With unemployment so high, more people will have to pay close attention to their life and disability insurance coverage as options offered by employers become less available or unavailable. Among other issues, employees who lose their jobs may be faced with the decision of how to continue paying for protection.
Many workers, especially younger workers, rely on group life and disability insurance benefits they receive through their jobs. These insurance policies may be available for free or at a nominal, and often discounted, cost. However, if you are furloughed or laid off, some or all of this insurance may no longer be available or may be expensive to cover.
For health insurance, private employers with 20 or more employees must offer the COBRA option, but the rules regarding the continuation of life and disability insurance are less clear. The rules vary depending on company policy, the terms of the group insurance plan, and applicable state laws.
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Given these realities, here are some answers to questions people experiencing work interruption and uncertainty may have about life and disability insurance.
What happens to my insurance if I am furloughed or laid off?
Some disability and life insurance plan documents allow employers to continue coverage during periods of unpaid work for certain reasons, such as layoffs, said John Dooney, human resources knowledge adviser at the Society for Human Resource Management.
Even if the plan documents don’t allow for this, many employers will work with disability insurers and insurance companies to ensure coverage is extended during an employee’s leave of absence, he says.
As for laid-off employees, many group insurance plans allow laid-off employees to convert their disability or life insurance to individual insurance. Employees who choose this option pay the full premium, often directly to the insurance company, Dooney says.
That’s why it’s important to read your company’s plan documents and ask your human resources department what options you have, says Nina Mitchell, senior wealth advisor and principal at Colony Group, a Boston-based registered investment advisory firm.
Some questions to ask include: What benefits are covered if I take a leave of absence? Are they different if I am laid off? If I have the option to keep my existing benefits, are there any costs or additional fees? Are there options to increase my benefits? How much would they cost?
If your company allows you to convert your policy, should you convert it or would it be better to buy your own policy?
When it comes to disability insurance, it should be easy to decide the fate of your company’s insurance: convert your insurance. If you’re not currently working 30+ hours a week, you can’t buy disability insurance. So if you’re one of the lucky ones whose company allows you to convert your disability insurance, do it, because if you lose your job you won’t be able to buy insurance.
With life insurance coverage, the decision may not be so simple
The first step is to review your company’s coverage. Many employees choose free coverage options, such as $50,000, $100,000, or even 1x the employee’s salary, so your company’s policy may only provide a portion of the protection you need.
Find out if you can change your employee insurance to a personal plan. Then, find out if there’s an option to purchase additional coverage. Some plans allow this, says HR expert Dooney, but depending on the increase requested, the insurer may require proof of a medical condition.
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The next step is to shop around on the open market. Premiums vary widely depending on factors such as the term of coverage, gender, age, health, state of residence, and insurer. Younger, healthier people may find better, more affordable coverage by shopping around for different insurers rather than simply swapping group coverage for individual coverage, says Erin Erdrey, president of Dynama Insurance, a Manhattan-based independent insurance brokerage.
With so many options, Ardrey recommends comparing at least two different terms (such as 20 and 30 years) from at least three different insurers, which she says will allow you to compare costs and levels of coverage between different companies.
Many people worry about the cost, but once they receive their retirement benefits, Mitchell says they could consider using some of it to buy individual life insurance.
You may also find that life insurance is more affordable than you thought, especially if you purchase term insurance. Many experts recommend term insurance over whole life insurance, in part because term insurance is usually more cost-effective.
If your budget is tight, instead of worrying about the next 30 years, think about the next few years and what you need to do to fill the gap until now, when you’re employed and other insurance options are more likely to become available, says Erdrey.If budget isn’t an issue, it’s wise to get long-term insurance while you’re young and healthy.
If you choose individual life insurance, how much coverage do you need?
Everyone wants a magic number, but it depends on factors such as the number and ages of children, spouse’s employment status and salary, liabilities, assets, liquidity and how much money has been saved for retirement, says Carol Petroff, vice president and senior relationship manager at Kendall Capital, a registered investment adviser in Rockville, Maryland.
Still, as a general rule of thumb, insurance broker Ardrey recommends creating an income stream that replaces 50% to 75% of your income and considering buying enough insurance to pay off at least 50% of your debts and obligations, like your mortgage or your children’s college fees.
Make sure you make your payments on time to avoid your insurance lapses, and if you’re having problems, contact your insurer to see what flexibility is available, advises investment adviser Mitchell.
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