Intro to Insurance – What you need to insure (and what insurance to avoid)

Insurance.  The idea sounds pretty reasonable: you pay a smallish payment (called a ‘premium’) on a regular basis (usually monthly), and in exchange, when something bad happens to you or your property, the insurance company covers the damage up to an amount specified in your insurance agreement.

While the idea may sound simple, there are some very important things to understand in order to think about insurance correctly.

It’s a bad bet, but you still have to buy it

Insurance is what is called a ‘negative expectation’ bet.  The insurance company is out to make money.  As a result, they are going to make sure that, on average, they make more money in ‘premiums’ paid to them (from you) than in ‘claims’ paid out (to you.)  Sometimes they’re wrong, sometimes they’re right, but most of the time they’re right.

If getting insurance is a losing bet, then why should people do it?  For only ONE reason: to reduce risk.

Insurance companies, and their commission-seeking agents, will try to sell you unnecessary and expensive policies and options (called ‘riders’) for all sorts of reasonsUse this guide to make sure you only buy the necessary policies that serve the interests of yourself and family.

Risk

Human beings are generally risk-averse when it comes to money.  That means that they’d rather get constant income (think treasury bonds), than income that varies (think stocks.)   As a result, people are willing to give up some money in order to reduce their risks (loss of life, home, car, physical ability to work, etc.)

BUT, because insurance is a losing proposition, you only want to pay for just enough insurance to cover you against big losses.  Any loss that you can cover yourself (usually up to a few thousand dollars), should be covered by you.  This is one reason why it is important to build up and maintain a healthy emergency fund (of at least a few thousand dollars) in something stable like a high-interest savings account or bond fund.

From these principles, we can create a few general insurance-buying rules.

Rule #1 – Only insure what would be financially very painful to replace on your own

If your $3,000-valued used car gets totaled in an accident that’s your fault, it’ll hurt a bit to replace it on your own.  However, if you have some emergency savings, replacing it shouldn’t wipe you out financially.  As a result, you should probably avoid paying for collision auto insurance on a car of that little value.  (On the other hand, if you just bought a new Mercedes with them frog eyes, you’d better insure it.)

Similarly, if you have a $1,000 deductible (the amount you have to pay per accident before the insurance company will kick in anything) on your homeowner’s policy, and your roof caves in, paying that $1,000 shouldn’t cause you to fall on hard times.  Depending on your available savings, income, and comfort with risk, the amount you can pay to replace something without too much pain will vary.

That said, most people should be comfortable with ‘self-insuring’ for losses in the range of $1,000 to $10,000.  Anything over $10,000 should probably be insured (unless you’re really wealthy), and anything under $1,000 should definitely be self-insured by keeping an emergency stash.

One exception to this rule is if somebody else (your employer, the government) is subsidizing the cost of your insurance by paying a substantial part of your premiums.  This often changes the math in favor of you getting more insurance coverage than you would if you had to pay for it on your own.

Rule #2 – Keep your deductibles high and your premiums low

Related to rule #1, rule #2 tells us to increase your deductibles to the maximum level that you’re comfortable with.  Raising deductibles is the surest way to reduce your premiums.  For auto and home policies, $1,000 is a good level to set deductibles to.

Health insurance is a little trickier.  If you’re relatively healthy, or if you can’t afford more comprehensive coverage,  and you have to insure yourself without an employer’s help*, you may want to look at high-deductible ‘catastrophic’ insurance.  Be sure to look at both the deductible AND the annual out-of-pocket maximum.  Combine these two to get a true picture of the most you’ll potentially have to pay in one year.  You can get a feel for what policies are out there at ehealthinsurance.com.

* Even if your employer DOES pay part or all of your health insurance premiums, if you’re young &/or healthy, you should take a good look at any high-deductible health-care plans that your employer offers, especially if the plan is HSA-eligible.  Such employer plans often have extra benefits like employer contributions to an HSA on your behalf, or zero premiums that you have to pay.

Rule #3 –  Err on the high side for coverage limits

While you want to be aggressive by keeping deductibles to the highest level you can afford if and when disaster strikes, you want to play it safe when it comes to protecting yourself from a large loss by having high coverage limits.

The logic behind this is simple: insurance is to protect you from BIG losses.  It’s okay to risk a (relatively) small loss of a few thousand dollars in exchange for lower premiums, but it’s NOT okay to potentially wipe out your finances with low coverage limits.

Here are a few ‘standard’ recommended limits to keep yourself safe (tailor these to your own risk profile and net worth.  The more you have to lose, the more you need to protect.)

Car insurance: Liability limits of “100/300/100” are pretty standard, and correspond $100,000 per person for bodily injury (as in paying for the health costs of someone you injure), $300,000 per accident for bodily injury (total injury costs for all the people you injure), and $100,000 per accident for property damage (paying for that other car/fence/house that you ran into.)

Health insurance: If you’re pretty healthy, or can’t afford more comprehensive insurance, have a deductible of at least $1,000 – $2,000, with an annual out-of-pocket maximum of no more than $5,000 or $10,000 per person or family, respectively, or less paying if that amount in the event of a health catastrophe terrifies you.

(Keep in mind that even if you do have to pay, say, $300 out of pocket for some annual trip to the doctor, the amount you save in premiums with a high-deductible plan that doesn’t cover such a visit, versus a more comprehensive (=higher premium) plan that would,  might still make the high-deductible plan a smarter choice.)

Your lifetime maximum benefit should be at least $1 million**.

(** You may not have to worry about lifetime & annual maximums: As part of the Patient Protection and Affordable Care Act, aka ‘Obamacare’, lifetime maximums should be unlimited for all health plans at time of this writing (March 2012), however, your annual coverage maximum may NOT be unlimited until at least 2014.  If this part of Obamacare is repealed in the future, as some politicians & voters would like, then you should adhere to the guidance written above this note.)

Life insurance: I have a whole post on life insurance here, but I’ll give you the quick summary:

Buy a 20 – 30 year TERM life insurance policy with guaranteed level-premiums with a death benefit around 5 – 10 times your family’s expenses (say, $500 K – $1 million for a middle class family of 3 or 4.)  Click here to get a quick quote online.

IMPORTANT: You should almost NEVER buy any kind of ‘cash value’ life insurance which goes by seemingly benign names like ‘whole’ or ‘universal’ life.  These are fee-laden policies that should only be considered by the rich who need more ways to avoid paying taxes on their investments.

Long-term disability insurance:  Your employer should offer some form of long-term disability insurance.  If not, you should probably buy some on your own, as you have about a 2:1 greater chance of being disabled by the age of 60 than dying, and you’ll need income if you’re hurt so badly that you can’t work.  I recommend getting coverage for at least 40%, and preferably at least 60%, of your income.

You can reduce your premiums by lengthening the period of time after you’re disabled but before benefits kick in.  This is called the ‘elimination period’ and should be at least 90 days, and perhaps more (180 days to a whole year, if you have enough savings to make it until then without income).

Home insurance:  Buy ‘Guaranteed Replacement Cost Coverage’ (GRCC), which guarantees to pay whatever it would cost to replace your home at today’s prices, regardless of the stated ‘dwelling limit coverage’ in your policy.

If you can’t get/afford GRCC, buy ‘Extended Replacement Cost Coverage’, which typically will replace up to 120 – 150% of the ‘dwelling coverage limit’ specified in your policy.  This helps to protect you if your ‘dwelling coverage limit’ (the amount that your home is insured for) ends up being lower than your home’s new construction value.

Avoid ‘Replacement Cost Coverage’ (pays up to 100% of the ‘dwelling coverage limit’ to replace your home) and ‘Actual Cash Value’ (which pays only the depreciated value of your home’s construction, which is always less than the replacement cost) policies.

Rule #4 – Don’t buy insurance you don’t need

There are tons of silly insurance policies sold that no one should ever buy. I’ll just mention a few here:

1) Pet insurance: fido’s vet bills should be small enough for you to cover yourself in the event of an emergency.

2) Rental car insurance: use your credit card to book a rental car & you should (check your credit card’s policy) be covered already for collision, AND your regular auto policy should cover you for liability, so tell that pushy Hertz salesperson to take a hike when they try to push any kind of rental car insurance on you.

3) Life insurance for children: unless your child is supporting dependents with their income (maybe you have a young Hollywood star that’s supporting you?), there’s no reason to buy life insurance that covers them.

4) Cash value life insurance: I’ve mentioned this once already under the life insurance rules of thumb section, but it bears repeating: all except the wealthy who need more ways to save on taxes should AVOID cash value life insurance, such as ‘whole’ or ‘universal’, like the plague!

5) Insurance targeted at specific, ‘scary’ risks like so-called ‘dread disease’ policies: The policies you have should already be broad enough to cover most risks (or possibly include ‘riders’ to cover some non-standard risks, for example, earthquake protection for your home).  Don’t let fear-mongering insurers push duplicative & expensive policies for specific risks.

Rule #5 – Keep insurance and investments SEPARATE

This rule boils down to avoiding high-cost, heavily-pushed combined insurance-investment products like cash value life insurance (called ‘whole’, ‘universal’, ‘variable’) and annuities (especially variable ones; fixed ones with good rates may sometimes be appropriate, but I prefer investing in fixed income vehicles like bond funds, instead of locking my money up in an annuity.)

Whenever an insurance agent or commission-driven financial ‘advisor’ starts talking about insurance with ‘investment’ components, run the other way.  These products are typically high-fee, low-flexibility money traps that generate high commissions for the people that sell them (because they’re very profitable for insurance companies.  And guess what?  Those profits come out of your pockets.)

Conclusions

Insurance is a useful risk-reducing tool that should ONLY be used to insure against large losses (never against relatively small ones that you can cover using your income and/or emergency savings.)

So, raise those deductibles and cut your premiums, but make sure you err on the high side of benefit amounts & maximum coverage limits, as well as the length of time that a policy will cover you & your family (in the case of life or disability insurance.)

Stay safe and protect your family & money!

P.S.  If you’re shopping for insurance, or just trying to understand your policy, this link from Investopedia provides some explanation of the various aspects of different types of insurance.

Life Insurance – Why you need it, and what kind to get (Term!)

Quick life insurance takeaways up front

1) AVOID buying ‘cash value’ life insurance policies (whole, universal, variable).

2) Instead, buy TERM life insurance with guaranteed level-premiums.

3) Buy a term of 30 years. The term you choose should be long enough to make sure all of your dependents will be financially independent when the term expires and you are no longer covered. This means your kids should be out of college & gainfully employed, your house paid off, and your spouse & yourself should have plenty of retirement money socked away by the end.  Err on the side of a longer term than you think you’ll need: it’s usually not much more costly than a shorter term. Policies are cheap when you’re young and healthy (so quit smoking/don’t smoke.)

4) Get a death benefit of $1,000,000. The ‘death benefit’ should be large enough to pay off your family’s debts and provide at least 5 – 10 years’-worth (or more, especially if your spouse doesn’t work) of living expenses. If you make a lot and live life relatively high on the hog, you might want $2,000,000. If you’re strapped for cash and used to living on less, $500,000 might do it.

5) Go get a quote HERE.   Also, check with your employer to see what coverage they offer and compare rates.  Many employers offer a little coverage for free (say, 1-2x your base salary), and give you the option to buy more.

6) Make a decision and buy coverage from a company with an AM Best or Moody’s financial strength rating of at least A or A- to protect your family!

Why I hate insurance, even though I need it & buy it

If there’s one thing I hate, it’s high-fee financial products.  Of these, insurance products are often some of the worst offenders.  The main perpetrators are ‘cash value’ life insurance and annuities (although there are plenty of other useless types of insurance to avoid.)

Anyone with dependents (those that depend on your income) needs life insurance.  That being said, Ward’s rule #1 when buying insurance is ‘DON’T!’  What I mean by that is ONLY buy insurance for things that can’t be planned & paid for by your own savings.  If you were fabulously wealthy and had already saved, say, 25 times your family’s annual spending needs in your retirement fund, then you probably don’t need any life insurance at all.

Alternately, even if you aren’t rich: if you don’t have any significant debt, have no dependents, your spouse makes enough money to live off by themselves, and you have other savings, you may not need any life insurance either (or at least no more than the paltry amount offered by your employer as part of your standard benefits package.)

For most of us, especially when we’re young, starting a family, and relatively low on the net worth totem pole, we need life insurance to protect our families in the unlikely-but-possible event of our early demise.

The only life insurance you’ll ever need

Most insurance companies will try to sell you some type of ‘cash value’ life insurance policy.  These include ‘whole life’, ‘universal life’, and ‘variable life’ policies.  Cash value policies all have an investment component to them as well as a ‘death benefit’ (a lump sum paid out to your beneficiaries when you die, regardless of your investment amount in the policy.)  The catch is that these policies are awful because they hit you with high fees (often in the form of the terrible investment choices with high expense ratios that come with your cash value life insurance policy.)

My general rule of thumb (and by ‘general’, I mean you should nearly always do this!) is to keep your insurance and investments strictly separate! Therefore, say it with me, “I will NEVER buy cash value life insurance no matter what an insurance agent or financial salesperson (sometimes disguised as an ‘advisor’) tells me!”*

Okay, so what life insurance SHOULD you buy?  Term life!  Term provides one thing, a death benefit, and that’s it.  Fortunately, that’s exactly what you need.

How term life insurance works

When you buy a term life policy, you pay an annual premium.  The older or more unhealthy you are, the higher the cost (since there’s a greater probability that you’ll die, forcing the insurance company to cough up the dough to your heirs.)  If you die within a certain period of time (the ‘term’, often 20 or 30 years), the insurance company pays the beneficiaries listed in your policy a ‘death benefit’ of some fixed amount of money that you’ve specified when you buy the policy (typically in $100 K increments, the most common amounts being $500 K or $1 million.)

Example: You’re a 28-year-old non-smoking male in good health.  You determine that your wife and child would need $500 K to live on if you were to die.  You figure that in 30 years your kid will have graduated from college and your wife will be doing fine, so you buy a 30 year term policy with a $500,000 death benefit.  You would likely pay a premium of around $400 – $500 per year, less than the price of a cell phone plan!

Make sure you buy a ‘guaranteed level-premium’ policy.  This means you are essentially renewing the policy each year and paying the same price to do so.  Without this your rates can fluctuate and/or you can be denied coverage if your health changes for the worst.

You can always cancel your policy if, say, you strike it rich and no longer have a need for the insurance.  (Although, it may pay to keep the policy anyway if you’re deep into the term since the premiums are relatively cheap compared to what it would cost you to buy new term life insurance at your decrepit old age.)

How big of a death benefit do you need?


This is a tricky question, but some general rules of thumb are helpful. If you don’t want to go through this exercise and you can afford it, just get $1,000,000 and call it good.

To be more precise, consider your family’s annual expenses, your outstanding debts, and your assets.  Most people want enough so that their spouse can pay off the mortgage, cover the kids’ college, and pay for any funeral expenses and other miscellaneous debts you leave behind, as well as have enough to live on to make up for your loss of income for the next few years, and any necessary single-parent help like childcare for the kids.

For most families, somewhere between $500 K to $1 M should do it.  The more assets you already have, such as your 401k, stock accounts, any social security death benefits accrued, the more money your spouse makes, and the closer your kids are to being financial independent, the less life insurance you need.  If you’re young, term is cheap, so err on the high side for the death benefit.

A sample calculation might go like this: 10 years of annual family expenditures: $60,000/year x 10 years = $600,000 + mortgage and other debt of $300,000 + today’s cost of 4 years of college at Your State University for 1 child ($100,000) = $1,000,000.

How long of a term should you get?

If your spouse works and could support themselves (not including the costs of raising children), then I would recommend getting a term policy to get your kid’s through college.  So, estimate when your last child will graduate college and be self-sufficient (the two are not necessarily synonymous) and get a policy that will last at least that long.  Again, err on the safe side, so if you or your wife is pregnant with what you expect to be your last child, round up to a 30 year policy.

Get a quote and buy a policy from an A-rated company


I like Quickquote.com for getting comparable online term life insurance quotes**.  You can play around and get a feel for premium costs when varying term length and death benefit amounts.

Compare these quotes to the prices offered by your employer for life insurance (and check to see what they might already give you as part of your standard benefits package.)

Lastly, make sure that the insurance company you buy a policy from has an AM Best or Moody’s financial strength rating of at least ‘A’ or ‘A-‘, which means ‘excellent’.  This helps insure that the company is stable enough to still be around if and when your family needs the payout. The quotes you get from the above sites will tell you the rating.

Tip: I’ve found that round number periods like 20 and 30 years seem to cost much less than one would think given the relatively expensive 15 or 25 year periods.  Also, the more benefit you buy, the cheaper it is per dollar of premium; another reason to err high on the death benefit.

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* The only situation where you MIGHT consider cash value life insurance is the following: you’re wealthy and in a high tax bracket AND you’ve already maxed out ALL of your tax-advantaged retirement savings (401k, IRAs, HSAs if applicable, college savings plans if you need those for someone.)  Not only that, but you must have AT LEAST 15 – 20 years until retirement in order to offset the fees with the marginal tax benefits from cash value life policies.

SO, if you are within 15 years of retirement, STOP, don’t buy cash value life.  Similarly, even if you ARE 15+ years from retirement, max out all of your (far superior) tax-advantaged retirement savings options before even considering cash value life.  Even if you pass these two criteria, give this some serious thought with a fee-only financial advisor.

** I also used selectquote.com, but I DON’T recommend them because you don’t get instant results online (instead, some insurance agent will call you up to give you your ‘free’ result, which is really just an excuse for them to sell you a policy.  I hate being sold to!) I also struck accuquote.com from the list because they called me (twice! by two different salespeople!) to give me the ‘hard sell’ after I got the online quotes.  This really irritates me.

Smoking is bad for your wealth: Quit today!

Today, everyone can repeat the Surgeon General’s warning that smoking is terrible for your health.  Given the high costs in terms of everyday spending, insurance rates, quality of life, and other effects, smoking is also extremely harmful to your wealth.

Direct costs of smoking – the high price of cigarettes

According to a 2002 study, the average smoker smokes 13 cigarettes per day.  If we assume that a pack is 20 cigarettes, and the average pack costs $5, that’s $3.25 per day (= 13/20 * $5) or $1,187 per year.  Obviously, the more you smoke, the more it’s costing you.  With the federal tax per pack having been raised to over $1 combined with many state taxes at $2 (including Washington’s), the cost of cigarettes seems to only be going up ($6.33 per pack in Washington state as of this writing.)

For reference, a person in the 15% tax bracket could quit smoking their 13 cigarettes per day and contribute nearly $1,400 per year (pre-tax) to a 401k.  If this person quit smoking at age 30 and retired at age 65, their 35 years’ worth of cigarette savings would’ve grown to $206,000 (in real dollars) given historical stock market returns of 7%.

Indirect monetary costs of smoking – insurance, job prospects, resale values

In an article on the high costs of smoking, MSN Money “pulled some online quotes on 20-year term life insurance (a $500,000 policy) for a healthy 44-year-old male … The lowest quote for a nonsmoker was $1,140 in premiums per year; for someone smoking a pack a day, the lowest price more than doubled to $2,571 per year.

[…] According to eHealthInsurance.com, the monthly premium for a policy from Regence Blue Shield with a $1,500 deductible for a 44-year-old male nonsmoker is $552 more a year [for smokers].

A few state governments also charge their employees extra for health insurance if they smoke, and others are gradually joining the trend.”

Additionally, home owner’s typically receive a 10% discount for being non-smokers, tacking on about $85 per year for smokers, given average home insurance premiums of $850.

“Numerous studies find that smokers earn anywhere from 4% to 11% less than nonsmokers. It’s not just a loss of productivity* to smoke breaks and poorer health that takes a financial toll, researchers theorize; smokers are perceived to be less attractive and successful as well.”

Add on higher dry cleaning bills, lower resale values of homes and cars (or money shelled out to clean them), and perhaps the occasional teeth whitening service, and you’re looking at a few to several thousand a year to smoke.

[* – I should note that in fairness to smokers, I’ve read assertions that other than early death, there are no appreciable losses in job productivity attributed to smokers.  However, if employers believe there are anyway, smokers will still receive lower salaries, everything else being equal.]

Indirect non-monetary costs of smoking

Besides bad breath, yellow teeth and smelly personal effects, smoking seriously reduces one’s quality (and length) of life.  The average smoker dies 7-8 years sooner than a non-smoker.  In addition, they are way more likely to live an unhealthy (and therefore uncomfortable) old age, suffering higher incidences of various cancers, heart diseases and strokes:

“The number of people under the age of 70 who die from smoking-related diseases exceeds the total figure for deaths caused by breast cancer, AIDS, traffic accidents and drug addiction.”

There are other side effects as well due to reduced blood flow: “For men in their 30s and 40s, smoking increases the risk of erectile dysfunction (ED) by about 50 per cent.”  For both men and women, smokers’ skin develops more wrinkles and looks paler.

The sooner you quit, the better

The benefits of quitting become immediately apparent (including more cash in your pocket):

From Wikipedia: “The immediate effects of smoking cessation include:

  • Within 20 minutes blood pressure returns to its normal level
  • After 8 hours oxygen levels return to normal
  • After 24 hours carbon monoxide levels in the lungs return to those of a non-smoker and the mucus begins to clear
  • After 48 hours nicotine leaves the body and taste buds are improved
  • After 72 hours breathing becomes easier
  • After 2–12 weeks, circulation improves

Longer-term effects include:

  • After 5 years, the risk of heart attack falls to about half that of a smoker
  • After 10 years, the risk of lung cancer is almost the same as a non-smoker.”

While quitting is difficult due to the addictiveness of nicotine, there are several methods that greatly increase your chances of succeeding.  Try to surround yourself with those who have quit smoking, or are non-smokers:  “A study found … that smoking cessation by any given individual reduced the chances of others around them lighting up by the following amounts: a spouse by 67%, a sibling by 25%, a friend by 36%, and a coworker by 34%.”  So if your significant other, friends or coworkers smoke, try to get them to quit too.  You’ll both help each other succeed.

The best approach using pharmacological aids seems to be use of “[t]he Nicotine Patch plus [as needed] use of gum or spray” which “increased quit rates to 36.5%, the largest quit rate reported.”  In addition, joining a social ‘support’ group seems to help.  “Programs involving 8 or more treatment sessions can double success rates.”  Use support lines like 1-800-QUIT-NOW (1-800-784-8669), to talk to an expert and increase your likelihood of success even further (live IM chat is available too.)

Despite all these methods, it often takes people more than one attempt to quit, so keep at it if it doesn’t work out the first time.  Set a date to quit, then use the above resources to stick to it.  You can get started by tossing your cigarettes & buying some nicotine patches and gum.  Then, check out this free quitting guide at smokefree.gov.

Good luck, your bank account and body will thank you!

Useless types of insurance to avoid like the plague

Here’s is a good link from Bankrate.com on 14 types of useless insurance to avoid.  It’s good information and ties in with the article I wrote recently on auto insurance (and how a saved a bunch of money on my car insurance by switching to GEICO…)

The main moral of the story linked below is that for any event related to your death, you should just buy adequate life insurance (likely term life, which I recommend.)  For property, often your car insurance, homeowner’s/rental insurance, or sometimes your credit card will cover you.  Often your employer has some types of insurance (life, disability) built into your compensation package gratis; check this out as well.

As a follow-up, here’s a brief introduction to life insurance on ‘Get Rich Slowly’.  Again, for 95% of people, I recommend using Term Life if you have dependents (and NO life insurance if you DON’T have dependents.)

I just saved $160 per year on my car insurance by switching to GEICO! (No, really, I did.)

What do Warren Buffett, a green gecko, and an Indian blogger dude all have in common?  They all suggested I’d save money on my car insurance by switching to GEICO… and they were right!  I’ll be honest, I was skeptical and sloth-like in seriously investigating how I could save more money on my auto insurance, but thanks to Ramit Sethi’s motivating tip on how to have money on auto insurance, I searched around and found a better deal in about 45 minutes when I stumbled upon and filled out GEICO’s online quote process.

How can you save money on your insurance?

First, read the above-linked article by Sethi.

Second, read another link within that post that goes over how much coverage you should have.

Next, call up a couple of reputable firms and get quotes (or do it online.  You could start with esurance, which I used; followed up by GEICO.)

One thing I DIDN’T do, that I should have, was call my previous (as of today) insurance company and make sure I had the lowest possible rate based on available discounts (like maybe they weren’t including the fact that my wife and I have low-risk occupations, teacher & engineer.)

Coverage mumbo-jumbo

A few tips on deciding what type of coverage and limits to get: most states (like Washington, my home) mandate that you have liability insurance to cover accidents where you’re at fault.  There are two types of this: Bodily & Property.  Bodily liability insures passengers in your car and those in the car you hit.  The limits are given as two numbers, per person and per accident.  I have $100K/$300K (typical for many, but maybe too much if you have few assets (no home) and have a low net worth/salary.)   This means I’m insured up to $100K in medical bills, etc per person and up to $300K per accident.

Property liability covers the non-living things that you hit (typically a car, or God-forbid, you blind-drunk fool, a house.)  A typical limit is $50,000 per accident.  I got $100K because the difference was only ~$4 more per year for both me and my wife.  (So if I wreck your new Lexus, you don’t have to sue me; my insurance will cover it!)

In addition to liability, there’s Collision, which pays for damage you cause to your own car.  Comprehensive covers damage due to other causes like theft, vandalism, natural disasters etc.  Both of these have deductibles, often $500, which you must pay yourself before your insurance pays for anything above that.  One way to lower your premiums is to raise your deductible to, say, $1000 (but make sure you have an ample emergency fund to cover this if you need to.)

Another way to lower your premium in a big way is to drop Collision/Comprehensive entirely.  If you have an older car, you might want to do this.  Apparently, the rule of thumb is to drop your Collision &/or Comprehensive coverage when your yearly Collision premium is 10% or greater than the value of your car.  I would also add that you should bulk up your emergency fund/short-term savings to include the price of a new (used) car.  My wife and I drive relatively inexpensive cars, >7 year-old sedans worth about $5000 apiece, so we dropped Collision completely.  Also, with our short-term savings, we could cover the price of replacement cars should something happen to either of ours.

Of course, having a safe driving record is the best way to lower your auto insurance premium, so be careful on the road and save money.

Back to GEICO

So what did I do?  I put my current policy in front of me (which I found online at Progressive.com.  If you’re not insured through Progressive, you probably won’t find your policy there…)  My Progressive policy was $383 per 6 months.  Next, I called up Ameriprise to see if I could get a good deal via my Costco membership.  I couldn’t; their quote was $567!

Then, I checked out GEICO and was quoted $303.  I was stoked at this point, but restrained myself from signing up instantaneously until I did a search on esurance (which I really should’ve done first, since it searches multiple sites.)  This returned $336.  Go GEICO!  I signed up for everything online and had new insurance in ~30 more minutes!

$160 in savings per year for about 2 hours of reading and workI highly recommend you check out your insurance options TODAY.

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Description of coverages from Allstate.com’s website (that’s not an endorsement; I just happened to search and found their definitions first!):

Protection for People, Property, and the Unexpected

Bodily Injury Liability Coverage

If people are injured in an accident that’s your fault, Bodily Injury Liability coverage helps protect you from bills that can include:

  • Emergency aid at the scene
  • Medical expenses for bodily injury
  • Medical services for sickness or disease
  • Compensation for loss of income
  • Funeral expenses
  • Legal defense fees and/or bail bonds for anyone listed on your policy
  • Other expenses not listed here

[…]

Property Damage Liability Coverage

If another driver’s property is damaged in an accident that’s your fault, Property Damage can help pay for their:

  • Structural damage to homes, storefronts, etc.
  • Repair or replacement costs for other stationary objects
  • Vehicle repair or replacement costs

It can also help keep your assets safe in the event of a lawsuit resulting from a covered accident.

[…]

Other Coverages

Choose any of the following options that might suit your individual circumstances best and build an auto insurance policy that helps fit your needs.

Collision Coverage helps pay for repairs or replacement to your car if you’re in a covered accident that involves other vehicles or stationary objects.

Comprehensive Coverage helps pay for covered losses caused by natural disasters, theft, vandalism, or other similar events.

Underinsured/Uninsured Motorist Coverage helps protect you if the covered accident was another driver’s fault and he/she either has no auto insurance, or not enough insurance to cover the expenses.

Medical Payments Coverage helps pay medical bills if you or your passengers are hurt in a covered accident. This option may also cover other members of your family when they’re driving the insured car.

Personal Injury Protection typically helps reimburse you for lost income, child care expenses, medical expenses, and other similar things if you’re hurt in a covered accident. (Personal Injury protection is not available in some states)

Limits and Deductibles will apply to certain types of coverage. Your Limits and Deductibles determine how much your insurance company will pay and how much you’ll have to pay when you make a claim for a covered accident.

Use triple-tax-advantaged Health Savings Accounts (HSA) to save on health care costs (and cut your taxes)

As health care costs in America continue to soar, so do health care insurance premiums.  The fortunate ones have access to quality, affordable, employer-sponsored group health insurance.  Those that are not so lucky?  Well, let’s just say your affordable options are somewhat limited (assuming you’re not independently wealthy and don’t want to “self-insure.”)

What does a “normal” health insurance policy cost for an individual?

A quick search on ehealthinsurance.com returns several plans with a wide range of premiums, coinsurance percentages, out-of-pocket maximums and coverages.***  The search I performed assumes that the policy holder (the person who’s buying the insurance) is a male non-smoker who lives in North Seattle and is 25 years old.  (Premium prices for a person who is 55 are in parentheses right next to our sample 25 year-old’s monthly premiums.)

Our sample person would pay $226 ($431) per month for a policy with a $500 deductible, 20% coinsurance after the deductible, and an out-of-pocket maximum of $4,500 (including deductible.)  The first 1-5 per year office visits to a primary doctor or specialist are exempted from the deductible.  All our person would have to cover is the $30 copayment (or “copay”, a typically small payment towards your health care per office visit.)  Also, prescription drugs are covered at a $20-$40 copay.

Health insurance is expensive!  How can I lower my premiums?

If that $226 ($431) monthly premium sounds pretty hefty to you (adding up to $2712 ($5172) per year), there are alternatives.  The easiest way to lower any kind of insurance premium is to increase your deductible.  This means that if you do use your insurance, more of the upfront costs will be born by you.  The benefit is that if you’re relatively healthy, you may not pay much out of pocket for health care, saving yourself the difference in premiums.  High-deductible health insurance is also referred to as “catastrophic” health insurance.  I.e: this type of insurance doesn’t pay much if anything for the small stuff, but if something terrible happens to you and you wind up in the hospital for a few days, you won’t be wiped out financially.

If we run our male 25-year old (55 year-old) search for high-deductible plans we find one with a $2,000 deductible, 10% coinsurance after the deductible, and an out-of-pocket maximum of $5,100 (including deductible.)  However, we don’t find any deductible exemptions for office visits on this policy.  Also, prescription drugs aren’t covered at all (which may be a consideration for our sample 55 year-old person.)

What’s the upside to the higher deductible (and out-of-pocket maximum) and the reduced benefits on this catastrophic policy?  Premiums are less than 30% (40%) of the lower-deductible policy at $65 ($168) per month.  Comparing our lower deductible and high-deductible policies, those premium differences amount to $1,932 ($3,156) per year in savings.  If you rarely go to the doctor, that could make a pretty big difference to you over the years, especially if you’re investing the difference and earning returns on that money each year.

Health Savings Accounts – how HSAs can help those considering high-deductible health insurance

The government has created a tax-advantaged device that might make high-deductible health insurance even more attractive to you.  This vehicle is called a Health Savings Account (HSA.)

The idea behind a Health Savings Account is fairly simple:

Step 1) An individual or family purchases a high-deductible (greater than $1,200 for individuals in 2011; $2,400 for families) health insurance option from any carrier they like (including your employer.)  The $1,200 minimum deductible does NOT apply to preventative services.  Thus, you could have a plan that waives it’s deductible for routine office exams and immunizations that still qualifies for an HSA.  Also, the out-of-pocket maximum for an HSA-eligible plan must be less than $5,950 (for an individual in 2011;  $11,900 for families.)

Step 2) The same individual or family opens up an HSA, into which they can contribute up to the annual amount stipulated by the IRS.  For 2011, those annual limits are $3,050 & $6,150 for individuals & families respectively, with an extra $1,000 ‘catch up’ contribution for those who are 55 and up.

Benefits of an HSA – Triple tax-advantaged!

– You can deduct contributions that you make to the HSA from your taxes** (without having to itemize.)  Also, you can invest in whatever you want, similar to an IRA.  In theory, any provider of IRAs is eligible to offer HSAs.  In practice, however, I haven’t heard of any brokerages or mutual fund houses that offer HSAs directly (but hopefully that will change as the HSA becomes more popular and widely known.)

** State tax treatment of HSAs varies. Depending upon the state, HSA contributions and earnings may or may not be subject to state taxes.  See THIS for information on your state.]

– Your contributions remain in your account from year to year until you use them (unlike Flexible Savings Accounts which are often “use it or lose it” for a given year.)

– The interest or other earnings on the assets in the account are tax free.

– Distributions are tax free if you pay for documented qualified medical expenses.  These expenses can include medical/dental/vision/chiropractic services, over-the-counter and prescription drugs, medical hardware like eyeglasses and hearing aids and long-term care insurance premiums (however, generally you cannot treat insurance premiums as qualified medical expenses for HSAs.)

Who’s covered?

The qualified expenses can be for you, your spouse, or any of your dependents (i.e.: children.)

What’s covered?

From the IRS, “the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.”

A large list can be found HERE, and includes all the ‘normal’ medical expenses one might think of (exams, hospitalization, treatment, lab fees, vaccines, surgery (NOT cosmetic!, medicine), as well as acupuncture, dental treatment & hardware (dentures, braces – but teeth whitening is NOT covered),  birth control, chiropractor bills, contact lenses (including saline solution), glasses (for vision correction), eye exams, laser eye surgery, hearing aids, and nursing homes & services.

There is also a list of things NOT covered, which includes cosmetic surgery, hair removal or transplant, funeral expenses, gym memberships, nonprescription medicine (e.g.: aspirin), and nutritional supplements (e.g.: vitamins).

What about insurance premiums?

In general, insurance premiums (the cost you pay to maintain your insurance) are NOT covered, since they aren’t direct payment for medical care.  However, you CAN use HSA money tax & penalty-free if you’re paying for 1) Long-term Care insurance (up to certain limits), 2) health care continuation coverage (COBRA), 3) insurance while you’re receiving unemployment benefits, and 4) Medicare premiums once you (or you AND your spouse if you’re covering your spouse) are 65 or older.  See Pub 969 for details.

What if you DON’T use the money for qualified medical expenses?

If you use the money for something else, you will pay a 20% fee on the money and income taxes (so DON’T do that!)  However, if you are 65 or older or disabled, you can withdraw the money for whatever you like and only pay regular income tax (avoiding the extra penalty, making the HSA similar to a Traditional IRA or 401k.)  After 65, you continue to withdraw your HSA money tax-free to pay for medical expenses.

Additionally, unlike Traditional IRAs and 401ks, there are NO Required Minimum Distributions (RMDs) for HSAs, so the money can continue to grow tax-free while you’re in retirement.

Furthermore, if the policyholder ends their HSA-eligible insurance coverage, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use (1).  Your HSA is also “portable” in that it stays with you if you change employers or stop working.

In order to qualify for an HSA, you must be enrolled in a high deductible health plan (HDHP), you can’t be enrolled in Medicare, and you can’t be claimed as a dependent on someone else’s tax return for the year you enroll/contribute.  In 2014, a HDHP must have a MINimum annual deductible of $1,250 for an individual ($2,500 for a couple) and a MAXimum out-of-pocket maximum (INCLUDING the deductible) of $6,350 ($12,700) for ‘in-network’ coverage, if your plan is a in/out-of-network plan.  HDHPs MAY cover preventative care without requiring the deductible.

Your health insurance provider, and health care search engines like ehealthinsurance.com, can tell you whether your plan qualifies as a HDHP so that you (or your employer) can contribute to an HSA.

Conclusion

Health insurance can be tricky and somewhat complicated.  Besides looking at the financial side of things (premiums, coinsurance, out-of-pocket maximums) you need to be especially careful at reading through a potential policy to understand everything that’s covered, and more importantly, what isn’t.

HSAs are one way that a person might be able to save on health care costs.  However, to benefit you should be healthy (i.e.: need the doctor rarely in the future), in a tax bracket where the tax savings will give you a nice benefit, and making enough money and have the discipline to invest in your HSA.  Doing so successfully could result in significantly lower health insurance premiums, while allowing your HSA to grow tax-free until you either need it for medical expenses down the line, or you use it like a 401k/IRA after you turn 65.

Regardless of which health care option you choose for yourself or your family, make sure you understand it and make sure you enroll in one of those options!  Due to the high cost of health care, and the likelihood that something can happen to you at any moment, you can’t afford NOT to buy health insurance.  You may feel young and invincible (I sure do!), but all it takes is a car wreck or a sports accident to lay you up.  Often times these circumstances are completely beyond our control.  Your entire savings and assets could be wiped out (and you could accrue significant debt) by a few days stay at a hospital.

So, stay healthy (both physically and financially)!  Eat right, exercise, invest early and often and make sure you have health insurance to protect yourself and your family.

[To learn more about HSAs, check out the IRS’s Publication 969.]

***”Coinsurance” is the % of your covered health care costs that YOU will pay for AFTER you pay costs up to the amount of the deductible. (Therefore, if your coinsurance is 15%, you pay 15% of the costs after you pay the deductible amount and your health insurance company pays the balance of 85%.)

The policy’s annual “deductible” is the amount of health care costs that you will have to incur (per year) before your insurance company will help pay some of them.

The annual “Out-of-pocket maximum” is the total amount of money that you might be liable for, in one year, should you have to pay that much in health care costs that year.  This number sometimes includes the deductible and sometimes does not.

The monthly “premiums” equate to the amount you must pay to maintain your health insurance coverage.  For a given policy, premiums generally go up as you get older, as it becomes more likely that you will incur health care costs that your insurance provider will have to cover.

Here’s an example to show how all these parts of your health insurance policy work together: Let’s say Joe N. Shured has a policy which features a $1000 deductible and 20% coinsurance after that, with an out-of-pocket maximum of $5000, which includes the deductible.

In 2008, Joe goes in for a routine checkup which costs $250.  Since this amount is below his annual $1000 deductible, Joe pays for the whole $250 out of his own pocket.  Later in the same year, Joe breaks his arm skiing and has to go in for X-rays, a cast, etc.  His total bills for the broken arm are  $6750.  Since Joe had already paid $250 towards his deductible, the first $750 of his broken arm bills also goes towards the $1000 annual deductible (which he pays all himself.)  Now that Joe has paid health care costs in 2008 equal to his deductible, the coinsurance of 20% kicks in.  Joe therefore pays 20% of the remaining $6000 balance, which equals $1200.  His insurance company picks up the tab for the remaining $4800 (assuming his policy covers those types of medical expenses; always read your policy carefully!)

To date, in 2008 Joe has paid $1000 for the deductible plus $1200 after the coinsurance kicks in for an out-of-pocket total of $2200.  His insurance company has paid $4800 (for a total of $7000 in medical bills in 2008.)  Let’s say that Joe, the clumsly being that he is, falls down a flight of stairs later in 2008 and breaks both legs.  These leg bills come to a total of $20,000, after a couple days stay in the hospital.  At 20% coinsurance, you might think Joe would have to pay $4,000, but notice that Joe already has paid $2,200 out-of-pocket medical expenses this year.  Because Joe’s policy has an out-of-pocket maximum (including deductible in our example) of $5,000, Joe only has to pay $2,800 of the leg bills out-of-pocket.  (Because $2,200 + $2,800 = $5,000.)  His insurance company must pay the remaining $17,200 of bills.

Joe finally makes it out of 2008 without anymore scrapes.  However, on Jan 2nd of 2009, Joe celebrates State U’s touchdown a little too violently and gives himself a hernia.  His hospital bill for this is $225.  Since Joe is in a new calendar year, his deductible has reset to $1000 again, so Joe must pay the whole $225 himself.  (Joe’s annual out-of-pocket maximum is also back at $5000 for 2009.)

(1) http://en.wikipedia.org/wiki/Health_savings_account

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