Practicing Significance

Glorifying God by fulfilling your own unique purposes through the never-ending

action of acquiring, using, and sharing diverse resources.

 

                    

 

 

               

 

Other Insurance

 

 

 “Idealism is fine, but as it approaches reality the cost becomes prohibitive.” William Buckley

 

“It is idiosyncratic of Americans to think that every problem has a solution.”   Gail Sheehy

 

“If life was fair, Elvis would be alive and all the impersonators would be dead.”   Johnny Carson

 

 

Introduction

 

Life is not fair.  Life is full of risk.  Problems can be expensive.  Insurance was invented to allow us to share risk and mitigate the financial effects of unexpected and unfortunate events.  Life insurance and annuities are examined in another Practicing Significance lesson.  This lesson deals with many other types of insurance.

 

 

It Is What It Is

 

Insurance has one purpose – mitigate the financial effects of an unfortunate event.  Insurance companies pool insurance premiums together so that each customer pays a small amount in return for receiving a larger amount back if a certain type of event occurs.  Some ideas about insurance are:

1.      Insurance is expensive.  Insurance companies have high costs which are passed along to you.  These overhead costs include:  advertising, profit, salaries of all employees, commissions to salesmen, legal fees, lawsuits, and scrupulous and unscrupulous claims. 

2.    Insurance can only mitigate the financial effects of an event.  Except for how this mitigation helps you, insurance cannot give you peace of mind, help your relationships, or give you psychological or spiritual security.  Our dependency should be in God, not in having enough insurance.

3.     You can spend your entire budget on insurance and still never feel like you have enough.  Making decisions on insurance should be done when you budget so you will be able to budget all of your precious resources properly.  As noted in other lessons the best form of insurance is to just minimize problems by maintaining good health, having good habits, and maintaining or protecting your material goods. 

4.    All of us already pay for most problems which occur.  For instance, if I ruin a shirt in the washer, I have to replace it.  If I lose my briefcase, I have to replace it.  In insurance terms, I “self-insure” most of the events in my life.  For the most part we should self-insure events.  However, in two cases we should consider buying insurance:

a.     The insurance is a good value for the risk involved.  Unfortunately this almost never occurs because of the overhead costs of the insurance company.   Many types of insurance actually double-cover events covered by other insurance you may have.  Therefore, except as noted below, you should consider avoiding these types of insurance: legal, cancer, extended warranty and repairs, flight, rental car, credit, pet, and identity theft.  There is no doubt some people have benefited by these types of insurance, but for most people it is not the best way to spend the limited amount of money they can allot for insurance. 

b.    There are certain types of insurance that most people should consider, especially as they get older or more affluent.  These types of insurance are for events for which you cannot or choose not to suffer the financial effects, such as:

                                                             i.      death (life insurance is discussed in another lesson)

                                                          ii.      disability

                                                       iii.      health

                                                        iv.      long-term care

                                                           v.      liability

                                                        vi.      damage or theft to your house, car or other critical possession

 

 

Disability Insurance

 

The most precious asset of most people who work is their income.  If you have dependents, they are probably very dependent on your income.  Nonetheless, many people neglect to evaluate or underestimate their need for this type of insurance.  Some aspects of disability insurance include:

 

·        It usually only covers 60% - 80% or less of your income.

·        Payments usually don’t start for up to six months or one year after the disability occurs.

·        The definition of “disability” varies greatly from policy to policy.  The definition usually relates to either your loss of earning, to your inability to do your current occupation, or to your inability to do any occupation.  This is a very critical term to understand.  Along with this term, it is necessary to understand the treatment and definition of “partial disability.”

·        The benefit period may be limited.  Sometimes it will last until death, but often lasts only a specific number of years.

·        The most economical place to obtain this insurance is usually through your employer’s group plan.  If you are self-employed, you will have to purchase an individual policy.

·        The tax effects will probably depend on whether the premiums were paid with pre-tax or after-tax dollars.

 

 

Health

 

Health insurance is virtually a need in America.  Few people are affluent enough to fully self-insure their health-care.  Unfortunately, the cost of health care is very high, and many employers are shifting more health care insurance premium costs to their employees.  Unfortunately, these insurance costs are so high that many people are sorely tempted to do without. Instead, consider reducing costs by comparison shopping, using independent agents, and having high deductibles. Since there are innumerable types of health insurance with many complex regulations, the following are some of the most critical points to consider:

 

·        Health insurance is so vital that many people continue working, get jobs, or take specific jobs just to have access to the health insurance.  This is just another reason to improve and maintain your skills.  Another benefit to obtaining health insurance through an employer is that under COBRA regulations, you will have the right to maintain the insurance for you and your family for a period of time if your employment ends, although the premiums will likely increase.  If feasible, you should work long enough to qualify for your employer’s retiree health-care coverage (if any).

·        If you are self-employed, find a cost effective way to buy health insurance.  There are many ways to join a group or association which could help control your premium cost.  In an effort to control costs even further, it might be a good idea to get a policy with a high deductible.  It would be much better to have a very high deductible than no insurance.

·        Once you qualify for Medicare and/or Medicaid, you will be introduced to a complex new governmental program.  There are many limitations on Medicare, so you might consider buying supplemental insurance.  See the Practicing Significance lesson for Care Giving for Aging Parents/Spouses for a more thorough discussion on these programs.

 

 

Long-term Care

 

This type of insurance is something to seriously consider especially if you are in the age group from the 50’s to the 70’s.  Statistics show that most of us will need long-term care during our lifetime.  Premiums are a bit high and are based primarily on age, the waiting period before benefits kick in, the amount of benefits, and how many years of coverage you choose.  Long-term care insurance is generally limited in time and benefit amounts.  Coverage may also include one or more of the following:  nursing home care, in-home care, respite care, and/or hospice care.  As with all other insurance policies, the fine print is all important, especially with regard to certain diseases such as Alzheimer’s.  It is also important to understand the terms under which they can cancel a policy.  It would be best to get quotes from several companies and have an expert compare them…it will be worth the effort.  As always, choose a very financially strong insurance company since you may not need them for twenty or thirty years.

 

According to experts, only those who have very limited assets and income should not consider this type of insurance.  If you have a significant amount of assets or income and want to protect them, and want to pay for your own care and support, you should consider this insurance.

 

 

Liability

 

Most of us have continuing sources of liability.  Your residence, your car, your job, and your daily activities place you in a position of being liable (responsible) for accidents to others.  The postman slips on an acorn in your driveway…you are liable.  Your teenager runs into a school bus…you are liable.  You hit someone with a golf ball…you are liable.  You open a door into someone’s face…you are liable.  In our litigious society, you are subject to an absurd number of liabilities. 

 

Most of us protect ourselves by using liability insurance on our cars and houses.  Often you will be unable to obtain financing for an asset without liability insurance.  In most states, it is illegal to drive a car without liability insurance.  It is a good idea to have significant car and home liability insurance, but to be cost effective, you may need to have as high a deductible as you can afford.  In addition, if you have a full or part-time business in your home, you will probably need a rider on your home insurance or an additional policy.  As with all insurance, you should reexamine the coverage every year to make sure you have the best liability coverage for the cost of the premiums.

 

Another type of liability insurance that many of us should consider is “umbrella” insurance.  This is liability coverage in excess of our other policies which cover general actions and negligence.  Umbrella insurance is usually reasonably priced so should be considered by everyone who can afford it. Many times it has to be purchased from the insurer of your home and/or automobile.  Since this is “cheap” insurance, you should consider having coverage that approximates your net worth.

 

Here are a few ways to keep your costs to a minimum:

 

·        Many insurers use credit records in their premium calculations; therefore, have a good credit rating.

·        Have a good driving record.

·        Have a high deductible.

·        Buy low-risk, low horsepower cars

 

 

“Damage” Insurance

 

For critical or expensive items, you may find it reasonable or necessary to insure for damage, loss, theft, repair, etc.  These policies are sometimes named comprehensive, collision, theft, etc.  General ideas for these types of policies are:

·        Get a deductible as high as you can afford to self-insure.  For instance, on my last home insurance, my annual insurance premium was decreased by $2,000 if I would raise the deductible by $4,000.  I didn’t like having such a high deductible, but how could I turn down a two-year payout?

·        If your car has little value, consider not carrying comprehensive and collision.  In this case, these coverages can cost as much as 30% of the value of the car on an annual basis!

·        This type of coverage might include an extended warranty for a car, major appliance, or electronic equipment.  Since electronic equipment typically becomes outdated quickly, you may not really need an extended warranty for very long, maybe not any longer than the manufacturer’s warranty.  Again, evaluate the cost versus the risk.  For cars and major appliances, the length and type of the manufacturer’s warranty is probably the critical factor in deciding whether an extended warranty is cost effective.

 

 

Conclusion

 

Your budget will probably allow you to only carry limited insurance.  Therefore, it is necessary to weigh the risk and rewards of all the types of insurance that you desire before choosing any.  Some people become “insurance poor” because they try to protect against all circumstances.  Self-insure where you can, protect against the catastrophic, and spend your insurance dollars wisely.

 

 

Additional Resources

 

Burkett, Larry and Blue, Ron    Wealth to Last

 

Mayo Clinic   Mayo Clinic on Healthy Aging

 

American Association of Retired Persons (AARP)  1-800-424-3410   www.aarp.org

 

National Insurance Consumer Helpline  1-800-942-4242

 

Ben Lipson J.K. Lasser’s Choosing the Right Long-Term Care Insurance