Should I Buy Insurance?

It seems that every time I turn around, someone is trying to sell me insurance of one type or another.  It doesn't take a genius to figure out that the ones selling are making money--why else would they do it--but does it make sense for me?

What Is Insurance?

No matter the type or who sells it, insurance is a risk management tool.  Insurance takes an unknown and turns it into a known. 

You don't know if you will require medical care next month, or if so, how much.  It could be that you won't require any care; it is possible that you will be diagnosed with and treated for a long-term very expensive illness.  It is possible you will have no medical bills; it is also possible you will incur hundreds of thousands of dollars in medical bills next month.  Health insurance can't keep you from getting that serious illness, but it takes those unknown bills and turns them into a known premium, plus co-pays and deductibles.

In the same way you do not know if your cell phone will spend the next year right where it belongs, or whether it will land in the washer or toilet.  The insurance on the phone turns the unknown (will I have to replace my phone) into a known--the premium you pay.

Why Do I Need Insurance?

You need insurance to protect  you from things you cannot afford to have happen.  You'll note that I said "things you cannot afford" as opposed to "things you'd rather not do".  

Insurance companies are not charities.  If they pay out more in claims than they collect in premiums, they go broke.  Most people who are paying the full cost of their insurance (health insurance is different because employers and the government kick in so much of the cost) will pay more in premiums than they will receive via claims.  

What Are Some Types of Insurance?

Life Insurance

Life insurance is money paid to your designee when you die, if you die when the policy is in effect.  As more fully explained in this post, it is either good for a certain term, or something that is maintained throughout your life.  

The purpose of life insurance is to make sure no one suffers financially if you die.  If the only hardship your death would cause loved ones is emotional, then you do not need life insurance.  

Burial Insurance

Burial Insurance is basically a type of life insurance that pays the proceeds of the policy to a funeral home rather than to he heirs.  Reality is that we will all die one day.  If you do not have enough assets to pay for your burial, and you are one of those people who will find a way to pay a bill, and a way to spend any extra cash, then burial insurance may be a good idea.  Unless you die prematurely, the chances are very good that your family can bury you for less than what burial insurance ends up costing you.  

Disability Insurance

Some type of disability insurance is a common fringe benefit.  Disability Insurance replaces part of your income if a medical or psychiatric condition makes it impossible for you to work (some policies specify unable to work at your current job).  

While Social Security offers some disability benefits, the standards for being considered "disabled" are generally higher for Social Security than for private insurance.  Also, particularly for high earners, private policies can pay higher benefits.

Disability insurance is usually divided into two types:  Short-term disability cuts off after a few months, but generally kicks in after a few weeks.  This insurance is designed to pay your family's bills if a breadwinner is sidelined with something from which they are expected to recover. 

Long-term disability generally has a longer "elimination" period--the time you have to be disabled before which you can collect on the insurance--but it can pay out for years.

Health Insurance

Health insurance is designed to help pay medical bills.  As we all know, health insurance is a common fringe benefit of middle and upper income jobs.  Health insurance obtained via the Affordable Care Act is subsidized by the government.  Because of these subsidies and they way our healthcare system has developed, health insurance is involved in most healthcare transactions.  This article talks more about healthcare and health insurance, but suffice to say that for many of us, our health insurance bill is one of our biggest. 

Homeowners'/Renters' Insurance

Your homeowner's policy pays to repair the damage done to your home by a covered peril.  Covered perils include (usually) wind, fire, hail, lightning, snow or other "sudden emergencies" such as broken plumbing. . Homeowner's insurance policies do not cover floods, and in some areas they do not cover wind.  

Your homeowner's policy will also, if you choose, cover the cost of the contents of your home.

In most states, a homeowner can choose between replacement cost or the depreciated value, but in no case will the policy pay more than the face amount.  What that means is that you (or your mortgage company) decides how much you want to insure the house for.  If you select $200,000, then $200,000 is the most the insurance company will pay, absent some special provision that says otherwise.  If your policy pays depreciated value, and the 20 year roof you put on the house 19 years ago is damaged in a hailstorm, they will only pay 1/20 of the cost of a new roof.  If you have replacement value coverage, they will pay to replace the roof, providing that replacement cost does not exceed $200,000.

While I do not know about policies in other states, Louisiana has a "value policy" law.  Basically, if damage exceeds 50% of the cost of the house, state law requires the insurance company to pay the face value of the policy.  The purpose of the law is to keep insurance agents from over-selling policies.  For example, if the cost to rebuild your house from scratch would be $200,000 and the house was 75% destroyed in a fire, in Louisiana, the insurance company would be required to pay you your policy limits, whether your policy was for $20,000, 200,000 or $2 million.  

You (with the approval of your mortgage company if you have one) can select a variety of deductibles, besides deciding whether your policy will cover replacement cost or depreciated cost.  Of course, the more you would pay out-of-pocket, the lower the premium.

While homeowners' insurance generally covers both the structure and the contents, renter's insurance covers the contents--generally the structure is the landlord's problem. 

The other thing that homeowers' and renters' insurance offers is personal liability protection.  Basically if you get sued for many of the common things people get sued for, other than automobile accidents or business disputes, your homeowner's policy may pay for an attorney and cover any judgment.  

Flood Insurance

Floods are not covered by standard homeowners' policies.  If you want coverage for floods you have to buy a separate policy.  While these policies are sold by the same agent who sells your homeowers'/renters' coverage, they are underwritten by and covered by the US Government.  While Allstate and State Farm probably charge different amounts for your homeowners' coverage, if they are quoting the same limits, both will charge the same for flood.  Flood insurance policies are serviced by the company that sold them--my flood insurance bill comes from Allstate and if my house floods I'll call Allstate, which will send an adjuster. 

Umbrella Policy

These policies may be called "umbrella" "excess" or "personal liability" but what they all do is provide another layer of coverage over your homeowners or automobile policy.  Because the other policy pays first, these policies are able to offer a lot of coverage for a little money.  They are primarily purchased by people with high net worths or high earnings. 

Extended Warranties/Product Insurance

When you buy an appliance, a car or even electronics, you are usually offered the opportunity to buy an extended warranty which covers defects or some repairs.  Sometimes (like with phones) you are offered the opportunity to insure it against things like dropping it.  The thing to remember about these warranties is that you are betting against someone who knows the odds.  If the warranty company pays out more in claims that it makes in premiums, it goes broke.   In short, if you can afford to replace the item if it breaks, the odds are you will be better off not buying the extended warranty.  

Automobile Insurance

Your automobile insurance policy, at a minimum, pays me if you cause an accident between us.  You can also get insurance to fix your car if you are in an accident, to pay your medical bills if you are in an accident and to pay you if I cause an accident and do not have enough insurance to cover your damages. I wrote more about auto insurance here.

Should I Buy Insurance?

If you have a mortgage, your mortgage company requires you to buy homeowners insurance, and sometimes flood insurance.   The law requires you to have health insurance.  Other forms of insurance are optional, so people wonder if they should buy them.

As noted above, when you buy insurance, you are betting against someone who has spent a lot of time and money calculating the odds.  Most people are not going to make money from their insurance company.  

You should buy insurance to protect you from things you cannot afford to have happen.  If you are struggling to make the payments on your new car, you not only need standard auto insurance (with a deductible), you probably need gap insurance to allow you to pay off the car on which you are "upside down" so you can get another one.  If you are driving an old car that isn't worth anything and you have money in the bank, comprehensive/collision coverage is probably overkill. 

If you are able to save money and have an emergency fund available, and are paying the full cost of your health insurance, the odds are you will be better off with a high-deductible plan.  However, if lack of first dollar insurance coverage is going to keep you out of the doctor's office when you need to be there, you may need a lower deductible, especially if you are the type of person who will pay monthly obligations but who has trouble in unexpected bills. 

As I said earlier, the purpose of insurance is to protect you from things you cannot afford to have happen.  It is not there to meet routine expenses and if you try to buy insurance to use for routine expenses all you do is increase the cost of those expenses. 

How to Save Money on Healthcare

Many families want to know how to save money on healthcare. While it is a major portion of many family budgets, there are ways to, if not save money, at least get the most for it.

Compare the Costs and Value of Offered Insurance Plans:

Whether you purchase your health insurance on Obamacare Exchanges, get it as a fringe benefit at work or buy it from an agent, to save money on healthcare, carefully consider all your choices.  Many employers are offering a variety of choices and those buying from the exchanges or from an agent need to decide on the appropriate level of coverage.  Look at the portion of the premiums you will pay, the co-pays and the deductibles.  Then, sit down and figure out what your family will pay 

• If no one in your family gets any healthcare this year except for routine physicals (which are supposed to be covered 100%);
• If your family gets your usual and expected healthcare; and
• If someone in your family gets sick enough to reach the maximum deductible/co-pay on the policy.

Often, for the same network of doctors, the high-deductible plans are cheaper in all three cases; however, if someone else (like your employer or the government) is subsidizing the plan, that may not be true.  The only way to find out for sure which is best to save money on healthcare is to run the numbers.  Even after  you run the numbers, be honest with yourself.  If the high deductible plan would be cheaper, would you put the premium savings in an HSA for healthcare expenses, or would you spend it?  If spending it is likely, what would you do if you incurred a large medical expense?  Even if you would save the premium savings, what would happen if someone in your family incurred major expenses next week?

Also, you may be asked to choose between plans with various networks, network benefits and out-of-network benefits.  Some plans require that care be coordinated through a primary care physician; others do not.  In short, generally the more limited your choices, the lower your cost, if you follow the rules.  However, those limited networks may not include the doctors you want to use or, if the doctors are included, they may have few slots available for patients with that insurance.  If you are contemplating switching insurance, particularly if that switch will require you to switch doctors, call the preferred new doctor's office and ask for an appointment for a check-up, and when they ask about your insurance, tell them you have the plan you are contemplating.  If it will be a while before that doctor can see you, tell the appointment clerk that you do not yet have that insurance, but are considering it.  If you need ongoing care, tell her why (eg. I take blood pressure medication) and that you are considering switching insurance and switching to Dr. X as your primary care physician.  Ask how soon after the insurance takes effect you would be able to see Dr. X, and if it isn't soon enough, consider another choice.  If you do not need ongoing care, tell the clerk that you are considering switching to that insurance and to Dr. X as your primary care physician, and ask what you should do if you develop an acute illness before you are able to be seen for a check-up.  The answer to that question should be part of your choice.  If you are going to end up in the emergency room because the doctor won't/can't see you, and the insurance is going to deny your claim because your sore throat should not have made you fear loss of life or limb, then the low premium isn't much consolation.  

Know the Terms of Your Policy, and Follow Them:

What happens if you go to an out-of-network doctor?  What happens if you go to the emergency room for what is deemed a non-emergency?  What happens if you self-refer to a specialist?  How much will your prescription cost?  Those are all questions to consider both when selecting a policy and when seeking healthcare.  If you choose to pay an out-of-network provider, and that provider prescribes medicine, is the medicine covered?  Which hospital are you supposed to use?  Do you have to try a generic drug first, before a brand name?  You will not save money on healthcare if you do not follow the terms of your policy.  

If Your Employer Offers a Flexible Spending Account, Use It

Flexible Spending Accounts are a way many employers help employees save money on healthcare.  Flexible Spending Accounts allow employees to choose to have up to $2550.00 per year withheld from their paychecks and placed into an account that can only be used for healthcare expenses.  Insurance co-pays and deductibles are eligible expenses, as are prescription drugs, out-of-network doctors, dental or orthodontic care and even some over-the-counter drugs.  The advantage of an FSA account is that the money is withheld pre-tax.  If you use after-tax dollars to pay those expenses, you can only deduct those expenses that exceed 10% of your adjusted gross income; with the FSA, all the expenses are, in effect, deductible.  Also, your employer may allow you to spend the money before it is deducted from your check so that a root canal in January can be paid for from the plan in January, and basically financed for the rest of the year.  The downside of an FSA is that if you don't use it, you lose it, though employers can allow you to carry forward a small amount.

If You Have a High-Deductible Plan, Get a Health Savings Account

People whose health insurance deductible (the amount they pay before the policy pays anything) exceeds $1,300 per person/$2,600 per family qualify for a Health Savings Account.  Some employers offer them; if yours does not, your bank probably does.  You receive a tax deduction for money deposited into the account, and you do not pay taxes on money that is withdrawn, as long as you use it to pay healthcare expenses.  You can carry over the account from year to year.  One tactic people use is to choose a high-deductible plan and then put the difference between the premiums for the high -deductible and low-deductible plans in an HSA.  As long as  you do not have major claims, after a few years there will be more than enough in that account to pay the deductibles.

Don't Buy Stupid Insurance

The purpose of insurance is to protect you against things you cannot afford to have happen.  If you are going to pay money for premiums, you want to buy insurance that makes a difference if it is needed.  There are many "supplemental" insurance plans offered by companies like AFLAC or sold via newspaper ads that pay if you get cancer, if you are in an accident, if you are hospitalized, or if some specified disease occurs.  While the low premiums are the selling point for these policies, the possible payouts are also relatively low, and in the grand scheme of things, for many people,  are unlikely to make much of a difference in your life. Sit down and run the numbers.  How many months would you have to pay premiums before your benefit would equal what you paid?  How much difference would that check make if the bad thing happened?  Is there a period of time during which the policy will only return the premiums paid, rather than paying the face value?  Remember you are betting against an insurance company that knows the odds.

Pick the Right Level of Care

Face it, emergency rooms are expensive.  Unless you have no other choice, don't go there.  While choices may be limited in rural areas or small towns, larger cities have other options including drugstore minute clinics and urgent care clinics.  Unless you suspect broken bones, major trauma or serious illness, try the minute clinic or urgent care if your doctor can't see you.  Also, your primary care physician is often the least expensive person to see about an illness.  Yes, it is possible that s/he will refer you to a specialist, so that you will get two bills instead of the one you would have gotten had you gone straight to the specialist, but the reality is that most problems can be handled by an internist, family medicine doctor or pediatrician.  

Check Your Bills

Medical bills are pages and pages long and include procedure codes, diagnosis codes and charges upon charges.  Make sure you or your loved one got what you were billed for.  My husband received two bills for his colonoscopy one year.  As he said "I may be an A----but I don't have two of them".

Keep Yourself Healthy

Some healthcare problems are unavoidable; however many are of our own making.  Eating right, maintaining a health weight and exercising regularly and avoiding stupidity behind the wheel will do as much to lower average medical bills as any fancy government program or overpriced medicine.  

Healthcare is expensive.  We all know it.  There are no magic bullets that allow us cheap healthcare; however, becoming better consumers can help save money on healthcare.  Do you have any advice for those struggling to pay for healthcare?

Linked to Frugal Friday.

*Part of Financially Savvy Saturdays on brokeGIRLrich, Disease Called Debt and Friday Night Shenanigans*

Oh No, I Was in a Wreck!

The day after I finished my article on automobile insurance, I got a first-hand look at why you have it. I was running an errand for work in heavy traffic. The car ahead of me stopped, and so did I. Unfortunately, the car in back of me did not. 

The Accident:

Okay, it happened. Your car and another have made contact and there is damage. What now? First, make sure you and everyone in your car is okay. Then, call 911 to report the accident. Ask the operator if the police will respond, as in some jurisdictions they do not respond to accidents on private property or to property damage only accidents. Ask if you should move the cars. Follow his/her directions. Then, make a decision about whether you are better off in your car our out of it. In most neighborhoods, at most times of day, you do not want to be in the cars above, with fuel on the ground. On the other hand, you don't want to be holding on to three kids on the side of the Interstate. If the police have been called, wait for them to arrive. 

Take a deep breath. Once the police arrive, they will gather the necessary information from both parties. Do not engage with the other parties any more than necessary. If it is a minor accident and the police tell you to exchange information without them (the norm in some areas for fender benders that are blocking traffic and have no injuries) do so quickly, politely and without admitting fault. Take photos of both vehicles where they came to rest and, if possible, on all sides once they are on the side of the road. If the police do not respond, make notes for yourself about what happened, and when it happened. If you decide to make a claim against the other driver's insurance, you will need his/her name, make, model and license number of the car and the insurance information. If someone decides to make a claim against you, or if you make a claim with your insurance company, you'll be asked to provide the same information to your insurance company. If you are going to make a claim, whether against your insurance or the other driver's insurance, call them as soon as possible. 

The Aftermath:

Property Damage

No matter which insurance policy you are making a claim on, the next step for the damage to the car (assuming it has been removed from the scene) is the damage estimate. These are done either by an insurance adjuster or by a body shop, and the process is pretty straight-forward. Few auto accident property damage claims are handled by attorneys unless liability is contested. In my case, the other driver's insurance company has agreements with certain body shops and they deal directly with those shops. While I was free to use any shop I wanted, picking one of those meant that I was able to drop my car off and know that the body shop and the insurance company would deal with each other, and that the insurance company would warranty the work. I got my rental, paid for by his insurance, and until my car is ready, I'm set. 

 

Bodily Injury

It is not at all uncommon for someone to be "fine" at the scene of an accident, and yet to be very sore the next day. Other people hurt at the scene, often from seat belt or airbag contact. They may have bumps and bruises or broken bones and internal injuries, depending on the severity of the accident. There are two things to remember at this point: 1) unless you have hired an attorney, do not sign a document releasing the insurance company until you are back to normal, health-wise and 2) if it is getting close to a year since the accident, and you are not back to normal, see an attorney, even if you have good health insurance.

The Claim Process

Whether it is you or the other party that calls the accident into your insurance company, once they know about the accident, a claim file is open and a number assigned. At this point your insurance company is looking at two things: 1) Liability: In other words, whose fault is the accident, and to what degree? Is it all your fault? All the other party's? Is liability shared? 2) Damages: In other words, how much is this going to cost? An adjuster will talk to you and, if possible, to the other party to determine how the accident happened, what is wrong with the cars and what injuries were sustained. The majority of car accidents are property damage only and are resolved between the insurance companies with little fuss. But why might that not happen?

Liability. The parties may tell very different stories about how the accident occurred and the insurance companies may not agree on the degree of fault to attribute to each driver.

Damages. In short, the question is how much money did this accident cost the person not at fault? Some elements:

• Medical Bills. Unless there were pre-existing conditions these are easy to add up.
   
• Lost Wages. This can be more tricky, especially with claimants who work irregularly, or are paid commission, but the idea is to compensate for time missed from work due to the accident
  
• Pain and Suffering, inconvenience etc. Different jurisdictions use different amounts, but for settlement purposes, most places have a lawyers' rule of them that says x dollars per month that you were injured or treating and y dollars because you have that kind of injury.

Generally speaking, the higher the damages and more speculative, the higher the chance that the case will not settle at the claim level.

My next article will deal with what happens when claims are not resolved, and move into lawsuits.






Photo credit: By Dino Kužnik from Ljubljana, Slovenia (Flickr Uploaded by Sporti) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt*

Preparing for the Unexpected: Automobile Insurance

Photo from Wikipedia

We've all seen the commercials for the lawyers who promised big checks to people who are in car accidents.  They make it sound like a car accident is a way to riches--and it is--for the lawyers.  That money has to come from someplace and that someplace is usually an insurance company.  Today I'm going to talk about car insurance.  

Different states have different laws about what types of automobile insurance are sold in those states but these are generally the kinds sold:

Collision:  

This pays to fix your car if you are in an accident.  The insurance company will get an estimate, generally from a repair shop, of what it will cost to fix your vehicle.  They compare that estimate to the value of the vehicle and decide whether to repair the car or "total" it and pay you its book value.  Remember the adage that insurance is to protect you against things you can't afford to have happen.  Generally, you can afford to replace an old car, and you will be disappointed at how much (or more precisely, how little) you are paid if you are in a wreck.  Check with your agent every year or two about the amount you would be paid if a car was totalled.  Decide if it is worth paying the premiums to get that amount of money if the car is wrecked.  You can reduce your premiums by increasing your deductible--the amount you pay out-of-pocket before the insurance pays anything.  

Comprehensive:

This pays to replace or repair the vehicle if it is stolen or damaged in some non-collision manner, like hail or flood.  Again, it is not going to pay more than the car is worth, and again, the way to lower premiums is to increase deductibles. 

Liability:

This pays for harm you cause to others.  In other words, if we are in an accident and the accident is your fault, your liability insurance will pay to fix my car, pay my medical bills and pay another other damages I incur as a result of the accident.  Most states require that you carry a certain amount of this as a condition of driving on public roads.  In Louisiana, the requirement minimum is "15/30" meaning that a policy will pay up to $15,000 per person and up to $30,000 per accident.  The maxium my insurance company sells is $500,000/$500,000.    The amount you need depends on your assets, your earning power and your conscience.  In short, you want enough insurance so that if you are in a bad accident, the attorney for the person you hit will be satisfied with the insurance, and will not come after your personal assets.  If you are a low wage earner with no real assets outside of a retirement plan, a 15/30 policy may be enough.  If someone gets a judgment against you, you can file bankruptcy to get rid of it, and though your credit rating will take a beating, you will get over it and life will go on.  On the other hand, if you are a high earner with a lot of assets, no plaintiff lawyer worth anything is going to take a 15/30 policy for a serious injury because you have assets they can get.  

Uninsured/underinsured motorist:

If you are in an accident and the at-fault party does not have enough insurance, this coverage pays after the at-fault party's insurance.  You purchase this coverage and agents often recommend you carry the same limits as you do in liability.  Most of the  time you cannot purchase more UM coverage than you do liability coverage.  This coverage seems like something that can be skipped if you are trying to save money, but if you are in a serious accident that is the fault of someone with little or no insurance, this is the insurance that could replace your lost wages and pay for your pain and suffering.  

No Fault Coverage:

Some states have "no fault" insurance, either totally, or up to certain limits.  This means that following an accident, each party's insurance fixes their own cars and pays their own bills, at least up to a point.  The idea behind no-fault was to reduce cost by getting lawyers out of the minor car accident business.

  

Medical Payments:

Most policies include a certain amount of "med-pay" and do not allow you to waive it.  Again the idea is to provide coverage that pays without the need for suit to be filed or even blame to be assessed.  The limits are usually only a few thousand dollars, but it is enough for an ER visit and a doctor's visit or two.  

Used with Permission

Umbrella or Personal Liability Policy

This policy pays on top of your homeowner/renter policy and your auto policy.  It is protection for people with high net worths or high incomes.  If a claim exceeds the value of their auto or homeowner's policy, this policy pays.  Since it doesn't pay very often, it can provide a high amount of coverage for a relatively small price.  

As with any other insurance, you need to consider your personal situation in deciding which coverages to purchase, and how much of each.  If you finance a car, the lien holder will require you to purchase collision and comprehensive insurance, and maybe even a "gap" policy which would provide enough money to pay off the car in the event that it it totalled, since most people owe more than the car is worth for at least the first year they finance it.  If you are driving an older vehicle you an afford to replace, then skipping the collision and/or comprehensive makes financial sense.  Skimping on liability coverage could come back to haunt you--but carrying too much doesn't make sense either.  

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and She Picks Up Pennies*