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.

Macroeconomics lesson in two easy rap videos – Hayek v. Keynes – FIGHT!

Yo, son!

Hear the two macro heavyweights John Maynard Keynes (in the stimulus/top down corner) and F.A. Hayek (in the libertarian/bottom up corner) spit some fierce econ battle rhymes.

Professor and economist Russell Roberts is behind this piece of youtube brilliance.  Check out his excellent podcast at econtalk.org.

Round 1

Round 2

Chef vs Meth

For more famous rap battles, two of the Wu Financial‘s finest duke it out here:

Ramit Sethi will teach you to be rich – 4 links to wealth: negotiate, automate, cut costs & earn more

Ramit Sethi is my favorite financial blogger and advice-giver for the ‘basics’ (which can still be complicated) of personal finance: spending, saving and earning income.  He recently railed against those who worry about things that they can’t control, yet fail to do the simple steps that will really matter.

His quoted question below to these people (and everyone else who needs to take control of their money) have 4 excellent starting points (links) for personal financial freedom.  Check out each of these and apply them to your financial life.

“Have you negotiated? Automated? Earned more? Taken the 30-day challenge to save $1,000?”

Negotiation

Ramit stresses the importance of negotiating all things financial, from credit card interest rates, getting out of bank fees, to your next salary raise.

Automation

The best way to save is to automate the process so that no active effort is required on your part.  This can be anything from setting up direct deposits on your paycheck (most employers allow you to split the check into multiple accounts, the better to target your savings goals), having 401k deductions come out of your check, or using Vanguard (or whoever your mutual fund provider is) to invest money from your bank account on a regular schedule.  (If you already have a Vanguard account, go here.  If you need to set up a Roth IRA or other financial account, go here.)

Earn More

Expenses are only half of the financial coin of savings.  Earning a healthy salary is also a big help along the road to wealth.  Here’s a few ideas on how to make more money:

Get an education (academic or vocational, formal or informal) that increases the worth of what you know, and your ability to apply that knowledge and make money (or other benefits) from it.

Ask for a raise at work.

Start your own business on the side, or find a part-time or freelance job that you can do in your spare time.  (Make it something you enjoy and that energizes you, otherwise it’ll be hard to force yourself to do it given your other work/life commitments.)

Save Money – Enter Ramit’s ’30 day challenge’

Ramit put together a fantastically useful list of 30 tips (described in each of the links below) to save money.  These aren’t the typical ‘stop buying lattes’ ideas generated on so many financial blogs.  Instead, they’re likely to save you big bucks without taking away the things that you really enjoy in life.

While I’ve copied Ramit’s entire list below (with his links for the details of each tip), his original post can be found here.

Full list of Ramit Sethi’s tips from iwillteachyoutoberich.com
Tip #1: Pack lunches for the rest of the week
Tip #2: Turn your thermostat down 3 degrees
Tip #3: Sell something on eBay today
Tip #4: Involve your friends in your savings challenge
Tip #5: Optimize your cellphone bill
Tip #6: Use gas prices to become your own hedge fund
Tip #7: Create a “No Spending” day once a week
Tip #8: Implement the A La Carte Method
Tip #9: Only buy new things when replacing something old
Tip #10: Use the free rewards from your credit card, car insurance, and workplace
Tip #11: Never pay full retail price for clothes or eyeglasses again
Tip #12: How I’m saving $2,000+ on eating out in 2009
Tip #13: How to negotiate your car insurance
Tip #14: Use self-persuasion to share how much you’ve saved so far
Tip #15: Forget going to a bar — ask people over for dinner
Tip #16: Cancel any large purchase this month
Tip #17: Buy generic for the stuff you don’t care about
Tip #18: No Christmas gifts this year
Tip #19: Save Money, Eat Well and Look Hot in Less Than an Hour
Tip #20: Change the date of Christmas
Tip #21: Save thousands by pre-paying your debt
Tip #22: Analyze your progress in the 30 Day Challenge (plus, see how I’m doing)
Tip #23: Go cash only for 15 to 30 days
Tip #24: Cut your commute expenses by 40%
Tip #25: Earn more money using your God-given skills
Tip #26: Gardender? Cleaning lady? DIY instead
Tip #27: Use barriers to prevent yourself from spending money
Tip #28: Use price-protection guarantees to always get the lowest price (travel, retail)
Tip #29: Stop being a loser and spend money to save money
Tip #30: How I’m saving $25,000+ in 2009

 

10 tips on how to get rich from Warren Buffett

Okay, the tips are technically from Buffett’s biographer… as told by Parade magazine.  STILL, it’s a decent list, and as a HUGE Warren Buffett fan, I can’t help but share them.  The original Parade story is HERE.

I’ve copied the 10 items below with my own take on how to make them actionable in your life.

1. Reinvest your profits
This is key.  When your income goes up, invest/save a large portion of that increase (like, 75% of the gross!)  This keeps your lifestyle in check while allowing you to build more wealth.  For youngish people, continuing to basically live like college students after graduating and getting a ‘real’ job is brilliant.  You don’t feel like your neglecting yourself because you’re used to living cheap, and you can get a great start on retirement, saving for a house, paying off debt, etc.

Another corollary to this rule is to do what I call ‘banking windfalls’.  This just means that when you run into unexpected cash (a bonus at work, an inheritance, or a tax refund check), save it or pay off debt, don’t blow it.  To celebrate, treat yourself to something small like a nice dinner out with your significant other rather than immediately take a vacation or buy a big screen TV.  This allows you to feel good while preserving most of the windfall.

2. Be willing to be different

Buffett talks frequently about the importance of having an ‘Inner Scorecard’, “judging yourself by your own standards and not the world’s”.  This is really key to being financially successful (or successful in many other ways) because success by its very definition usually means doing something that the majority of people have not and will not do.

For personal finance, this means saving a large chunk of your income and investing in a smart-yet-unflashy way (hint: stock index funds!)  It also means forgoing what others might think of as ‘normal’ or at least highly desirable: spending a lot of money going out, driving an expensive car, not talking about money, etc.  Instead, take control of your own money by deciding exactly what’s important to you AND what’s not.  You should splurge on things you love, but make it up by cutting costs aggressively on things that are less important to you, and always keep track of how this spending relates to your financial goals.

3. Never suck your thumb
“Thumb-sucking” is Buffett’s phrase for not taking action when you should be.  Personal finance is full of this behavior.  People ignore their debt, investments and other parts of their financial lives because of mental blocks they have dealing with these areas.  Instead, take action on the areas of your personal finance that you know deep down need work.  If you’re not even sure where to start, read through this blog, talk to a friend who you know is on the way to wealth (it may not be who you think; ask for balance sheets as proof 🙂 ), or contact a professional advisor like me who can help you.

4. Spell out the deal before you start
This means always knowing the price, rates, and any other terms of any financial agreement, formal or informal, small or large.  On the small scale, this means simple stuff like knowing how much drinks or that delicious-sounding special on the menu is going to cost you (AFTER factoring tax and tip.)

(A personal aside: I HATE it when waiters rattle off the specials without telling you how much they are!  I suspect this is because 1) they know you’ll feel like a cheapskate if you ask how much they are and 2) they are usually much more expensive than the ‘regular’ items on the menu.  Same thing with bars that don’t list prices next to alcoholic drinks, what the hell is up with that!?  I want to know what beer is going to cost BEFORE I order it damn it!!)

Large scale financial deals require proportionally more caution.  Understand all the terms of any loan, investment (check expense ratios and other fees), credit card, real estate purchase, job offer, insurance, etc that you buy.

For me, the key things to ALWAYS be aware of are 1) Price, 2) Fees, 3) Interest rates/historical rates of return (investment sellers try to trick you here, so be careful accepting what they seem to indicate you should expect), and 4) periods of payment or any timelines associated with getting or giving a good or service.

5. Watch small expenses

I would note that while this is true, pay even more attention to LARGE expenses and small, recurring expenses that add up to large expenses (think, your cable or cell phone bill.)  An extra $50 per month for a cell phone data plan may not sound like a ton, but that’s $600/year, which is roughly $12,000 in present value (a fancy term for adding up all future payments and discounting them back to the present.)   For comparing recurring expenses to one-time purchases, I use a rule of thumb of multiplying the yearly expense by 20.  So, saving $20/month on your heating bill by turning the thermostat down 3 degrees amounts to $240/year or ~$4,800 in present value (assuming you keep it up for the rest of your life.)

Improving your credit score to secure a lower mortgage interest rate in the future will similarly save you dramatic amounts of money in interest payments saved.  Buying a cheaper model of used car vs an expensive used or new car will similarly make a huge difference in your finances.

6. Limit what you borrow
Try to never incur high-interest debt like that associated with credit cards or car loans.  I recommend always paying cash for cars, and never financing a house with less than 20% down.  In both instances this forces you to avoid buying things that cost too much relative to your saving ability, and to keep interest payments low.  Keep lower-interest debt like that associated with student loans and mortgages to the bare minimum too.  You want to have your money making interest for you by investing in stocks and bonds, rather than letting someone else (bank, credit card company) use their money to keep you paying them.

7. Be persistent
Stick to financial goals.  The easiest way to do this is through automatic investing and debt-paying.  Use direct deposit and paycheck withdrawals to fund savings and retirement.  401k plans are great for this.  Set up automatic transfers that take money out of your paycheck BEFORE the rest of it goes into an account for you to spend on discretionary items.  (You’ve probably heard of this rule as ‘pay yourself first’.)

Being persistent also means continuing with a well-thought out plan in the face of adversity.  When the stock market tanked in 2008 and 2009, did you keep you money in there and keep investing?  I and many others did, and it paid huge dividends.

8. Know when to quit

Just like a bad relationship, you need to break off financial deals when they aren’t working.  This might mean giving up smoking to improve your health and wealth, switching to a no-fee credit card or checking account, or moving your money from high-priced, broker-pushed mutual funds or annuities into index funds, perhaps with the help of a no-commission financial advisor.  It could also mean asking for a raise, leaving a job where you’re underpaid (find out if you are here), or getting a new job where you’re paid more.

9. Assess the risks
Know the potential risks of decisions you make.  This does NOT mean avoid risks.  On the contrary, it means taking appropriate risks for your situation.  My entire retirement portfolio is in stocks.  Is this risky?  For me, absolutely not.  I don’t plan to retire for at least 20 – 30 years, so what do I care when the market dives in between this period?  (In fact, I viewed ‘bad markets’ as great opportunities for youngish investors like me to buy more of the market at a cheap price.)  On the other hand, if I was a widow(er) living on a social security and some small personal savings, having ANY amount of money in the stock market might be too risky.

Take risks that you can afford that have large upside and only moderate downside (or downside that can be mediated) given your situation.  When you’re young and living well below your means, you can afford to take more risks to make you even better off.

Just make sure you’re being honest about the upside of your investments and not just abusing the notion of ‘taking risks’ to gamble in negative expectation situations (casino gambling, lotteries, penny stocks, picking individual stocks, etc.)  Even though I’m in an all-st0ck retirement portfolio, that money is safely invested across thousands of companies and in the hands of a secure financial company.

10. Know what success really means

For me, being wealthy doesn’t mean having a huge house, expensive car, wine collection, etc.  It means being able to live in comfort and security and do the things I really care about doing: spending time with my family & friends, traveling (on a modest budget), eating well for cheap, reading, and savoring the world’s greatest beers.  This essentially boils down to being able to control how I spend my time, rather than slaving away at some job I don’t like just to pay for an expensive lifestyle that doesn’t make me any happier than I would be without it.

Lest you think wealth has to only be about you, I also would like to have efficiently given away a large sum of money to help those most in need by the end of my life.  Whatever your philanthropic impulses, I encourage you to factor them into your financial plan as well.

I’ll leave you with a great quote by Mr. Buffett himself on this subject (bolding mine):

“I know people who have a lot of money,” he says, “and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. When you get to my age, you’ll measure your success in life by how many of the people you want to have love you actually do love you. That’s the ultimate test of how you’ve lived your life.”

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.

Two new FANTASTIC retirement calculators

Financial awesomeness

I just discovered two really excellent and easy-to-use/understand retirement calculators from Vanguard (who else?) These are both essential tools for planning for retirement.  They will help you determine if you’re going to run out of money in retirement, how much to save for retirement, and how to retire earlier.
#1 Retirement nest egg

The first one computes the likelihood that your portfolio will last in retirement given your spending amounts, how much you start with, and what your asset allocation is.

This is a great tool for determining how much you’ll need in retirement, and if your current nest egg will get you through retirement.  You can even include information about any company matching you might receive

It also gives you a feel for the safety of different asset allocations.

#2 Extra savings

The second calculator shows you how much more money you’ll have in retirement if you increase your current contributions by 1 to 2%.  You can also use it to simulate how much you’ll have if you increased your contributions beyond that, or with whatever other variables you want to look at.

Missing some cash? Search for unclaimed property to find out

Ever had the feeling that you didn’t get a check or payment you were due, or just want to see if anyone owes you money that you forgot about?  Search your state’s unclaimed property records to see if there’s some ‘found money’ just waiting for you to pick it up.

Go to http://www.unclaimed.org/ and select your US state(s) &/or Canadian province(s) of past & present residence, and  search for any unclaimed property in your name (or the names of family/friends).

It’s quick, easy, and who knows, something may turn up!

P.S.  For those in my native state of Washington, you can go straight to this link to skip directly to Washington’s unclaimed property search.  Click here if you’re an Oregonian, and here to search California.

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