💸 Optimizing Insurance Part 2 (Life, Disability and Travel)

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In Optimizing nsurance Part 1 I wrote about a few main types of insurance: homeowners/renters, auto, liability/umbrella and pet. While those made up most of the policies I had since going to college, there are a few other types of insurance I’ve had to learn about since then that I want to talk about: life and disability. I also want to briefly talk about travel insurance since I’ve gotten a few questions on that as well.

🩺 Life Insurance

Life insurance is one of those important things that can have a huge impact in your loved ones' lives should anything happen to you. It will primarily replace the loss of your future income for those you’re leaving behind, but can also help cover funeral expenses or pay off debt. It’s highly advised for those with young kids or those who have people that depend on you and your income to survive.

What kind should you get? This is where life insurance gets very confusing, so I’ll keep this short and sweet. You should get term life. It’s a policy that has a term limit for which the policy is active. 10, 20, or 30 years for example. If you pass away within that term, your beneficiaries get the face value of the policy, also called a Death Benefit. If you pass after the term expires or age out of the term without renewing it, they get nothing.

So why go with term life insurance if it expires? Because it’s a better deal. Other permanent (aka whole/universal) policies market themselves as offering you a benefit that lasts your whole life, which is easy to do when they have much higher premiums, complex rules and high fees. You’re almost always better off taking what you save with the lower premiums of a term life policy and investing the difference in low-fee index funds yourself.

So why is it so hard to find that advice? It’s crazy how common the advice to get Term Life is amongst those “in the know”, yet when searching online it’s almost impossible to find an article that agrees. Why? Because the commissions are so high for permanent life insurance that companies can spend fortunes on marketing, affiliate fees and sponsorships to nearly every site on the internet (except this one… I’ll never take money from someone selling permanent life insurance). That said if you search hard enough for the right content you’ll find articles from The White Coat Investor and NerdWallet that speak the truth. You can also find countless posts on Bogleheads or r/PersonalFinance that offer the same advice.

Also, one great strategy for Term Life is laddering (or layering) your policies. That means having multiple policies that expire at different times. This lets you lock in your policies when you’re younger/healthier, but have the payout decrease over time as your family's needs decrease (e.g. kids get older, mortgage is paid off). This PolicyGenius article explains the tactic in more detail.

Finally, I’d be remiss if I didn’t mention that I’m not a life insurance professional, so please do your own home work or talk to a certified professional if you want more info (just not a permanent/whole/universal life sales person please).

🧑‍🦽 Disability Insurance

Anyone, at any age, can become disabled and unable to work, whether it be from illness or injury. In fact, 1 in 4 of today’s 20 year-olds will become disabled before reaching age 67¹. So how do you make sure you’re financially covered should you have an accident or sudden illness that prevents you from working? By having some type of disability insurance in place (especially if your income supports more than just you).

There are two main types of disability insurance:

• Short Term Disability, which usually only covers you up to six months

• Long Term Disability, which can cover you for a few years or until you retire, but usually has a waiting period of 3-12 months before kicking in

Many of us might be offered or given short-term and long-term coverage through our employers or have access to short-term disability through a state fund like we have in CA. While those policies might “replace” 60-80% of your income, they often have weekly/monthly caps that might result in them replacing a much smaller %. If those policies aren’t enough or if you don’t have coverage from work, you can also buy full or supplemental policies on your own.

If you have enough of an emergency fund to cover living without your full income for 3-6 months, you might find it easier to self-insure your short term disability needs (or at least self-insure the difference between the coverage you have and your full income).

However, unless you’re financially independent, you probably won’t be able to self-insure against the chance you become disabled for the long term. So if you don’t have a policy through work I definitely recommend looking into one. Or if you don’t have enough coverage from your employer to live on comfortably until retirement, I’d recommend looking into a supplemental policy. From my research, two of the top providers are Guardian and MassMutual, but I don’t have experience with either.

It’s also worth pointing out that there is Social Security Disability Insurance and Supplemental Security Insurance. Those FICA taxes you see deducted from your paycheck are what fund these programs. Because of this, you need to have paid into these services for a certain amount of time to be able to use them. Luckily, most of us have hit the threshold of 40 work credits or about 10 years of employment. If you’re unsure how many credits you have, you can check through the Social Security Administration website.

While so much of the insurance content online is from providers, I did like this NerdWallet article for a more detailed overview of short and long term disability.

🛫 Travel Insurance

In the past few years airlines have been pushing travel insurance so hard that I’ve gotten more questions than ever about travel insurance, so I wanted to share how I think about things. The short answer is that most top credit cards offer most of the travel protections you need without buying any supplemental policies, as long as you book the trip with that card. That means, they’ll cover things like:

• Delayed, lost or damaged bags

• Trip delays, cancellations or interruptions

• Medical evacuation and emergency medical treatment

• Rental car collision damage

This coverage varies widely, so I definitely recommend finding your “Guide to Benefits” online and confirming (here’s an example for the Chase Sapphire Reserve®). With this coverage in place, I’d feel good traveling without other insurance except for a few circumstances:

• If your health insurance doesn’t cover you while traveling abroad, I’d consider a travel insurance policy that covers non-emergency medical treatment

• If you’re concerned with getting stuck abroad after a positive covid test, I’d get a policy like the Safe Travels Voyager from Trawick that specifically covers flight changes and lodging costs after a positive covid test (we did this on our trip to Mexico and it was only $343 for 8 travelers. Or if you want to be sure you can still travel back home, you can get a Covac Global policy for ~$600/person that will charter you a private flight if you test positive abroad.

• If you plan to do adventurous activities like Scuba Diving or Rock Climbing that might not be covered under your existing insurances, I’d suggest a travel insurance like WorldNomads that will cover these activities.

• If you’re booking a very expensive tour/vacation like this Galapagos Cruise, I would double check your credit card policies and specifically your limits to make sure you’d be fully covered in the case that you test positive for covid in advance or your flight is canceled/delayed and you miss the cruise departure.