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 three I’m going to mention Identity Theft Protection and Life 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.
Read Understanding Insurance – Part Two here where I discuss health, disability, and long-term care insurance.
Identity Theft Protection
I recommend not to buy identity theft protection services that only provides credit report monitoring. Make sure to shop around and compare rates to services. Check out these reviews of these 10 best identity theft services.
Keep in mind most of these identity theft protection services will not do the following:
- They don’t inform you if a new cable or cell phone service is opened up in your name.
- They don’t monitor bank account transactions, fraudulent credit card transactions, retirement accounts, brokerage accounts, etc.
- They do nothing to tell you if someone has stolen your identity for non-financial purposes such as getting a passport, driver’s license, etc.
- They do nothing to stop tax fraud or tax refund fraud against you. The same is true for other government programs such as fraud related to social security, Medicaid, Medicare, and welfare.
If you do sign up for protection remember that identity theft services should include protection restoration services that assign an advisor to clean up the mess. Of the ones I’ve researched I like is Zander Insurance which does provide such protection.
Why Zander? Zander is the only identity theft protection service that “will handle all the work to restore your identity” and covers all types of ID theft, including Social Security fraud, medical ID theft, tax fraud, employment fraud, benefits fraud and family fraud. Zander also claims a 100% success rate in restoring victims’ identities to their pre-theft status.
I personally had identity theft protection through CapitalOne for years and I paid $12.99 plus tax a month. CapitalOne was my first credit card too. I’m pleased to say that I cancelled that card and got rid of identity theft protection service which did not cover assigning an advisor to clean up the mess in the event of identity theft.
Today, I simply get a free credit report every 4 months through annualcreditreport.com. You are allowed to get one free credit report from each of the credit bureaus so I just stagger the reports every 4 months. This is not to be confused with getting a FICO credit score which is a different service you don’t really need in my opinion.
- If you do get identity theft protection get a plan that provides full restoration benefits in the event you are a victim of identity theft that covers all work with collectors, police, social security, government agencies, and creditors.
- Make sure that the plan covers all risk of identity theft not just credit related issues.
- Every year order your credit report from each of the three credit bureaus at least once a year.
- Enroll your entire family since children and elderly tend to be the targets of identity theft.
- Avoid purchasing plans offering credit monitoring or fraud alert programs as these types of plans typically only deal with credit issues and don’t protect you in case of other forms of identity theft.
- Don’t pay for services which are free or you can do yourself.
- Avoid enrolling in credit score improvement or monitoring services. Pay off your debt and your score will improve. Stop borrowing once you have paid off your debt and your score will eventually become a 0.
Life insurance is insurance that pays out a sum of money either on the death of a person or after a set period. It is typically used to replace potential lost income.
Most people have no idea what kind of life insurance they own. There’s two basic types of life insurance: Term Insurance and Cash Value Insurance.
- Term insurance is significantly cheaper, is for a specific time frame, and does not have a savings plan built into the coverage.
- Cash Value insurance is typically more expensive, often is coverage for life, and does include a savings plan. There are different types of Cash Value insurances including whole, universal, or variable life.
Remember that insurance agents are typically paid on premium. If you own cash value or whole life insurance it’s time to fire your insurance agent in my opinion. If an insurance agent is pushing hard for whole life insurance take your business elsewhere. Why?
Whole life insurance is the payday loan of the middle class in America.
Here’s a simple graph that explains the difference between term and whole life insurance.
Here’s what the financial experts say:
“For most people, the right type of life insurance can be summed up in a single word: term.”
~ SmartMoney.com, April 5,2012
“I strongly believe that term is the best insurance for the vast majority of people, and it literally costs a fraction of other forms of life insurance.”
~ Suze Orman, The Road to Wealth: A Comprehensive Guide to Your Money
“Cash value life insurance is one of the worst financial products available.”
~ DaveRamsey.com, “The Truth About Life Insurance,” October 25, 2010
“For most people, term life still offers the best combination of coverage and cost.”
~ WSJ.com, “Honestly, What’s the Best Policy,” May 28, 2011
Okay so the experts could be wrong right? Pull out your calculator and together shall we do a little math?
Let’s look at an example of John Doe who is 30 years old and is considering getting insurance. I’m using this online calculator here.
Option 1: Terrible
- $100 per month for Cash Value or Whole Insurance for lifetime coverage.
- $250,000 coverage
Insurance and Cash value:
John would be paying $1200 a year for this insurance. After 20 years the cash value of this asset would be $24,000. At the age of 70 he would have $48,000 cash value and $250,000 life insurance coverage in case you pass away. When you die, however, the insurance company keeps the cash value and simply pays your beneficiaries the face value of $250,000. Returns on cash value life insurance are historically low. There are typically high fees deducted from any return as well.
Option 2: Good
- $10 per month Term Life Insurance for 20 years
- $90 invested monthly assuming a 10% rate of return
- $250,000 coverage
Insurance and Investment Value:
John would be paying $120 a year for this insurance. After 20 years he would have spent $2,400. At the age of 50 his monthly investment of $90 with a return of 10% assuming yearly compounding would be worth $68,042.78. John would have contributed $21,600.00 towards this investment. At age 50 the term insurance would expire and John would then self-ensure himself. Assuming John continues to invest $100 a month at 10% annual rate of return he will have contributed $43,200.00 and the investment would be worth $533,360.91 after 40 years at the age of 70.
Option 3: Best
- $15 per month Term Life Insurance for 20 years
- $85 invested monthly at 8% rate of return
- $500,000 coverage
Insurance and Investment Value:
John would be paying $120 a year for this insurance. After 20 years he would have spent $2,400 and would have double the coverage at $500,000. At the age of 50 his monthly investment of $85 with a return of 10% assuming yearly compounding would be worth $64,262.56. John would have contributed $20,400.00 towards this investment. At age 50 the term insurance would expire and John would then self-ensure himself. Assuming John continues to invest $100 a month at 10% annual rate of return he will have contributed $40,800.00 and the investment would be worth $507,929.39 after 40 years. The cost of getting double the coverage in the first 20 years would be $25,431.52 or $533,360.91 minus $507,929.39.
The most common myth is that the need for life insurance is a permanent situation.
Twenty years from now, with the kids grown and gone you will be able to self-ensure your assets and will no longer require life insurance. Your house will be paid off, you will have no outstanding credit card debt, the cars will be paid for, the kids college will be taken care of, and you will have saved for retirement.
- Get Term Life insurance coverage in the amount equal to 10 times or more your income on a 15 or 20 year guaranteed level term plan.
- Make sure to only shop with companies that are rated “A” or better.
- Protect your spouse whether they work or stay at home. A stay-at-home Mom needs life insurance too!
- Only get small riders say $10,000 to $20,000 for children to cover burial expenses.
- Insurance is a horrible savings plan.
- Do NOT buy Cash value insurance including whole, universal, or variable life insurance.
- Remember to have a new term policy in place before you cancel any existing policy.
- Avoid additional insurances such as credit life, disability, accidental death, and mortgage life insurance.
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.
- Clark Howard: Consumer Issues & Identity Theft
- Zander: Get an Instant Life Insurance Quote
- Suze Orman: Protect Your Loved Ones… Life Insurance: How do I protect my spouse if something happens to me? (About a 2 minute video)
- Suze Orman: Suze Orman on Life Insurance: Term Vs. Whole Life (About a 3 minute video)
- Suze Orman: Suze’s Short and Sweet Life Insurance Quiz (Probably takes 1 minute)
- Dave Ramsey: Do I Need more Term Life Insurance? (About a 3 minute video)
- Dave Ramsey: 5 Term Life Insurance Mistakes to Avoid
- Dave Ramsey: The Importance of Having a Written Will
- Dave Ramsey: Why use an Endorsed Local Provider (or ELP)?
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Do you use an identity theft protection service? Do you have life insurance? Do you have a written will?