Wednesday, March 24, 2010

FPU: Insurance

I know this is a HOT TOPIC right now and people are going to freak out when they see the title, but it's not what you think. This lesson briefly covers key notes on seven basic kinds of insurance coverage:

1. Homeowners or renters:
-- If you need to save a little money, some times you can do so by increasing your deductibles. So, how do you know when it is worth increasing your deductible? Dave gave the following example: You have a $250 deductible and you increase to $1000 (increased risk by $750) -- if your premiums go down by $75/year, you have to go 10 years without an event in order for it to make sense. Is that practical for your family/home? You really have to think about the logistics
--Always carry good liability insurance.: Always take at least $500,000
--Should be GUARANTEED replacement cost. The guaranteed replacement cost makes sure you get the full coverage cost even if you haven't updated the value on your policy to keep up with appreciation. So, if your policy is EXTENDED replacement cost you have to be sure to update it once a year. Be sure to stay very involved and very plugged in.
--Umbrella policies are a very good idea. It covers any shortage in your auto policy in liability. You can buy an extra $1 million umbrella for a couple hundred dollars a year, so as you build your assets be sure you protect yourself.

2. Auto:
-- Changing your deductible on your car isn't as likely to be beneficial on auto insurance as it is with homeowners insurance.
-- Consider dropping collision if you have a really old car.

3. Health Insurance:
-- You can save costs by changing your deductible or your co-insurance ratio. The more risk you take on, the cheaper your premiums. You can increase your stop-loss (maximum out of pocket), but don't decrease your maximum pay out (keep this at a least $1 million).
-- Unless you have a chronic illness in your family, the best option out there right now is an HSA - Health Savings Account. You can often save enough in your premiums each year to cover the added risk of the deductible. It's tax free health savings and tax deferred investments. There is a maximum you can deduct from your insurance each year, but it's a great added investment or protection to have.

4. Disability:
-- Designed to replace income lost due to short term or long term disability.
-- 1 in 3 chance that you will become disabled during your working years.
-- Try getting Occupational Disability Insurance. This provides disability coverage for your own occupation that you were trained to do. One option is to get this for 2 years and then dropping.
-- Do not buy short term disability (terms under 5 years). Your emergency fund is the only short term coverage you need.
-- Your rate will be based on the type of work you do, not your health
-- Best way to get disability insurance is through your work. If you buy it on your own it can be VERY costly. If your work doesn't offer it, look in to getting it through a trade organization.
-- Your coverage should be around 65% of your current income
-- Buy with after tax dollars. That way if you become disabled, you don't pay taxes on your insurance pay outs.
-- Elimination Period (amount of time you go before payments kick in) is the same as a deductible. The longer your elimination period, the cheaper your premiums will be.

5. Long-term care:
-- Nursing Home coverage. A good policy will cover in-home care too.
-- #1 problem facing this generation is not college
-- Do NOT recommend until you are 60. The probability of a nursing home stay before you are 60 is virtually 0.
-- If you are financially able and your parents are unwilling to purchase, you may want to consider buying it for your parents.
-- Right now spouse is allowed to keep $79,000, a house, and a car. Every thing else has to pay for the nursing home before government aid will kick in.

6. Identity theft protection:
-- Fastest growing white collar
-- Will spend an average of 600 hours in getting the mess cleaned up.
-- Don't buy protection that only provides credit monitoring (you can do that on your own)
-- Make sure it includes restoration services

7. Life insurance:
-- Cash Value: Is normally for life in order to fund a savings plan. This is the more expensive plan. The average returns on the investments are usually lower than you can make by doing your own investments. Basically, if you invest the amount you save each month by using term life instead (can be over $100/month) your return will be DRAMATICALLY higher (Avg.12% vs. 2%-7%). If you have Cash Value (Whole Life), cancel it immediately and get Term Life instead.
-- Term: For a set period of time. It is substantially cheaper and has no savings built into it. Dave recommends 20 year level term insurance. If you follow Dave's plan you become self-insured (by have no debt, a fully funded emergency fund, paid for house, and a retirement fund) by the time the term is over. Then if some thing happens, you don't really need the insurance.
-- Dave recommends your Term Life Policy be equal to 10x your income (e.g. If you make $40,000/year you should get a policy for $400,000). The theory being that you could average 10% return on your investment and live on that if the individual was to pass away and you lost that income.
-- Don't forget to buy for the spouse (even full-time moms). If some thing happens to the stay-at-home mom, you will have to pay some one to do things they do (childcare, cleaning, etc).
-- Stay away from fancy options - accidental death, return of premium feature
-- Children don't need a big life insurance policy. All they need is a $10-$15,000 rider to help cover burial costs.

The following are some BAD IDEAS Dave warns against:
* Credit life and Credit disability
* Credit card protection
* Cancer and hospital indemnity
* Accidental Death insurance
* Any insurance with cash value, investments, or refunds
* Pre-paid burial policies
* Mortgage life insurance (unless you are uninsurable)
* Any kind of duplicate coverage

If you are paying a premium that seems really low it's because it's NOT WORTH IT! Insurance companies are not stupid. If they can sell you an option for next to nothing, it's because their risk is basically nothing. Insurance is all about transferring risk. This should always be kept in mind when making decisions regarding your insurance coverage.

Just this past month I finally made the step to get Term Life insurance. I was surprised how easy and inexpensive it was. They actually came to my house to do the physical, so I didn't even have to make any effort other than fasting. I don't know my final policy price yet, but the original quote was around $12/month for $300,000 worth of coverage.

Do you have life insurance? Do you have the right kind of insurance? Do you know your deductibles?

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