We are all exposed to different types of risk in our lives. Practically speaking, insurance is an effective way to limit risk. It’s very important to understand how insurance works and how you can reduce risk in your life.
In an emergency, an emergency or rainy day fund covers you in case of an emergency. Emergencies can and will happen. Your emergency or rainy day fund is a form of insurance. There are other insurances you need beside an emergency or rainy day fund though.
What is the purpose of insurance? The purpose of insurance is to transfer risk from you to the company insuring you. You cover the little expenses and get the insurance company to cover the big expenses.
Without proper insurance, some losses can cost you hundreds of thousands of dollars or even bankrupt you.
There are a wide variety of insurances you should learn about. This will be a at least a three part series I’m going to do in December about various types of insurances. Today with part two, I’m going to mention Health, Disability, and Long-Term Care Insurance. I’ll also briefly mention again a written will although I think the subject is important enough to warrant it’s own article.
Read Understanding Insurance – Part One here where I discuss auto, home, and renter’s insurance.
I’ve spent hours upon hours reading about health insurance in the United States and still feel I have a ton to learn. That said, here’s a few observations about health insurance. Consider increasing your deductible or coinsurance amount to bring premiums down. Consider too increasing your stop-loss but never decrease the maximum payout. Decreasing either of these to save on premium costs is a horrible idea. You would take on way too much risk!
See if a HSA, or a Health Savings Account, would make sense for your family’s specific situation. The HSA is a tax sheltered savings account for medical expenses that typically works well with a high deductible insurance policy.
- Did you know deposits are 100% tax-deductible?
- Interestingly enough you can save up to 100% of your deductible in the savings account.
- With this account you can pay most medical expenses with tax-free dollars.
- The beauty of a HSA is unused money stays in the account and grows with interest on a tax-favored basis to supplement retirement just like an IRA.
- Always consider the highest deductible you can afford based on your emergency fund, sinking funds, and the medical needs of your family.
- Check into increasing your stop-loss limit to help reduce premiums costs.
- Consider opening a Health Savings Account (or HSA) since through this account allows you keep the savings in a tax-free account for potential future expenses and it allows you to save money through higher deductibles.
Disability insurance is designed to replace income lost due to a short-term or permanent disability.
This is based on your age and occupation. The best place to get long-term disability is typically through your work. If that is not available the second best option is to go through a trade association.
You really want to find an independent insurance broker. They will look at a variety of companies and will typically offer you the best deal. Insurance broker’s that represent one company typically are simply out to get their commission on the sale of a policy.
Try to buy disability insurance that pays if you cannot perform the job that you were educated or trained to do. This is called occupational disability. Many times this is only available for two years. Beware of short-term polities covering less than five years.
When you do buy it, buy long-term disability insurance with after-tax dollars. Why, do you ask? So the disability benefits will be tax-free. Your coverage should be for 60-65% of your current income.
A longer elimination period will lower your premium. The elimination period is referred to as the length of time between the beginning of an injury or illness and receiving benefit payments from an insurer. Many policies have a 90 day deductible. That said, if you want a lower premium take a 180 day deductible.
Zander insurance is a good place to start for a quote for disability insurance. However, remember to shop around for multiple quotes.
- Do purchase long-term disability coverage that has a benefit period of no less than 5 years.
- If available, try to enroll in group or association plans since these are typically easer to qualify for and are often cheaper.
- Coverage should be for 60-65% of your current income.
- Select 90 or 180 day waiting periods to save money by using your emergency fund for shorter needs.
- Do not enroll in short-term disability plans such as critical illness, cancer, and emergency accident.
- Rely instead on your emergency fund and long term disability.
Long-Term Care Insurance
Long-term care insurance (or LTC) is coverage for expenses such as assisted living facilities, in-home care, and nursing homes.
One of the biggest challenges facing the Baby Boomers, Generation X, and Millennials is long-term care for their parents. The last six months of your life or your loved ones life can cost as much as a whole decade of your life previously. Be prepared both for your spouse and your children’s sake.
Dave Ramsey says:
“Only buy LTC insurance when you turn 60. When you turn 60, the probability of having to stay in a nursing home increases dramatically. On your 60th birthday, buy it immediately!
According to the American Association of Home and Services for the Aging, 69% of people will need some form of LTC after age 65.
If you become ill, it ensures that your spouse will have enough money to eat and your kids won’t be burdened with huge payments. Not having LTC insurance can be a $300,000 to $400,000 mistake.” *Source
Of note, moving assets to falsely quality for welfare or Medicaid is called fraud. For some reason in discussion forums this is one of the first things people think about if they or their loved ones don’t have LTC. Don’t do it and discourage those who are thinking about it to attempt to do so. This means you can’t move your parents’ home or investments into your name for them to try to qualify for Medicaid.
Check out one of Dave Ramsey’s Endorsed Local Providers or ELP’s to find an insurance agent near you.
- Do purchase LTC protection when you turn 60.
- Discuss LTC with family members including parents, aunts, uncles, grandparents, siblings, etc. once they turn 60.
- Check average local nursing homes cost coverage since they can vary by city and state.
- Take longer elimination or waiting periods to reduce costs.
- Don’t consider less than a 5 years benefit period and preferably get lifetime coverage.
- Shop around for plans using an independent agent.
- The statistical need for LTC before 60 is typically minimal.
- Don’t buy the first plan you find.
- Don’t buy a LTC plan that piggy backs with a cash value life insurance policy.
A Written Will
As I mentioned last week one of the best gifts you can give you family is to get a written will. Estate planners indicate that about 70% of Americans die without a written will. Having a written will make the management of your estate very clear and a lot easier for your family. Have all your documents in order as a gift to your spouse and family. Again, I think the subject is important enough to warrant it’s own article. Stay tuned for an article on this subject in January.
In the near future, I will also be sharing with you a concept called FLO or financial life online. This will help you keep track of your finances, user names, & passwords. If you are the nerd in the family this will also be a gift to your spouse or significant other for peace of mind in the future.
- How Stuff Works: Understanding Health Insurance
- NYTimes: Looking Out For Yourself with Disability Insurance
- LearnVest: Long-Term Care Insurance 101
- Dave Ramsey: The Importance of Having a Written Will
- Dave Ramsey: Why use an Endorsed Local Provider (or ELP)?
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When was the last time you checked on your Health Insurance? Do you have Disability or Long-Term Care Insurance? Do you have a Written Will?