Transcript Document

Luke Erickson M.S., AFC
University of Idaho Extension
Educator, Personal Finance
Madison County Extension Office
(208) 359-6215
[email protected]
Idahostwocenttips.com
There are worse things
than death. If you’ve
spent an evening with
an insurance agent,
you know what I mean.
- Woody Allen
2
Avoid Risk
Transfer Risk
Avoid Debt
Emergency Savings
Insurance is Expensive!
C.L.U.E.
Insurance needs and wants
Types of insurance
Health Insurance
Health Savings Account
Double Coverage
Dental/Vision
Life
Cash Value vs Term
Disability
Auto
Homeowner’s
Renter’s
Umbrella
Long Term Care
Insure anything!
Young and single
Gone in 60 seconds
Teen risks
Did you know?
Avoid Risk
• Read #1 on Page 81
And
• Do Exercise 6A
Transfer Risk
• The purpose of insurance is to transfer
or share risk!
• Read #4 on pg. 81.
Avoid Debt
• The purpose of insurance is to transfer
risk
• The RESULT of insurance is avoiding
debt!
6
No insurance = Debt
• Medical debt is one of the leading causes of
bankruptcy.
• Insurance is a tool for avoiding debt.
• With 3 to 6 months of income in an
emergency savings, and inexpensive high
deductible insurance plans, debt can be
much better avoided.
7
Emergency Savings
• 3-6 months of expenses
– Covers deductibles
– Self Insurance
– No “administrative costs”
• Insurance companies charge large fees to
process small claims
• With a higher deductible (lower insurance
premiums) your emergency savings can grow
faster.
The first $1,000 is the most
expensive to insure.
• Why?
– Administrative costs
9
Rule of Thumb
• High deductible.
-$1,000 or more in most cases.
-Lowers the premiums significantly
• Use your 3-6 month emergency savings to
cover the gap.
– Statistics say that you will not need it, but if you do
it’s there AND has been MAKING YOU MONEY in
the mean time.
• Use the saved premiums to build up your
emergency savings quicker.
10
Insurance is expensive!
• 60% payout (as a percentage of
premiums). Money, March 2007
• State Farm – 66.6%
• Farmer’s – 56.9%
• All-State – 43.5%
• Claim denials are at an all time high.
11
Insurance is expensive! (2)
• It is hard to compare policies and “fight
the company” when you are wronged.
• “Insurance companies are paying out
less in claims relative to the premiums
they collect than at any time in the past
20 years.” – Money Magazine, March,
2007.
• Insurers have been posting 20%-plus
gains in earnings.
12
Insurance is expensive! (3)
• Keep Good Records
• Be Frank – be completely honest in
your application. Otherwise there may
be grounds for claim denial later on.
• Read the Fine Print
• Be a Boy Scout – Pre-approve
anticipated procedures.
13
Insurance is expensive! (4)
• Do your homework – Don’t
automatically accept the insurers
estimate.
• Keep your cool
• Challenge coverage decisions if
inadequate.
• Get help – Turn to your state’s
department of insurance for help.
• Weigh your last resorts – Don’t sue
unless there is big potential for payout.
14
Insurance is expensive! (5)
• Remember: The first $1,000 is the most
expensive to insure.
– Why?
– Administrative costs
• Use high deductible plan, and build
emergency savings account.
15
C.L.U.E. – Comprehensive Loss
Underwriters Exchange
• Is like a credit report for insurance.
• Your insurance (claim) history is
recorded and kept on record for up to 5
years.
• Small claims can cost the insurance
companies much more in administrative
costs.
16
– They will count this against you and
possibly raise your premiums.
Insurance
• Need for insurance
– To insure you or you
loved ones from
devastating financial
loss.
– To prevent the need
to go into debt or
declare bankruptcy.
– Protect your quality
of life.
17
• Want for insurance
– To avoid any
possible risk of
financial loss no
matter how small.
– This is a luxury
• And very expensive!
• Health
• Dental/Vision
• Life
• Disability
• Auto
• Homeowner’s
• Renter’s
• Umbrella
• Long-Term Care
18
Health Insurance
• Read “Health Insurance” pg. 90.
Health Insurance (2)
• 1/3 of Americans do not have access to
health coverage through work.
• Private Insurance is expensive but can
be reduced through the use of a high
deductible.
20
Health Insurance (3)
• Reduce Premiums
– Increase deductible.
– Increase co-pay
• 80/20
• 70/30
– Increase stop loss
• Maximum out-of-pocket.
21
Health Savings Account (HSA)
• Contributions not taxed
• Automatic deduction from paycheck
• Used with high deductible plans!
– Reduces administrative costs.
• Investment options in some HSAs
• If you don’t use it, you keep it!
– Not to be confused with annual “use it or
lose it” cafeteria plans or medical savings
accounts (MSA).
22
Avoid Double Coverage
• Only one company can pay your health
costs.
• If you have two health policies, both
companies will fight over who pays
– In the end neither will pay.
23
Dental/Vision
• These are often included as employee benefits
in employer health plans.
• Individually these types of insurance do not
make much sense.
– Insurance company will keep 40% of premiums, and
payout will be lower that total pay-in on average.
• Major orthodontic work is often excluded
anyway.
• Much more effective to divert these premium
payments to the build-up of your 6-month
emergency fund.
24
Life
• Read “life insurance” on pg. 90.
Life (2)
• Cash Value plans simply have a
savings component built into them.
• BUT the savings component can never
beat your own private investments.
– Because insurance companies only pay
out 60% of the premiums they take in.
26
Life (3)
• Term life insurance is cheaper than
ever.
• Financial Planners – “Term life is the
cheapest most effective coverage.”
• Insurers don’t push them
– low commission product
27
Many other life insurance
products:
• Universal 4.3% avg., Variable 7.4% avg.
– (Avg. Index Mutual fund. 10-12%)
• Accidental death, returned premiums, etc.
– Just gimmicks. If you invest those premiums
yourself you will be much better off.
• Often sold by your friend, brother-in-law, or a
“salesman,” not an actual insurance expert.
28
Life: Many products
• But they all boil down to either cashvalue or term policies.
• The need for life insurance is fluid and
temporary.
• Term is the most effective tool to fill
these temporary needs.
29
Never spend your money on
something you don’t understand.
• Most people do not understand their life
insurance products.
• The goal is to become to self-insured.
30
Cash Value Vs. Term
• Premiums for $125,000 coverage for 20
years.
• Cash value = $100 per month
• Term = $7 per month.
• If you invest $93 a month for 20 years at
10% = $356,052
• Cash value at $100 per month after 20
years = about $50,000.
31
Difference of $300,000!
• At this point you don’t need a policy any
more because you have more than
enough to be self insured!
32
Insure a non-working spouse?
• Yes, this spouse provides value to your
household.
• How could you work if the children’s
caretaker was no longer there.
• Meals, Laundry, Etc.
33
Insure Children?
• Just Burial
• Do not use a cash-value to save for
children’s college.
34
35
Disability
• Read “Disability” on page 90.
Disability
• You are 3 times more likely to become
disabled than to die if you are in your
30’s.
• Own Occupation Disability – if you can’t
do what you are trained to do.
• Might make sense with white collar job
• Usually very expensive for blue collar
jobs.
•37 Buy Long-Term coverage.
Reduce premiums for disability.
• Coverage will usually be for 50-65% of
your current take home pay. More than
that is very expensive.
• Elimination Period
– Deductible might include increasing the
number of days before the policy coverage
kicks in.
– 90 days is a decent deductible.
– With emergency savings you can increase
your elimination period.
38
Good places to buy disability
insurance.
• Though employer
– Cost can be as much as 75% cheaper than
in the open market.
39
Why do we need
auto
?
40
41
42
43
44
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Auto
• Factors that affect the cost of auto
insurance: pg 85.
Auto
• 3 parts
– Liability
– Collision
– Comprehensive
47
Insurance 3
Auto
• Did you know, your address can make a
big difference in auto premiums?
• Liability is a very inexpensive part of
total auto insurance costs.
• If you have paid cash for a car –
collision/comprehensive is optional.
– It is a want because borrowing money for a
car is a want!
48
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Homeowner’s
• Read “property insurance” pg. 90.
Homeowner’s
• Liability and Property Insurance in one
package.
• Replacement cost coverage.
– Need to adjust every 5 years or so as the
value of the home rises.
51
Homeowner’s
• Reduce premiums
– Fire alarms
– Smoke detectors
– Home security system.
• Some things are not covered
– Floods
– Earthquakes
52
Insurance 4
Renter’s
• Read “property insurance” on pg. 90.
Renter’s
• Covers possession, but not the
apartment itself.
• You can often get a significant discount
if you already have auto, or other
policies.
54
Umbrella
• Read “liability insurance” on pg. 90.
Umbrella
• Big Liability Policy
– Over Auto and Homeowner’s
• Very inexpensive dollar coverage.
– One of the best buys in the insurance
world.
• Protects against lawsuits.
56
Long Term Care
• 60% of people over 65 will have some
form of long term care in their remaining
life.
57
Long-Term Care
• Do not need to buy until about age 60.
– Before this time, simply invest for your own
care.
• Largest expense facing the baby boom
generation is not their kids’ college, but
rather their parents’ care.
• Kids must approach their parents about
this topic.
– Responsibility eventually falls on the kids.
58
Insure anything!
• Read “You can insure just about
anything” pg. 91.
Insure anything! (2)
• Almost always bad deals
– Extended Warranties
• extra warranty coverage that must be
purchased
– Credit Insurance
• Credit Cards
• Mortgage
• Very Expensive!
60
Life stages
• Read 2nd paragraph on pg. 92.
Young and Single
• Shop for auto insurance.
– Premiums may vary by company by
hundreds of dollars.
– Renter’s insurance is cheap.
– Individual health insurance with a high
deductible and HSA (Health Savings
Account).
– Don’t need life insurance.
62
When Kids Arrive
• Buy lots of 20-30 year flat rate term
insurance.
– Coverage = 10 times your annual salary.
– Rates in 2007 are about $30-$40 a month for a
$500,000 policy.
• Disability insurance.
• Reassess health care coverage.
• Maximize discounts
– Good grades
– Multiple policy discounts
– Good driving records.
63
Empty Nesters
• When kids move out auto rates drop
and need for life insurance decreases.
• Long Term Care premiums are less
when you are younger.
• Downgrading your house size can also
save in homeowner’s.
• Shop again for good rates on Auto.
64
Retirees
• Check for senior citizen discounts.
• Supplement Medicare coverage with
private insurance if necessary.
• Consider Long-Term Care coverage.
65
Gone in 60 Seconds
• Quiz on pg. 80.
Teen Risks
• Exercise 6A pg. 81.
Did you know?
• “Did you know?” Pg. 85.
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Evaluation
Questions
Luke Erickson M.S., AFC
University of Idaho Extension
Educator, Personal Finance
Madison County Extension Office
(208) 359-6215: [email protected]