Wondering About Life Insurance? Here’s What to Consider

Why We Avoid Talking About Insurance

In his interview, Mark shared, “Insurance forces us to think about things we don’t like to think about.” Many people don’t want to contemplate their own mortality or the possibility of becoming disabled. But as Mark put it, “You have to have it so that if something did happen to you, your family isn’t decimated.”

The other psychological hurdle? Insurance is something you pay for while hoping you’ll never use it. Unlike Amazon Prime, where you get immediate gratification, with insurance, the best-case scenario is that you’ve “wasted” your money. But that’s precisely the point—we want to spend money on insurance because if we use it, something has gone terribly wrong.

Disability Insurance: The Coverage You’re More Likely to Need

Did you know you’re more likely to become disabled than to die before age 65? According to the Council for Disability Awareness, just under one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age. Only 13% of those workers will actually pass away during the same period. Because of these sobering statistics, our advisors tell our working-age clients that disability insurance should take priority over life insurance.

Group vs. Individual Disability Policies

If your employer offers group disability insurance, that can be a great start. These policies typically cover:

• 60% of your base salary up to a monthly cap (usually $10,000)
• Benefits that are taxable if your employer pays the premiums

But here’s where things get tricky. Many group plans only cover your base salary, which means if you receive bonuses, commissions, or other variable compensation, a significant portion of your income might not be protected. For high earners especially, that “60% coverage” might actually be closer to 20-30% of your total compensation.

When should you supplement with an individual policy? 

Consider it if:

• You are a single parent, or you’re the primary earner in your household (especially if there is a big difference between your and your partner’s income)
• A significant portion of your income comes from bonuses, commissions, or other variable compensation
• You’re self-employed or an entrepreneur
• Your work can be physically dangerous, or you have health problems that could lead to long term absence from work

If you fall into any of those categories, we recommend that you have disability coverage of at least 80% of your current income.

Short vs. Long Term Disability

Most employers offer two kinds of disability benefits, short term and long term. 

Short-term disability (STD): covers a disability for a short period, from a few weeks to a few months. It usually replaces a percentage of income which is determined by  salary and plan coverage. Short-term disability insurance typically covers about 80% of one’s income.

Long-term disability (LTD): covers a more extended period, often until you can return to work or reach retirement age, depending on the policy. Depending on the policy, a LTD plan typically pays a base payment that’s between 50% and 80% of “pre-disability earnings,” up to a maximum.

Here are a few other facts that most people don’t know about disabilities and disability insurance: 

1. About 55% of long-term disabilities are caused by back and joint issues, cancer, mental health and heart issues. Only about 13% of claims arise from injuries. 
2. The most common cause of a short-term disability claim is pregnancy. 

One other topic Mark discussed was the availability of riders on individual disability policies that may not be available from your employer’s policy. Some common riders include cost of living increase coverage, student loan coverage and a future increase option that allows you to increase your disability coverage in the future without having to have medical underwriting.

Adjusting Coverage to Fit Your Budget

If the cost of comprehensive disability coverage gives you sticker shock, there are ways to make it more affordable:

• Extend the elimination period (the waiting period before benefits kick in) from 90 to 180 days
• Reduce your monthly benefit amount slightly
• Shorten the benefit period (though Mark still recommends coverage to age 65 if possible)

Remember, if you pay for your own individual disability policy, the benefits are tax-free—making them more valuable than taxable group benefits.

Life Insurance: Protecting What Matters Most

When it comes to life insurance, many people rely solely on their employer’s group coverage—often just 1-2 times their annual salary. That’s usually not enough.

A good rule of thumb is to have coverage equal to 10 times your annual income. But even that might not be sufficient if you’re young with decades of earning potential ahead.

Term vs. Permanent Insurance

For most families, term life insurance makes the most sense. It provides pure death benefit protection for a specific period (10, 15, 20, 25, or even 30 years) at an affordable price.

While permanent insurance (like whole life) has its place in specific situations—estate planning, special needs planning, or leaving a guaranteed legacy—it’s typically much more expensive than term coverage.

The Laddering Strategy

One of Mark’s favorite insurance techniques is “laddering” multiple term policies to save money while still providing robust coverage. Here’s a hypothetical example of how it works:

Instead of buying a single $1 million 20-year term policy, you might purchase:

• $500,000 of 10-year term (covering the years when your children are young)
• $300,000 of 15-year term (covering college expenses)
• $200,000 of 20-year term (covering remaining mortgage and retirement preparation)

This approach provides $1 million in coverage initially, with coverage gradually decreasing as your needs and financial responsibilities change. The best part? It typically costs less than a single large policy.

Converting Term Insurance to Permanent

In general, we recommend that people buy term insurance that expires when you no longer need the life insurance, i.e. when your retirement savings are adequate to cover your expenses, your children are independent, etc. But Mark reminded us that situations may arise where it makes sense to move from a term policy to a permanent policy. Most term insurance policies are convertible, but some are not, so it pays to check when buying term insurance. Here are a few instances where conversion may make sense: 

1. You like the idea of your life insurance building cash value as well as insurance, and you are more able to pay for the additional features now than when you first purchased the term insurance.
2. You develop a health condition that makes life insurance more important to your family’s security, but you want to avoid having to do the medical qualification. Converting an existing term policy may avoid that step. 
3. One of your heirs develops special needs and the life insurance can help fund a trust for them.
4. You own an illiquid asset like a farm that might be difficult to leave to more than one heir. Life insurance can help the heir who wants to own the asset buy out the other heirs. 

Making Insurance Decisions

The right insurance coverage depends on your unique situation. A few key considerations:

1. For disability insurance: Look beyond your employer’s coverage if you’re the primary earner or have variable income
2. For life insurance: Start with at least 10x of your income and ladder policies when possible
3. For both: Align coverage with major life events (raising children, college funding, mortgage payoff, special needs planning, retirement)

Insurance isn’t exactly a fun topic, but it’s an important piece of your financial foundation. Getting proper coverage in place gives you something priceless: peace of mind knowing your family is protected no matter what life throws your way.

Want to learn more about insurance planning? Visit LLIS.com for resources and tools to help you make informed decisions.