Get ready for the most boring blog post you will ever read... or is it?
That's right we are going to talk about insurance. Insurance may not seem like a sexy finance topic to go over, but it is one that could be costing you a lot of money if you are not careful.
When I first got my job offer out of school I was pretty much only worried about the salary. The first day at work I am given a packet of information on these things called "benefits". So here I am fresh out of school still trying to figure out how to read these things called "lease agreements" and pay for electricity and I am supposed to decide what types of insurances are best for my situation? Get out of here.
So I did what any millennial would do and did a quick Google search and just chose some stuff. Luckily I made some decent choices, but otherwise I could have been paying for a lot of stuff I didn't need. I don't want you to go through the same process so here I will lay out what insurance is and what things to consider depending on your situation.
First, let’s talk about what insurance really is.
- Insurance is a cost. We say that because you should not be looking to make money on insurance. This especially comes into play with life insurance.
- Insurance is only to transfer financial risk for events that you cannot cover with your current assets. For example, you probably can't cover a major surgery with cash, but you can probably afford (even if it sucks) to replace your phone if you drop it in a toilet one drunken night.
- Insurance is easy to sell to people because risk is scary, but you don't always need it.
Now that we have a better understanding for what insurance is we can talk more about the details. I will split this up into insurance you want and insurance that you don't want.
Insurance That You Want
Health Insurance - If you are living in the US then I am sure you know are aware of the current situation. As of February 2017, you are required by law to have health insurance and if you don't you will have to pay a penalty on your taxes. The political debates on this subject are heated, but what we can be sure of is that you better have it. First, let's talk some health insurance basics.
All health insurance plans have a couple basic features: they have monthly premiums that you/your employer (if applicable) pay, they generally have some type of deductible or limit at which you will have to pay out of pocket before receiving full benefits, and lastly they have some structure of who you can see and how the care can be given. There are generally three different types of health insurance plans I will list them here and let you know what type of situation they are best for:
- Health Maintenance Organization (HMO) - The health maintenance organization plan is gaining in popularity. With this plan you will designate a primary care physician (PCP) who will coordinate all of your care. If you need to see a specialist then you need them to give you a referral to do so. Otherwise it will not be covered. This plan generally as low co-pays meaning you will pay very little out of pocket for general office visits. This is typically good for a person or family that goes to the doctor frequently either for an existing condition or otherwise.
- Preferred Provider Organization (PPO) - This is similar to the HMO except you do not have to choose a primary care physician. Instead there is already set up a network of specialist and other care givers that you can see as needed. The other thing to be aware of is that if you want to see a specialist that is outside of the network then you typically will have to pay out of pocket. Like the HMO you will receive services within the network at a steep discount, sometimes even more than the HMO. Like the HMO this is good for a person/family that makes frequent visits to doctors or specialists, but doesn't want to go through a PCP. Monthly premiums are similar to those of HMOs if not a little more.
- High Deductible Health Plan (HDHP) - This one has the cheapest premiums of the three. Like the name says this is a plan that has a higher deductible than the other two and usually no discount for general visits. You have to pay 100% of health care costs until you reach your deductible. The great thing about the HDHP is that you will have access to the Health Savings Account (HSA). This account is the only account in the US that gets you TRIPLE tax savings: you contribute your money tax free, you can invest the money and any gains are not taxed, then when you take the money out it is not taxed. The only way to get access to this account is the have a qualified HDHP plan. You can contribute up to $2,500 per year into it and some employers even make contributions for you. The main stipulation on this account is that the money can only be used for qualified healthcare costs. This plan is great for people who are younger and healthier who don't plan on using their insurance very much. This allows you to save for your future while at the same time paying lower monthly premiums. This is the type that I currently have.
Most people will get their health insurance through their employer. If you are unlucky enough to have to purchase on the market then you know the extreme cost that it is running right now. Here are a couple other options for relief.
- Consider changing plan types - Plan types can have drastically different costs. If you have the option, moving to a high deductible plan and supplementing with a Health Savings Account can be a great alternative to a higher priced PPO plan.
- Health Sharing Programs - Here is a good article on what they are and how they work.
Car Insurance - Just like health insurance, a minimum amount of car insurance is required by law. Most of the time this is called "liability" insurance. Although insurance companies spend billions of dollars per year to convince you that you need a lot more coverage. The good news is that we can use this fierce competition to our advantage.
Shopping around for insurance quotes is easier than ever and can be done almost exclusively online. Here is a great article on different ways to get car insurance. Remember that insurance is a cost, so we don't want to be paying to transfer financial risks that we can afford. Adjusting deductibles and coverages can save you hundreds of dollars per year without even switching providers. Here is more great information on sizing up your insurance coverage needs.
Long Term Disability Insurance - It's never nice to think about a scenario where you could become permanently disabled and unable to work, but these events do happen. Depending on social security to take care of you if it were to happen is a recipe for disaster. This insurance is fairly inexpensive to purchase and can often be done through your employer. Here is great information on what to look for and where to buy.
Term Life Insurance - This one really applies if you have dependents such as a children and/or a spouse that depends on your income to live in or if you have a large amount of cosigned debt. Notice how I specified TERM life insurance. You will see why down below. Term insurance is just like it sounds, it is life insurance over a certain period of time. Usually people will purchase 30-year term, but there are shorter periods as well. Here is a great broker for you to get some price quotes from.
Now we will move to some insurances that you definitely want to steer clear from.
Insurance That You Don't Want
- Whole Life Insurance - The premise of whole life insurance is that the policy lasts your entire life rather than just a term. The problem is that it is multiples higher than term insurance! They also will try to attach investments and other little gimmicks to it all in the name of separating you from your money while having to provide the least amount of value possible. Here is a good article that has some numbers on the subject. Overall, I never recommend anyone to purchase any variant of whole life insurance.
- Extended Warranties - One of the most popular of this variant is cell phone "insurance". Have you ever noticed that it seems like everything you purchase from an electronics store has the option to purchase an extended warranty? Have you ever wondered why that might be? It's mostly because they make a ton of profit from it! At the beginning I talked about insurance being to transfer financial risk for things you can't afford. This is a perfect example of paying a cost to transfer a financial risk that you can afford. Unless you happen to be using your electronics while scuba diving then this is probably a waste of money for you. Here is a good article on extended warranties when it comes to cars. Here is one on cell phones.
- Cancer Insurance - Like any great gimmick there needs to be an imminent danger of death. Cancer insurance is touted to cover the costs of treatment. But there question is doesn't health insurance cover that? Well, it does. Sure there could be some coinsurance and deductible costs, but health insurance will cover most of it. Here is a great article on the details.
So now is a great time to take a look at your coverage and see if you have overlaps and where you can save some money. If you can find some savings you can roll that directly into your retirement and investing accounts! See you next time.
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