Insurance

Insurance protects us against bad unexpected events. We are buying a promise that if something bad happens, the insurance company will help us put the pieces back together. It’s important to make sure that we buy appropriate insurance before it matters because once we need it, it will be too late. One part of this is making sure that the company is healthy and will be around if you need them to pay a claim. This article talks about how to find a healthy insurer. This link has some more good articles on insurance. In addition, the text below will discuss various types of insurance.

Insurance comes in two categories:

1. Property and casualty cover possessions and liability if anyone is hurt through the insured’s negligence. This includes auto, homeowners, and umbrella insurance. 
2. Life and health cover things related to the insured’s health. This includes life, medical, and disability insurance. The price of insurance policies varies significantly between different insurance companies. You should get a few quotes before you buy any insurance policy. You should also make sure that you understand what coverage you are getting and what is excluded.

This post only discusses personal insurance. If you need business insurance for your company, I have yet to write about that. I may add something on that topic in the future if there is interest.

Auto Insurance

Almost everyone is required to buy car insurance to get license plates for their car. This is how the states ensure that people hurt in car accidents will be able to receive compensation. Car insurance has two pieces:

1. Liability to compensate anyone else who is hurt by an accident the insured causes and physical damage to cover any damage to the insured. Liability insurance pays on the insured’s behalf, up to the policy limit. That means that if the damage exceeds the limit, the insured is liable for the difference and needs to pay that excess amount. Thus, it is ideal to have high limits.
2. Physical damage has deductibles. The insurer will only pay damages above the deductible. Thus, if an insured has a deductible of $500 and the insured’s car needs $2,000 in repairs after an accident, the insurer will only pay $1,500. Choosing a higher deductible means that the insured is keeping more of the risk, but it also makes the insurance cheaper. You should think about how much you are willing to pay if CvS you have an accident. 

This link talks more about auto insurance.

Property (homeowners or renters)

We save a long time for a downpayment for our house, and then we continue paying for it for decades. Many of us could not afford to pay for another house if something happened to it. Thus, it is important to make sure that we have adequate insurance for our home. This insurance will cover the house, the possessions that we keep in the house, our living costs if we are not able to live in the house, and our liability if someone else is hurt due to our negligence. (Automobile accidents are the biggest exclusion since they are covered by auto insurance.)

Renters’ insurance is similar to homeowners’ insurance. It doesn’t cover the building, since the insured doesn’t own it, but it does cover possessions, living costs if the apartment is uninhabitable, and liability if someone else is hurt. This liability coverage is important and this is the easiest way to get it. Renters should consider buying it, just for the liability coverage.

Like auto insurance, it is important to think about limits and deductibles. If we overinsure (valuing our home and contents too highly), we are paying for more insurance than we can use. If we underinsure (value them too low), our claims may not be paid in full. Thus, it is important to have a good estimate of what our house would cost to rebuild. It’s also important to think about deductibles. How much risk do you feel comfortable keeping? Some policies have high deductibles for wind losses (think hurricanes and tornadoes). Many losses, such as earthquakes and expensive jewelry are excluded or have limited coverage unless you add an endorsement. It is important to know what your policy covers. This link has more helpful information.

Umbrella

Unfortunately, sometimes very bad accidents happen. In these cases, the negligent person can be liable for a large amount of money. For people with more assets, it may make sense to buy an umbrella policy. This policy provides additional coverage above the amounts included in the auto and homeowners policy. It makes sense if you want extra protection for your assets. Typical situations might call for a $1 million policy, but your specific situation might call for more.

Life Insurance

If someone depends on you, you should have life insurance. Money won’t replace a parent, but it will help make things less bad than they would be otherwise. You should think about how much money your family would need if C”V your income were no longer available. Generally, life insurance is not taxed, so you only need to replace your income, but you need enough to replace it for many years. frum.finance recommends your policy being how much more your need to reach your FI number. For example, if you need $2.5 million to cover upcoming retirement, tuition, chasunos, etc, and you currently have $500k invested, you would need a $2 million policy.

You will need a physical to qualify for life insurance, and the price will depend on how healthy you are. Thus, it makes sense to purchase this while you are healthy and not waiting until you may gain a few more pounds or have higher blood pressure, not to mention the fact that your 2-month-old bochor needs this protection. There are a few options for life insurance: permanent and term. Like most choices, there are trade-offs. Due to the number of moving pieces to dissect permanent life insurance (such as whole life) to make it understandable, I will leave that to an upcoming article.

Term insurance is bought for a fixed number of years and then expires. This generally comes with a fixed premium for the life of the insurance policy, so you’ll pay a lot in the early years, but lock in the rate for the life of the policy. Many companies will allow their employees to buy life insurance as part of their employee benefits. The drawback with this is that if you leave your company, you will lose this insurance. I have a $1M term life insurance with a strong company plus 3 times my salary through my employer. At some point, I will let the $1M policy expire and just rely on the insurance through my employer.

You should think about what expenses your wife and children will have – for the rest of your wife’s life and until your children become independent. As a frum yid, these expenses can be quite large. Also, your expenses might grow in the future. In 2004, I bought a term life policy with a $1,000,000 limit. At the time, I made well under $100,000 and a noticeable part of that was going to federal income tax, state income tax, social security, and Medicare. So, I figured this would replace my take-home pay for quite a while. Since then, I’ve changed jobs twice, received a few promotions, had another kid, and that doesn’t seem like nearly as much money. I’ve supplemented this by buying additional term insurance through my employer.

Health Insurance

The remaining insurance coverages we will discuss are related to you and your family’s health. Health insurance pays for medical care that we would otherwise have difficulty paying for. Health insurance has three benefits:

1. If you purchase health insurance through your employer, the premiums are tax-deductible.  This will save you money on your taxes.  If you paid directly for the care, you would get some tax benefit, but it is generally smaller.
2. Your insurance will cover both preventive care (such as physicals) and small unpredictable things (such as stitches and antibiotics), This makes your healthcare spending more predictable and easier to budget.
3. Health insurance covers large unexpected costs that would otherwise cause extreme hardship.  My fourth child has significant health problems.  Before she was one, our insurer had spent over $500,000 on her medical care.  This was after the various adjustments and negotiated rates.  I don’t know how I would have come up with that money if we didn’t have health insurance.

Once you reach 65, you are eligible for Medicare – government-sponsored health insurance. (Some people with disabilities may be eligible sooner). There is also an option for a medicare advantage plan and Medicare supplement insurance.

Dental Insurance

This is much cheaper than health insurance and it covers much less. It’s worth getting if you expect to get braces or have other major work done. It also offers some help with regular exams and fillings. You should be able to look at what you’d pay for the year and then estimate what the benefits will be worth during the year. For example, you might pay $400 a year in premiums and decide that it will be worth $300 just for the savings on regular exams plus $50 savings for each filling plus additional savings for other things that you might get during the year. At that point, you can think about whether it’s worth it. One additional benefit is that you can get a tax deduction for the premiums.

Vision Insurance

Vision insurance is also relatively cheap, but it covers less. You will get discounts on glasses and contact lenses and it will pay for some vision exams – but you may also be able to get your health insurance to pay for these exams. You should figure out how much the insurance costs and what benefits you can expect from it. One additional benefit is that the premiums for this insurance are also tax-deductible.

Disability Insurance

Every day, some people are disabled to the extent that they are unable to work. Hopefully, this will never happen to you or anyone you know, but the point of insurance is to protect us against bad things that can happen. Disability insurance replaces income if someone is unable to work. However, there are significant differences in what these policies cover. For example, disability insurance in social security only pays if someone is unable to hold any gainful employment. Some policies will pay if someone is unable to perform their current job. There are also a lot of differences in the waiting period (how long someone needs to be out of work before benefits start paying) and how much of income is replaced. Often the benefits from disability policies are not taxable, which is a significant help.

Here are some helpful links:

http://www.iii.org/article/how-can-i-insure-against-loss-income

http://www.iii.org/article/what-are-types-disability-insurance

http://www.iii.org/article/what-you-need-to-know-about-buying-disability-insurance

Long-Term Care Insurance

People live longer than ever before. For many people, there is a cost in a lack of health in their final years, years that are often spent in a nursing home. This can be very expensive. Medicaid can help, but only after one’s assets have fallen below some level. This would mean fewer assets left for a healthy spouse.

Long Term Care insurance will pay some of the costs for home health care, nursing home, and other long-term expenses. This allows a family to save money, both for a healthy spouse and to leave for their children. This should provide you with more information.