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Interview: David Woods

Why Life, Disability and Long-Term Care Insurance are Important

David Woods

David Woods is immediate past president of the Life and Health Insurance Foundation for Education (LIFE), a non-profit organization dedicated to educating the public about the important role of life and health insurance in sound financial and retirement planning. The author of numerous articles on financial security at death, disability and retirement, Mr. Woods is an internationally known author and speaker. This is an edited transcript of an interview conducted on September 9, 2007.

"I frankly worry that the American people today are being mislead by all these so-called financial gurus who say term insurance is the only way to go. Short term it may be right, but in the longer term, that is a receipt for financial disaster."

What is disability insurance, and why would a person want to consider it?

Disability income insurance is a product designed to replace a worker's income when they are disabled because of an illness or an injury, and lasting income as a result. One of the ways for a person to determine if he or she needs long-term disability income insurance is to ask themselves the question, "What would happen if I became disabled, couldn't work and lost my income? How would I survive? How would I pay the bills, the mortgage?" And if their answer is, "I don't know; I don't know where the income would come from," they need long-term disability insurance regardless of their age, whether they are 25 or 55.

How many people will need disability insurance?

There are some 160 million life insurance policies in existence in this country, but there are only about 6 million individual disability income policies in force now. Only 40% of large companies and 20% of smaller companies provide long-term disability insurance for their employees. Yet the reality is that roughly 30% of all people between the ages of 35 and 65 are going to be disabled for 90 days or more. One out of five is going to be disabled for a year or longer. Most people can't go longer than a month without an income, never mind three months or a year or longer. So the exposure is great.

People have misconceptions about disability insurance, don't they?

Many people are under the misconception that if they are disabled, workers compensation will take care of them. The feeling is, well, I'm a worker, if I'm disabled, I should get an income. That is not true. Worker's compensation will only pay you an income if your illness or injury is related to your job or is caused by something to do with you job. The other misconception is that Social Security will pay you an income. Roughly 40% of those who apply for Social security disability payments receive it. In other words, 60% of those who apply for it don't get it. You have to be totally disabled, it must have lasted for a year or be expected to result in your death.

What is life insurance, and what is the difference between term and whole life?

Life insurance is a product that is designed to pay a lump sum of money to someone who is financially dependent upon you at your death. If somebody will suffer financially at your death, then you probably need some life insurance. What kind should you buy term insurance, which will last for a term of 5, 10, 20 years? Or whole life insurance, which will last your whole life? Whole life insurance is known also as permanent life insurance. It is there for a specific period of time. Which product is better is very much an individual circumstance issue. Most young people on limited budgets probably should own a lot of term insurance because it is inexpensive. On the other hand, as you get older, the cost of term insurance goes up substantially to the point where when you are in your 50s, 60, 70s you probably can't afford to keep that term life insurance. The premium on the permanent insurance that you bought 15, 20 or 30 years ago, however, stays level and never increases with age, so it becomes more affordable the older you get.

Is there any way I can borrow against the money that has built up in my whole life insurance policy?

A whole life insurance policy, or any other form of permanent life insurance, has what are known as cash surrender values. A savings account inside the policy, if you will. That is designed to be sure that the premiums will be level over the course of a lifetime. But those dollars are your dollars, and are available to you if you want to borrow them for any particular reason, no questions asked. You don't have to pay it back over any specific period of time. If you die, that amount will be deducted from the death benefit of the policy.

You can use cash that has built up in your permanent life insurance fund as a supplement to long-term care insurance, a retirement income, or to buy an annuity to pay you an income for as long as you live. Or, you can simply leave it there to add to your estate at your death.

Is it true that I need less life insurance as I get older?

There is a misconception that the older you get the less you need life insurance. That is not true. Most of us in this country have not saved enough money for retirement as we are going to need. So we are going to have to do other things to bring enough money in. Maybe even work substantially longer than the traditional age 65. That means that at my death, for example, my spouse may well need income. Or maybe the assets that we have accumulated in our 401(k) plan have diminished because of the market turn-around, or because we spent more than we thought we were going to spend. That life insurance becomes tremendously important to my wife at that point. It is a misconception that life insurance will not be needed after retirement.

What is a Waiver of Premium Provision on an insurance policy?

I have sold insurance for 40 years or more, and I have always urged my clients to add a provision called Waiver of Premium when I sold them a life insurance policy. This provision says that if they are disabled and can not work, the insurance company would take over and pay their premiums for them for as long as they were disabled. When they got back to work again then they would pick up the premiums where the company left off and they would owe the company no money for the premiums that they paid during that period of disability. It really is insuring the insurance.

What is long-term care insurance?

Long-term care insurance is a relatively new product, probably the last 25 years, which has been created to help people pay for the cost of a nursing home or home care when they need it as they get older and may need that kind of financial protection. It is designed to pay a daily benefit to them to help defray the costs of a nursing home or of a home health aid, or perhaps an extended care facility.

Why is long-term care insurance so important?

A person can accumulate a lot of money during a lifetime, but then if they have to go into a nursing home in their later years, that could last for 9 months to 9 years. Some places might cost $300 to $400 a day. You can very quickly wipe out a significant size estate. So long-term care insurance was created to help people defray those expenses so they don't run out of money trying to take care of themselves as they get older. Medicare doesn't cover it. Medicaid provides very limited coverage, and only for people who are at the poverty level. So it really falls back on the individual to take care of him or herself.

Long-term care insurance is important because it allows people to spend the latter part of their lives with a degree of dignity, in the kind of facility where they are comfortable, where the surroundings are the kind they would like rather than some state institution or state-sponsored institution. I've heard long-term care facilities in some cases described as poor houses. I've actually been in some of these state-qualified long-term care facilities. The furniture is broken, the smell is awful, the food is worse and these poor elderly people sit around kind of hunched over with nothing to keep them occupied, no stimulation of any kind.

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