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How to Ensure You’re Not Underinsured

Table of Contents
Life insurance Disability insurance Critical illness insurance Insurance: what is it good for?

If you’re reading this, chances are you’re a real, live, human adult with at least one job. I’d also wager that you’re hoping to retire one day; maybe, if you’re really on top of things, you’ve already taken some steps towards that goal (like opening an IRA or buying a home).

Wherever you’re at on your journey through the sticky marshes of adulthood, you may have found yourself wondering “do I need life insurance? What about critical illness or disability insurance?”

If you have asked yourself these questions, you’re certainly not alone. Anyone who’s accumulated enough wealth or property will eventually wonder how much coverage is reasonable to protect what they’ve earned and will earn as they progress through life.

Answers to these questions, however, are rarely simple. The level of insurance appropriate to your lifestyle will depend almost entirely on your lifestyle. Fear not, however: we’ve gathered all the basic information about three common forms of insurance recommended by financial advisors and will break each down for you in the paragraphs that follow.

Before we get started, a quick note:

The best way to ensure that you have the correct level of insurance is to speak with a financial advisor. They have expertise and will be able to recommend products most suited to your specific situation. Reading a blog is all well and good, but you should talk to a professional before making any serious decisions.

Life insurance

This might sound grim, but a life insurance policy is basically a bet you make with an insurance company that you will die. Given that everyone dies at some point, it tends to be a good bet.

However, depending on what kind of life insurance policy you purchase, the odds of you cashing in on the bed change (don’t get excited; we haven’t found the secret to immortality…yet).

Term life insurance

Term life insurance is exactly what it sounds like: an insurance policy the coverage of which extends for a specific time period, usually somewhere in the range of 10 to 30 years.

If you die within the term outlined in your policy, the insurance company will make a payment to whomever you have designated as your beneficiaries.

This type of policy is attractive if you want to ensure that dependents will have financial protection while they grow old enough to be able to support themselves (for example, after college graduation).

Term life insurance policies tend to be much cheaper than permanent policies. The average cost of a 20 year term life insurance policy with a $500,000 death benefit for a healthy 35 year old is between $20 and $25 per month. Granted, premiums increase and decrease depending on a whole slew of personal factors, so I wouldn’t take this estimate to Vegas or anything…

The point is, if you want to ensure that a dependent has a couple legs to stand on if anything horrible were to happen to you, term life insurance is a generally affordable way to do just that.

Permanent life insurance

Permanent life insurance, also known as “whole” life insurance, isn’t really a bet at all. When you purchase a whole life insurance policy, you’re buying more than just a guaranteed death benefit: your premium payments accrue cash value which you can use while alive under certain circumstances.

Death benefits

The death benefits of a permanent life insurance policy are clearly defined when the policy is purchased. So, as long as you maintain on-time payments throughout the life of your policy, your designated beneficiaries will receive the agreed-upon death benefit when you die.

Cash value

As you might expect, it costs quite a lot more to insure an octogenarian than a 30 year old. However, if insurance companies increased premiums as their customers aged, many would not be able to afford their policy payments once they reached retirement age (if not sooner).

The way insurance companies work around this issue is by charging higher (but consistent) premiums from the get-go. It isn’t all bad, though.

When you’re young, and are overpaying on your policy, your insurance company actually takes a portion of those monthly payments and puts it into a tax-deferred savings account. The cash value of this savings account will, of course, grow over the course of the life of the policyholder (according to an interest rate set by the insurance company when you purchase the policy).

Some policies pay dividends to their owners based on the performance of this account. Whether your policy pays dividends or not, you can access the cash value of your account in several ways:

  • Surrender your policy: you might decide at some point that you no longer need your policy. If you do, you can surrender it and your insurance company will give you the cash value of the savings account they created when you took the policy out.
  • Take a loan: if you don’t want to surrender your policy, but need access to a large chunk of money, you can take out a loan against the cash value of your policy. Because the loan is secured by actual money that’s actually yours, you tend to get fairly low interest rates on such loans.
  • Withdraw the cash: you can also simply withdraw the money from your policy’s cash value account. Be aware, however, that doing so is likely to reduce the death benefit associated with your policy.


Because whole life insurance is more like an investment than insurance coverage, monthly premiums tend to be much higher than those for term life insurance.

A general estimate of the monthly premium price for a whole life insurance policy purchased by a relatively healthy 35 year old is somewhere between $450 and $600 per month.

That seems wildly expensive when compared to the $25 you might pay for term life insurance in similar scenario, however there are a couple of important factors that might make such an expense worthwhile.

First, it’s a guaranteed payout when you die as long as you continue to make the monthly payments.

Also, you’re paying for a cash value account as well. How much of your monthly payment goes towards cash value compared to the actual cost of insuring your death depends on many factors, including your age and general health situation.

However, as a general rule, when you are younger and healthier, more of your monthly payment will go into savings; when you are older and it costs more to insure you, more of your payment goes towards that.

Do you need life insurance?

Again, this is a question best answered through a conversation between yourself and a licensed financial professional. Having said that, financial advisors tend to recommend life insurance for their clients, especially if they have dependents that will need care in the event of their death.

If you’re single and have no dependents, disability or critical illness insurance might make more sense.

Disability insurance

Disability insurance provides coverage for a portion of your paycheck in the event that you are unable to work due to injury or illness.

There are a variety of types of disability coverage you could purchase, depending on whether your employer offers it or you purchase from an agent and for how long you need the coverage to last.

Group disability insurance

If your employer offers you the option to purchase disability insurance, it will be on a group policy. The result is that it will likely be less expensive than an individual policy.

The average group policy premium is $257 per year for short term or $411 per year for long term coverage (I’ll break down the difference in a moment).

Individual disability insurance

If your employer doesn’t offer disability insurance, or if the coverage they offer isn’t enough to let you sleep at night, you can purchase your own policy through an independent advisor.

However, because you’re purchasing a policy as an individual as opposed to in a plan negotiated with a group, the premium you pay is likely to be much higher than those for group plans.

The average individual disability insurance premium in the US is around $2,400 per year, which is quite a lot higher than the averages for group policies (even considering this includes both short and long term coverage).

Keep in mind, of course, that these are just estimates. Actual policy premiums will vary, and you should always get several quotes before making any sort of official decision on any insurance product.

Short term disability insurance

Short term disability policies are designed to provide you with money to replace your income while you recover from an injury or illness and you expect to be able to get back to work relatively quickly.

These policies tend to only provide income replacement for a shorter period of time, usually up to six months.

Because the coverage period for these policies is so short, the elimination period (the amount of time you must wait before receiving benefits) tends to be quite short as well.

Long term disability insurance

As you can probably guess, long term disability insurance covers you for a much longer period of time.

So, if it will take you a year or more to be able to get back to work (or if you may not be able to return to work at all) a long term disability policy would cover a portion or all of your pre-claim salary.

Do you need disability insurance?

Do you need an umbrella? Only when it rains, of course. But lots of people think it’s best practice to take one with them just in case.

That’s sort of the same logic that governs your decision to purchase disability insurance. If your employer offers a group plan, it’s likely so cheap that you wouldn’t even notice paying for it, so why not?

If you’re considering an individual plan, however, and the cost seems potentially prohibitive, it might be worth having the conversation with a financial professional.

One thing is certain, however: those who have disability insurance and end up needing to use it are beyond relieved, whereas those who don’t wish they did.

Critical illness insurance

Critical illness insurance is a bit different from what you normally imagine an insurance policy to be. It’s designed to provide coverage in the event that you are diagnosed with — you guessed it — a critical illness.

Of course, what constitutes “critical illness” will depend entirely on the policy you purchase. When you obtain a critical illness insurance plan, you agree upon a set list of diseases that will be covered. Generally, the diseases you would expect to be covered by critical illness insurance will be — cancer, heart attacks, strokes, etc.

Key difference: lump sum

What makes critical illness insurance different from other forms of insurance coverage, however, is that these policies are purchased with a pre-determined lump sum payment.

So, rather than paying for all of your expenses beyond a set deductible, if you are diagnosed with one of the diseases for which you have coverage, you’ll be handed a chunk of money to do with what you please.

Because of how critical illness insurance works, it’s not really suitable as primary coverage, which means it doesn’t “count” as having insurance coverage under the American Care Act.

What it costs

If you want to buy critical illness insurance, the cost will be determined by a few factors, mainly the level of coverage you want and your age and other health factors. You can purchase critical illness insurance policies that are worth anything from $50,000 to well over $200,000, and adjust the diseases for which you will have coverage as well.

Because of all the varying factors that go into determining how much critical illness insurance costs, premium estimates are not all that useful, but we’ll go ahead and give you one anyways:

If you’re a relatively healthy 30 year old person looking for $50,000 in critical illness coverage (perhaps to supplement the crappy health insurance offered by your job) you can expect to pay somewhere in the ballpark of $20 to $50 per month.

Do you need critical illness insurance?

Unfortunately, the people who need critical illness insurance most (i.e. those most at risk for critical illness) are probably going to have to pay the most for it due to pre-existing conditions or family history.

Despite that, there are still some reasons you might choose to get critical illness insurance:

  • To supplement insufficient primary health insurance
  • If monthly premiums are affordable for you
  • If you’re more concerned about paying medical bills than replacing lost income

Insurance: what is it good for?

Lots of people subscribe to the belief that insurance is a scam. Usually these people change their tune, however, when they end up in a situation where insurance would have been really nice to have.

While you’re required to have health insurance in the United States, additional, supplemental policies are often not only affordable, but necessary to fill gaping holes in coverage.

If you’re wondering whether life, disability, or critical illness insurance would be beneficial for you specifically, it’s worth having the conversation with your financial advisor.

You may not be able to afford a Ferrari, but peace of mind is a luxury that might very well be within reach.


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