Smart Money Podcast: Choosing the Right Insurance Policy to Protect Your Income: Life Insurance, Disability Insurance, and More
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Explore coverage options to protect your income in worst-case scenarios, such as life insurance and disability insurance.
Hosts Sean Pyles and Liz Weston discuss the importance of insurance coverage, highlighting statistics around how many people are underinsured or lack adequate coverage. To dive deeper into different types of coverage, Liz welcomes Insurance Nerd Ryan Brady and John Ryan, founder and CEO of Ryan Insurance Strategy Consultants, to explain various types of insurance.
They also cover life insurance, accidental death and dismemberment insurance (AD&D) insurance, and disability insurance, and explore the nuances of employer-provided life insurance and supplemental insurance. Plus, the complexities of disability insurance, comparing short-term and long-term coverage, and the interplay between employer-provided disability insurance, individual disability insurance, workers' compensation, and Social Security.
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Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.
Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sean Pyles:
You never want it to happen, the absolute worst. You're injured, you get sick, or maybe you even die. Your income is gone. That's what insurance is for, but there are so many kinds that sometimes it's hard to figure out what you need and what you don't need.
Ryan Brady:
Most employers in the US offer a limited amount of life insurance for employees as part of workplace benefits. This coverage is usually what's known as basic group life insurance, and it's actually pretty easy to get. To opt-in, all you typically have to do is fill out a form and maybe meet any eligibility requirements that your company has, such as working a minimum amount of hours per week.
Sean Pyles:
Welcome to NerdWallet's Smart Money Podcast. I'm Sean Pyles.
Liz Weston:
And I'm Liz Weston.
Sean Pyles:
And today we have the second episode of our Nerdy deep dive into open enrollment, that time of year we all look forward to when we get to think about health plans, life insurance, vision and dental, and oh, so much more.
Liz Weston:
Yes. And in this week's episode, we're going deep on insurance that's supposed to help you protect your income if something happens to you and you can't provide for yourself or your family. In other words, you are either disabled or you die.
Sean Pyles:
Liz, nobody wants to talk about this stuff.
Liz Weston:
I know, I know, but everybody really, really needs to. Sean, this is so incredibly important and too many people ignore it. Insurance of all kinds is meant to protect you from costs you couldn't easily pay out of pocket. But too many people who need certain types of insurance just don't have it.
Sean Pyles:
And others get talked into buying policies they don't need, right?
Liz Weston:
Absolutely. There's a reason life insurance salespeople don't have, shall we say, the most positive of reputations. But that doesn't mean you should stay away from the concept altogether. The Life Insurance Marketing and Research Association, which is known as LIMRA, released its latest insurance barometer study last spring, and only 52% of American adults reported having some sort of life insurance. And 41%, both insured and uninsured, said they didn't have adequate coverage. Now we're not here to tell people what to do, but I think it's worth hearing the case for having some sort of financial backstop if that thing you think will never happen to you happens to you.
Sean Pyles:
Yeah. So you mentioned that the main purpose of all of this is to protect income if you're unable to work.
Liz Weston:
Yes. One place where people tend to be critically underinsured is their income. How would you get by if you could no longer do your job? How would your loved ones manage if you're no longer here? Disability and life insurance can help fill the financial gaps if something bad or something worse happens to you. So today we're going to look at all the different types of insurance that can protect your income, because open enrollment is a great time to review your options.
Sean Pyles:
All right. Well, now that I've got the dialogue from Double Indemnity running through my head, we want to hear what you think too, listeners. To share your ideas, concerns, solutions around open enrollment with us, leave us a voicemail or text the Nerd hotline at (901) 730-6373. That's (901) 730-NERD, or email a voice memo to [email protected]. So Liz, where do we start today?
Liz Weston:
We're going to start with life insurance, and our guest is fellow nerd Ryan Brady, who covers insurance. Ryan, thanks for being here.
Ryan Brady:
Great to be on, Liz. Thanks for having me.
Liz Weston:
All right. Give us the scoop. What even is life insurance? How does it work when you're getting it through an employer plan?
Ryan Brady:
Life insurance is basically a safety net for anyone who depends on you financially. So if you die unexpectedly, life insurance provides money that could replace your income, pay off a mortgage, pay for your kids' college tuition, or really any other expense you want to cover. It can also give your loved ones the funds to cover your own funeral and burial costs without them having to dip into their own savings.
Liz Weston:
And that can be a chunk of change, right?
Ryan Brady:
Yeah, it could be a lot. I believe the current estimate for funeral and burial costs is close to $8,000.
Liz Weston:
Wow.
Ryan Brady:
So typically, you don't buy life insurance for your own benefit, you buy it for the benefit of others. So if you think about it, our ability to earn income is really our greatest asset, at least for most of us. So we ensure that asset through life insurance, that way our loved ones can maintain their standard of living with hopefully minimal disruption. Of course, there are other reasons why some people buy life insurance, like for investing or estate planning purposes, but generally it's best to think of life insurance as a way to replace your income if you pass away.
Now, when it comes to your job, most employers in the US offer a limited amount of life insurance for employees as part of workplace benefits. This coverage is usually what's known as basic group life insurance, and it's actually pretty easy to get. To opt in, all you typically have to do is fill out a form and maybe meet any eligibility requirements that your company has, such as working a minimum amount of hours per week. You also need to name a beneficiary and that's going to be the person, or it can be an entity like a charity, to whom you want the payout from your life insurance to go when you die. And you can actually name multiple beneficiaries and update beneficiaries as your life circumstances change, so there's a lot of flexibility there.
Liz Weston:
Okay, good. Now at what point in your life do you want to start contemplating getting this kind of insurance? Should it be earlier in your career, mid-career?
Ryan Brady:
So ideally, you should really be thinking about getting life insurance when anyone depends on you financially. For some people, that could be kind of more in the beginning of their career; for others, it may be more in the middle. But really, everyone's situation is going to be different, so it really just depends. I'll say that for a lot of people the need for life insurance comes up when they get married or when they start a family. And Liz, this conversation's pretty well-timed because personally speaking, I just bought life insurance myself about a month ago.
Liz Weston:
Oh, and I think I know why.
Ryan Brady:
Yep, yep. We have a baby on the way.
Liz Weston:
Yay.
Ryan Brady:
Yeah. Yeah. So in about four weeks, baby Colin is going to be here. So I thought, "What better time to get life insurance?" It kind of got me thinking about it. If I get flattened by a bus tomorrow, let's say.
Liz Weston:
Ooh.
Ryan Brady:
Would my wife be able to pay the mortgage, pay for the groceries, pay for college expenses or something down the road, all on one income? Right? And so, the answer to that's probably not very easily. So I bit the bullet. I wish I would've done it a little bit sooner, but I'm glad to have gotten life insurance.
Liz Weston:
I think a lot of people are in the same boat. They don't think about it until the first kid comes along or sometimes when they buy a house and have a mortgage with somebody else and they realize, "Ooh. If something happens to me, they wouldn't be able to keep the house."
Ryan Brady:
Exactly. That's a great point. And also, the need for life insurance becomes greater as you take on more debt and other responsibilities like you mentioned, Liz, especially if you share those responsibilities with somebody else.
But even if you don't have any big shared responsibilities today, you may still need to think about getting life insurance if you're planning to in the future, let's say if you want to buy a house or start a family down the road, and that's because life insurance is generally cheaper the younger and healthier you are. So it may be wise a lock in a policy now while you still qualify for those lower rates. And of course, you could always buy more life insurance later if you end up needing it. It just might be a little bit more pricey.
One last thing I'll say here is that a lot of people think life insurance is expensive, and sometimes it is. But if you're relatively young and healthy, life insurance can be surprisingly affordable. According to NerdWallet's analysis of life insurance rates, the average cost of a 20-year term insurance policy with a $500,000 payout is less than $20 a month for a healthy 30-year old.
Liz Weston:
Now we've been talking about this as a benefit of employment. Don't some employers just give you some life insurance almost whether or not you want it? And how much is that usually?
Ryan Brady:
Yeah, you're right. When it comes to basic group life insurance, most employers do offer it as a job perk and it's usually free. So there's a good chance you already have some life insurance coverage through work if you've opted in. And unlike many individual policies, you generally don't have to take a medical exam or fill out a questionnaire. The amount of coverage though is usually pretty low. Basic group life insurance is often capped at about one to two times your annual salary. So if you're making $50,000, you might have $50,000 or $100,000 of coverage.
Liz Weston:
Ryan, is that generally enough coverage? And if not, what kinds of coverage could you get maybe through supplemental insurance from your employer?
Ryan Brady:
That's a good question. I'd say for some people it may be enough, especially if you're single, you don't have any dependents, or any big shared debt obligations like a mortgage. Maybe group life insurance is all you need for now. But I'd say for a lot of people it probably won't cut it. That's why a lot of employers allow you to pay for more coverage through the group plan. They call this supplemental or voluntary group life insurance, and it's used to supplement or add to your basic group coverage amount. You can typically opt in for this extra coverage when you start a new job or during open enrollment. And because supplemental coverage is based on group rates, it can be less expensive than getting your own policy, especially if you're older or less healthy than most of your coworkers.
As far as how much of it you can buy, I'd say the amount of supplemental life insurance you can get varies by company, but it generally maxes out at about $500,000. And when you tally up all the life insurance you have between your basic and supplemental group policies, that might be enough for a lot of people.
If you're not sure how much life insurance you need, a general rule of thumb you'll hear is to buy coverage equal to 10 times your annual income. But I'd say that's a pretty crude estimate, and there's actually a lot that goes into figuring out your life insurance needs. So I'll just give a quick plug that NerdWallet actually has a really great calculator that helps people figure out how much life insurance they need, so I encourage listeners to try that out if they're curious.
Liz Weston:
And we'll have a link to that in our show notes. Now, Ryan, do you have to do a medical test to qualify for that extra coverage?
Ryan Brady:
Yeah, sometimes you do. If you just purchase a small amount of additional coverage, you likely won't have to do any sort of medical screening. But if you want to get a lot of supplemental coverage, you may be asked to do a medical exam or at the very least fill out a simple health questionnaire. And depending on how that goes, there's a chance you actually might be denied coverage.
Liz Weston:
Okay. Now what happens to all of this if you decide to quit and go work for another company? Can you take these policies with you?
Ryan Brady:
Yeah. So that's really the big downside to all this life insurance coverage you get through work, is that when you part ways with your employer, you typically part ways with your group insurance coverage, too. However, some policies may allow you to convert a group life insurance policy into an individual policy when you leave your job. But the price could go up quite a lot from there, so I wouldn't count on that as an option. And then, you have to think about what if your next employer doesn't offer group life insurance? You may end up needing to buy your own policy anyway. So if you think you need life insurance, it may be better just to buy your own policy now, is what I would say.
Liz Weston:
And you mentioned when people are older and less healthy, group insurance can be a better deal. It sounds like the flip side of that is if you are younger and healthier than your average coworker, you might be able to get a better deal on your own.
Ryan Brady:
Yeah. That's absolutely right, Liz.
Liz Weston:
Now let's say you've bought these policies and you're covered when you die. Is there anything that can happen that could keep your loved ones from getting a payout?
Ryan Brady:
Yeah. There's a few things that could happen. With most life insurance policies including supplemental group life insurance, companies could actually deny a claim if you take your own life. So this suicide clause typically will last two years after getting the policy.
And then, your claim may also be denied if your insurance company finds that you gave false information on your application or health questionnaire as well. So for example, if you said you don't smoke but your insurance company later discovers you died from a smoking-related illness, it can actually deny or delay the payout to your beneficiaries. Again, there's generally a two-year window after getting your policy where they can do that.
And insurance companies do this to reduce the risk of fraud. But the good thing is with basic group life insurance, they typically don't have those provisions, so your survivors should get a payout regardless of how or when you die.
Liz Weston:
If you're contemplating getting more life insurance than you're automatically offered, how do you decide between going for a supplement through your employer or getting outside insurance? What are the upsides and downsides of these options?
Ryan Brady:
So you could probably guess what I'm going to recommend at this point, but I'd say it's generally better to get your own individual life insurance policy if you think you need more than what your company's free basic group coverage offers today. And that's because of all the reasons I kind of mentioned already. An individual policy is yours, right? So it lets you maintain coverage even if you change jobs. And as we mentioned, term life insurance is actually surprisingly affordable for a lot of people. Not only that, but getting your own policy gives you way more flexibility. You could shop around with lots of providers and customize a policy that better matches your needs, but with a company group life insurance policy, you're generally stuck with whatever options they have available.
However, supplemental group life insurance can actually be a big benefit if you're older or have health conditions and only need life insurance for a limited time. So if that's the case, then getting supplemental coverage may be your best bet. Just remember, if you change jobs, your next employer may not offer supplemental coverage, or if they do, they may have different options or limitations to their plan. So just keep that in mind.
Liz Weston:
All right. Well, I feel like we have a good handle on life insurance, so let's move on to another aspect of employer benefit plans. And this one has a much grimmer name. It's called accidental death or dismemberment insurance. So how does this work and who should consider it?
Ryan Brady:
Yeah. So accidental death and dismemberment insurance, often called AD&D, but not to be confused with Dungeons & Dragons, is actually quite interesting. It's a sort of hybrid life insurance and disability policy, but it's not nearly as comprehensive to replace either one of those. So AD&D has two distinct parts to it. It's got that accidental death part which provides a payout to your loved ones if you die in an accident such as a car crash. Then there's the dismemberment part which pays you if you suffer an injury that results in you losing a limb or becoming blind or paralyzed. And every AD&D policy is different and covers more or less situations, but those are kind of the broad basics.
And in terms of workplace benefits, AD&D is similar to basic group life insurance. Your workplace often gives it to you for free and it typically has a coverage amount of one to two times your salary. So you probably already have basic AD&D coverage through your workplace as long as you've signed up for it. But like group life insurance plans, you may be able to buy more AD&D coverage through your workplace. And this might be useful if you think you're prone to accidents, like if you have a slightly risky job or a risky hobby, let's say.
Liz Weston:
And what would make you or your survivors ineligible for the benefit? We talked about life insurance exclusions and I assume they're similar here?
Ryan Brady:
Yeah. So there's some overlap there. For example, accidental death and dismemberment insurance won't pay your survivors if you take your own life. And other common exclusions include death or injury from drug or alcohol abuse, criminal behavior, or natural causes.
And I mentioned risky jobs and hobbies a second ago. It's worth noting that some AD&D policies will actually exclude coverage for deaths resulting from certain high risk careers or hobbies such as working in law enforcement or going skydiving. So if you're an adrenaline junkie, you might run into some issues there.
Another thing worth pointing out is that if you die from an accident but not right away, your loved ones may actually not get any payout at all. AD&D policies often require the death to have followed a covered accident within a certain timeframe, typically a few months.
Liz Weston:
That sounds like a lot of restrictions. Is this actually a substitute for life insurance?
Ryan Brady:
Yeah. So that's a great point. I'd say it's better to think of AD&D as a supplement to life insurance rather than a substitute, and that's because it's very limited in what it covers. For example, AD&D insurance won't cover deaths from illness or natural causes, and that's pretty significant given that the chances of dying from an illness are actually greater than the chances of dying from an accident. But if you have it for free through work, hey, that's pretty great, right? It's a nice bonus. I just wouldn't put all my eggs in that basket, especially if you have loved ones who depend on you financially.
Liz Weston:
Ryan, you've given us so much great information. Thank you for taking the time to talk with us about these issues today.
Ryan Brady:
Hey, happy to help.
Sean Pyles:
Liz, as you know, I am a planner and I'm also a slightly paranoid person. So after that conversation, I'm adding finding a supplemental life insurance policy to my open enrollment to-do list. I don't have a big family that relies on me, but if the worst happens, I want to ensure that my partner, Garrett, and by extension our pets are able to get by a little easier.
Liz Weston:
And that's because you love them and you don't want to leave them in the lurch.
Sean Pyles:
That's true. That's the positive side of paranoia is that I'm worried about how they're going to be if something happens to me. Well, another thing we should probably touch on briefly is the difference between term and whole life insurance. Term life insurance is for a specific amount of time. Ryan gave an example of a 20-year policy during your conversation, while whole life insurance is for well, the whole of your life. And while that might sound like the better option, whole life insurance is significantly more expensive and complicated to maneuver. Many financial advisors will suggest folks go for term over whole, right?
Liz Weston:
Yes. If you do need life insurance, one of the most important things is to make sure that you have enough. Insurance agents can make whole life sound pretty awesome, but it's definitely not for everyone, and the expense could tempt you to skimp on coverage.
Sean Pyles:
Okay. So that was a great explanation of life insurance. What about disability, Liz?
Liz Weston:
Well, Sean, your chances of becoming disabled are actually much higher than dying during your working years.
Sean Pyles:
Wait, really? I feel my paranoia growing.
Liz Weston:
Really. Today's 20-year old has a one-in-four chance of being disabled before retirement, which is about twice the risk of dying according to Social Security actuaries. Workers' compensation covers only work-related illness and accidents, and a lot of disabilities aren't job related.
Sean Pyles:
But what if you have decent savings already?
Liz Weston:
Well, that's great, but a 2018 Federal Reserve study found only 40% of US households had liquid savings equal to three months expenses, and less than 30% had enough for six months. On top of all that, the average Social Security disability benefit in 2023 is $1,483 monthly. That adds up to less than $18,000 a year.
Sean Pyles:
Yikes. That will not get you very far if you're unable to work. So who is walking us through the vagaries of disability insurance?
Liz Weston:
I had a great conversation with John Ryan, not to be confused with our earlier guest, Ryan Brady. And John is the founder and CEO of Ryan Insurance Strategy Consultants.
Hey, John, it's great to have you on Smart Money.
John Ryan:
Thanks, Liz.
Liz Weston:
So we're going to talk about some various kinds of insurance that folks might have as options on their employer-sponsored benefit plans. And I'd like to have you help us out first on disability. So what exactly is disability insurance, and why would somebody need it?
John Ryan:
Well, disability insurance is designed to replace a person's income if they get sick or hurt and can't work. It pays the bills, keeps them in their lifestyle, very important to have. Life insurance does that. If someone dies, it provides a benefit. They can invest the proceeds and live off the proceeds. Disability insurance provides the same kind of cash flow if someone's disabled and cannot work at their job.
Liz Weston:
Okay. And I hear that people are much more likely to be disabled than to die during their working years. Is that true?
John Ryan:
It is true. You have to be careful of the statistics, though. Some of the statistics that get used are like Social Security statistics, which is all walks of life. If we're dealing with more white collar, predominantly white collar risks, it's less frequent, but it's still more likely to occur than death at any age, actually.
Liz Weston:
So you mean that a disability is less likely to happen to you if you have an office job, which makes sense-
John Ryan:
Right.
Liz Weston:
... than if you have a blue collar job or where you're out working with machinery or something else that could hurt you.
John Ryan:
That's right.
Liz Weston:
That's good to know. So what does employer-provided disability insurance usually cover?
John Ryan:
It usually will cover the employee in their job, usually for a certain period of time at least, if they should get sick or become unable to perform the important duties of that job. And benefits usually begin after, say, a 90-day waiting period. And then, it pays a certain percentage income replacement of their income for a set period of time, usually to age 65 if they had a real long-term disability.
Liz Weston:
So there's short-term disability and long-term disability. Can you talk about how those work?
John Ryan:
Yeah. Well, short-term picks up right away. It can pick up as early as a single day for an accident and a week for a sickness. It helps those who don't have some income saved for that buffer for that 90 days. And so, it would provide a weekly benefit for that 90-day period until the long-term disability benefits could kick in.
Liz Weston:
And then, the long-term can run for a certain number of years, or as you said, all the way up until retirement age.
John Ryan:
Yeah. Social Security normal retirement age is usually the duration for a provided plan.
Liz Weston:
Are there differences between what kind of disability you would go on or qualify for if you're unable to do your specific job versus if you're not able to do any job?
John Ryan:
Well, yeah. As you would imagine, if I have a disability policy that's going to insure me if I can't be, for instance, an insurance broker specifically, even if I could go and do some other line of work, they're still going to pay me my benefit to age 65 versus a policy that says, "John, you have to be unable to do any job for wage or profit before we'll pay you a benefit." You could see how the two are vastly different.
Liz Weston:
Yeah.
John Ryan:
One would cost more than the other because the risk is higher to the insurance company. But there are about six different definitions of disability in the disability world, all the way from Social Security, which is the harshest, least favorable, up to the best individual policies on the marketplace have the most precise definition, which favors the insured. It obviously costs more, but many insureds are willing to pay it because of the advantage of that precise treatment of their sickness or injury.
Liz Weston:
Okay. And actually, I wanted to get into that a little bit because people, if they're working and they're injured at work, they're typically covered by workers' compensation insurance.
John Ryan:
Mm-hmm.
Liz Weston:
And John, would you talk a little bit about what that is and how it relates to disability coverage?
John Ryan:
Well, it's if you get sick or hurt on the job, the state can provide you some relief in the form of indemnities, disability payments. It's only related to on-the-job illnesses or injuries. How much one would receive as a percentage of income, I'm not sure.
Liz Weston:
Yeah. I think it varies a lot by state, so it's good to look up. But it doesn't cover anything that happens off-the-job, right?
John Ryan:
Correct.
Liz Weston:
And when it comes to Social Security, I understand that's pretty hard to get.
John Ryan:
It is. It's very hard to get. Social Security usually favors the person that is least well off, I should say. So typically, white collar employees and owners are going to be last in line when it comes to qualifying for those kinds of benefits. They usually take care of the less well off first, is typically how that works. And as far as the employer policy, it will offset for benefits that are received from Social Security. But since it's such a rare occurrence, there usually is not an offset.
Liz Weston:
And speaking of employer provided disability insurance, is this coverage portable? Does it follow you to your next job if you quit this one?
John Ryan:
No, it does not. It is only effective when you work for your employer, and usually the work requirement is at least a 30-hour work week. If you leave your employer, you almost always lose your coverage. Hopefully, you're going to work for another employer that has similar coverage. But the lack of portability is also a reason why many will buy an individual, privately owned policy as a supplement to the employer plan. And those policies are portable and can be added to.
Liz Weston:
And what should people know about buying an individual disability policy?
John Ryan:
It's almost always underwritten. One of the beauties of employer plans, and we really like employer plans, is that it's usually no questions asked. It's guaranteed issue as soon as you become employed. You go down to the human resources office and you sign a few papers and you're covered immediately. Now there is a preexisting conditions clause, but there's no exam, no lab work, no medicals.
With an individual policy, it's fully underwritten, so there'll be a formal application. They may request medical records. They may send a nurse to your home or your work to do your lab work. There's a medication search that they do. The underwriting for individual disability insurance is the most rigorous there is when it comes to buying a policy like this.
Liz Weston:
Even more rigorous than life insurance?
John Ryan:
Yes.
Liz Weston:
Interesting.
John Ryan:
Yeah.
Liz Weston:
Now you said medication search, so somebody is actually keeping track of what medications we take that we are insured for. And so, there's a big database somewhere that these companies can check?
John Ryan:
There is a database like they do for your driving record, but there's also a medication database that they go to.
Liz Weston:
There's a database for everything.
John Ryan:
Yeah, you bet.
Liz Weston:
All right. Well, let's move on to hospital indemnity coverage. This is something that our listeners might know of because of a certain duck in those advertisements.
Aflac Duck:
Aflac.
Liz Weston:
Is this something that's generally offered by employers in a benefit package?
John Ryan:
It is. It's not as popular a coverage as you would think. And I don't usually recommend it because I think the dollars are better spent maybe looking at a private disability policy to supplement the employer plan. I believe the emphasis should be on the catastrophic, the loss that you just can't sustain, can't tolerate.
Liz Weston:
Yeah.
John Ryan:
Which would be the long-term loss. But the Aflac-type coverages, it's basically, as they say in the ad, gap coverage. There might be something, a higher deductible. There may be certain conditions that are not covered by your basic employer plan that the supplemental hospitalization plan can pick up.
Liz Weston:
So even though you don't recommend it necessarily, can you explain what it is, what hospital indemnity insurance does and what purpose it serves?
John Ryan:
It'll cover those expenses that your basic health insurance does not cover.
Liz Weston:
So it's basically like they're just giving you cash, essentially.
John Ryan:
That's right. And some hospitalization plans are accident-only.
Liz Weston:
Okay.
John Ryan:
Which is much less expensive. The perception is that if I get disabled, it's probably going to be an accident. And so, they'll get an accident-only hospital indemnity program. So there's two types of supplements to the basic medical program that an employer may provide.
Liz Weston:
And finally, John, let's have you explain critical illness insurance for us, pretty much what it sounds like, right? Insurance in case you get a critical illness.
John Ryan:
Right. And those critical illnesses are illnesses like cancer, stroke, heart attack, diabetes, etc. And critical illness insurance can be easier to qualify for than a full coverage private disability program. So for someone who has difficulty getting that type of insurance, a critical illness policy can be a good backup plan.
Liz Weston:
So once again, if you can get the disability policy, this might be a backup.
John Ryan:
Right.
Liz Weston:
Okay. What's the extent of the benefit that you usually get from this insurance? Cancer or Parkinson's or something like that could keep you out of work for months if not years. How long do the payments go on, and how much are they usually?
John Ryan:
Normally it can be a lump sum or an installment payment. Lump sums can be as high as $150,000 for cancer, maybe even higher. You do have options when you buy it. For additional premiums, you can get a higher benefit if you'd like. So you can tailor make each policy based on what your budget is and what kind of condition is most important to you to insure.
Liz Weston:
So if you have a family history of cancer or something like that.
John Ryan:
Yes, that's right.
Liz Weston:
Okay. I assume there's a preexisting condition clause though, right? If you already have cancer, can you get this coverage?
John Ryan:
No. If you already have the condition, it's too late, which is why it's important to get it while you're younger and before any serious problems surface.
Liz Weston:
This all feels a bit overwhelming and like if I'm not insured for all the worst-case disasters that could ever befall me, I'm in trouble. So is there such a thing as too much insurance against life?
John Ryan:
Well, there are rules of thumb as to what's a reasonable expense. For instance, for an individual disability policy, you generally try to keep the cost between 2% and 3% of the income that you're insuring.
Liz Weston:
Oh, that's super helpful.
John Ryan:
Yeah. Women sometimes can pay upwards of 4% because the industry perceives women to be a higher risk. But if you're buying individual disability insurance to supplement the employer plan, you're probably looking at about 1% of your income. So someone making $100,000 will spend about $1,000 a year for a good supplemental plan.
Liz Weston:
Why are women considered a higher risk?
John Ryan:
I wish you didn't ask that question.
Liz Weston:
I put you on the spot here, John.
John Ryan:
Let's just keep it high level and say that they have a tendency to have more frequent claims and longer lasting.
Liz Weston:
So it's actually based on what the insurance companies are experiencing, not just because they've decided that women are flaky.
John Ryan:
Exactly.
Liz Weston:
Okay. All right, good. So the rules of thumb you were giving us are really helpful. Is there anyone that doesn't need disability coverage?
John Ryan:
Well, yeah. Someone who, if they ask themselves the question, "If something happens to my income, who does it impact negatively?" And if the answer is, "I can lose my income but still maintain my financial responsibilities and still support the financial plans that I've outlined with my advisor, and the plan doesn't come crashing down," then they probably don't need the insurance. But to the extent if you crash test your financial plan and it looks like well, you might be able to get away with three years, but then after that things really start to fall apart, then you're looking at the need for some level of coverage.
Liz Weston:
Okay. So if you are approaching retirement and you're all set, or you're Elon Musk, you probably don't need disability insurance.
John Ryan:
Right.
Liz Weston:
John, thank you very much. We really appreciate your help.
John Ryan:
Well, thank you, Liz, and nice to connect with you again. Appreciate it.
Sean Pyles:
Liz, I'm really glad that you and John talked about disability insurance, because many of us non-disabled people who are sometimes called TABs, or temporarily able-bodied, by people in the disability community so take for granted that we are able to move about the world and do our jobs that we can't imagine not being able to do so. But the truth is that anyone can become disabled and you'll be really grateful for this coverage if that does happen.
Liz Weston:
Temporarily able-bodied, ooh, I love that.
Sean Pyles:
Yeah. It kind of hits you where it hurts, right?
Liz Weston:
Oh.
Sean Pyles:
But Liz, you kind of hinted at this with John that most of this really sounds like worst-case scenario planning. I suppose all insurance is planning for a worst case, but death, dismemberment, cancer, heart attacks, we're talking about insuring against just about anything that could happen to us. Is that necessary? Is it possible to say when maybe you have too much insurance?
Liz Weston:
I think the bigger problem is that people get overwhelmed with all their choices and then they don't do anything to protect themselves and their loved ones, or they don't do enough. Our guests gave us some great information about how to think through this coverage and fit it in with all the other stuff that we want to do with our money. And of course, we have lots of resources on the NerdWallet site to help you figure all of this out.
Sean Pyles:
All right. Well, Liz, tell us what's coming up in Episode Three of this series.
Liz Weston:
We're talking about pets.
Sean Pyles:
Oh, my favorite topic.
Liz Weston:
Well, pet insurance, at least it's one of the many benefits you'll find companies offering during open enrollment, along with things like gym memberships, adoption assistance, and we can't forget insurance for caring for your eyes and teeth.
Amber Clayton:
Many dental plans actually provide a hundred percent coverage on the preventative care type measures, so things like the cleaning that someone might get for their teeth. Outside of that, there might be a percentage that employees would have to pay for other services like getting the X-rays done or getting cavities filled.
Liz Weston:
And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at (901) 730-6373, that's (901) 730-NERD. You can also email us at [email protected]. Visit nerdwallet.com/podcast for more information on this episode, and remember to follow, rate, and review us wherever you're getting this podcast.
Sean Pyles:
This episode was produced by Tess Vigeland and Liz. I helped with editing. Katia Iervasi and Liz helped with fact checking. Kevin Tidmarsh mixed our audio. And a big thank you to NerdWallet's editors for all their help.
Liz Weston:
And here's our brief disclaimer. We are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Sean Pyles:
And with that said, until next time, turn to the Nerds.
