Navigating The Insurance Maze

Subscribe to BusinessWeek

For people just getting started in their careers and other life adventures, life and disability insurance may be the farthest concerns from their minds. But it's precisely because most of their earning years lie ahead of them that they need to be thinking about how to guarantee their future income in the event of an accident or other mishap.



The greater your financial obligations, the larger the amount of life insurance coverage needed to ensure your family's bills get paid if something happens to you. And for younger people, term life policies make better economic sense than whole life insurance, which costs more because it doesn't expire after a set time period, usually pays a dividend, and often doubles as an investment vehicle.



"If a young client has a mortgage of $400,000 and young children, one of their glaring needs might be a couple million dollars of life insurance," says Dan Yu, a senior manager in the Personal Wealth Advisors Group at accounting firm Eisner LLP. "There's a fractional cost on a term policy. It would be one-tenth the cost of what a whole life policy would cost."



The premiums for term insurance have come down sharply in recent years because people are living longer, so the payouts that insurance companies would have made years ago aren't occurring as frequently, says Yu.



And disability insurance is arguably more important than life insurance, as a person in his 30s to 50s is seven times more likely to become disabled than to die prematurely, Yu says.



On and Off an Employer's Tab

If you're working at least 35 hours a week for a big enough company, life and disability insurance are typically part of your benefits package. Employees can generally pick a term life plan that would pay benefits of up to two or three times their annual salary. Where employers are willing to pick up the tab for only a certain amount of life or disability insurance, employees have the option of paying for supplemental coverage, which often costs no more than an extra $10 or $15 a month under a group plan.



One advantage of getting life insurance through an employer is being able to convert to an individual policy when you leave a job, but employers aren't obliged to help you pay for life insurance anymore, says Charles Nyce, who oversees educational programs at the American Institute for Chartered Property Casualty Underwriters and the Insurance Institute of America.



Individuals shopping for life or disability coverage need to make sure the insurance company they're buying the policy from is a valid, licensed insurer in their state. Another key is to avoid financially shaky companies, warns Nyce. You want to make sure your insurer will be around a few years down the road to pay a claim. State insurance departments rate insurance companies, as do rating agencies such as A.M. Best and Standard & Poor's. [S&P, like BusinessWeek, is a unit of The McGraw-Hill Cos. (MHP)] It's also smart to check with your state insurance bureau or Better Business Bureau to see how many customer complaints have been filed against an insurer.



Making Trade-offs

In buying health insurance, people in their 20s and early 30s who are in fairly good health are generally willing to trade convenience for cost savings. While the least expensive option, like an HMO, may make sense if you're single, you're likely to want a wider selection of doctors after you get married and start a family.



For people with families, flexible savings accounts [FSA], which are available only through employers, are a good way to reduce your taxable income by putting aside money you know you'll need to cover medical expenses for the coming calendar year. The trick is to set aside no more than what you're sure you'll actually spend, because you lose whatever you don't use.



Dependent care for children is the easiest thing to put money aside for, as the costs are predictable. Health-care expenses are harder to gauge, but you should put aside enough to cover predictable costs such as co-payments for doctor visits and prescriptions. If you know that you're having a baby or have a scheduled operation next year, you'll want to make sure you have enough in your FSA to cover those costs, at or at least the deductibles, says Nyce.



Deductible Decision

When it comes to health insurance, Nyce advises individuals to shop around to find the most advantageous premium and coverage available. Because there are more individuals looking for life insurance, there tend to be more options available. No such luck for those hunting down health-care coverage.



"If you're in good health, look for high-deductible plans," which could require you to pay the first $5,000 to $8,000 in yearly medical expenses out of pocket. The trade-off is fairly affordable premiums.



Health savings accounts [HSAs] are typically tied to high-deductible plans and enable you to put aside pretax dollars through an employer, or tax-exempt dollars if you're self-employed, to use toward your deductible on medical bills. Even better, you can invest the money in these accounts and it remains yours at the end of the year. Employers often pay a portion of an HSA, sometimes contributing the first few thousand dollars to the account, according to Nyce.



Options for Contractors

Young people who are either self-employed or work as independent contractors can also access group plans and the significant cost savings that come with them through local trade or professional associations.



The New York State Bar Assn. offers a handful of term life plans and a disability plan. But the advent of the community health ratings has eliminated any cost savings that usually come from providing group health coverage.



The American Institute of Architects offers its members insurance and other benefit programs through the AIA Trust, which was established in 1952. The trust chooses one provider for each of its insurance plans, which include term life and disability coverage. It discontinued its endorsed health insurance plan with New York Life Insurance in early 2005 after deciding it was no longer advantageous to members once rates had spiked, as only the people least able to get coverage elsewhere stayed in the plan.



The AIA Trust now offers its members a medical benefits brokerage center "that works with A-rated insurance companies only and works with individual members to get them competitive quotes for individuals, their families, and small groups," says Ann Casso, executive director. She estimates there are more than 20,000 participants across all of the trust's various insurance plans.



The Alma Mater Angle

Another option for independent contractors and owners of small businesses is to check with their university alumni associations, some of which have started to offer group insurance plans. The Columbia University Alumni Assn. has been offering term life, disability, and major medical coverage since the late 1970s. In 2005, a person between ages 25 and 29 who earned $5,000 a month and was eligible for disability benefits up to 60% of that, or $3,000 a month, paid a semiannual premium below $50, and around $67 if he or she was between ages 30 and 34, according to Columbia's Alumni Assn. Web site.



Working Today's Freelancers Union offers health coverage in 31 states to independent contractors and those who are either self-employed, work for multiple companies at the same time, or haven't been a W-2 employee at any one company for more than 18 months. The premiums for its five health-care plans range from $127 a month for a high-deductible plan to $324 a month for its top-of-the line plan.



People who qualify can also get a disability plan that pays up to 50% of their monthly earnings, as long as their salary is no higher than $3,000 a month.



Entrepreneurs have been less fortunate in finding cost-efficient insurance options, partly because their businesses don't fit into recognized professional associations and they don't qualify for group plans. One entrepreneur in the Midwest wasn't available to be interviewed for this story because she was training for a new full-time job as a regional sales representative for a food company. She took the job expressly to get affordable health coverage for her growing family -- and reluctantly handed over the reins of her food-preparation business to her husband.