MoneyMonday: Insurance 101

Life is full of risks which, in insurance terms, is defined as the potential for loss. We can use insurance to help us avoid, reduce or transfer the potential for loss. Of course, we can also choose to retain the risk by self-insuring.

Just like we progress through the stages of financial wellness, our insurance needs follow a progression as well.   In stage 1, our primary needs are establishing a foundation to ensure loved ones and property. In state 2, we might have more property to insurance but might need to increase insurance to cover things like paying for college or preserving investment assets. Finally, in state 3, insurance is used to protect your retirement income, as part of an estate plan, or to execute a charitable giving plan.

The types of coverage most important in the financial safety stage are health, auto, homeowners/renters, and life insurance.

The types of protection most important in the wealth accumulation stage are additional life insurance, disability insurance, and estate items like Wills and Trusts.

The types of protection most important in the financial freedom stage are insurance for medical expenses like long-term care as well as supplemental life insurance which can be part of an estate plan.

Let’s start with health insurance.

For many, health insurance comes through their employer. During open enrollment, you can choose from a variety of options. Be sure you fully understand the options before you select coverage.

Let’s touch on a few types of options you might encounter.

Let’s start with Health Savings Accounts or HSA’s. Think of these accounts as “save and spend later.” These are tax-advantaged accounts that allow you to set aside enough money to cover your annual deductible. Then, if you have a medical situation, you can use those dollars tax-free. This helps avoid blowing up your budget or going into debt when facing a medical emergency.

Next, Flexible Spending Accounts or FSAs. These are “use it or lose it” accounts. You set aside dollars that you can use tax-free throughout the year for things like medical expenses and even daycare costs.

Health Reimbursement Accounts or HRAs are for medical expenses only. Think of these as “spend first then get reimbursed” accounts. You usually need to submit proof of medical expenses to get reimbursed.

At age 65, you’ll join Medicare. If you’re still working, be sure to understand whether your employer requires you to use Medicare as your primary insurance or if you can wait to apply until you retire. Note: there is a window during which you need to apply for Medicare. The window opens 90 days before your 65th birthday and closes 90 days after. If you fail to apply during that window, there are penalties so stay on top of this task!

When you retire, consider meeting with an insurance specialist to evaluate your need for insurance over and above Medicare known as Medicare Supplement or Medigap insurance.

One note regarding HSAs. Most folks use these accounts to save dollars to spend on their annual deductible, but they are also a powerful wealth-building tool. HSAs are one of the very few ways to get a TRIPLE tax benefit. You take a deduction for the contributions you make to the account; the dollars grow tax-deferred within the account. Finally, withdrawals for qualified expenses are tax-free.

So, if you can pay your medical expenses without tapping into your HSA, you can use that HSA as a super-charged investment account for healthcare expenses in retirement.

Now, let’s talk about protecting stuff… coverages for home and auto are collectively called Property and Casualty Insurance.

Coverage and costs vary widely so work with an insurance agent. While some coverages, like auto and homeowners, are required, coverage for renters is often optional. That doesn’t make it less important though and we recommend acquiring this type of coverage which protects your furniture, valuables, and other property.

Another coverage we recommend is coverage for uninsured motorists which may or may not be included in your auto policy.

Finally, umbrella liability insurance is worth considering if you can afford it. This insurance sits on top of your home and auto coverages and protects against injury and property loss experienced by others on your property.

Some people need an umbrella policy more than others. Personal liability risk factors include owning or renting out a property, employing household staff, having a trampoline, hot tub, or swimming pool, and hosting large parties, for example. Also, having a teenage driver also puts you at increased risk. Basically, the more likely you are to be sued, the more you should consider umbrella insurance.

Here are some good P&C insurance habits to build…

Re-evaluate your coverage every 2-3 years. As needs and possessions change, your coverage should too.

Check deductibles and make sure you are prepared to cover them if necessary.

Consider uninsured motorist coverage.

And make sure your homeowner’s insurance is replacement cost coverage. If you visited the lumberyard recently, you probably know that it costs more to build a house today than it did when you moved in. Make sure your policy would provide what you’d need to rebuild.

Okay. There’s a lot to say about life insurance and many ways to use it within your financial plan. But a detailed discussion is beyond the scope of this session.

So, we will focus on the two general categories of life insurance. The first is term life coverage. think of this as “renting” coverage. You pay a set amount for a set time period. Although some policies contain an option to convert to permanent coverage, most of these policies expire at the end of the term. Because these policies don’t accumulate any cash value, this is the most affordable type of coverage.

We recommend using term insurance to cover risks that a have finite life – for example, your mortgage or paying for kids to go to college.

The other type is permanent coverage. There are many types of permanent insurance, but most provide benefits for life so long as premiums are paid. Generally, the premium and insurance amount can be adjusted as your needs change. And many policies have a cash value component that allows you to cancel the policy and some cash with you. For this reason, these policies are generally more expensive than term.

This coverage is used to protect risks that don’t have an end date. For example, funeral costs or estate taxes.

The most common question we are asked is how much? As income and assets increase, you’ll need additional life insurance.

While every situation is unique, a general rule of thumb for Stage 1 is to have enough term insurance to provide loved ones with 3 times your annual salary plus any significant debts you have. Keep in mind that some student loan debts are forgiven at death.

As you move into Stage 2, consider adding some permanent insurance and increase your coverage to 5-10 times your annual salary.

As you move into Stage 3, you may find you can decrease your coverage as mortgages have been paid off and kids have flown the coop. However, sometimes insurance is part of an estate plan to restore assets lost to medical expenses, taxes, etc.

Finally, maintaining life insurance through retirement is important if you do not have long-term care insurance. We’ll talk about this more in a minute.

You would probably agree that your income is one of your most important resources. But only about one-third of Americans feel it’s important to insure their income.

As you enter the accumulation stage, protecting income takes on greater importance. A prolonged disability that leaves you unable to work can drain bank accounts and force early liquidation of investment assets. Financial stress can compound your illness and delay your return to work. This is why disability insurance is important.

Like health insurance, disability coverage is often through your employer. So, understanding your workplace benefits is critical. Equally critical is maintaining your emergency savings account since most policies won’t pay benefits right away.

Most policies are layered meaning one policy pays first, called short-term coverage, and a different policy pays if your disability continues, called long-term coverage.

If you are unlikely to return to work for a very long time, you may qualify for Social Security disability insurance.

I’m sure that you feel like Superman or WonderWoman but the odds of experiencing a disability that results in lost income are higher than you might think.

More than 25% of today’s 20-year-olds will experience a disability before they retire

The average disability claim lasts almost 3 YEARS!

And the majority of initial Social Security disability claims are denied

Here are some good habits regarding disability insurance:

• Know how long you’ll have to wait for your coverage to kick-in. This is where your emergency account comes in handy
• Know your coverage period or how long benefits will be paid
• Confirm whether benefit amounts are pre-tax or after-tax. This depends on whether you or your employer are paying the premium.
• Finally, confirm the disability definition which can be either own occupation or any occupation. This is an important, often overlooked, item. The “own occupation,” which means you are considered disabled if you are unable to perform the duties of your OWN occupation makes it easier to remain on disability than “any occupation” which only pays if you are unable to work in any occupation. For example, if you’re a welder and can’t weld, any “own occupation” policy would pay. But if yours is an “any occupation” policy, they will want to be sure you can’t sit behind a desk all day before they will keep paying benefits.

Okay. We are on the home stretch now. Speaking of homes… long-term care costs are a common destroyer of even the best-laid retirement plans.

Part of the reason is that we are living longer.

Interesting to note that when the first Social Security was created in 1940, life expectancy for men was 61 and for women was 65. Since the retirement age was 65, I don’t think the program’s founders worried much about running out of money.

The story is different today. The odds of a 65-year-old celebrating their 90th birthday is 35% for men and 46% for women*. But that doesn’t mean we are living in good health. Thus, the importance of Long-Term Care planning.

* 2019, Society for Actuaries Report

Absent planning for long-term care costs, family members are left to pick up the care burden.   In fact, 1 in 5 are assisting with caregiving. Worse, 9 in 10 are receiving little to no financial support. So having a long-term care conversation is not only important for you but for your aging parents too. In fact, I have clients who have purchased coverage for parents to ease their own potential financial burden.

You may have seen these scary figures before but…

costs for care are steep and growing steeper. The yellow numbers represent the cost of care estimates by 2035.

There are multiple long-term care insurance options. The riskiest is self-insuring, in other words, doing nothing. In this case, you retain 100% of the risk.

Many folks mistakenly believe that Medicare pays for long-term care. Medicare only covers very short stays and only under specific circumstances.

You may have heard of Medicaid, a government health care program. Medicaid is needs-based and reserved for those with limited financial resources. Despite popular opinion, you cannot simply give your assets away to qualify. In 2021, an unmarried Medicaid applicant must have an income of less than $2,523 per month and may keep $8,000 in countable assets to qualify.

That leaves insurance as the most common method of planning long-term care expenses. There are traditional policies and policies called linked benefits. The linked benefit is a life insurance policy that will pay out early to cover qualified LTC costs. It is often more affordable than traditional policies.

Since most employers offer some or all of these coverages, a good best next step is to make sure you understand the types and structure of your workplace coverages.

Other key action steps are to review your insurance needs every 1-3 years. As life changes, so do your need for coverage. Shop around to be sure are making the most of the dollars you’re spending on insurance. Know how much you actually need. Consider completing a life insurance needs assessment. 

Apply BEFORE you need it. Many types of insurance that you purchase personally require a medical exam. So, the younger and healthier you are, the lower your premium will be.

Finally, if you can, pay your premiums annually. This will often save you a few dollars when compared to more frequent payment methods.

Then just keep taking the best next step. Google is full of advice. So are family and friends. But not all advice matches your situation. We are here to help you figure out what the best next step is for YOU, right NOW, so you wind up where you want to be.

There are lots of resources in MoneyNav for this and many other financial topics.  Schedule right from your MyMoneyNav dashboard or email yourfinancialcoach@moneynav.com.

If you haven’t already done, a great next step is to complete the MoneyNav assessment. Your responses will be used to build a personalized set of best next steps or MoneyMoves to get you on track and moving forward. Email yourfinancialcoach@moneynav.com for a link to your company’s assessment.