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5 Insurance Policies Everyone Should Have

Lisa Smith (INVESTOPEDIA.COM)
January 2023

An insurance policy can protect you from the hazards of normal life, from floods and fires to car accidents and life-threatening illnesses. You can't stop disasters from happening, but a good insurance policy can provide financial coverage for these unexpected expenses.

Protecting your most important assets is an important step in creating a solid personal financial plan, and the right insurance policies will go a long way toward helping you safeguard your earning power and your possessions. In this article, we discuss five policies you shouldn't do without. 

1. Long-Term Disability Insurance

The prospect of long-term disability (LTD) is so frightening that some people choose to ignore it. While we all think that "nothing will happen to me," relying on hope to protect your future earning power is not a good idea. Instead, choose a disability policy that provides enough coverage to enable you to enjoy your current lifestyle even if you can no longer continue working. 

Long-term disability provides a monetary benefit equal to a portion (e.g., 50% or 60%) of the insured's salary for covered disabilities. Long-term disability typically begins when short-term disability ends. To receive benefits, the disability must have occurred after the policy's issuance and then, typically after a waiting period. Medical information, often confirmed by a physician, must be provided to the insurer for consideration.

Most long-term disability insurance policies categorize disabilities as own occupation or any occupation. Own occupation means the insured, due to disability, is unable to perform their regular job or a similar job. Any occupation means the insured, due to disability, is unable to perform any job for which they are qualified.

Similar to short and long-term disability insurance, workers' compensation, or workers' comp, it pays a monetary benefit to workers who become injured or disabled at work or while performing their jobs. Most states require employers to carry workers' compensation insurance for their employees. In exchange, employees may not sue their employer for negligence.

While long-term disability insurance and workers' compensation insurance both pay for disabilities, long-term disability insurance is not limited to disabilities or injuries occurring at work or while working.

2. Life Insurance

Life insurance protects the people that are financially dependent on you. If your parents, spouse, children, or other loved ones would face financial hardship if you died, life insurance should be high on your list of required insurance policies. Think about how much you earn each year (and the number of years you plan to remain employed), and purchase a policy to replace that income in the event of your untimely demise. Factor in the cost of burial too, as the unexpected cost is a burden for many families.

 

3. Health Insurance

The soaring cost of medical care is reason enough to make health insurance a necessity. Even a simple visit to the family doctor can result in a hefty bill. More serious injuries that result in a hospital stay can generate a bill that tops the price of a one-week stay at a luxury resort. Injuries that require surgery can quickly rack up five-figure costs. Although the cost of health insurance is a financial burden for just about everyone, the potential cost of not having coverage is much higher. 

 

4. Homeowner's Insurance

Replacing your home is an expensive proposition. Having the right homeowner's insurance can make the process less difficult. When shopping for a policy, look for one that covers the replacement of the structure and the contents, in addition to the cost of living somewhere else while your home is repaired. 

Keep in mind the cost of rebuilding doesn't need to include the cost of the land since you already own it. Depending on the age of your home and the amenities it contains, the cost to replace it could be more or less than the price you paid for it. To get an accurate estimate, find out what local builders charge per square foot and multiply that number by the amount of space you will need to replace. Don't forget to factor in the cost of upgrades and special features. Also, be sure the policy covers the cost of any liability for injuries that might occur on your property.

 

Renters Insurance

Renters also need peace of mind that they will be made whole in the event of a loss. Fortunately, renters insurance is a type of property insurance available to people who rent or lease properties. This insurance provides coverage for personal belongings, liability, and additional living expenses for covered losses.

For one property, there may be two types of property coverage: homeowner's insurance and renters insurance. However, homeowners insurance does not cover the personal property of the tenant. Therefore, it is important for lessees to obtain renters insurance to protect their assets.

Although renters insurance differs from homeowners insurance, they have the same components: coverage A for the dwelling, B for other structures, C for personal property, D for additional living expenses (also known as loss of use), E for liability, and F for medical payments. Because renters are not responsible for insuring the dwelling or other structures, coverages A and B are often set to $0.

Coverage C covers the personal property of the renter. Coverage D provides additional benefits for living expenses in the event of a loss. For example, if the renter is displaced from the home due to a fire, Coverage D provides covers the cost of living elsewhere, such as a hotel and food expenses. Coverage E provides coverage for injuries and property damage caused by the insured, and Coverage F covers medical expenses for guests of the renter on the property with permission.

5. Automobile Insurance

Some level of automobile insurance is required by law in most places. Even if you are not required to have it, and you are driving an old clunker that has been paid off for years, automobile insurance is something you shouldn't skip. If you are involved in an accident and someone is injured or their property is damaged, you may be subject to a lawsuit that could cost you everything you own. Accidents happen quickly and the results are often tragic. Having no automobile insurance or purchasing only the minimum required coverage saves you only a tiny amount of money and puts everything else you own at risk.

Shop for Insurance Carefully

Insurance policies come in a variety of shapes and sizes and boast many different features, benefits, and prices. Shop carefully, read the policies, and talk to a licensed insurance professional to be certain you understand the coverage and the cost. Make sure the policies you purchase are adequate for your needs and don't sign on the dotted line until you are happy with the purchase.

Consider enlisting the service of an insurance broker as they can search for policies across several insurance companies to find coverage that best suits your needs. Ask the broker to provide you with several options so you can compare features, provisions, and rates. Be in control of your protection by being well-informed to make a decision.

 

What Is a Whole Life Insurance Policy?

whole life insurance policy is a permanent life insurance policy in which death benefits are paid upon the death of an insured. The whole life policy remains in force for the life of the insured as long as premiums are up-to-date. In addition to death benefits, whole life policies build cash value, which can be accessed during the insured's lifetime.

 

What Is a Universal Life Insurance Policy?

universal life (UL) insurance policy is permanent life insurance that allows the policyholder to invest their cash value in a separate account, which features funds tied to the stock market. It is a flexible policy, whereby premiums and death benefits can be adjusted.

 

How Do You Cancel an Insurance Policy?

A policyholder must cancel an insurance policy according to the cancellation provisions of their contract. Often, insurers allow policyholders to cancel by phone; however, some require the request in writing.

 

What Is an Umbrella Insurance Policy?

An umbrella policy is liability insurance that provides additional coverage in excess of the policyholder's current policy limits. For example, if damages exceed the limits of a policyholder's property insurance (e.g., home or auto), the umbrella policy will provide the additional liability coverage, up to policy limits. This type of insurance most benefits those with sizeable assets, which could be subject to seizure.

 

How Much Does a $1 Million Life Insurance Policy Cost?

The cost of a $1 million life insurance policy varies according to the type of life insurance issued—whole or term—the insured's age, the insured's health, and other underwriting factors. It could range from a few hundred dollars to thousands of dollars. The best way to find out how much a $1 million policy costs you is to get quotes from a life insurance agent or broker.

 

What Is the Cash Value of a Life Insurance Policy?

The cash value of a life insurance policy is the amount in excess of the premiums that has accumulated in the policy. Cash value is the savings component of a permanent life insurance policy that accumulates interest and can be accessed by the policy's owner in the form of a cash withdrawal or a loan.

 

What Is the Declarations Page of an Insurance Policy?

An insurance policy declarations page is the part of the insurance contract that includes the general policy information. This page lists the policy owner, insured, the face amount of coverage, and terms and conditions.

 

The Bottom Line

In life, losses are inevitable, and the degree to which these losses impact our lives varies. Insurance lessens the impact by providing financial benefits for covered losses. There are many types of insurance available, but there are some which top the charts in terms of importance. Home or property insurance, life insurance, disability insurance, health insurance, and automobile insurance are five types that everyone should have.

5 Top Benefits of Life Insurance

Kat Tetrina (INVESTOPEDIA.COM)
January 2023

Life insurance is often overlooked but should be part of your financial plan

Life insurance can be essential for protecting your family financially in case of a tragedy, but many people go without it. In fact, nearly half of American adults do not have life insurance, according to a 2021 survey. One reason is that people assume life insurance is too expensive. For example, when asked to estimate the cost of a $250,000 term life policy for a healthy 30-year-old, the majority of survey respondents guessed $1,000 per year or more. In actuality, the average cost is closer to $160 a year.

5 Top Benefits of Life Insurance

Life insurance provides a number of useful benefits. Among them:

1. Life Insurance Payouts Are Tax-Free

If you have a life insurance policy and die while your coverage is in effect, your beneficiaries will receive a lump sum death benefit. Life insurance payouts aren’t considered income for tax purposes, and your beneficiaries don’t have to report the money when they file their tax returns.

 

2. Your Dependents Won’t Have to Worry About Living Expenses

Many experts recommend having life insurance that's equal to seven to 10 times your annual income. If you have a policy (or policies) of that size, the people who depend on your income shouldn't have to worry about their living expenses or other major costs. For example, your insurance policy could cover the cost of your children's college education, and they won’t need to take out student loans. 

3. Life Insurance Can Cover Final Expenses

The national median cost of a funeral that included a viewing and a burial was $7,848 as of 2021. Because many Americans do not have enough savings to cover even a $400 emergency expense, having to pay for a funeral can be a substantial financial burden. If you have a life insurance policy, your beneficiaries can use the money to pay for your burial expenses without having to dip into their own savings or use credit. 

Some insurers offer final expense policies. These policies have low coverage amounts and relatively inexpensive monthly premiums. 

4. You Can Get Coverage for Chronic and Terminal Illnesses

Many life insurance companies offer endorsements, also known as riders, that you can add to your policy to enhance or adjust your coverage. An accelerated benefits rider allows you to access some or all of your death benefit under certain circumstances. Under some policies, for example, if you are diagnosed with a terminal illness and are expected to live less than 12 months, you can use your death benefit while you’re still living to pay for your care or other expenses. 

5. Policies Can Supplement Your Retirement Savings

If you purchase a whole, universal, or variable life insurance policy, it can accumulate cash value in addition to providing death benefits. As the cash value builds up over time, you can use it to cover expenses, such as buying a car or making a down payment on a home. You can also tap into it if you need to during your retirement years.

 

However, a life insurance policy should not replace traditional retirement accounts like a 401(k) or an IRA. What's more, cash value life insurance is considerably more expensive than term life insurance, which has no savings component but simply a death benefit.

The Bottom Line

Life insurance isn’t just for the wealthy. No matter your income level, life insurance can ensure that your loved ones could make ends meet if you were to pass away. And, life insurance might be more affordable than you think. If you decide to get coverage, check out Investopedia's list of the best life insurance companies of 2022.

What Is An Annuity Beneficiary?

Kat Tetrina (FORBES.COM)
January 2023

An annuity beneficiary is a person or entity that receives the benefit of an annuity after the death of the annuity owner. Who you choose to be the beneficiary of your annuity depends on several factors, including the type of annuity you own and your financial goals for it.

What Is an Annuity?

Unlike retirement investment accounts like 401(k)s or individual retirement accounts (IRAs), annuities are contracts between you and an insurance company.

 

With an annuity, you make a lump sum payment or a series of payments over a designated period to the insurance company. In exchange, the insurance company agrees to pay out a stream of income in retirement or at a predetermined future date, depending on the type of annuity purchased.

The benefits of annuities are numerous, including predictable income in retirement, tax-deferred growth and even a death benefit if you pass away.

Types of Annuities

There are several different types of annuities, but they can be divided into three main categories:

  • Fixed annuity. If you purchase a fixed annuity, the insurance company commits to paying you a minimum rate of interest and a fixed amount of periodic payments. These are the safest type of annuity, since you know the minimum you’ll earn.

  • Indexed annuity. An indexed annuity combines features of annuities and investment securities. The insurance company’s payments are based on the performance of a stock market index, such as the S&P 500. When the index performs well, the value of the indexed annuity increases. However, it can also decline along with the index’s performance.

  • Variable annuity. With a variable annuity, you can use your annuity payments for investment products like mutual funds. Your payout is dependent on the performance of how much you invest and the rate of return on those securities. Variable annuities can be risky, but they also have the potential for higher returns.

 

Who Owns an Annuity?

Whoever signs an annuity contract is considered the owner of the annuity. The annuity owner chooses how the annuity will be funded, how payouts will be made and who will receive the payouts. They also select beneficiaries, control withdrawals and hold the power to cancel the contract.

In some cases, two people might jointly own an annuity. However, joint ownership of an annuity no longer offers the tax advantages that it once did.

An annuitant is the person who receives income payments from an annuity contract.

What Is an Annuity Beneficiary?

Some annuities have death-benefit provisions, meaning that you can select someone to inherit the remaining annuity payments if you pass away before it’s been fully paid.

The designated recipient of that benefit is known as the annuity beneficiary. The beneficiary can be an individual, such as a spouse or sibling, or an entity, such as a trust or charitable organization.

The death benefit of an annuity is usually the remaining contract value or the amount of premiums, minus any withdrawals, upon the annuity holder’s death.

 

Why Do You Need an Annuity Beneficiary?

Although you aren’t required to name a beneficiary when you purchase an annuity, it’s highly recommended.

If you don’t have a designated beneficiary in the annuity contract, the annuity must go through probate—the legal process for recognizing a will and distributing the assets within an estate. Probate proceedings can be expensive and time-consuming, and it could be six to 12 months before everything is resolved and the heirs receive their inheritance.

Going through probate can also incur hefty attorney fees and court fees, which are paid from the estate. Once the probate process is complete, you may find that there is less money since a large portion had to be used for legal expenses.

Worse, failing to name a beneficiary can have more significant consequences. There are some cases where the annuity can go through probate and the assets end up forfeited to the issuing insurance company.

Even if you’re married and intend to leave everything to your spouse, it’s critical to name your partner as your beneficiary. Depending on your state’s laws, the annuity may not automatically go to your spouse. Instead, they have to go through probate—unless your spouse is the designated beneficiary.

How Your Annuity Beneficiary Impacts Taxes

Who you choose as the annuity beneficiary may impact how the annuity income is taxed if you pass away.

If the beneficiary is your spouse, your partner can take over ownership of the annuity and receive payments under the annuity schedule. The annuity would be tax-deferred, and your spouse would only owe taxes on the distributions when they take them.

The rules are different if your beneficiary is someone other than your spouse. A non-spouse has three options when inheriting an annuity:

  • A lump sum payment. The beneficiary receives the annuity’s remaining value as one upfront payment. The beneficiary must pay income taxes immediately on the lump sum.

  • Nonqualified stretch. The annuity payouts—and the required income taxes—are stretched throughout the beneficiary’s lifetime.

  • Five-year rule. Beneficiaries can withdraw smaller amounts from the annuity during a five-year period after the annuity holder’s death, or they can withdraw the entire amount in the fifth year. This approach can be a good option if the lump sum payment or higher distributions would push the beneficiary into a higher tax bracket.

 

If you choose a charitable organization as the annuity beneficiary, the amount the organization receives is normally included in your estate for estate tax purposes. However, the death benefit isn’t usually subject to estate taxes since it will qualify for an estate tax charitable deduction.

Who Chooses an Annuity Beneficiary?

Only the annuity owner can designate a beneficiary. You can change beneficiaries at any time, as long as the annuity contract doesn’t require you to name an irrevocable beneficiary.

You can also choose multiple beneficiaries, designating a percentage of the annuity to each person. For example, you may give 50% to your children and 50% to other family members.

Annuity contracts often allow you to name a contingent beneficiary—a designated person to receive the annuity payments if the primary beneficiary dies before the annuity owner does.

Planning Ahead

Naming an annuity beneficiary is a crucial step in the estate-planning process. It can help your heirs avoid probate and legal delays, and helps them access the money faster.

Your choice of beneficiary also has a significant impact on how taxes are handled, so taking the time to document your wishes can save your loved ones from headaches down the road.

Investors scrambling to lock in rates propel annuity sales to
record highs

INSURANCENEWSNET.COM
January 2023

In the aftermath of the 2008-09 financial crisis, Americans flocked to the safe gains provided by fixed annuities and sales soared. It is happening again.

 

Total annuity sales surged to $310.6 billion in 2022, a 22% increase from 2021 results and 17% higher than the record set in 2008, according to preliminary results from LIMRA’s U.S. Individual Annuity Sales Survey.

 

“Investors seeking guaranteed growth and downside protection drove extraordinary fixed annuity sales of $208 billion, 49% above the record set in 2019,” said Todd Giesing, assistant vice president, LIMRA Annuity Research. “Fluctuating interest rates in the fourth quarter prompted investors to lock in crediting and payout rates while they were high. Our forecast suggests that protection products will continue to boost growth in the annuity market for the next several years.”

In the fourth quarter of 2022, total annuity sales were $87.2 billion, a 39% increase from the fourth quarter of 2021. This marks the third consecutive quarter in which annuity sales set a new record.

 

Huge sales increases

Total fixed-rate deferred annuity sales were $37.5 billion in the fourth quarter, 241% higher than fourth quarter 2021 sales. This is the best sales quarter for fixed-rate deferred annuities ever documented. In 2022, fixed-rate deferred annuities totaled $112.1 billion, more than double (111%) the sales in 2021. This is 38% above the previous annual high of $80.8 billion set in 2002.

 

Fixed indexed annuity sales also had a record quarter and year. In the fourth quarter, FIA sales were $21.9 billion, a 32% increase from prior year. This tops the previous quarterly sales record set last quarter. For the year, FIA sales were $79.4 billion, up 25% from 2021, and 8% higher than the record set in 2019.

 

“Current economic conditions are ideal for the FIA market. Insurers have been able to offer very competitive crediting rates while protecting the principal investment from equity market volatility, making FIA products more attractive to investors for the foreseeable future,” noted Giesing. “In 2023, LIMRA is forecasting FIA sales to experience moderate increases, as investors continue to seek protection and growth opportunity. We expect this growth to continue through 2025.”

Registered index-linked annuity (RILA) sales were $9.9 billion in the fourth quarter, down 4% from the fourth quarter 2021. Despite lower fourth-quarter results, total RILA sales reached $40.9 billion in 2022, 6% higher than prior year and a new all-time high for the product line’s sales.

 

VAs sales lag behind

Traditional variable annuity (VA) sales continued to falter. In the fourth quarter, traditional VA sales fell 42% to $12.6 billion. In 2022, traditional VA sales totaled $61.7 billion, down 29% from 2021 results. To put these results into perspective, annual traditional VA sales peaked at $184 billion in 2007. Given the current economic forecast and competitive pressures, there is little expectation that sales will improve significantly over the next several years.

 

Improved interest rates have spurred growth in the income annuity market. Single premium immediate annuity (SPIA) sales were $3.1 billion in the fourth quarter, a year-over-year increase of 94%. In 2022, SPIA sales were $9.1 billion, 44% higher than 2021 results. In the fourth quarter, deferred income annuity (DIA) sales rose 59% to $720 million. For the year, DIA sales were $2.1 billion, up 24%. LIMRA forecasts income annuity sales to experience steady growth through 2026.

 

Preliminary fourth quarter 2022 annuity industry estimates are based on monthly reporting, representing 83% of the total market. A summary of the results can be found in LIMRA’s Fact Tank.

 

Fourth quarter 2022 top 20 rankings of total, variable and fixed annuity writers will be available in early March, following the last of the earnings calls for the participating carriers.

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