What You Need To Know
“The True Value of Your Benefits”
Ron Cohen, RHU, RR
When you receive proposals from an agent or broker, they should be
clear and understood. Your understanding, in other words, should
also be relative to “the times”. Many life insurance producers offer
their prospects $1,000,000 of level term insurance death benefit,
without realizing, they may be short changing the individual’s actual
“needs” vs. their “wants”. As a consumer, here are some simple
thoughts, which might prove very beneficial to you.
“If you died and you’re (wife or your husband) beneficiary was to
receive $1,000,000, what would they do with the money?” Most
individuals think their spouses would pay off their homes, but that
typically seldom happens, as the money is usually needed for living
expenses. Therefore, the beneficiaries normally invest the money in
a vehicle, such as a CD.
Let’s assume that you could find a CD at a 5% interest rate. The
annual interest your beneficiary would receive would be $50,000.
Now, the tax must be paid on that, thus leaving them with an annual
income of a lot less than one would believe $1,000,000 is worth. So,
let’s use $3500 per month as a figure… (Which is allowing for a 3-
5% fluctuation in the CD market?) How much money would your
beneficiary actually need to live on? $3500 per month might not be
Realizing the Value of Your Disability Policy
Once you understand and realize the “true value” of current dollars
and then can compare the life insurance net CD income to a monthly
disability benefit, it will become quite clear, how valuable your
disability policy really is. In other words, your beneficiary’s $50,000
per year taxable income vs. a $5000 per month non-taxable
disability benefit…..which you would receive during your lifetime.
It’s easy to understand, using this example, that a $5,000 per month
disability benefit (in current times), is worth more than having
$1,000,000 invested in a CD!” The lower the country’s CD interest
gets the more valuable the monthly disability benefits get. The
other extremely important point here is that the disability benefits
remain constant. Regardless of the fluctuating interest rates, fed
cuts, stock market ups and downs, “If you become disabled, nothing
will change your monthly benefits…Except for the fact that they
could increase. By adding the Cost of Living Rider, your monthly
benefits do indeed increase at the levels which you purchased: 3%
or 6%....your choice!
So, if we were to compare benefits: Using age 40
$1,000,000 of life insurance = a $3500 per month fluctuating
interest rate, due to varying investment vehicles, which your
beneficiary will have to shop (and shop again, after each CD period
ends) for the “best rates”. When your beneficiary (ies) is or are in
this position (using the principal for monthly income), “risk” is
typically avoided. Normally, guarantees are more in line with their
needs. Yet, recession and inflation dictate the result….the monthly
income can be lower, which is presently quite obvious. In other
words, there are no guarantees.
Guaranteed Benefits During Your Lifetime
Comparing “risk to a constant”: Disability Insurance
“The odds of you becoming disabled, are 3 times greater than dying
prematurely, professionals understand that and as a result, they try to
insure the maximum monthly disability benefit they qualify for!”
$5000.00 per month of Disability Insurance =$60,000 per year
Payable to Age 65 without COLA = $1,500,000 non taxable
Compared to a taxable benefit in a 25% Tax Bracket that would be the
equivalent of $2,000,000
As an individual disability policy premium remains level and
guaranteed to age 65, it avoids fluctuation in uncertain times.
The policy will also provide a waiver of premium provision, which
eliminates the need to pay premiums during a claim.
(Note: The waiver of premium should also be added to your life policy.)
You should also understand the actual risk vs. cost element of a
disability insurance policy. As most people cannot envision
themselves as being permanently disabled, the simplest way to
understand the true value of a disability policy would be, by taking
the annual premium cost for the disability policy and multiply it
times the number of years until you reach age 65:
Example: Age 40 x 25 years (To Age 65) = Total Premiums
Now, take the monthly benefit they will receive if they were to
become disabled for 1 year: The example we’ve already seen shows:
$5,000 per month x 12 months = $60,000.
Now, compare the 2 figures and you will notice that in most cases,
you normally will not pay as much (in total premiums to age 65) as
you would receive for a one year disability claim. If in fact, you were
to become permanently disabled, the total amount of benefits
received, (non-taxable) could easily be in the millions. As life
insurance is usually used to protect the “loss of the breadwinner’s
income”, so too is the case of disability insurance….Yet, for the
insured, it is a rose that you get to smell during your lifetime…….
Life Insurance & Disability Insurance
The face amount of a typical term life insurance policy remains
constant. The monthly benefit in a disability policy increase will
increase with the addition of the cost of living rider (COLA). Thus,
the inflationary factor alone, dictates, that the $1,000,000 dollars of
life insurance over time, will decrease in value. Again, another
reason to consider greater face amounts.
All in all, understanding the “true value” of money and the “true
value of benefits” can prove quite beneficial when considering both
your current and future needs.
Disability Policies also allow for increases: The Future Purchase Option Rider
is worth consideration.
Ron Cohen, RHU
PO Box 298
Barker, TX 77413-0298