The 4 Types of Insurance Everyone Should Understand

Lesley: Welcome everyone to our next series in our webinars. Today we’re gonna be talking about insurance. Specifically we’re gonna cover four areas of insurance. We’re gonna talk about life insurance. We’re gonna talk about long-term care insurance, disability insurance, and then umbrella insurance policies.

So some broad insurance topics for your, for your knowledge today, I’m joined by Andrew Randisi and Christopher Mallon. They’re both certified financial planners here at Pennsylvania Capital Management. And guys, let’s take it away. We’ll start with life insurance. Andrew, do you wanna kick us off with a little overview of the different types of life insurance?

Andrew: Sure, leslie. There are two basic types of life insurance that I would say most of us are familiar with. Usually, typically the one we see a lot with your employer if you have a W2 job, would be term life insurance. Term life insurance as it is coverage for a set period of time.

Often between [00:01:00] 10, 20 and 30 years. And it’s a very popular choice because it’s used as a stopgap or a bandaid ’cause it covers you for that particular period of time. It’s often very inexpensive because I would say in most cases it’s statistically likely the po the policy is going to expire, worthless, ’cause you’ll outlive it. That’s why it it is, it’s often very cheap unless you have some underlying health condition that might make it more cost prohibitive. Really good really good way. Really good way for, especially in particular young people that are starting families. Or you just start a new job or going through a life change to get some insurance to cover wages, lost wages, lost salary, paying for education costs in the event something might happen to you or your spouse.

Then the other type of insurance, we also of life insurance, we all often see is permanent life insurance. This last permanent life insurance lasts your entire lifetime, typically, so long as you pay your [00:02:00] premiums up to date. And there’s usually cash in the policy as well. Oftentimes, we see these policies, you can borrow the cash if you so choose to do that, but it gives you more long-term flexibility for financial planning. Now, where do we see the permanent life insurance file policies fit? Usually that could be coming in a couple different areas. One, it’s often and can be used to pay future inheritance or estate tax if the individual or family or a couple’s estate might be well over the lifetime exemption.

We also are seeing it to, I do some wealth transfer as well. If mom and dad say, hey, wanna spend all their money down the life insurance policy refills the pot for future heirs. And then last but not least, we often see it used for setting up trusts for children or dependents or grandchildren that might have special needs.

Lesley: Great. Thank you for that little overview. I was just gonna add a little personal note that [00:03:00] on the term life insurance I have two kids and when my kids were born, I got term life insurance when they were born. I, and they’re they’re twins and I got 20 year policies thinking, okay, that’ll get them, to early adulthood.

And then when they were turned about, I guess 10 or 11, I realized, man, getting them to 20 or 21 isn’t probably gonna be enough, especially ’cause I’m a single mom. So then at that point, then I bought an another… I think I bought another 10, I bought another 15 year policy at that point. And really the whole thinking for me was just to make sure that if something happened to me that, my kids weren’t gonna be really struggling beyond, comfort, survival levels.

Yeah, just wanted to throw that out there. I think term of life and it’s given me a great deal of comfort over the years, knowing that if something did happen to me that my kids weren’t gonna be really destitute. So just wanted to throw that out there.

Andrew: That, and it’s not costing, it sounds like it’s also not costing you an arm and a leg.

Lesley: No, not at all. It’s been very inexpensive.

Chris: Yeah. Determines it being very cheap, permanent, obviously costs a lot [00:04:00] more ’cause there’s a guarantee to the payout, I’d say the permanent policies that will interact more as if, is almost, we’d say that term policies are definitely a need for almost every, family out there.

And then a, the permanent policies is a, it can be a need in a certain, higher net worth situation to, help with, transfer taxes and things like that. But then it’s can be a want, I’d say if you’re not necessarily in estate tax planning realm if you just wanna have a certain, box checked oh, I know if I spend X, Y, and Z amount of dollars, my heirs are gonna get A, B, C dollars no matter what.

Yeah, that’s usually we see that come into play more.

Lesley: Sounds good. A little overview on life insurance there for you. We can move on now to long-term care insurance. Chris, do you wanna give us a little overview of what long-term care insurance is?

Chris: Yeah, so I’d say all the different types of insurance we’re talking about today. First off is covering, essentially we look at, it’s a big risks, right?

Whenever we’re looking at things through financial planning realm, it’s what [00:05:00] derails the whole plan? So obviously a, a death while in, peak earning years is obviously a big one with the life insurance. And then long-term care is something that a significant amount of us will eventually have to pay for.

Something like 70% plus will need some type of long-term care. Like help when you get over age 65 and onward. So I’d say there’s two different types of policies, one of which. Doesn’t really exist anymore. Your traditional long-term care policy would be what it sounds like.

Use pay a certain amount of premium and it’s gonna cover a certain amount of benefits per day. If you, if a long-term care event happens, not entirely dissimilar to how like a disability policy would work. There is a waiting period before benefits start kicking in. And then sometimes it’s, it’s a certain, it’s usually a certain dollar figure or a certain percent of whatever the costs are would be covered by the plan.

However, those don’t exist in that format that often anymore. Mainly because the policies, as we started living longer and [00:06:00] longer. It wasn’t financially feasible for insurance companies to write them that way. So what we pretty much see now is people getting these, it’s called hybrid policies, so it’s a life insurance policy.

However, it has very, strong long-term care benefit riders. What that allows you to do is essentially to use the policy almost in an either or situation. And so it’ll have this, this life insurance benefit. And then it allows you to use a certain amount per month from that benefit to long-term care expenses.

Which is nice to see it’s hey, say you fund this policy and then you don’t end up needing long-term care benefits from it, then you pass away and then your beneficiary as well essentially get how the math usually has worked out, policies we’ve seen, but at least getting your money back, typically, that’s paid into it. Or if you need the benefit, then you can use the long-term care benefit and then the beneficiaries will receive, usually, almost nothing at the end of the policy if it’s drawn down for long-term care benefits or significantly [00:07:00] less. So it is a nice comfort factor to have.

Considerations there, they are expensive. And it’s definitely it’s important to weigh the cost benefit of, okay, should I self-insure? Essentially looking at, hey, this is what the premiums cost versus what if I just put this money into a separate account and saved it? And how much could that pay for in the future?

It’s balancing those two things. And then the timing is really important too, because if we, run quotes for, people who are in their, mid sixties already, they’re, it’s almost, it’s pretty cost prohibitive at that point. It would really be a I wanna say almost more of a mental accounting situation.

It’s Hey, I don’t necessarily care what this costs, I just want that box checked. I don’t wanna worry about it. Maybe not the most efficient use of cash, but we’ll do it. I’d say that sweet spot ends up being, typically we say what, like early fifties Andrew is when it makes some sense.

You can do 10 pay policies that kind of line up nicely with, peak earning years and still some time for the policy [00:08:00] to, not be too expensive. And there’s health underwriting too. So that usually ends up being the time it’s, yeah. There we don’t see tons and tons of them because when you run that analysis it’s almost ends up being a tomato situation versus self-insuring versus buying a policy.

Andrew: Yeah. Typically the time to do it is the earlier the better. And you wanna be healthy too. If you’re a walking disaster or with your health, with underlying health issues in your early fifties, you’re likely not gonna wanna be a candidate to wanna get one of these policy a long-term care policy.

And we’re off what we’re often also seeing clients do, which is Chris, getting back to your point of the self-insured route. In lieu of one of these policies, we’re seeing a lot of clients decide to go the continuing care retirement community route, CCRC’s. That often include a long-term care benefit as part of the insurance fee.

That does help cover a lot and manage a lot more of the future healthcare costs for what might be needed for assisted living or nursing care or memory care if one of your loved ones gets to that [00:09:00] point with their health.

Lesley: I think that’s a great point, Andrew. I think a lot of people don’t realize that it, in lieu of getting a long-term care policy your plan can just be, I’m gonna go to a continuing care retirement community instead.

Chris: Yeah. It gets bundled in, which is nice.

Lesley: Yeah, I think that’s a great point. Great. Thank you guys. Let’s move on to disability insurance. Talk about that for a few minutes.

Andrew, do you wanna?

Andrew: The often forgotten insurance that most people don’t think about. ‘Cause I’d say statistically speaking, you are more likely to have a short-term or long-term disability event than get struck by a bolt of lightning or go down in an airplane or sink with the, or sink with the Titanic on a cruise ship.

So it’s one thing to you wanna make sure that your income is protected especially if you are the higher earning spouse or the sole earning individual in the family household. And it’s most, and sometimes oftentimes for W2 [00:10:00] employees, you’ll be able to get employer employer will offer short-term disability, short-term disability.

Most times that’ll be included as part of your benefits package. That’s good to have, but often it, it doesn’t usually cut the cheese a hundred percent because what it’s going to be doing is typically only working for maybe three, six, maybe up to 12 months on a short-term policy. It’s often better to additionally have long-term disability insurance that if you do have a serious medical issue that prevents you from working for years or until disability age, which would be, or social security age, which would be 67 for most of us. It’s good to have that, be able to make sure you have your income protected. Couple of things that one can do is review your employer’s disability benefits, see what’s included as part of your compensation or see what also can be purchased ad hoc additionally. When you come up for benefits renewal once a year you can also purchase a policy [00:11:00] outside through an insurance broker. Typically what you wanna aim for is making sure at least 60 to 70% of your income can be replaced by a disability insurance policy. And you also want to be making important that when you’re looking for a policy and reviewing the defined details that you wanna make sure it covers both illness and injury and can, has inflation protection and also covers your own occupation.

Chris: Yeah, I think the own occupation one’s important because that’ll be if you are, so it’s either own occupation or like any occupation, right? So if you get some sort of injury that prevents you from, working at your, say you work a white collar job and then you’re, working at a desk and you get some sort of injury that prevents you from doing that, but you’re able to do other things and it’d be like, oh, you’re able to work in some capacity, so you’re not gonna get paid your policy versus if it is own occupation, it’s okay, you can’t do this. That’s your own job, then you’ll get your benefit. So it’s important to have [00:12:00] that, distinction.

Andrew: Yeah. The best example would be a surgeon, a hand, a surgeon, eats their hands. They could still quite, if they can’t use their hands, they could still do other another job.

But you wanna make sure without an occupation, disability insurance you are being able, you’re getting income replaced for your own job, which would be being a surgeon.

Chris: Yep.

Lesley: Good point. Thank you. I hadn’t thought of that. I didn’t know that they could write the policy so that as long as you could work any job you wouldn’t get benefits.

Is that the idea?

Andrew: Yeah. So that would be a, that would be like a disability where you are significantly more hampered.

Lesley: Yeah. Okay.

Andrew: So theoretically a surgeon, they could work

Lesley: I mean as a receptionist or something.

Andrew: Exactly. Exactly. Yeah.

Lesley: Yeah. And they wouldn’t get the disability policy if it hadn’t been written specifically for their own profession

Andrew: And then their occupation.

Lesley: Their own occupation. Yeah. [00:13:00] Okay. Good to know. All right. And our last important topic, and I know we talk about this a lot with our clients umbrella policies. Chris, do you wanna give us a little overview on an umbrella? Umbrella policy?

Chris: Yeah. I’d say umbrella insurance is a fantastic additional layer that’s inexpensive of liability coverage.

So basically trying to cover any scenario where someone would be getting, sued either for, if somebody hurts themselves on a property or a car accident type of situation. This is essentially where, or say you are a, a landlord, you have tenants or Airbnb houses out or something like that.

Basically if there’s a situation where somebody could get hurt on your property or, again, in a vehicle type of situation where your typical, call it property casualty insurance will cover up to a certain amount of liability, a couple hundred thousand dollars. However, if somebody is, significantly hurt or injured and is, suing you for dollars [00:14:00] beyond that and you have the assets elsewhere, then you could be on the hook.

Especially depending on how the, insurance and court situation were to pan out. So getting that umbrella insurance is that extra layer of protection against, a situation like that. And it’s pretty inexpensive, right? So if you have a situation where you’re being sued for a million dollars ’cause somebody got significantly hurt in a car wreck, then your car insurance would cover the first couple hundred thousand.

The rest of that, could be on you. Especially again, if the assets are there and then the courts may say, Hey look, this is what, how bad this injury is. This person’s never gonna be able to work again. So they’re gonna be owed this, amount to cover that. The umbrella policy can come in and fill that gap.

And yeah, I think it’s, for every million dollars of extra protection, it’s about, a hundred, 200 ish bucks a year. It’s not a totally expensive thing. It’s important for, all, almost all our clients we’re talking to, we recommend it. Again, just because it’s, we’re looking at situations where we can derail a financial plan.

God forbid something happens, the [00:15:00] person injured finds out that there’s a lot of assets there. They might try and go after it. And then the umbrella policy can step in and help cover that.

Lesley: Andrew, do you have anything to add on umbrellas?

Andrew: It’s the one thing when you’re looking with your umbrella insurance, you want to coordinate that with your home and your auto to make sure your home and auto insurance are at the right proper deductibles as well.

Because umbrella insurance has certain specific requirements for liability for home and auto before an insurance company will write the umbrella policy for you.

Lesley: That makes sense. Yeah. For mine’s all bundled together and I think you even get a discount if you bundle ’em all together too.

Andrew: Yeah. Typically, your insurance carrier will require you to carry first the highest level of liability for home and auto before they’ll write the, before they’ll write that additional umbrella for the X level of millions that you would need for your to cover, protect yourself.

Lesley: Yeah, makes sense.

Yeah, and as Chris said, we’re big proponents of umbrella insurance. It’s [00:16:00] a, cheap way to get you some more peace of mind and a little more coverage for your risk. And, particularly in this litigious society that, that we’re all living in, people get sued really easily for, oftentimes for small things.

And if you’ve got any kind of assets, and especially I think if you’ve, any, got any kind of visible assets, whether that be, you’ve got a famous name or you’ve got a big house, fancy cars. People are gonna know that they’re, you’ve got assets there and when they file a suit.

They’re gonna, they’re gonna go big after you. Big fans of umbrella. Umbrella policies here.

Chris: Yeah. And then you can divert more of the ’cause then it becomes the insurance company’s job, essentially to negotiate, payouts and everything, and settlements on their own behalf, right? Because if they’re on the, the hook for the dollars, then that’s just less things that you could be involved with. You can be like, Hey, whoever your policies are with, be like, Hey, there’s a situation that’s going on. Their attorneys get involved with the, the other side’s attorneys, and then you [00:17:00] can be, in the mix as little as possible because you already paid your premiums and your dollars are not necessarily typically on the hook that much anymore.

‘Cause typically the suing party is looking to deal with the insurance companies, get some sort of dollar settlement within policy limits, and then, move on to the next one. So ideally having that kind of, firepower of the insurance companies to work on their own behalf, frankly is better versus, you having to be in the mix and deal with it.

For sure.

Lesley: Yeah.

Chris: I wouldn’t wanna deal with it.

Lesley: No, absolutely not. Chris, do you mind getting, do you have the d you have that ready? I do. And I did wanna, I just wanna say one other thing as we wrap up, we do not sell insurance at PCM, we get no commissions for recommending insurance. We just believe that it’s important to, to cover all your risk bases.

So I’m, I want everybody to know that we don’t sell it. We just recommend it and are here to answer any of your questions about insurance. Whenever you’ve got questions, reach out, give us a call. Thanks [00:18:00] for joining us today, everybody. Take care.

Chris: Bye guys.