Thinking About Insurance Early

How to assess your need for various types of insurance as you progress toward retirement.

Your working life can be divided into four stages: early career, when your adult life is beginning to take shape; mid-career, where you may have a growing family and increasing financial responsibilities; pre-retirement, when the kids may be grown and you have an empty nest; and retirement years, with more health care needs and a fixed income, but fewer financial responsibilities.

The cost and needs for different types of insurance will change as you go through each phase. This week, let’s look at the first two: early career and mid-career. Next week we’ll examine the latter two stages.

Early Career

Health insurance: At this stage of life, you need good preventative care and protection in case of an accident or sudden major illness. You might consider a health maintenance organization or lower-option preferred provider-type plan. Your focus should be on low premiums and good preventative benefits.

Life Insurance: Who is depending on you financially? If something happened to you, how would that affect them? What type of risk is involved in your lifestyle? Do you travel to places where an act of terrorism or an act of war is more likely? Do you carry a gun and a badge in your line of work? Do your hobbies include adrenaline-filled activities such as mountain biking, hang gliding or skydiving? Answering these questions will help you determine your need for life insurance. The good news is that when you are young, life insurance is cheap.

Term life insurance can meet most people’s needs and is the least expensive form of coverage. The Federal Employees Group Life Insurance program, available to all federal workers, is a form of term life insurance. You also can get this kind of insurance through groups such as USAA , SAMBA, Compass Rose and WAEPA.

Survivor Benefits: Both the Civil Service Retirement System and the Federal Employees Retirement System include survivor benefits for spouses and dependent children. CSRS survivor annuities amount to 55 percent of an employee’s earned annuity (the retirement benefit available if the employee had retired on the date of death). FERS includes a basic death benefit payable to a surviving spouse equal to 50 percent of an employee’s basic salary rate plus a lump sum payment of $31,316.46 (for 2013). If the employee had 10 or more years of service, then the surviving spouse would be eligible for a lifetime annuity equal to 50 percent of the employees FERS basic retirement benefit.  Here is a previous column I wrote on these benefits.

Social Security: Social Security also provides protection for your dependent family members. To find out what your spouse and dependent children would be entitled to from your Social Security record, check out your latest personal benefits statement by creating an online Social Security account.

Long-Term Care Insurance: Even though this is the stage of life where it’s least likely you’ll need long-term care, there are two reasons to consider purchasing coverage. First, if you have a serious accident or an early onset of a debilitating illness, you won’t be able to purchase long-term care insurance due to the medical underwriting requirement. Second, the cost of a monthly premium will be very low when you are young and you can choose an inflation option that will allow the benefit to increase while keeping the premiums low. To determine your cost of insurance under the Federal Long-Term Care Insurance Program, use this online calculator.

Mid-Career

Health insurance: At this stage of life, you’ll continue to need good preventative care and protection in case of an accident or sudden major illness. An HMO or a lower-option PPO-style health plan may still be a good choice. You might also consider a high-deductible health plan with a health savings account or a consumer-driven plan that will allow you to pocket the savings that you don’t spend on health care. This is also a good time to evaluate supplemental dental and vision insurance to help with routine expenses. To cover out-of-pocket expenses for things like deductibles and coinsurance, consider using a flexible spending account.

Life Insurance: At this point, you’ll still have a high need for life insurance protection, as you did in the early stage of your career -- especially if you are providing for others financially. Term life insurance continues to provide the best protection for the least expense. If you have optional coverage under FEGLI, remember that every five years the premium will increase. It’s a good idea to reevaluate this coverage every five years to make sure your needs are the same as they were before.

CSRS and FERS Survivor Benefits: At mid-career, the value of your retirement benefits are increasing, since they are based on your length of service and salary. While you’re reevaluating your life insurance needs, consider the value of your retirement benefits, since survivor benefits are tied to them.

Social Security: It’s worth checking your online Social Security account again to get an update on what your spouse and dependent children are entitled to.

Long-Term Care Insurance: You’re still at an age where long-term care premiums are very reasonable -- and you’re likely to meet underwriting requirements. For example, a 50-year old can purchase a $365,000 lifetime benefit for $205 per month, with a 5 percent automatic inflation protection feature and comprehensive coverage that includes in-home care as well as facility care. The 5 percent feature means that every 14 years or so, the amount of the benefit will double.

Use the FLTCIP online calculator to price the cost of insurance at this stage.

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