Total Money Makeover, Week 9

This week at FPU (week 6) we talked about insurance.  Auto insurance, home insurance, health insurance, disability insurance, you name it.  I actually learned quite a few things, which I will now try to impart to you.

According to Dave Ramsey, the purpose of insurance is to transfer risk. Insurance is there to protect you from loss. Dave gives some tips for different kinds of insurance:

Auto Insurance

If you have a full emergency fund (3-6 months of expenses, baby step 3), you can safely raise your auto insurance deductible.  Auto insurance has two general areas where you select a deductible, collision and comprehensive.  Collision is for when you are in a car accident, and comprehensive is for things like theft, flood, fire, etc. My deductibles for each of these was $500, but I upped them to $1,000 because that is how much I have in my emergency fund and I doubt that I’ll have to make a claim for both things at once.  Upping the deductible saved me some money on my premium.

Carry enough liability. Dave recommends a minimum of $500,000 – half a million dollars in liability.  Liability insurance protects you. I took the following descriptions from Geico.com: Bodily Injury Liability pays if you are responsible for another person’s injury or death in an auto accident. Property Damage Liability pays if you are responsible for damage to another person’s property.

I changed my liability limits from $100,000/$300,000 ($100,000 per individual, $300,000 maximum payout) to $500,000/$1M.  It only bumped up my cost about $8 total for six months.  It is worth it to have higher liability because that means you won’t get screwed if an at-fault accident causes more than $100,000/$300,000 in damage.  If a million dollars of protection only costs me $8, I will take it.

Other options you may have from your insurance coverage include medical, uninsured motorist bodily injury, and underinsured motorist.  Again, descriptions are from Geico: Medical Payments coverage pays medical expenses such as surgery, x-rays, ambulance, and physicians, regardless of who was at fault. Uninsured Motorist Bodily Injury will pay for your injuries caused by a driver without insurance. Underinsured Motorist (UIM) coverage pays you, your household relatives, and passengers in your insured motor vehicle for damages resulting from bodily injury or death arising out of accidents caused by motorists whose liability limits are not sufficient to cover your claim.

I set my Medical Payments amount to $3,000 because that is my health insurance deductible.  When I have a spouse and/or children, you bet that number will go up but for just me (since 99% of the time, I am the only person in my car), $3,000 seems practical.

Homeowner’s and Renter’s Insurance

Homeowner’s insurance should ideally cover the replacement cost of your home and possessions.  It’s generally recommended that you keep a list of your possessions and their value for insurance purposes.  Be aware of what your insurance policy covers.

If you are renting, you need renter’s insurance.  My apartment actually requires that I purchase it as a condition of my lease.  If you are renting and there is a fire or other catastrophe and your possessions are lost, your landlord is NOT liable to replace.  You need to carry adequate renter’s insurance.

Health Insurance

Such a hot button issue right now with the new ACA law and obligatory uproar (my political feelings aside, let’s not get into it)… health care is a big deal. And it is often expensive!  Medical bills are the number one cause of bankruptcies (article) and having appropriate insurance can help mitigate some of that risk so that you’re not facing a huge pile of health care debt. Dave Ramsey has the following recommendations for health insurance:

Increase your deductible or coinsurance amount to reduce your premium.  Only do this if you have the emergency fund to back it up.  I have a $3,000 deductible and that’s actually the buy-up plan at my workplace.  The basic plan is a $5,000 deductible that doesn’t even include co-pays.  Sure, it’s cheaper, and sure, I very rarely see the doctor, but that just seemed like too much risk for me.  So I pay more to get my fancy-pants, still-not-the-best $3,000 plan.  And I’m okay with it.  In the event I do need to go to the doctor, I can afford to do so.  I have used my insurance twice in 1.5 years.  Once for a double ear infection (knowing what I know now, I could have avoided that and self-treated), and once to get some moles checked out by a dermatologist (ugh, biopsies, and the subsequent emotional breakdown of being alone with no one to help me put band-aids on my back).

Check out a Health Savings Account, or HSA, to see if such a plan makes sense for you.  I am interested in learning more about HSAs, as I have never used one.  Seems like a cool setup though.  See: How Does an HSA Work? The HSA is a tax-sheltered savings account for medical expenses.  With an HSA, your deposits are tax deductible, you can save up to 100% of your insurance deductible in the account, you can pay most of your expenses with tax-free dollars, and unused money stays in the account and grows interest like an IRA.  HSAs sound pretty cool.

Disability Insurance

This is one that I never thought about before but will definitely look into in the coming months.  Disability insurance is designed to replace your lost income if you cannot work due to a short-term or long-term disability.  Dave’s suggestions for disability insurance:

Try to buy disability coverage that pays if you cannot perform the job that you were trained or educated to do – this is called occupational or own occ disability insurance. It’s often a short-term coverage option, paying for 2 years.

Beware of short-term policies that cover less than five years.

Always buy long-term disability coverage with after-tax dollars so that your benefits are tax-free.

Get disability coverage for 65% of your current income.  If you make $30,000 a year, your coverage should be at least $19,500.

You can lower premium costs by selecting a longer elimination period – the elimination period is the time between being declared disabled and the time you begin receiving payments.  It’s usually 90 days, but selecting a 180 day elimination period will result in a lower premium cost.

Long-Term Care Insurance

This type of coverage is for nursing home, assisted living, or in-home care costs. Dave recommends this insurance as a “must have” for anyone over 60.

Identity Theft Protection

Good ID theft protection includes restoration services and an assigned counselor to clean up any mess that results from ID theft.  Avoid protection services that only monitor your credit report.

Life Insurance

Life insurance is designed to replace lost income due to death.  30% of households do not have life insurance, and most people have no idea what kind of life insurance they own.  There are two types of life insurance: Term and cash value.

Term life insurance is for a specified period, is cheaper than cash value, and has no savings plan built into it.

Cash value insurance is normally for a person’s whole life and is more expensive to fund a savings plan.

Do. Not. Buy. Cash value insurance. When you die, they keep the money you have saved and only pay out the face value of the policy.  Term life insurance is definitely the way to go, since you don’t need insurance for your whole life.  Right now, say you’re 30 with a spouse and a child.  You need life insurance to cover your lost income if you were to die tomorrow, so that your family would be taken care of. That makes sense! But in 20 years, assuming you follow the baby steps and build wealth throughout your life, you’ll have enough money saved up to be self-insured, the kids will be out of college, and you will no longer need life insurance.  Maybe it’s just my addiction to the Dave Ramsey show talking, but whole life cash value insurance is a bad choice.  If you have it, go get rid of it. Get a term policy and invest the rest of the money you WERE spending on your cash value policy in your retirement. You’ll end up with a lot more money.  Like, millions. But remember to not cancel any policy until you have replaced it with a new policy.

Buy a policy worth 10 times your income.  Invested with a 10-12% rate of return, this amount would then replace your lost income.

Insurance to Avoid

• Credit life and disability
• Cancer and hospital indemnity
• Accidental death
• Pre-paid burial
• Mortgage life insurance
• Policies with fancy options like return of premium or waiver of premium

When Dave got to talking about the little policies that “nickel and dime you to death,” I did a guilty squirm in my chair.  I absolutely have Aflac policies for accidents, cancer, hospital stays, you name it.  “It’s only $8 a week!” I said… yeah, but that’s why I have health insurance, right?  I can’t cancel them until April, so that gives me a few months to think about whether or not I really need them.  And according to Dave, I don’t.  Sigh.  We all make mistakes!

Other considerations

78% of Americans die without a will.  You can get legal forms online to help you with your will today.  BE THE 22%.

Your loved ones should know how to find all of your important documents about your insurance information, will, etc., so keep everything together in a drawer, file box, lock box, etc. so that it’s easy to find and carry out when necessary. Nobody wants to think about dying (I still get freaked out when my mom mentions her will and life insurance – she’s not ALLOWED to die, darn it), but it’s important to make things go as smoothly as possible.  You want to leave a legacy for your family, not a big mess.