Understanding Insurance - Part 1

Well, the last lesson was the most fun and entertaining lesson, which is sad that it has to be followed up by this lesson. Yes, this is the Understanding Insurance and Estate Planning lesson, and this is hard for me to teach. It’s hard because there’s absolutely nothing fun, entertaining, or exciting about insurance or estate planning….and it’s my job to teach you this stuff in a fun, entertaining and exciting way. Boy have I got my work cut out for me.

First I want to start by saying that I do not sell insurance, I never have, I never will. I am not licensed, nor do I have any stock in any insurance agency. I don’t even know anyone who sells insurance. So, all that just to say, that I have no vested interest in telling you any of this stuff. I just want to give you the best information that I can, and let you make your own informed decisions.

So, let’s look at insurance. That in and of itself can be a scary thing and it can be full of traps and a lot of holes to get our foot stuck in. So I’m going to try to iron it all out for you so that you can spring the trap and finally understand insurance.

First, never buy anything you don't understand. This is something we talked about in our last class. Chances are, you bought your insurance policies without fully understanding them. Insurance and Investments are the 2 areas where people think they know what is going on, but really don’t. So, just sit tight and we’ll work through it.

It will absolutely steal your financial peace if you do not understand insurance. This insurance stuff is a major deal. This is big, this matters. If you understand your insurance and make sure you’re covered, then it will get you some financial peace. If you do not understand your insurance then it will rob you of financial peace – and sleep at night.

So, what is the purpose of insurance? It transfers the risk of a loss from you to the company. So instead of us having to foot the entire bill if some moron rear-ends us at a red light, by having insurance we are transferring the risk to the insurance company. And if we so happen to be that moron that rear ends someone at a red light, then we are covered because we transferred the risk to the insurance company. I think we can pretty much all agree that insurance is necessary.

However, how many of you hate insurance? We know insurance is a good thing, but deep down inside of us we have this nagging feeling that something is wrong. And it is. Most of us have been ripped off by insurance companies for far too long that it’s just the norm.

Well that ends tonight! We are going to remedy that situation entirely and put you in control of your financial future and in control of the insurance you purchase.

We are going to be discussing 6 types of insurance. The first is

Homeowner's & Renter's Insurance

If you rent a home or apartment, you need renter's insurance. It is so inexpensive to get renter’s insurance, but it is necessary. You of course can control what you do, but you cannot control the idiots who live in the same apartment complex, who fall asleep while smoking a cigarette and burn down the entire complex. So, get renter’s insurance…it’s so important to have.

If you own a home, it's important to have guaranteed replacement cost insurance. Replacement cost means that they guarantee to replace your home no matter what happens. Most of the major companies no longer have guaranteed replacement cost – they switched it out. What they’ve done now is that they put a dollar amount on it (your coverage plus 25%). Let’s say you bought $100,000 worth of a home, and if in 10 years it’s worth $175,000 and you never bothered to change it. You only have $125,000 worth of coverage. If it burns, you’re $50,000 in the hole. Never buy anything that doesn’t have guaranteed replacement cost insurance. Most of the large ones do not offer it. If yours doesn’t, consider changing. This is a big deal. If you get a great deal from your company and cannot find one to switch to, then you need to make sure to increase your coverage based on property values and rate of inflation EVERY SINGLE YEAR!

You also need to carry adequate liability - about $500,000. If someone falls on your property and sues you, they are not going to sue for a couple thousand. They aren’t even going to sue for $250,000…they are going to sue for $500,000…..why because a half a million sounds better than a quarter million.

An Umbrella Policy. For a couple hundred bucks a year, then you can get about $2 Million more of liability if someone falls against your car in your driveway. If someone were to do that, your home and auto would kick in, then after that is exhausted, the umbrella policy kicks in to cover you. You want to have this kind of insurance in place when you really start building some wealth. If you have $200,000 or more worth of paid-for stuff. Once you start getting some assets, you become a big target in our sue happy culture. Once you have assets, you need to transfer the risk to insurance companies and put them between you and the moron who wants to sue you. There are also other ways to keep your assets out of the reach of sue-happy people…we’ll talk about that in estate planning part.

As we talked about last time, just because you need something doesn’t mean you have to pay whatever your insurance agent tries to sell you. There are ways to save money. If you have an emergency fund, it is certainly okay to raise your deductable. It will save you quite a bit of money because you are taking on more risk, which will potentially save the company some money, thus you get lower rates. Another thing you can do is to get your homeowner’s insurance through the same company you get your auto insurance through. You not only get a discount on home, but you get a discount on auto. The third and most profound way to save money is to shop around. We had been with Allstate for 3 years. I had no problems with them, until they increased out homeowner’s policy premiums 2 years in a row. In 2 years, the premiums increased by $220 and we had no claims. I began shopping around and we finally settled on Farm Bureau Insurance. They were able to give us better coverage for $332 less a year, and from what I understand, they usually do not raise premiums by as much as the other larger companies do. But even-so, a $300+ savings a year is worth shopping around.

The second kind of insurance we’ll be focusing on is...

Auto Insurance

In Tennessee it is the law to have car insurance, and the minimum coverage requirement is way too small to protect you, so carry adequate liability insurance. Again, people aren’t going to sue for $100,000….they are going to sue for $500,000. Liability Insurance is the best buy in the insurance business. You should at least carry a half a million dollars minimum. So transfer the risk to the insurance company so you don’t end up bankrupt.

Some ways to save money: You can increase your deductable. In order to figure out if it’s a good idea for you to raise the deductable, you need to do a little math. Take the difference (let’s say you’re going from $250 deductable to a $1000 deductable. So that’s a difference of $750. That’s $750 extra risk. If it only saves you $30 a year, then it will take you 25 years without a wreck to break even. But if you save $250 a year, then you only have to go 3 years without a wreck to break even. That might be a better deal. Just do a break-even analysis. Are you getting enough savings in premium to justify incurring that risk.

On an old car, drop the collision. If you drive a $2000 car and it costs you $400 a year for insurance, then you might want to drop the collision to save you some money. Now don’t drop collision before you have some cash saved up because if you wreck that thing, and it’s your fault, then you’ll be without a car if you can’t pay for the repairs or to replace it. If you have some cash saved up, then you can drop collision. We do not have collision on my husband’s truck. It’s worth about $2700 and needs a new transmission. We can easily be a 1 car family if we need to. We ran the numbers and we couldn’t justify the increase in premium when he drives a half mile to and from work a day, and if the car were to be destroyed, we just wouldn’t care that much.

Again, shop around. By shopping around we saved $120 a year on auto by switching.

Health Insurance

Health Insurance is a MUST! If you have the opportunity to get insurance through your employer, it is irresponsible not to do it.

The #1 (or #2) reason people file bankruptcy is medical bills. I say number 1 or 2 because it’s right up there with credit card debt. And depending on what set of statistics you’re reading, it will either be number 1 or number 2. And it’s interesting that many of the people who file because of credit card debt, actually had paid some of their medical debt on credit cards and couldn’t pay the credit cards. So, it’s a big deal out there people.

"I can rely on TennCare/Medicare if I need to" This drives me bonkers. I have a friend who does not have insurance for herself or her husband, and she has said that when they are going to try for another baby, “it’s okay because Medicaid will take care of her and the baby while she’s pregnant.” Ugh….it drives me nuts because the government can’t even take care of itself…is it really going to take care of you?

How many of you do not have insurance through your employer? Or know someone who doesn’t?

Individual health insurance policies can be quite pricey. When my husband switched jobs a couple years ago, there’s always that 90 day waiting period, and I did not let us go without insurance, so we went the route of individual policies. There are ways to save yourself a little money on the premiums.

1. Raise the deductable
2. Instead of a 80/20 co-pay, raise it to a 70/30. That will lower your premiums, but you’d better have your FFEF or a HSA.
3. Have a higher stop loss on the policy. Stop Loss in individual policies means that you will have a maximum out of pocket. For example, our health insurance policy has a maximum out-of-pocket expense per family per calendar year of $5,000. After the 80/20 split, we pay up to $5,000 (which would be our 20%) – anything beyond that, they pay 100%. It came in handy last year when Cadence’s birth racked up over $125,000 at Vanderbilt’s NICU, without a stop loss, we would have had to pay $25,000 out of pocket. A $10,000 stop loss will also keep your premiums down, and it will make it a decent buy.

Only do these things if you have an Emergency Fund or Health Savings Account to cover the extra risk.

How many of you have some kind of self-employed income in your home? Or know someone who does? This is a great choice for those who are self-employed. It is only for those who are self-employed.

Look at a MSA (Medical Savings Account), which is a major medical insurance policy with a tax deductable savings account attached. It works with a large deductable and you can only get it if you’re self-employed. You can take a $4500 deductable with an 80/20 split (and you can do that with a FFEF) and you can get a HUGE drop in premiums. With the MSA, you are allowed to save, tax deductable, 75% of your deductable into a Medical Savings Account every year. It is like an IRA, but without penalties when you use it for medical related expenses. You can take that money out and spend it on medical needs without a penalty. This can be doctor visits, major medical bills, or even a bottle of tylenol.

For healthy self-employed families, you’d profit from this. It’s a good plan.

Disability Insurance

This is THE most under insured policy in North America. If you work, you need to look into this immediately, and I’m talking you’d better be calling someone or going into HR tomorrow.

Disability Insurance replaces your income due to disability. It usually replaces around 60% of your regular income.

You are 12 times more likely to be disabled than to die before the age of 65. A 28 year old guy came up to Dave once and said “Dave, you saved our family’s life because you’re looking at a man that makes $60,000 a year and is on permanent disability.” He was declared permanently disabled at 28 years old. Because he covered this issue, his family is surviving. (yes, he made 100,000 a year, but if he didn’t have disability insurance, his paycheck would have gone from 100,000 to 0.

There are 2 kinds of disability products:
Short Term Disability (STD): I generally do not recommend this products for a couple reasons. 1. if you have a fully-funded emergency fund, you are self-insured for the 90 day elimination period before LTD kicks in. And 2. Because you’re not going to be all better in 3 months when you lose a limb, have a stroke, or whatever. The only exception where I do say it’s a decent buy is if you are a young couple and the wife is working outside of the home and you are planning on having children in the near future, STD is a good option. I was lucky enough to sign up for STD at my last job one month before I got pregnant with our first son, Hunter. Because I had that STD in place before I got pregnant, I was paid 60% of my salary for 3 months while out on maternity leave. I didn’t return to work, but it was great that I had that coverage because I still had money coming in.

Long Term Disability (LTD): This is the way to go. Unless you’re going to be growing your family in the near future, just pump up the EF and stick with LTD.

For LTD Insurance, you want to get the kind that is called "own occ" or "occupational" - that means that if you cannot do what you are trained to do, then you are considered disabled. That means that if my husband, who is an IT guy, lost the use of his hands. Then he’d get paid for X amount of years before he had to find something else that he can do.

I know I tell you to shop around for the best bargain, but if it is offered through your place of employment, get it there. Don’t even bother to shop around because you will not find it cheaper than you can through a group policy. It just doesn’t happen, so get it through your work if they offer it. Just ask HR.

Long Term Care Insurance

Long Term Care Insurance covers nursing home and in-home care. If you are 60 years old or older, I highly recommend getting this insurance. If you are younger than 60, invest the premiums to be able to self-insure yourself through this. If you invest your money wisely and have a million dollars in assets by the time you’re 65, then you’re self insured and you can afford a nursing home stay.

Regardless of your age, this is a big deal to think about now because you might not be over 60, but your parents are. And you’re going to have to sit down with them and have the talk. Yes, the dreaded talk. They thought the birds and the bees talk was hard enough to give to you…it’s got nothing on the nursing home and long-term care talk you have to give them. The largest issue facing the babyboomers today is the elder care of their parents. So, you’re going to have to have that talk with them. If not, when they are ill you are going to be faced with the burden of putting them in a welfare nursing home because they do not have the money to afford anything else or coming up with the funds yourself.

When having the talk, there is this thing called "The Powdered Butt Syndrome". Once someone has powdered your butt, they don’t want to take advice from you. But you need to go in, armed with some statistics like: 60% of the people over the age of 65 will require some long term care in their life. 20% will need it for 5 years or more.

A lot of people say that they'd be fine being sent to a state-run home, and I have heard of people saying that they'd just hide their parents' assets so that they can qualify for the free care. If you want to hide mom & dad’s assets, then you’re saying that you’d want to quit your job to get on welfare. The federal government, by law, can look back 60 months and un-do any asset transfers to keep you from taking advantage of welfare nursing homes so that they can get free government nursing home care. Doing that is now a criminal offense and is punishable by law.

Your parents (or your) assets must be liquidated before any type of government funding can take place. Medicaid allows for the spouse to keep the home, 1 car, and up to $79,000. Everything else will be used for nursing home care until it is depleted. However, if your spouse is deceased, then all of their assets will be disbursed to pay for elder care.

When everything is gone, then the government will step in and let them go to a Medicaid run institution – which is a welfare nursing home. The level of care there is not what most of you want your parents to be.

You absolutely have to look into long term care insurance. A 62 year old with Alzheimers can live up to 25 years out of their minds. That is close to a million dollars worth of care. All of their hard work and life savings have just gone down the drain. This is not a game folks. This is something you absolutely need to look into and you need to talk to your parents about it.

I’ve tried twice to have that conversation with my parents, and I will be having it again since it didn’t make it through the first 2 times. This is imperative that you have to have the talk with them.