Interview: Steve Weisbart

How Life and Disability Can Protect Your Retirement

Steve Weisbart is vice president and chief economist for the Insurance Information Institute. He oversees the Institute's program of economic research and analysis, preparing studies in support of the organization's communications mission, speaking to media and conducting briefings for member companies, industry organizations and public policymakers. A specialist in annuities, pensions, and life, disability and long-term care insurance, Dr. Weisbart frequently also makes presentations on property/casualty issues to industry audiences as well as legislative forums. This is an edited transcript of an interview conducted on September 9, 2007.

"These days, many people reach retirement with a tremendous amount of debt. And so one of the things that life insurance can do for a retiree is to cancel that debt so that it doesn't saddle the survivor with expenses that would be very difficult to maintain."

How many American households have life and/or disability insurance?

About two-thirds of households have some form of life insurance. About a third of this group has only group life insurance from their employer. Another third of that group have only individual life insurance not with an employer. The last group has both individual and group insurance. About 40-50% have disability insurance.

Why is it important to have life insurance?

It's important to have life insurance to protect the people who financially depend on the income or assets that you're generating while you're alive.

How prepared are Americans to offset income loss?

Not very prepared at all. A recently study of survivors whose family member had died in the last five years asked the question: "After life insurance that you may have had, what was the effect of the death on your financial situation?" Nearly 60% said that the effect was devastating or significant in causing a financially adverse outcome. To me that says that they are not pr–– ill-prepared for the effect of a financial disaster from a death, and the same, I'm sure, with respect to disability income.

Is there any reason why a retired person should have life insurance, outside of leaving an inheritance to someone?

With a husband and wife who are receiving Social Security income, the income that they will receive goes down when one of them dies. Social Security typically pays either individual benefits to the two income earners, or if it's more, the spouse will receive half of the benefit of the higher earning individual. When the first one dies, the income will drop perhaps by as much as one-third, so if they've made financial commitments that rely on that income, life insurance could replace the lost Social Security income and take care of those commitments. These days, many people reach retirement with a tremendous amount of debt. And so one of the things that life insurance can do for a retiree is to cancel that debt so that it doesn't saddle the survivor with expenses that would be very difficult to maintain.

What are the odds that someone will become disabled before the age of 65?

If you are 40 years old, you have about a 40% chance that between now and age 65 you'll be disabled for 90 days or more. And if you are disabled for 90 days or more, there is about a 50% chance that you'll continue to be disabled for up to two years. So it's a potentially serious problem. Injury accounts for 10-15% of the reasons why people have long-term disability. Illness is the other 85-90%.

What is term life insurance?

Term life insurance is a policy that pays if you die within a certain period of time. It used to be the most popular policy – with a one year renewable term up to age 65. That is not as popular a policy anymore. Now people are buying 20, 25 or 30-year periods for life insurance. So you might buy a twenty-year term at age 40, and if you died before age 60, the policy would pay a benefit, and if you died after that, it would not. In contrast, there are various forms of what is now called permanent insurance. Traditional whole life is one of them, and universal life is another.

Can I withdraw any money from the insurance policy if I have some kind of life crisis, or even if I want to pay off a part of my mortgage?

In general you can, but if you do that, it also reduces the death benefit that would be payable because it's a kind of advanced payment of the death benefit. If you feel that your life expectancy is suddenly shorter than you hoped, if you become sick or have some other life-threatening situation, you're probably better holding on to the policy and not dipping in too early, because in general, the death benefit is much greater than the cash value. Also, the excess of the cash value withdrawn over the premiums you've paid in is taxable. Death benefits are income tax exempt.

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