverage or buy the insurance coverage forever?”

That’s probably its own podcast, but usually you try and match up. Is it a temporary need? If so match it up with a temporary type of insurance. Then there’s, I know, Andrew, we talk about this a lot, you may think “I’ve got a small family now. Maybe it’s time to do simple wills”—that sort of thing. If you both have $3 million of term-insurance coverage, if either or both of you passes away, your remaining loved ones are going to not inherit—or say you have $50,000 in the bank, they’re going to inherit $3 or $6 million.

Victor Colella: Your estate planning has to be taken a lot more seriously when you do have some of those insurance coverages, because I’m sure some people would be kept up at night if their teen all of a sudden received a check for $6 million. Who knows what the world would look like after that occurred? Those are a couple things. And then what else, or what are we missing, Andrew?

Andrew Busa: I mean, you’re still in your prime-earning years, right? Your 30s, 40s and 50s, you’re probably making more money now than you ever have before. Again, we go back to that disability insurance. It’s as important as ever to protect that long- term income until you hit retirement.

One quick call out here, let’s say you’re transitioning between jobs and you lose your group coverage for disability. That would be a good opportunity to explore purchasing a private disability insurance policy first because you can potentially buy the private insurance. Then when you become employed again, you can get the group coverage and actually double up. The group insurance policy won’t be able to look at what you have for private. It doesn’t work vice versa.

Victor Colella: A private company will say, “You’ve already got coverage through your employer, I’m going to cap you at a certain dollar amount.”

Andrew Busa: Exactly. You could really insure yourself well if you do it in that order.

Victor Colella: Yes. One last item here is that a lot of our clients in this timeframe are getting older, sure; but their parents are starting to enter our next age group.

We’ve all heard the stories of the “sandwich generation,” where you’re taking care of your kids and your parents who began needing care and can’t pay on their own. It may be time to have a conversation with your parents and see what their situation looks like. Do they have any long-term care coverage, for example? This is a good time to have that conversation before it’s too late for them.

Chris Hagan:  I know in my situation, this is where you’re possibly becoming power of attorney for your parents’ finances. Getting back to the bundling thing, is there a way to help, to maybe even lump in their insurance with yours to get them on a lower rate? Then also, of course, starting conversations with your parents about their plan for long-term care.

Andrew Busa: Right. Just like we said in this section, life gets complicated.

Victor Colella: Yes, exactly.

Andrew Busa: We’re here to answer any of your questions as a listener here. If you have questions so far, please let us know. This is a big section.

Victor Colella: Especially because we’re not able to go terribly deep on any one type of insurance here. Each one of these could be their own conversation.

Let’s go to the last but certainly not least category, which is insurance in your 60s and beyond. In your 20s you were an asset. Now, in your 60s, unfortunately you’re the biggest liability.

Andrew Busa: Ouch.

Victor Colella: We didn’t rehearse that.

Andrew Busa: No, we didn’t.

Victor Colella: What risks are you protecting in retirement? By nature, your income-earning years are starting to wind down if not go away altogether. You’re protecting the assets that you’ve accumulated. You’re also beginning to protect things like your health. This covers health insurance, which looks like Medicare in a lot of instances.

We have a podcast about “Medicare Made Simple” if you’d like to know a little more.

Victor Colella: It also starts to talk about long-term care, which we just mentioned and we’ll circle back to again. Another one here is estate planning. Although a lot of your life-insurance needs for protecting your income may be going away, you may still need to protect your estate for your kids through insurance—also that liability coverage conversation comes back in here. I’ll start with life.

A lot of our clients we see have expiring term policies and they’re saying, “Should I just let this thing expire when the term is up?” Most times the answer is “yes” because your income-earning years are coming to a close. But sometimes we’ll look at things like the ability for you to convert part of that policy to a permanent and keep it around for your kids or different estate-planning techniques.

Chris Hagan:  We also have clients that decide to self-insure with the assets they’ve got.

Victor Colella: Yes, exactly. The insurance conversations start to look like, “Let’s make sure your estate plan is in place.” That may be funded with insurance, or it may just be, “Let’s use our assets.”

The next one is long-term care. This is where we spend so much of our time with pre-retirees and retirees starting at around age 60, but even up to 70, and some start a little bit sooner. I thought we’d hit you with some statistics here. They’re really staggering for long-term care.

According to longtermcare.gov, if you’re turning 65 today, you have a 70% chance of needing some type of long-term care services during your lifetime. Long-term care isn’t medical care: This isn’t covered by your health insurance usually. This is help with eating, bathing, transferring. If you can’t walk, if you can’t communicate…

Victor Colella: One third of people may never actually use long-term care, but 20% of those who need long-term care needed it for greater than five years. The average stay for women in long-term care is a lot longer, around four years, versus men, where it’s around two years. There’s a lot here. Help me unpack this, guys.

Chris Hagan:  Well, one thing I’ll mention is that a lot of times we have clients purchasing long-term care because they want to remove the burden from their children. Right now, when I talk to clients, it’s not uncommon to hear figures like $13,000 a month for a nursing home, right? Those numbers are pretty big, right?

Andrew Busa: Staggering.

Victor Colella: Yes, and a lot of clients aren’t even drawn to nursing homes any more. That used to be really what you thought about with long-term care, but home health care, having a home health aide around the house—either 24 hours a day or 12 hours a day—can approach the same cost level. This can be a really big bill for folks who are no longer earning income.

Andrew Busa: Right. Chris, you mentioned taking the financial burden off your children. This plays right into, Victor, what you talked about earlier: Protecting your estate. This is protecting your legacy potentially for your kids as well.

There are different types of policies that we see out there that clients come to us with. Sometimes we’ll review a policy. You sometimes see the pure long-term care insurance. You can think of this almost like a term life insurance policy. You’re paying premiums, and if you don’t use it then…

Victor Colella: You lose it.

Andrew Busa: Right. What we’re seeing more and more of are these long-term care life insurance hybrid policies. Victor, I know you’ve done a lot of analysis on those.

Victor Colella: Yes. What that’ll sometimes look like is that you can access part of your death benefit if you qualify for long-term care.

Usually the way that you qualify for long-term care is that you have to be unable to perform two out of six activities of daily living, some of which I called out earlier—eating, bathing, continence, basically the things that that you would need help with just to live your live your life but are not necessarily medically related.

There are a couple of things in these long-term care policies to look out for: Duration of your benefits. Someone who we work with on a regular basis, Chris, through you, she likes to say, “Is it a short and fat policy, or is it long and skinny?” Meaning, can you use $200,000 a year for two years, or is it $50,000 a year for four years? That’s the short and fat versus the long and skinny. What else?

Andrew Busa: Yes, we want to make sure that benefit you just mentioned is inflation adjusted.

Victor Colella: That’s a good one.

Andrew Busa: The cost of healthcare and long-term care grows so quickly that we want protection there. There are also things that you’re going to want to look at: Is the company that’s offering the policy high quality? Is it strong financially? That’s another one.

Victor Colella: With most retirees living into their upper 80s and perhaps even early 90s, you have to think is this company going to be around to pay in 30 years? If you’re around 60, that’s a seriously long time frame. You want to make sure that they have their financial house in order.

Chris Hagan:  Right, and there’s less and less providers now of long-term care. A lot of them have actually left the industry or left the business.

Victor Colella: Yes, it’s not just expensive for the people receiving the services. If the insurance providers have underestimated how much it’s going to cost, it has taken a lot of them out of the industry.

Andrew Busa: Chris, I know we’ve done plans together where we’ve run the long-term care insurance analysis for folks, and we do find that insurance isn’t always the answer, right?

Chris Hagan:  Absolutely. I can think of a handful of clients where we’ve come to that conclusion because long-term care insurance is not cheap.

Victor Colella: We run the numbers and sometimes it’s worth it. Sometimes our clients say “Well, we’ll take the risk.” It makes sense for them. Then again, Medicare is a big part of what you’re trying to figure out in your 60s, from an insurance perspective.

We do encourage you, if you have any deeper questions about long-term care insurance, maybe it’s a future episode if we hear from you guys and it sounds like something that our listeners are into.

Victor Colella: I’m going to back up and give a quick summary.

We’ve talked about your 20s. In your 20s we talked a lot about disability insurance and some of that property and casualty, so renters, auto insurance, homeowner’s for the first time.

Our next category, things get complicated. You’re looking at life insurance, property and casualty, which is your homeowner’s, auto, sometimes umbrella comes into the picture here. You’re trying to make sure your parents are taken care of. You’re making sure that whether you get hurt, sick, or disabled, you have income that’s going to still come to your family. There’s a lot going on in that second category.

Victor Colella: Then as you retire it starts to get a little bit simpler, but the stakes get a little higher. Now you’re trying to protect all the assets that you’ve accumulated through liability coverage, through your life insurance program maybe, but especially your long-term care and your medical costs.

Victor Colella: All right, we’ve put a lot out there, but we know that you’re probably going to have additional questions.

Talk to somebody who knows what they’re doing here. The devil really is in the details. If you want us to go deeper, please do let us know. This is an episode where it’s really important that if you’d like to hear more about our experiences with any of these different types of insurance or with insuring individuals who look like you, your kids, your grandkids, your nieces, your nephews, whoever it is, please do let us know. You can do that by emailing us at info@adviserinvestments.com .

Victor Colella: This has been Chris Hagan, Andrew Busa and me, Victor Colella, and we want to thank you for joining another The Adviser You Can Talk To Podcast.

If you’ve enjoyed this conversation, please subscribe and review our show. You can also check us out at www.adviserinvestments.com/podcast. Your feedback is always welcome, and if you have any questions that you’ve either come up with today listening to us or topics unrelated to insurance, please let us know. Email us at info@adviserinvestments.com.

Thanks for listening.