As the name implies, “insurance” protects us from life’s risks. Life, disability, health, long-term care, and for that matter, property and casualty insurance, provide safety and comfort if and when our worst fears are realized. Insurance of any kind is a burden when you don’t need it and a godsend when you do.

If your late spouse had life insurance, you must make a claim for payment of the proceeds. You must also elect whether to take payment in a lump sum or over a period of years. If others depend on you for their support, you own a business, or will have substantial income or estate tax liability at your death, you yourself might need life insurance.

Unless you are over the age of 65, handicapped, or indigent, you are responsible for your own health insurance. Even if you are 65 or older, you may want to supplement the coverage provided under government-provided Medicare. Maintaining quality and comprehensive medical coverage for you and your family is of critical importance. Any gap in coverage exposes you to potentially devastating risks.

Health insurance and Medicare provide only minimal coverage in the event you require long-term nursing home care. Medicare provides coverage for a portion of the first one hundred days of nursing home care if you enter the nursing home from the hospital in a related illness (see Chapter 13, “Losing Independence”). Medicaid is available for indigent nursing home patients in a limited number of facilities on a limited availability basis. If you have substantial assets, long term nursing home care isn’t an issue. If you have limited assets, you might consider long-term care insurance to avoid dissipating all of your assets and to insure a stay in a quality facility.

LOCATING LIFE INSURANCE POLICIES

Finding life insurance isn’t always an easy task. Look through important papers at home, at the office, and in your safe deposit box if you have one. Examine your checkbook register for payments to life insurance companies.

You may enlist the help of your insurance agent, your late spouse’s human resources/employee benefits department, or the Veterans Administration to help you to determine if coverage exists. When speaking with your late spouse’s employer you might also inquire about other benefits such as accidental death benefits, unused sick time, unused vacation pay, deferred compensation arrangements, and qualified retirement plan benefits.

Look for “credit life” insurance on large purchases such as your home and auto. Although we don’t recommend you purchase credit life, your spouse may have obtained this coverage to pay off large debts. Typically, credit life insurance premium payments are added to the monthly loan payment on the purchase.

You may also use the power of the Internet to locate life insurance policies on your spouse’s life. For instance, check http://www.lifesearch.net.

Even if you find old policies that you know or suspect have lapsed, there may still be value in terms of a death benefit. It will cost you nothing to ask.

CLAIM PROCEDURE

You should begin the claims process as soon as possible after your spouse’s death. The life insurance claims process will take approximately thirty days from the time you make your claim to your receipt of proceeds. The first step is to call your agent, your late spouse’s company benefits department, the Veterans Administration , or the life insurance company directly.

In recent years, insurance companies have simplified the claims process. Although each company’s procedures are different, all that is usually needed is your claim for payment (sometimes required to be in writing on a form sent to you by the company) and a death certificate.

Nonetheless, you should have the following information handy:

1. A copy of the policy.
2. Your spouse’s last day worked.
3. His date and place of birth.
4. Source of birth information.
5. Date, place and cause of death.
6. Your name, address and Social Security number.

If you choose the lump sum settlement option, the insurance company may require you to surrender the original policy document. If another settlement option is selected (see below), you should keep the policy as evidence of your continuing entitlement to distributions. You may be entitled to additional (sometimes double) benefits if you late spouse’s death was accidental.

If your spouse died within 2 years of the policy’s issue date (the “contestability period”), the insurance company is likely to conduct a routine investigation to determine whether the death was caused by suicide, or if the application contained fraudulent misrepresentations. This procedure may delay the claim process.

Life insurance companies offer a number of settlement (payout) options at death. This is true for group as well as individual policies. The option you choose will depend on your short-term and long-term income needs, as well as your faith in your ability to manage your finances. We strongly recommend that you elect the lump sum option and integrate the proceeds into the financial plan you develop with the knowledge gained in Chapter 5.

The most popular distribution options are summarized below:

LUMP SUM

Lump sum distributions are the most common form of life insurance payout. They allow you full and immediate access to proceeds to pay current expenses and invest the money however you see fit. In most cases, a lump sum payment is preferred. The cash proceeds can be invested consistent with your financial plan (see Chapter 5) considering your need for income and future growth.

LIFE INCOME

Proceeds from the policy are paid to you over the balance of your life. The monthly benefit depends on your age and gender, and is calculated using standard actuarial tables of life expectancy. The life income option has a number of important drawbacks. Although you are guaranteed a payment for life, the payment is not adjusted for inflation. Once the life income option is chosen, it may not be altered. Finally, your heirs would be adversely affected by your premature death, since payments stop at your death, even if you die after receiving only one payment! For these reasons, life income is the least attractive payment option.

LIFE INCOME, PERIOD CERTAIN

The life income, period certain option provides income for the longer of your life expectancy or the period certain (usually five or ten years). If you die before the period certain, your beneficiary continues to receive the income amount for the balance of the period. For example, if you choose a “life income, ten year certain” option, and die after six years, your beneficiary is entitled to income for four years after your death. The period certain feature eliminates the risk of early death, but will reduce your payment.

LIFE INCOME, INSTALLMENT REFUND

This option guarantees the return of your investment. Amounts not paid to you as life income will be paid to your beneficiary in a lump sum. For example, if you placed $100,000 under the life income, installment refund option, and had received $70,000 by the time of your death, your beneficiary would receive $30,000.

FIXED PERIOD

The fixed period option provides income for a specific period of time such as ten or fifteen years. This option may be appropriate when you need income only for a set number of years. Because it is not a life income, the amount will be higher than any of the life income options.

INTEREST ONLY

The interest only option pays interest at regular intervals, but you reserve the right at any time to elect another option or a lump sum. The interest only option is best used on a temporary basis while you complete your financial plan.

The following chart illustrates the anticipated monthly payment for the various non-lump sum settlement options based on a $100,000 death benefit:
 

* Income figures are based on guaranteed interest rates. Actual, or "current" rates will likely be higher.

If you have children who depend on you, college expenses, substantial debts, a family business, or anticipated estate tax liability, you may need life insurance on your own life. Even if you are 60 or even 70 years old, you can still buy life insurance as long as you are reasonably healthy.

The “million dollar” question is whether you need life insurance, and if so, how much. The answer depends on your future economic need, balanced against the cost of insurance. Determining your insurance needs requires a detailed analysis of your current and future expenses as well as your sources of income.

Take for example a surviving spouse with three children, ages 12, 10 and 7. Let’s assume the following additional facts:

1. Annual living expenses are (after tax) $60,000 (food, clothing, auto, insurance, entertainment, and miscellaneous expenses).
2. An income tax rate of 20%.
3. Estimated funeral expenses for the surviving spouse of $10,000.
4. A mortgage balance of $80,000.
5. College funding needed for all children is $100,000.
6. A $20,000 emergency fund.
7. Gross income from the survivor’s employment is $27,000.
8. The family receives $15,000 of Social Security benefits per year.
9. Investments in the amount of $325,000.

Let’s also assume that the family will earn 8% annually on investments, inflation will be 3% per year, and that income is needed for 15 years, taking the youngest child to age 22.

Although $325,000 of investments sounds like a lot of money, and it is, it would not enough to provide for the children if the surviving spouse dies prematurely.

* $75,000 needed, less $42,000 ($27,000 income + $15,000 Social Security).
This amount represents the present value of an increasing income for 15 years.

Even with the $325,000 properly invested (earning an 8% average rate of return), there would be a shortage in the event the surviving spouse in our example dies prematurely.

At the very least, the surviving spouse should purchase term life insurance in the amount of $250,000 for a fifteen-year period. The annual premium for a healthy female in her forties would be less than $1,000 per year.

Moreover, a revocable trust should be created to avoid probate and to manage the spouse’s assets until such time as all of the children are raised and able to manage an outright distribution of their inheritance.

The type of insurance appropriate for you depends on a number of factors, including your age, how much you are able to spend, as well as the length of time and the purpose for which it is needed.

As a general rule, if you are under the age of fifty and need insurance coverage for a limited period (until children finish college), term insurance would be the most appropriate for you.

If you are over the age of sixty, and have a permanent need for life insurance (payment of estate tax, qualization of your estate among many children, etc.) a permanent product like whole life, universal life, or variable life would be more suitable for your needs.

It is extremely difficult to be a smart consumer when it comes to life insurance. Insurance policies tend to be like snowflakes, with no two alike. It is impossible to compare them. This is true even for term policies where the only thing being purchased is a simple promise to pay a death benefit. Compounding the problem is the fact that you cannot blindly rely on the advice of your agent, whose commission depends on the type of policy sold. The key is to obtain the advice of a trusted advisor and to ask the right questions to keep him honest.

There are no absolutes when it comes to buying insurance. You will need sound advice when choosing among the following options:

TERM INSURANCE

Term Insurance is the least expensive form of insurance, since it insures against the loss of life for a specified period of time. Term insurance is preferred you are under age fifty, need a large death benefit and cost is an issue. The policy does not build up value from year to year. If you stop making premium payments, the policy simply lapses. As such, term insurance has no “cash surrender value.” You can choose the length of time you intend to keep the policy. You have the right to continue the policy during the guarantee period without evidence that you are still insurable. You can elect a one, five, 10, 15, 20, 25, or 30-year term. The longer the guarantee period the higher the annual premium. Most term insurance is convertible to a permanent policy with the same company without evidence of medical insurability.

WHOLE LIFE

Whole Life is a form of permanent protection that combines a death benefit and an increasing cash surrender value. Although the premiums are substantially higher than term insurance, whole life can be very economical for those with a long-term or permanent need for life insurance. Overtime, premium payments may be paid from the policy’s cash reserves. You may also elect to reduce the death benefit if you are unable or unwilling to make future premium payments. If the policy is participating (that is, there are dividends payable), you may be able to use the dividends to help you pay the premiums or to otherwise enhance the benefits of the policy.

UNIVERSAL LIFE

Universal Life is a hybrid form of permanent insurance. Basically, universal life is term insurance with a “side-fund.” The side fund is an investment account that holds general short-term interest-sensitive assets of the insurance company. Universal life premiums are lower than those for whole life, but higher than term insurance premiums. Universal life offers permanent protection at below-whole life cost. As with all permanent products (whole, universal, and variable), the growing value of the side fund is used to offset the higher cost of maintaining the death benefit as you age.

VARIABLE LIFE

Variable Life is permanent insurance with a side fund is invested in mutual funds. Variable life is attractive to people who believe that in the long run stocks will outperform other investments. Many companies have combined the best features of universal and variable life insurance into variable universal life insurance, (“VUL”).

TAX ASPECTS

Life insurance death benefits are generally received income tax free. Although life insurance is included in the decedent’s gross estate for estate tax purposes, no estate tax is imposed when the proceeds are paid to the surviving spouse (unless the surviving spouse is not a U.S. citizen) on account of the “unlimited marital deduction.”

Large life insurance policies should be owned in an Irrevocable Life Insurance Trust (“ILIT”) if they would otherwise cause the insured’s estate to be taxable.

If one of the deferred settlement options is chosen, a portion of each payment is an income tax free return of the original proceeds, and the balance is taxable to the beneficiary as interest income. The insurance company will annually provide you with Form 1099 indicating the taxable portion of the distribution (a copy of Form 1099 is also filed with the IRS).

The loss of a spouse may be accompanied by a loss of health care coverage. Having a gap in coverage for even a single day can be devastating to you and your dependents.

If you are eligible for Medicare, no gap in coverage will occur (unless you fail to timely apply for coverage). However, you could experience a gap in full coverage if your supplemental “Medigap” coverage (see below) lapses.

If you are not at least 65 years of age and thus not eligible for Medicare, one of the first orders of business after your spouse’s death is to secure medical insurance.

You can secure private health insurance from any number of private health insurance carriers, or from your late spouse’s employer, if you are eligible for “COBRA” coverage.

COBRA COVERAGE

If at the time of your late spouse’s death, he was employed by a company with at least twenty full-time employees, you may be eligible to continue his hospitalization and major medical insurance. The right to continuation coverage was created under the Consolidated Omnibus Budget Reconciliation Act, and is commonly known as “COBRA coverage.”

The coverage is identical to the coverage offered while your spouse was alive. The maximum period that you may continue your late spouse’s coverage is 36 months. Both you and your dependent children are eligible.

COBRA coverage is not free; you must pay your late spouse’s employer 102% of its cost for carrying you. The company’s employee benefits department should be able to provide specific information as to the coverage available as well as premium cost.

COBRA coverage will likely be cheaper and more comprehensive than coverage you can find on your own, especially if you or a member of your family has serious health problems.

MEDIGAP COVERAGE

If you are eligible for Medicare (age 65+) you should purchase Medicare supplement (“Medigap”) insurance to cover medical costs not covered by Medicare. The most significant gaps in Medicare are deductibles, co-payments, and non-covered charges.

Adding Medigap coverage assures nearly complete hospitalization and major medical coverage and is therefore recommended.

Since Medicare only covers prescription costs associated with a hospital stay, you should also purchase the Medigap prescription option. Medigap can be purchased from many major medical insurance companies.

You might consider using the plans suggested by AARP as a way to compare various Medigap policies. Call the AARP Health Care Options toll free number at 1 (800) 245-1212, ext. 99.

Part A of Medicare generally provides reimbursement for hospitalization and miscellaneous services and supplies, plus home health care and limited skilled nursing care. Part B of Medicare covers for doctors’ services, medical services, and supplies. The charts below summarize the major provisions of Medicare Parts A and B.
 

Medicare Part A is financed through the 1.45% tax on all earned income, with an employer matching amount equal to the employee’s tax.

Note: You must also pay for any charges in excess of the Medicare-approved amount.

Medicare Part B is financed through monthly premiums of $50 per person, deducted from your Social Security check.

Important: see the discussion of Medicare in Chapter Three “Navigating Social Security” for more a detailed discussion of Medicare

Even if you have adequate medical insurance, you may still be a candidate for long term care (“LTC”) insurance. Long term care insurance has become increasingly popular as our population has aged.

Statistics show that the older we get, the greater the likelihood that we will experience an extended stay in a nursing home or require full time home health care. Traditional health insurance does not cover long term nursing home care.

Medicare covers a small portion of the cost of long term care for a stay of no more than one hundred days (see “Medicare” in Chapter Twelve).

The most important variables in any LTC policy are:

1. Daily Benefit Amount.
2. Length of coverage for any one nursing home stay.
3. Waiting (elimination) period.
4. Cost of living increases.
5. Number of “ADLs” (activities of daily living) included.
6. Premium cost.

Ideally, a LTC policy should cover the full daily cost (daily benefit amount) of your stay, and continue (length of coverage) for life. Naturally, if cost is a consideration, you may decide to cover a reasonable portion of the daily cost, and have coverage continue for a shorter period, say three years.

Three years of coverage tends to be popular for two reasons: first, the average nursing home stay is less than three years, and second, the Medicaid divestment period is thirty-six months (see Chapter Twelve: “Losing Independence” ).

The philosophy here is that you can give away (“divest”) all of your assets upon entering the nursing home and be eligible for Medicaid when your LTC policy runs out.

The longer the LTC waiting period (also known as the elimination period), the lower the premium cost. A ninety waiting period is common in part because Medicare covers a portion of the first one hundred days of your stay (if you are entering the nursing home from the hospital for a related condition).

LTC insurance may provide benefits long into the future. For that reason, it is extremely important that the daily benefit amount be indexed for inflation. You have two basic choices: either simple or compounded increases in your daily benefit amount. Although 5% simple increases are common, 5% compounded interest is better. Your selection will depend on your other resources and your premium tolerance.

The Activities of Daily Living usually include the following:

1. Bathing.
2. Toileting.
3. Continence.
4. Dressing.
5. Transferring.
6. Eating.

You are eligible for benefits under your LTC policy if you need substantial assistance with two or more ADLs, and your care is expected to last for at least 90 days, or, if you need supervisory assistance due to a cognitive loss such as Alzheimer’s or dementia.

Other important features and benefits to investigate while shopping for LTC insurance include:

1. Home health care benefits.
2. Intermediate and custodial care.
3. Waiver of premium.
4. Bed reservation.
5. Respite care.
6. Discounts for good health.
7. Guaranteed renew ability.

Fortunately, it is easier to compare LTC policies since they have become somewhat standardized. Nonetheless, it is prudent to obtain objective advice from a qualified professional, such as a financial planner with expertise in long term care planning. As always, check out the financial stability of the insurance company through rating services like Best’s, Moody’s, Standard & Poor’s and Weiss.

Long-term care premiums are income tax deductible to the extent that when added to other health care premiums and un-reimbursed medical expenses they exceed 7.5% of your adjusted gross income.

MEDICAID

If you have substantial liquid assets you may be in a position to self-insure your LTC needs. In the event you require nursing home care and do not have LTC insurance, you will be required to pay for your care out of your own pocket.

Medicare provides coverage for a portion of the first one hundred days of nursing home care if you enter the nursing home from the hospital in a related illness Only when your assets have been sufficiently depleted will you qualify for Medicaid.

Medicaid eligibility is discussed in greater detail in Chapter Thirteen. However, as a general rule you will be required to exhaust substantially all of your assets (other than your home and your car) before you qualify for Medicaid.

PLANES, TRAINS AND AUTOMOBILES

You should contact your property and casualty insurance agent and review your home and automobile coverage. Ask about an “umbrella” policy covering liability over and above your individual home and auto policies. Umbrella coverage is purchased in million dollar increments and tends to be a real bargain. You should sell your late spouse’s car (or turn it in to the leasing company). Don’t let family members use your cars or recreational vehicles and expose you to unnecessary liability.

CONCLUSION

First, attempt to locate all life insurance policies on your late spouse’s life. Then, begin the claims process as soon as possible in light of the fact that it may take 30 days to receive proceeds. Even though you may be offered a number of settlement options, the lump sum option will almost always be the best choice.

Life insurance proceeds should be integrated into a comprehensive financial plan discussed in Chapter Five. If you have dependent children, or other need for liquidity, you should purchase life insurance on your own life.

You should take immediate steps to protect yourself from any gap in health insurance coverage, and evaluate your need for long-term care insurance.

You should limit you exposure to property and casualty claims by securing adequate insurance including an umbrella policy.

Finally, you will need the assistance of a competent and trusted insurance professional to help you evaluate your insurance needs and the appropriate products.