Free Money Finance

The Psychology of Why People (Used to) Hate Annuities, Part 2

The following is an excerpt from Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money by David E. Adler. This is a fascinating book about the psychology of money and how our instincts and emotions often harm us when we make investing decisions. The excerpt below is part two of a two-part series (part one was posted earlier today.)

Annuities

There are rational reasons to buy an annuity when you retire. The foremost is you don't have to worry about outliving your money. With a guaranteed check coming in each month, you need never live your final years in poverty. On top of this, annuities also have the potential for higher returns than from traditional investments because of their inbuilt insurance features—if you survive that is. For people who make it into their 90s, the income from an investment in traditional assets would only be 40% compared to the income from the same amount of money spent on an annuity. The fact that people aren't necessarily good at handling their money once they have retired makes the arguments in favor of annuities even more compelling. This is why the wildly enthusiastic consensus among most economists, to say nothing of the insurance industry, is that annuities are a great thing.

But the consensus among the public is that annuities aren't so hot: Only a tiny fraction of people buy them. Many people hate annuities, which puzzles academics. Hence, economist Franco Modigliani, in his Nobel Prize acceptance speech, said, "It is a well-known fact that (individual) annuity contracts...are extremely rare. Why this should be so is a subject of considerable current interest. It is still ill understood."

It is no longer so "ill understood." The answer has to do with human psychology. Annuities, until recently, were a bad match for what most people, as opposed to most economists, worried about. One rational reason not to buy annuities is they tend to be very expensive, with the pricing opaque and hard to figure out. Also, they make the most sense if you plan to live a long time, and therefore attract people who are unusually good at doing this. Insurance companies have noticed, and priced annuities accordingly, meaning they are costly. They aren't actuarially fair, and the pricing favors the long lived instead of the general population. And they have some risks: Because they are contracts with individual corporations, if the insurer goes bust, there goes your annuity. Finally, annuities are complex and hard to understand, and people don't like complexity. The complexity starts with the name, with many things called an "annuity" that aren't annuitized. For instance, insurance companies offer products with annuity in their name that really resemble mutual funds: You don't have to surrender your principal and they don't guarantee lifetime income. The annuities I am referring to are "life annuities"—irrevocable insurance products that in exchange for a payment offer a minimum level of guaranteed income that lasts a lifetime.

The central problem is framing: Consumers view annuities as risky gambles rather than insurance. If we die early, we lose; if we live a long time, we win. Economists, and insurance companies, view annuities as insurance: not against dying but against the risk of outliving your wealth. They call this longevity risk—the risk that you live longer than you expected and have budgeted for. Anyone else would consider living to a ripe old age a good thing. Not economists who fret about all the financial dangers involved, which can be mostly taken care of by annuities.

This brings us back to Jeffrey Brown's framing experiment. Says Brown, "If I think about how much money I have in a bank, then an annuity looks horrible. I am giving up a lump of wealth and whether I get it back or not depends on how long I live; so it seems risky. But if I think about how much I am going to be able to spend every day, then an annuity looks great."

Insurance companies are well aware of our psychological problems with annuities, and current behavioral economics research into this area. Their psychological insights are allowing them to engineer products that meet consumer's psychological as well as financial needs. This includes "reframing" our perception of annuities by highlighting their insurance features. Some annuities are now explicitly offered as longevity "insurance"—these are usually ones designed to kick in very late in life, at 85 plus. Or another idea is to link an annuity to long-term care insurance, a sort of two-for-one product, addressing two big concerns of the elderly: cash flow and healthcare. Variable annuities try to emphasize growth and income, appealing to our desire for both. The biggest changes are in "guaranteed death benefits." Insurance companies are trying to take the "gambling with your life" feature out of annuities, through guaranteed death benefits. The idea is you, or rather your estate and beneficiaries, get the money back if you die before the annuity has kicked in. In fact, the development of annuity products is so rapid and extensive, much of it based on applications of behavioral economics, that insurance companies, once seen as plodding and dull, are at the center of financial innovation. It looks like they will succeed in making annuities popular.

But I still see challenges ahead because there is one remaining big psychological—and real—problem with annuities, and that is control. If you buy an annuity, you give up control of your money. Maybe the insurer will let you buy the annuity back, but such a rider is extremely expensive. And a true annuity is irrevocable. "Irrevocable" is not an easy concept or word to swallow. Once you buy an annuity, the money is no longer yours. Before you had, say $1,000,000. After the purchase, it now is the insurance company's. You get a check every month, but you no longer have the $1,000,000 to play with.

Even though an annuity reduces the risk you won't outlive your money, there are other risks to worry about, like the risk you won't have enough money exactly when you need it, if you get really sick, for instance, or have a sick grandchild. It doesn't have to be so morbid: You might prefer the flexibility of playing with your money. For all I know, you might have the desire to buy a $15,000 bottle of champagne and spray it around a nightclub, or go on a mega shopping trip to Dubai and end up broke afterward. These might be your desires. But it would be hard to live your dream on your carefully doled out "oldster" allowance in the form of an annuity from your insurance company.

So the question comes down to this: Do you want all your consumption needs insured in the form of annuity, or just some or maybe none of them? I don't think this is about being rational versus irrational; it's just a matter of your tastes, how you want to invest your money, and how you want to spend it.

The Psychology of Why People (Used to) Hate Annuities, Part 1

The following is an excerpt from Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money by David E. Adler. This is a fascinating book about the psychology of money and how our instincts and emotions often harm us when we make investing decisions. The excerpt below is part one of a two-part series. The second part will run later today.

Take the following retirement quiz about two people who have made permanent decisions on how to spend a portion of their money in retirement. Which sounds like a better deal to you?

Quiz #1

Each person has some savings and can spend $1,000 each month from Social Security in addition to the portion of income mentioned in each question. They have already set aside money to leave for their children when they die. The choices are intended to be financially equivalent and based on personal preferences for spending in retirement.

Mr. Red: Mr. Red can spend $650 each month for as long as he lives in addition to Social Security. When he dies, there will be no more payments.

Mr. Gray: Mr. Gray can choose an amount to spend each month in addition to Social Security. How long his money lasts depends on how much he spends. If he spends only $400 per month, he has money for as long as he lives. When he dies, he may leave the remainder to charity. If he spends $650 per month, he has money only until age 85. He can spend down faster or slower than each of these options.

Results: How did you answer? It is likely that you felt Mr. Red had a better deal than Mr. Gray. His consumption was guaranteed for life whereas Mr. Gray risked running out of money after age 85.

This financial quiz (actually a psychological experiment) was developed by the economists Jeffrey Brown, Jeffrey Kling, Sendhil Mullainathan, and Marian V. Wrobel, who wanted to understand what factors went into people's retirement decisions. They found the majority of participants when presented with this exact choice preferred Mr. Red's situation to Mr. Gray's.

Then the economists varied the experiment slightly. They rewrote the setup paragraph using new language and new descriptions, which conveyed a slightly different message. They tested it on a new group of participants.

Here is their new quiz. Try taking it. You might not change your answer because you have already seen the original version. Nonetheless, try reading the introductory paragraphs slowly and carefully, letting it put you in a new frame of mind before making your decision.

Quiz #2

Two people have made permanent decisions on how to spend a portion of their money in retirement. Which sounds like a better deal to you?

Each person has some savings and receives $1,000 each month in social security, in addition to the portion of savings mentioned in each question. Each person has chosen a different way to invest this portion ($100,000) of their savings. They have already set aside money to leave for their children when they die. The choices are intended to be financially equivalent and based on personal preferences for investing in retirement.

Mr. Red: Mr. Red invests $100,000 in an account which earns $650 each month for as long as he lives. He can only withdraw the earnings he receives, not the invested money. When he dies, the earnings will stop and his investment will be worth nothing.

Mr. Gray: Mr. Gray invests $100,000 in an account which earns a 4% interest rate. He can withdraw some or all of the invested money at any time. When he dies, he may leave any remaining money to charity.

Results: The majority of people who took this quiz said Mr. Gray had a better deal.

Quiz #1 and Quiz #2 are, of course, exactly the same in financial terms. But in psychological terms they couldn't be more different, because of the differences in language and descriptions. In the first quiz, everything is presented in terms of consumption: Mr. Red and Mr. Gray spend the money. When taking the quiz, you are confronted with the consumption consequences of financial decision. The second quiz emphasizes investments. It uses words such as invest and earnings. It mentions the account balance. When taking this quiz, you think about the return on the investment.

Psychologically, these differences in perspectives are known as frames. The underlying information is the same, but we filter it and make our decisions depending on how the choices are couched. When the financial decision is framed as a consumption decision, Mr. Red's guaranteed spending money looks the good deal. When the financial decision is framed as an investment decision, Mr. Gray's opportunity to invest his money looks like a better deal. In another words, context can be as important as content when it comes to financial decisions, even very important financial decisions.

I spoke to Mr. Brown (this is beginning to sound like a Quentin Tarantino gangster movie where each character is named after a different color, but here I am referring to the eminent economist Jeffrey Brown of the University of Illinois who cocreated this experiment). He said this of his results: "Traditionally, economists have had the underlying view that people are hyper-rational and are trying to maximize their happiness (what economists call utility). If you believe that, then how you package the information shouldn't impact their decisions. But you have huge swings in how people behave depending on how the information is packaged."

The larger point of the experiment is not just that framing has an impact; it is specifically about how retirement planning is "framed" in the U.S. and how we are conditioned to think about it. Should our financial focus be on building wealth for retirement, or on what we can consume after we retire? Is the right measure of financial success how much wealth we have when we retire? Or how much we can spend each month after we retire? Like the quiz, these are different ways of looking at essentially the same problem.

It is Jeffrey Brown's contention that we have been conditioned to think about retirement as mostly an investment decision, similar to quiz #2. Whereas he feels thinking about retirement as largely a consumption decision, similar to quiz #1, is more appropriate. Says Brown, "The messages that individuals receive when encouraged to save are all about how much you have in your account and your rates of return. But really you should think about how much can you eat each month, how much can you consume." This subtle conditioning or "framing" has a real result when we retire. Most people see themselves as Mr. Gray and choose the investment solution. However, most economists feel we should be in a consumption frame of mind, and follow Mr. Red's choice.

If it is not already clear, Mr. Red has bought an annuity: $650 a month. The experiment is an attempt to explain why annuities are so unpopular, despite their many economic advantages.

--------------------------------------------

Part two of this piece will post at 7:15 pm today Eastern time. Update: Here's part 2.

What It Means to Be Self-Insured

Every once in awhile I mention the concept of being self-insured as part of a post on life insurance. Quite often, someone will leave a comment like "what's it mean to be self-insured?" So I thought I'd write a post on the subject. It's not going to be an "everything you ever wanted to know about being self-insured" piece (do I ever write anything like that?), but rather a series of bulletpoints designed to give a quick but meaningful view of the issue.

Before I start, let me clarify that when I refer to "family assets" below I mean "net worth" -- the amount of value that's over and above any liabilities owed by the family. Having said that, here goes:

• Most people, myself included, buy life insurance to cover family expenses in case any of the family's breadwinner's or other members that provide "economic value" dies. This amount is designed to cover both living expenses as well as major one-time costs such as college education for kids and (sometimes) complete retirement funds for the surviving spouse. In our case, we have insurance on me to cover what the family would need if I passed away (since my job/income for the family would pass away at that time.) We also keep like insurance on my wife for an amount that would allow me to function economically if she wasn't there to handle the tasks she currently does for our family.

• The amount of life insurance usually purchased is generally dictated by this formula: total funds needed for family's provision = family assets + amount of life insurance proceeds.

• As you might imagine, when a family is young, family assets are quite low. In fact, they're often zero. In these cases, total funds needed for a family's provision is equal to the amount of life insurance needed. In other words, you have to buy insurance to completely cover your family's financial needs -- you can't cover any of the family's post-death needs from your current assets.

• But as time goes on, your family assets (net worth) start to build. Just follow my simple guidelines for getting rich and your net worth will increase steadily through the years. As the family's assets become larger, the amount you need from your insurance will decrease. And decrease. And decrease.

• Eventually, you'll get to the point where the total funds needed for the family's provision is equal to the family's assets. At this point, you're self-insured. You no longer need life insurance. As time goes on and your assets grow, your family assets will become much, much larger than the total funds needed for the family's provision. At this point you're not only self-insured, but you also have a nice cushion for safety.

For most people, the point where the family's assets equal and then surpass the family's need takes a long, long time to occur (if at all -- many will never really have enough to cover the family's need and they are left in big financial trouble if the breadwinner dies without any or enough life insurance.) For us, that point should happen in the next ten years or so -- about 15 years into a 20-year life insurance policy. At that point I can either keep the policy as a cushion of safety or cancel it (I'll likely keep it as it will be "cheap insurance" for someone in the last five years of a flat rate policy.)

One more thing to note: it's likely that the total funds needed for a family's provision will change over time. For instance, as children are added to the family, the total needed increases. As a larger house is purchased, the total increase. And so on and so on. As such, these higher levels of need will then require that either life insurance coverage or the family's assets (or both) increase as well. Just wanted to state that so no one thought I was implying that the total family need was static over a long period of time.

So, any questions, comments or thoughts? Anything you'd add that I may have missed or was unclear on?

Seven Life Insurance Mistakes You're Probably Making

US News lists seven life insurance mistakes you're probably making as follows:

• Thinking you have enough. In a recent survey of middle-income Americans, Allstate found that while respondents agreed everyone should have some level of life insurance, most believed that it should primarily cover bills and funeral expenses. Only two in ten said life insurance should replace the income of the person who died, in order to continue to support any children and other dependent family members.

• Not talking about it at all. "It's a topic that nobody really wants to think about," says Matt Easley, vice president for Allstate Financial, partly because thinking about death is so uncomfortable.

• Relying on old rules of thumb. Traditionally, people relied on a standard "seven times income" rule to calculate how much insurance they need. But that's not a useful measure, says Easley, because people's situations are so different.

• Ignoring your non-monetary income. Many people, when adding up how much of their income they would need to replace, forget about the benefits that come with their job, such as health insurance and retirement account payments.

• Forgetting the long-term. People often lose track of how long the life insurance payout should support their children and other dependents after they die.

• Thinking that it's too expensive. Many people mistakenly think life insurance is prohibitively expensive, says Bonvento, but it's possible to find a policy that fits your needs—and your budget.

• Forgetting to update it. While major life events, such as the birth of a child, marriage, or divorce, usually mean it's time to update your insurance policy, many people forget to do so.

Here's what I do regarding each of these:

• I personally advise people that they should look more at costs than income when setting life insurance amounts. For instance, my family can live on much less than my annual salary, so we bought our life insurance based on what they'd need to replace their current standard of living in case anything happened to me. We did NOT base it on my salary.

• I need to do a better job of "talking about" life insurance with my wife. For that matter, it's still "on my list" to write down where all the key records are for her in case anything happens to me.

• Yep, personal finances are personal. It's great to give rules-of-thumb (I do a lot of this) but every situation is different and people need to take these rules and personalize them to their situation.

• Yet another reason that it's better to calculate your needs based on expenses rather than income.

• Of course. You want your life insurance to last until you no longer need it. I think ours lasts until I'm approaching 60 and our youngest child is 25 or so (giving us a good cushion to get the kids through college and out on their own a bit -- not to mention plenty of time to build up our asset base.)

• Life insurance is not very expensive at all (if you want to talk expensive, then let's talk about disability insurance -- but you still need that too). I spend on life insurance annually about what most others spend on cable TV in a year. Seems like a good deal to me.

• We updated our life insurance with the birth of our last child and haven't had a reason to update it since then -- though we would if we'd need to.

Six Ways to Trim Life Insurance Costs

Bankrate lists six ways to trim life insurance costs as follows:

1. Shop around.

2. Get the right size.

3. Find the right kind of coverage.

4. Verify the company is sound.

5. Get some professional help.

6. Ask for a payment plan.

My thoughts on these:

1. Shopping around for anything is always a good idea and shopping around for something you'll have for 10 to 20 years is almost mandatory.

2. I would cut a lot of other expenses before I cut down on life insurance. That said, make sure you get only what you need. Your family isn't supposed to jump up three economic classes when you die -- they're supposed to maintain their current standard of living and be able to achieve planned for financial goals.

3. Personally, I like term as well, and even my agent has said that cash value probably isn't the right fit for me.

4. If you get a fantastic rate from a company that goes bankrupt in two years, you're not saving any money. Even worse, you may find yourself unable to insure yourself (for whatever reason) if a company goes down.

5. I got a great price online for my insurance and then told an agent I knew that I'd go with him if he could do the same or better. He called the company and was able to match the price, so I got the price I wanted along with the support/advice of an agent (who's also a good friend.)

6. My insurance company charges more if we pay in installments, so we pay in one annual amount. Your mileage may vary.

Is Whole Life Insurance Overpriced?

The following is a guest post from Michael, the administrator and primary writer for The Life Insurance Insider. He's worked in the life insurance industry as an actuary for about ten years doing company financials, product development, experience studies, underwriting, and marketing and currently works for Garden State Life Insurance Company.

When I try to defend whole life insurance, I usually feel like the lone voice of reason trying to fend off the angry mob.  Am I the only person short of evil insurance companies and money-grabbing agents to think that there might be a true purpose and place for permanent life insurance coverage in someone’s portfolio?  I am a big Dave Ramsey fan, but I cringe every time I hear him refer to any kind of permanent life insurance or anything with cash value as “rip-off insurance”.  I’d like to offer some facts that contradict the seemingly prevailing mind-set that whole life insurance is a bad deal.  

Most people give the argument that whole life insurance is overpriced or a “rip-off” when they see how much higher whole life insurance premiums are than term life insurance premiums for the same amount of death benefit.  It is true that in every company product portfolio I have ever looked at the whole life insurance premium is more expensive than the corresponding term life insurance premium for a given insured.  It is also true that every company’s thirty-year term product is more expensive than their ten-year term product. 

I ran a $500,000 quote for myself on one of the most competitive term life insurance companies in the market right now.  Their ten-year level term annual premium was $165 and the thirty-year rate was $455.  Does that make their thirty year product overpriced?  Does that make it a “rip-off”?  Of course not!  It is one of the most competitive thirty-year rates you can find.  

The longer the rate is guaranteed, the more risk there is for the insurance company.  Life insurance’s main purpose is to transfer your financial risks from death to the insurance company.  Based on its underwriting, the insurance company can be much more certain about your mortality risk five years out than it can fifty-five years out.  Whole life insurance premiums are more expensive because you are transferring the most amount of risk to the insurance company.  You can keep that mortality risk that will come thirty or forty years into the future and pay a lower term premium, or you can give that risk to the insurance company in exchange for a higher whole life premium. 

Everybody has a different risk tolerance.  Personally, I have a twenty year level term policy, but I realize that I am going to be taking on my own mortality risk in twenty years.  I am counting on the fact that I will have my house paid off in fifteen years and a lot of money saved up for retirement just like Dave Ramsey says.  That is my financial plan. 

What about the guy that is not comfortable with that risk?  He is afraid that he might not have his house paid off and pile of money in mutual funds in twenty years.  Is he a fool for wanting to pay more in order to transfer more of his risk over to the insurance company?  Sure it may take him a little longer to save for retirement or pay off his house if he has to pay a higher life insurance premium, but maybe he wants to make sure he has achieved his financial security goals before his life insurance safety net goes away.  I have trouble saying that the insurance company is treating him unfairly or an agent has tricked him by providing a product that allows him to get rid of that risk. 

What I Think of My Health Savings Account

The following is a guest post by Adam Zekmueller of Get Better Glasses. My company has an HSA as well -- and I LOVE it. And if you want to be creative, an HSA can do more for you than just pay for medical expenses. Now, here are Adam's thoughts.

With the annual cost of health care premiums outpacing inflation by a factor of three or four, my employer could no longer afford the deluxe health care plan to which I had grown accustomed.  So, beginning in January of 2008, all employees were switched to an HSA-style plan.  My employer now contributes $500 per year to my HSA and will match an additional $300 on a 2-for-1 basis (two dollars contributed equal one dollar of match).  I am contributing $600 of my own money each year and receiving an $800 match for a total annual contribution of $1400.  My “high deductible health plan” has a deductible and maximum out-of-pocket of $2500.

After a year on an HSA plan, I am beginning to more clearly see the benefits and drawbacks of such a setup.   I’d like to explore those in greater detail in this guest post.

Let’s start upbeat.  Here’s what I absolutely love about my HSA:

1. The HSA debit card. Whenever I make a major grocery/supply run, I separate out whatever non-prescription drugs or other medical-related items I have and pay for those on my HSA debit card.  I do have to remember to hang on to that receipt, though, should the tax man come.

2. Online eyeglasses.  I have several pairs of eyeglasses, most all purchased online for $40-$100.  With my employer’s matching contributions, it’s like getting a free pair or two of eyeglasses every year.

3.  “Non-traditional” medicine.  I can use my HSA money for acupuncture or to visit the chiropractor, something that never used to be covered by my insurance.

4. General flexibility.  I can shop around to get the best deal on an eye exam.

5. Routine, preventative visits are covered by my high-deductible-health-plan (HDHP) the same as they were under my traditional plan.  I get two physicals a year.

6. Combined with my HDHP, I know that no matter what happens, the most I’ll have to spend is the amount of my deductible: $2,500.  This is great peace of mind should something horrible occur.

But it isn’t all peaches and cream.  Here are the drawbacks I’ve found:

1.  If my life isn’t in danger, I won’t seek treatment.  I had pretty severe knee pain for about a month last summer.  I twisted my knee while out hiking.  I knew that I would have to pay out of my HSA for every dollar I gave the orthopedic doctor.  By the time I twisted my knee, I’d already spent much of the money out of my HSA and I wasn’t in a position to contribute much more.  I didn’t go to the doctor and my knee still hurts sometimes.

2.  I have consistent out-of-pocket expenses.  If anything goes wrong that costs less than $2,500 (my HDHP deductible), I pay for it.  Over the course of the year, the little things can really add up.

3. Prescriptions.  If I ever get a prescription, I have to pay for it unless those costs exceed $2,500.  Not so great if I take an average $2,000 or so in prescriptions each year (fortunately, I don’t).

All in all, I’d say I preferred the “deluxe” plan that my employer used to provide.  Everything was covered and my out of pocket expenses were minimal. But the HSA situation has some benefits and still provides tremendous peace of mind.  It works particularly well for young and healthy people like me who may not spend that much on health care.  The money contributed to my HSA is my money, and will grow over time.  Plus, after three or four years on the plan, my balance should consistently remain higher than my deductible.  I’ll really like it then.

Should Christians Have Life Insurance?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Here's an interesting question from Crosswalk -- should Christians have life insurance? After all, if they trust God for their provision, why do they need it?

The piece is written by a man who's associated with Sound Mind Investing (SMI), a Christian investment newsletter I've discussed in the past, and generally comes to the conclusion that life insurance is ok if the buyer's attitude is right -- if he sees it as a solid financial tool and doesn't look to it as his security (a place God should have alone.) The author also says that many times Christians make two mistakes when buying life insurance:

First, overbuying. When selecting an insurance amount, many times we provide an amount sufficient that the surviving spouse would never have to work again. In some cases, we insure for an even better standard of living than our family currently maintains. It may make sense to provide a level of insurance that would allow Mom to stay at home while children are young. But insuring to a lifetime "work-free" level wastes assets that would be better spent on what should be financial priorities (like debt repayment). And second, we transfer our confidence from God to insurance. The first is harmful, the latter fatal.

The piece ends with a couple thoughts on life insurance:

• God has committed to providing for his children (Matthew 6:26, 31-32).  He can use many methods—another mate, support of extended family, friends, church, scholarships and work-study programs, Social Security, and so on. Insurance is one of many tools He may use, but it is only one.

• Buying life insurance in a way that pleases God involves faith (Hebrews 11:6), not fear (Psalm 23:4, 91:5). For what are you trusting God in your life insurance planning?

Here's my take:

1. I agree that Christians should look to God as their source for provision (Deuteronomy 8:18).

2. That said, the Bible also says that we need to plan financially for the future (Proverbs 6:6-7). Life insurance is one way to do this. (FYI, Proverbs 13:22 also deals with this as well.)

3. Yes, you should buy the amount of life insurance you need, not an amount that is so over-the-top that it's the equivalent of winning the lottery if you die. If you're doing this, it's likely that you're spending way too much on life insurance. As we know, the odds are always stacked in favor of the insurance company (they make their living doing this, after all), so buying more life insurance than we need is a bad financial move.

4. You also need to buy the right kind of life insurance. Personally, I buy term and invest the difference.

Diversify Your Life Insurance

Here's a piece from MSN Money that asks if your life insurer will outlive you. Their key thoughts:

When you're buying coverage that might not be paid out for decades, you need to check whether the insurer is likely to be around for a long time. Here are three ways to evaluate life insurance companies:

1. A company's rating is a barometer of its ability to pay a claim down the road.

2. Many states compile complaint reports each year, tallying the number of complaints made against insurance companies and ranking them in relation to their market share. If your state has such a report, you can better keep tabs on your insurer.

3. The life insurance industry offers a "seal of approval," the Insurance Marketplace Standards Association designation. Membership is granted for three-year periods, so if the association drops its endorsement of your insurance company, that should raise a red flag.

One issue they don't bring up is the idea of diversifying your life insurance needs over several companies. That way, at least you have some protection if one of the companies goes belly up. This is a decent option, one noted in my post titled 13 Smart Insurance Moves for 2009, but it's also a more expensive option than staying with one company. Here's a thoughtful comment from a reader of that post on this issue:

Diversifying life insurance carriers may help spread your risk like putting money in multiple banks to stay under the FDIC limit but unlike banks diversifying carriers is likely to result in higher premiums because the larger the policy amount typically, the lower the cost per 1000 on the insurance. For instance, the first 100-200K of insurance is usually more expensive because of the administrative fees. Once you add on after that the rates are pretty similar.

You might find for instance that a 250K policy for a certain individual costs 250 dollars per year but a 500K policy only costs 450 dollars per year and a 1 million dollar policy only costs 825 dollars per year. In that instance that would mean that the first 250K was 1 dollar per thousand per year, the second 250K was 80 centers per thousand per year and the next 500K was 75 centers per thousand per year.

If you go to 4 different carriers to get the insurance you are likely going to pay 1000 per year for 1 million instead of 825 and perhaps even more because odds are that you won't find 4 who all give you as good a rate as the best 1 you found at the credit rating that gave you the 250K for 250 per year. So likely you would pay more than 1000 for 1 million in coverage by using 4 carriers versus the 825 by using 1.

The extra cost may be worth it for the risk protection, but you need to understand the extra cost associated with spreading your policies.

Personally, whenever I have redone my policies because of rate reductions I consolidated to bring rates even lower and I only buy from top rated companies although obviously we have seen that nothing is ever guaranteed in this kind of an environment.

However I would add that once we get through the next couple years, the appetite for risk and the willingness of the government to allow it will be greatly curtailed for a long time. After a couple decades we could end up back where we are now but once this clears the system will not allow it to return in the near term. Boom and bust cycles take longer than that so I think the risk is mostly being squeezed out of the system now and over the next couple years, painful as it may be.

I have my life insurance with one, solid company (of course, we all thought AIG was solid several months ago), but this idea of diversifying life insurance "risk" (basically) is an interesting one. Anyone out there doing this or ever think of doing it?

If You're Retired, You May Be Able to Save on Your Homeowner's Insurance

In their February issue, The Family Handyman has this advice on saving money on your homeowner's insurance if you're retired:

If you're over 55 and retired, you may qualify for an additional 10 percent discount. Insurers figure that you'll be around the house more and are less likely to be burglarized. You'll also be more attuned to disasters in the making and have more time for home maintenance projects.

Ok, so if the issue is "being around the home more = insurance discount", then what about couples where one spouse is at home most of the time? For instance, my wife is home much more than most people, so shouldn't we be able to get a discount too? Has anyone heard of this? Or maybe the "retirement" discount above is more of a "senior citizen's" discount.

I should probably ask my agent about this...

Two Homeowner's Insurance Claims to Avoid

In their February issue, The Family Handyman has this advice on two homeowner's insurance claims we all should avoid:

Think twice before filing a claim based on dog bites or water damage. These two claims are most likely to trigger a premium increase. Dog bites are the largest single cause of home policy claims. Water damage claims are red flags to insurers because of the costs of eliminating mold and repairing chronic plumbing problems.

This is in line with what Bankrate claimed early last year, so I think these are accurate. I've never had a dog bite claim, but I can tell you that a water damage claim (leaky roof due to too much snow) can raise your rates. The year after we made a claim, our rates went up. So what did we do? We shopped around (this example is for saving on car insurance, but the same principles work for homeowner's insurance) for a better rate and haven't had a claim since. ;-)

13 Smart Insurance Moves for 2009

Bankrate lists 13 smart insurance moves for 2009. Several of them are "no brainers" and really don't need any comment. But here are a few that I think are worth adding a bit more on:

Investigate the financial health of your insurance carriers.

Of course. You want to be sure that your company is there if and when you need it, right?

Discuss payment options.

I'd suggest "pay annually" as an option. It's likely that you'll save money this way instead of paying monthly, quarterly, or semi-annually.

Don't cut back on health insurance coverage.

Many people are doing this rather than cutting elsewhere. My advice: cancel the cable TV and keep your medical insurance coverage where it is.

Build your own insurance policy in the form of an emergency fund.

In particular, if you've raised your deductibles in order to save money on your premiums, then you'll need to increase the amount in your emergency fund to make up the difference.

Raise your property policy deductibles.

A great way to save on both home and auto insurance.

Revisit your life insurance.

One of the best ways to save on insurance is to regularly compare premiums from different carriers.

Do you want to diversify your life insurance?

Interesting concept -- I'd never seen it suggested before. Here are the details:

Find out at what level of coverage your state insurance department backs life insurance, since it varies by state. Then keep policies below that amount and simply buy several policies from different carriers to give you the desired amount of coverage.

And a few more insurance-related thoughts from me:

• Buying Life Insurance from Your Employer

• Six Ways to Save on Homeowners Insurance

• What Kind of Life Insurance Should I Buy?

• How to Determine the Amount of Life Insurance You Need

• Don’t Let Disability Sideline Your Financial Health in 2008

• 12 Ways to Save on Insurance

Five Insurance Policies Worth Having

Here's a list from Smart Money of five insurance policies worth having:

• Health Insurance
• Disability Insurance
• Auto Insurance
• Homeowner's or Renter's Insurance
• Life Insurance

We have all of these. In addition, we also have umbrella insurance. After all, commandment #7 in the 10 commandments of personal finance is "Thou Shalt Protect Thyself Against Risk." ;-)

Here are a few details on our specific situation:

• Health insurance -- My company has a health savings account which is funded by the company. In addition, we put in a monthly amount up to the point where the maximum annual amount is contributed. I haven't yet started using my HSA as a super savings account, but it's on my list.

• Disability insurance -- I have my own disability insurance policy (not with my company, they don't offer it.) It's expensive, but well worth the cost. Here's why.

• Auto insurance -- Of course we have it. We keep the deductible high and only will use it in case of a major accident. And we shop around for car insurance every year or so to save a bundle of money.

• Homeowner's insurance -- Same as auto insurance.

• Life insurance -- A boatload on me and a good amount on my wife. Becoming less and less needed as our net worth grows and our kids get older.

Buying Life Insurance from Your Employer

Consumer Reports discusses the ins and outs of buying life insurance from your employer (over and above what you might get from them for free). In particular, they make this important comment:

Advisers warn against having employer-provided insurance serve as your basic policy for family protection. "If a group policy can't be converted to individual coverage when you leave the company, it could be disastrous, especially if you have medical issues," says Ginny Stanley, a principal at REDW Stanley Financial Advisors in Albuquerque.

True. You'd hate to have to leave an employer, lose your insurance and not be able to get new coverage elsewhere.

Another issue is price -- especially if you are younger. In my earlier employment days, my company's policy was actually more expensive for me than what I could buy outside the company (my current company doesn't have life insurance coverage so I buy outside, of course.) So I always went outside. I don't think many people checked on the price options. They assumed that the company insurance was cheaper because they got "group rates". But inside almost any group there are always some bad risks, which raises the average cost. If you're younger and healthy, you can likely do better price-wise (plus have a policy that sticks with you in case you change employers.)

All About Annuities

Every once in awhile I get a question about annuities -- what do I know about them, what do I think of them, etc. I don't really have a single post that describes what annuities are, how to handle them, etc., so when I saw this piece from the Wall Street Journal that talks about annuities, I knew I had to post on it.

This specific piece describes many of the basics including how annuities work, the difference between fixed and variable annuities, how annuities have been affected by recent market conditions, and whole host of other questions. If you're interested in finding out more about annuities, this article is a good place to start.

If you're interested in the pros and cons of annuities, here's a piece from Bankrate. They start with thoughts on when an annuity should be considered:

Only after you've contributed the maximum to your 401(k), SEP, Keogh, IRA and whatever other tax-deferred opportunities are available to you, should you consider an annuity.

Then they list the benefits of annuities as follows:

• Lifetime income is guaranteed
• Earnings are tax-deferred
• There is no limit on how much you can contribute
• There are no income restrictions
• You can switch investments within your contract without paying taxes
• You get a premium for outliving your life expectancy

And the cons of them:

• Fee and commissions can be high and cut deeply into your return. Look for low-load or no-load contracts with low fees.
• Annuities are generally bought with after-tax dollars.
• At payback time, income is taxed as ordinary income, even if most of it is from capital gains. Not good if you're in a 28 percent or 39.6 percent income-tax bracket and your capital gains tax rate is 20 percent.
• Annuity talk can sound like doublespeak, making it hard to separate the good contracts from the bad ones.
• An annuity is a long-term investment, and bailing out early can kick up penalties, taxes and surrender charges.
• You could be paying for life insurance you don't need.
• You need a long stretch of time and a big chunk of money to make it work.

Personally, I haven't used annuities yet though I may do so in the future. My biggest hang-up with them is that I view them as wily expensive -- as are most "investments" available from insurance companies. Then again, maybe this is a misperception on my end and they aren't as expensive as I think.

Anyone have some words of wisdom on annuities for us all?

Are Kids a Form of Insurance?

I was thinking the other day about a relative who doesn't have any children. She and her husband are in their 70's and in decent health, though eventually they are bound to need some "help" from someone, right? But who do they go to since they don't have children? Other family members? Friends?

I got to thinking of myself in this situation 30 years or so from now. Upon whom will I depend? Most likely it will be my kids. Then I got to thinking -- is having kids a form of insurance (BTW, if it is, it's an expensive form of insurance)? Not that you'd have children just for this purpose, but in having them, are you insuring yourself a bit from future uncertainties? Is having kids a way to help make sure there will always be someone to take care of you? Or are those days long gone -- the days when older family members moved in with younger family members who took care of them?

Interested in your thoughts on this issue.

Six Ways to Save on Homeowners Insurance

Smart Money lists six ways to save on homeowners insurance as follows:

• Maintain a healthy credit score
• Inquire about discounts
• Increase your deductible
• Disaster-proof your home
• Monitor neighborhood changes
• Pay promptly

This is a good list IMO. Here's what we do on each of these suggestions:

1. Yep, you can save a bundle on your homeowner's insurance if you have a good credit score. We saved 44%.

2. I called my agent the other day just to make sure we were getting all the discounts possible. We were.

3. We keep our deductible VERY high (and have increased our emergency fund accordingly) and will only make a claim in case of a major problem. Any other (slight) amount of damage, we'll pay ourselves. Our perspective on insurance is that it's there to protect against catastrophic loss and everything else is to be paid by us.

4. I need to work on this. I check our fire alarms regularly, but I read somewhere that they should be replaced every 10 years or so. Anyone know anything about this? And we do have a fire extinguisher, but I'm not sure where it is -- not good at all!

5. Our neighborhood actually just started a neighborhood "association" that's designed to help us all get to know each other and work together to make our neighborhood a better place. My wife is a "section leader" in this new group.

6. This applies to ALL insurance -- pay on time. You risk being dropped if you pay late, so be sure you plan accordingly and pay before the due date.

Five Insurance Traps

Here's a list of five insurance traps from MSN Money:

• Caesarian sections -- If you're not covered by an employer plan and you're trying to buy an individual health insurance policy, you'll typically pay more for maternity benefits, which help cover the costs of carrying and bearing a child. But maternity coverage may be more expensive, or not available at all, if you've had a child by Caesarian section.

• Trampolines -- Kids love them, but many insurers don't. Some will charge a higher rate to cover the increased liability for injuries, while others won't cover you at all.

• "Bad" dogs -- Some insurers have blacklisted certain breeds, such as pit bulls. Others will cover any dog until it bites, and then you could lose your coverage, pay more for it or be forced to sign a waiver that excludes any further damage done by the animal.

• Bad credit -- In most states, insurers that provide homeowners and auto policies are allowed to consider your credit history when deciding whether to issue or renew a policy, as well as how much to charge.

• Mental-health problems -- If you've ever taken antidepressants, seen a therapist or been treated for an addiction, you may pay more for life insurance. If your problems are serious or ongoing, you may have to search hard to find a policy at all.

Here are some thoughts on each of these from me:

• Caesarian sections -- Not an issue for us and I can't really comment intelligently on this (I know, when has not being able to comment intelligently ever stopped me before?) ;-)

• Trampolines -- A co-worker of mine had this issue. I think she ended up taking the trampoline down. If any of you watch AFV, you'll know why insurers hate these things.

• "Bad" dogs -- Since we've discussed this issue before, I asked my agent what AAA's policy was. He said that if you have a dog, it's no problem. If your dog bites someone, they'll cover it, but then it's a problem (for potential future coverage).

• Bad credit -- We saved a boatload on our homeowner's insurance by having a great credit score. Unfortunately, the opposite holds true as well -- if your score is bad, your rates will be higher.

• Mental-health problems -- I have a friend who is on anti-depressants and since it was a "pre-existing condition", and future treatment she has in this area is not covered by her insurance.

More Insurance Firms Allow Medical Tourism

Just received word that there's a new edition of Patients Beyond Borders: Everybody's Guide to Affordable, World-Class Medical Care Abroad coming out at the beginning of August. I loved this book when I first read it a year or so ago and a TON has happened in the medical tourism industry since that time (and the industry continues to change/evolve almost daily.) I'll be receiving a copy of the new book soon and will give you my thoughts on it, but for now I wanted to share a few interesting points the publisher highlighted when she sent me a recent email on the book. Her comments:

Over the past few months and since the launch of the First Edition, medical travel has seen some tremendous changes:

• Two insurance company giants (Blue Cross/Blue Shield and Aetna) have begun offering coverage for medical care abroad.
• The American Medical Association (AMA) has published its AMA Guidelines on Medical Tourism.
• In the past year, more than 50 new international hospitals have gained American accreditation through the Joint Commission International (JCI).
• Two large US hospitals will soon open full-service medical facilities abroad.
• The number of medical travelers worldwide has jumped to nearly 3 million—180,000 from the US alone.
• For the first time, more patients are leaving than entering the US for medical treatment.

The issue of affordable health care is not going to go away (we'll be hearing a LOT about it during the upcoming presidential election, I'm sure) and medical tourism may be one solution to our "crisis." And even if it's not part of the national plan for everyone, I'm sure that a growing number of individuals will select this option for their major health care needs. The fact that major insurers are now paying for medical tourism procedures is a HUGE step in helping this trend gain momentum.

For more on this issue, see these past FMF posts:

• Big Savings in Medical Tourism

• Want Better Health Care? Go Abroad

• Medical Tourism Saves Money and More Insurance Carriers are Approving It

• Why Go Abroad for Medical Care Reason #1: Cost Savings

• Why Go Abroad for Medical Care Reason #2: Better Quality Care

• Medical Tourism Can Save You Thousands of Dollars

Having a Pool: Limiting Your Liability

When I spelled out my five principles early on in the life of this blog, one of them (principle 5) was to protect the value of your assets. One issue that falls under this principle is protection against liability and nothing seems to scream "liability" (at least to a homeowner) than the word "pool."

The Street takes on this issue and suggests ideas for protecting your backyard pool from tragedy (of both the human and financial kind.) The piece lists five things you can do with your pool to make it safer for everyone as well as reduce your potential liability. The first four are simply taking steps to make sure the pool is safe, guarded, and all laws are followed. Here's the final suggestion -- and the one that applies most to personal finances:

Get insured. Pools are considered an "attractive nuisance" by insurance companies, meaning they can increase your liability risk and your costs. Most homeowners' insurance policies come with at least $100,000 of liability insurance, although the III suggests pool owners increase that amount to $300,000 or $500,000. If the pool itself is expensive, make sure you have enough insurance to cover it in case of damage from a storm or other natural disaster, especially if you're in a risky area. There are also "umbrella" policies for an additional premium of $200 to $300 per year that will cover $1 million of liability above the homeowners' policy.

We don't have a pool, but several people in our neighborhood do. Of course we keep a close eye on our kids and have given them strict warnings about not going into a pool without us around. We've also given them several years of swimming lessons and both of them are fairly good swimmers.

We have looked at buying a home with a pool. Seems like there are lots of pros and cons to it. I'm wondering what the pool owners out there have to say on this issue. What thoughts do you have on the financial and non-financial issues associated with pool ownership?

Create a Home Inventory for Insurance Purposes

I've already shared how I created a home inventory for insurance purposes (I took video instead of making a list). This piece from The Street reminds us what a good idea it is to have a home inventory for insurance purposes -- so if anything happens to your home you can provide the insurance company a complete list of what is missing/damaged. Here are some of their suggestions:

The III offers software that can help organize your list of items. Some insurers, such as Nationwide, recommend using this program, while others, such as State Farm and Allstate, offer their own software. Any inventory will suffice, however, so long as it is comprehensive and organized.

In addition to a list of items, you'll need some proof that the items actually existed and were in good condition -- so you'll need to take pictures. That's much easier these days, since digital photography is relatively commonplace. (If you don't have access to a digital camera, you can also scan printed photos of your possessions.)

A quicker way to catalogue your items is to videotape the contents of your home. Although a video is less comprehensive than individual pictures, it will still provide visual proof of what you have (or had). Video also allows you to narrate as you go. Along the way, zoom in on details and open all doors and drawers so you don't miss anything.

You should also save receipts for any big-ticket items (things like electronics or furniture where prices can vary and you want to prove your stuff was good quality). You can store them in a folder along with your insurance information, but it is also a good idea to scan them and keep digital copies as well.

A couple final suggestions:

• Be sure to store your list/pictures/video off-site. It won't do much good if you have your list at home and your house burns to the ground. I keep my video in my desk drawer at work.

• Be sure to update your list/pictures/video when you get something new. I need to do this as it's now been almost a couple years since I did the last one.

How about you? Anyone out there have a home inventory? Any tips to making one that you care to share with the rest of us?

The Basics of Umbrella Insurance

Principle 5 of my five principles of personal finance is to protect the value of your assets. To me this means to have the right kinds and levels of insurance as well as have a valid estate plan.

I've discussed almost all forms of insurance on this blog and also have regular reminders about the need for a will. But there's something I haven't addressed yet and I'd like to do so today. That topic is umbrella insurance.

Let's start with a definition from Wikipedia:

Umbrella insurance refers to insuring more than one property as opposed to insuring only one. For example the owner might get a discount for insuring both his house and car rather than insuring them with separate policies because it might cost more. Typically, an umbrella policy is pure liability coverage over and above the coverage afforded by the regular policy, and is sold in increments of one million dollars. The term "umbrella" is used because it covers liability claims from all policies underneath it, such as autos and homeowners policies. For example, if you have an auto insurance policy with liability limits of $500,000 and a Homeowners policy with a limit of $300,000, then with a million dollar umbrella, your limits become in effect, $1,500,000 on the auto policy and $1,300,000 on a homeowners liability claim. Umbrella policies are mainly used by those who have sizable unencumbered assets, such as a home with a large amount of equity to ensure that even a catastrophic claim will not allow those assets to be placed at risk.

Now let's move to a piece from the NY Times on umbrella insurance. They illustrate how umbrella insurance can work:

Here's the nightmare: Your car skids. You crash into a Mercedes with a highly paid business executive at the wheel. He’s hurt so badly he cannot return to work. A jury awards him millions of dollars and you have to pay it.

You’re wiped out financially. The court takes your savings, goes after your home and, for decades, requires you to give up a part of your salary.

For some people such a nightmare could never happen. They have an extra insurance policy, known as umbrella or excess liability coverage, which takes care of their liability for the lawsuits and medical bills of the auto accident victim — or of the teenage guest who dives into the shallow end of the swimming pool or the deliveryman who trips on the front steps.

And here's another example:

One of Mr. Cox’s clients crashed into the rear of a car on a slick highway. A woman and a child were critically injured. After two years of litigation, his client settled the lawsuit for more than $5 million. The client had $15 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella,” Mr. Cox said, “they would have been completely wiped out.”

As you can see, umbrella insurance can be a key part of protecting your assets over and above what are normal insurance levels. For those with any sort of significant level of assets, umbrella insurance is a good financial move, but not many people carry this sort of protection:

State Farm, the biggest home insurer in the country, with a clientele of mainly middle- and lower-income homeowners, says about 12 percent of its policyholders buy umbrella coverage.

For those who want/need umbrella insurance, it's very affordable:

Buying such coverage usually does not greatly increase the overall cost of home and auto insurance. For example, in Louisiana, insurance on a $1 million home well away from the coast might run $4,500 a year, Ms. Edmonston, the Baton Rouge agent, said. Two cars could raise the cost of the package to $7,500. And $5 million in umbrella coverage might cost about $600 more, or about 8 percent of the total. In New York, agents say, $5 million in coverage might cost about the same.

I've had umbrella insurance for several years now and just upped ours to cover our ever-growing list of assets. In today's society where people sue others at the drop of a hat, cheap, umbrella insurance is a key part of protecting those assets that you've worked so hard to accumulate.

Help a Reader: Insurance Claim

Here's a question a reader left as a comment recently:

I wonder if anyone knowledgeable about it could comment on whether it's a good idea to file chipped windshield auto claims. I'm talking about the kind of minor damage that can be repaired for $50. The impression I've always gotten is that this is an exception to the don't file small claims rule, because it keeps the damage from spreading and causing a larger claim later (full windshield replacement).

I've always wondered about this myself. Anyone out there know the answer to this question?

What Kind of Life Insurance Should I Buy?

The following is a guest post by Kent E. Irwin of eFinPLAN. Want to know which is better for you -- term or cash value life insurance? Read on.

Virtually all fee financial planners and writers today recommend that people should only buy term life insurance instead of one of the other types of life insurance that have cash value. The insurance industry of course strongly argues the merits of cash value insurance. Over the years I’ve witnessed many emotional discussions between the insurance industry, financial experts and the financial media about the type of insurance people should buy.  I’ve been in both camps.

Prior to creating eFinPLAN financial planning software for consumers I was a fee only financial planner, holding the designation Chartered Financial Consultant or ChFC. During my 25 years experience in the financial services industry I have also sold life insurance, and worked in the home office of a life insurance company. In each of these roles I have tried to be an objective educator giving people good information so that they can make good decisions for themselves. The following discussion should provide some balance on the issue.

The conventional wisdom today regarding life insurance that only term insurance should be purchased may indeed be true for most people, however I think it is good to be informed about all the issues so that people can make well informed decisions.

Why do most experts recommend term insurance:

1. Term costs less than other forms of life insurance both initially and over 10 to 30 years.
2. Lower cost life insurance maximizes the amount of money someone can save and invest.
3. Cash value insurance earns a low rate-of-return on the cash build up.
4. Most people will not need life insurance when they are older if they have little debt and large investments.

Why life insurance agents recommend cash value insurance:

Cash Value insurance is also known as permanent because it lasts at least until age 100. Term insurance expires at the end of the term. Cash value insurance comes in many forms such as Whole, Universal and Variable life insurance. For a full grid comparing most insurance types, click here.  The following are the major reasons insurance agents recommend cash value insurance.

1. Cash value insurance costs less than term insurance, if you compare it over a long period of time.
2. Cash value insurance forces people to save money, which is helpful to people who lack the discipline to save.
3. Cash value insurance’s rate-of-return is comparable with the part of a client’s portfolio that might otherwise be invested in bonds or cash.
4. Many people need life insurance in their older ages: Wealthy people for estate planning, middle income people who were unable to save enough to self-insure.
5. Retirement income: Life insurance cash values grow tax-deferred and may be borrowed tax-free.

Costs & Need for Life Insurance Later in Life

Life Insurance provides protection. It is purchased to provide immediate cash so that loved ones are able to maintain a certain standard of living in case you die. Term life insurance is indeed the lowest cost life insurance initially and if you compare total out-of-pocket costs for premiums for the 20 or so years that most people need it most - when children are still at home and you have a mortgage.

However, there are situations in which people need insurance for longer periods of time. After divorce or death people start new families and have young children later in life. In addition to these “blended families” some don’t save enough and often carry too much debt. Therefore, if you compare term versus cash value insurance over very long time periods, cash value insurance may be lower.

Young people just starting out with new families, careers and mortgages are often at a point in time that their income is low, they have large needs and they can’t afford to compare long term costs. They need the lowest cost for their budget today, giving them maximum cash flow for savings and investing. Many people are underinsured for disability, if they have additional dollars, disability insurance should be a top priority.

Some agents suggest that if you have prosperous financial ventures, your net worth may some day be worth several million dollars. At that time you would need life insurance for estate planning. This may be true, however it is difficult to justify purchasing a lot of cash value life insurance when you are young on the chance of that future possibility. If you need it when you become wealthy, you will probably be able to afford it then.

Some may need life insurance in their older age to provide for their family. Bad decisions, setbacks, blended families and low savings may cause some in their 50’s to wish they had some life insurance other than term, because their term policy may soon expire or cost a lot to renew. They may also have health problems that may hinder their ability to obtain competitive life insurance.

Forced Savings, Rate of Return and Retirement Income

When I was a young insurance agent, one of the main motivations to encourage young people to buy cash value insurance was to force savings discipline. In actuality those that were undisciplined savers eventually let their policies lapse, and those that were disciplined sometimes cashed in their policies because they could see their other savings and investments growing faster. Instead of buying cash value life insurance to force savings they would probably be better off learning good budgeting habits and family financial management.

Is life insurance rate of return that bad when compared to other like investments?

Some argue: Since most people should have some of their investments in cash, money markets and bonds for safety, for reducing volatility and for emergencies – why not put some of that into cash value life insurance? Over the long term life insurance cash values from good policies and companies should perform in the middle single digits similar to a intermediate term bond. Some of the best policies may perform in the upper single digits – not bad for your “safe money.”  However these cash value policies may take 5 to 15 years to break even, and much longer to earn these comparable rates of return.  If you can afford to wait for these types of return, and are saving enough for emergencies and retirement, then you might want to consider cash value life insurance.

Life insurance is also sold to provide retirement income. Sometimes it is referred to as an IRA or 401(k) alternative, or under the LEAP system. Life insurance cash values grow tax deferred, and if properly arranged can be taken out in the form of loans without paying income tax. The computerized models of these programs can look competitive with other investments. Most advisors recommend that people take full advantage of the available retirement and IRA plans before ever considering such an approach. If you desire to investigate this, make sure that the agent provides computer illustrations that show results of lower rates of return and higher mortality and other expenses. Then perform internal rate-of-return calculations on these modest projections. If this still interests you, closely examine the insurance company and obtain quotes from other high quality insurance companies.

Conclusion

Term insurance is often the best decision for most consumers, especially for those with modest incomes and large needs. The first phase of financial planning, forming a secure foundation, usually begins with establishing an emergency fund, having adequate term life and disability insurance, and maximizing IRAs and employer sponsored retirement plans. Those with more mature financial plans may want to consider having a percentage of their life insurance to be the cash value type, depending upon their individual family circumstances, personal preferences, and overall financial circumstances and plan.

Claims that Boost Your Insurance Rates

I think everyone knows that certain insurance claims have a tendency to increase your premium. What are they? Here's a list from Bankrate on a few claims that will increase your homeowners insurance:

Bowen says that making two claims in a three-year period is more likely to trigger a hike, although each company is different.

Dog bites. A single attack is often likely to result in higher premiums.

Water damage. Water damage tends to set off a barrage of red lights for insurers, largely because of the costs of eliminating mold.

Slip-and-fall claims. Slip-and-fall injuries, according to the National Safety Council, are the single largest cause of emergency room visits. If someone hurts themselves on your property and files a claim with their insurance company, your rates may rise.

And here's what can raise your car insurance rates:

Factors that may be considered include whether you were driving while drunk, whether injuries incurred, and the severity and type of accident.

The piece advises only filing a claim when it's a major one. Here's the rationale they use in saying so:

It gets back to the notion of what insurance is all about: bailing you out from a large disaster, rather than the small things that annoy rather than harm.

A few thoughts from this on me:

1. I agree with them 100% on when to file a claim. If we have any minor damage, we always pay for it ourselves. Insurance claims are for major (over $2,000 for us) damage.

2. As such, we've raised our deductibles as high as possible. Doing so saves us a ton of money on our insurance premiums.

3. If you decide to do this as well, be sure to up your emergency fund so you have enough to cover the deductible in case a major accident occurs.

4. Just another expense of having a dog. Sorry, I couldn't help but throw that one in. ;-)

How to Determine the Amount of Life Insurance You Need

The following is a guest post from Marotta Asset Management.

You may have heard that "Life insurance is a gift of love." But if you bought a $100,000 whole-life policy because you wanted to build some cash value when you should have bought a million dollars of low-cost term insurance to meet the survival needs of your family, your well-intentioned effort was not an act of love.

Objective life insurance advice is hard to find. Prior to joining the National Association of Personal Financial Advisors (NAPFA), Bob Arms, CLU, ChFC, AIF®, coauthor of this week's column, sold life insurance for 26 years. He is currently licensed as a life insurance consultant, a fiduciary whose legal obligation is to represent the client first.

The first step toward representing your best interests entails an in-depth discussion of how much life insurance you might or might not need. The formula is Future Financial Needs minus Current Assets equals Your Current Risk. How much you want to provide for your loved ones should you predecease them (A) minus how much you have that could be used to provide for the survivors (B) equals your surplus or shortage (C).

To the extent that a gap exists between your financial needs and your current assets, life insurance is the most efficient product available to provide tax-free dollars exactly when you need them. As you go through the life changes of marriage, children, and career, you should recalculate your need and revisit the life insurance you own.

When members of a young family are making a decision about life insurance, six line items are significant.

1. Debts: The baggage of debt makes the journey toward financial success difficult. Avoid debt if possible, but if you have any, don't burden your family with it after you are gone. Being able to liquidate all credit card debt and car, home equity, and personal loans will give your surviving family the best chance at success in life.

2. Mortgage: Carrying a long-term fixed-rate mortgage keeps more money invested in the markets and qualifies you to enjoy a tax deduction on the interest. Leverage is a popular financial strategy of the rich. But if you would sleep better at night without a mortgage, sleep is more important. Either way, you need enough insurance or investments to pay off the mortgage.

3. Educational and child-care expenses: Depending on the age of your children, multiple expenses must be considered. If your children are preschoolers, the cost of child care may make it impractical for the surviving spouse to return to work. Consider the math. When the children are school age, will you want them to attend private school? Call the schools in your area and work the numbers. What percentage do you want to help with college? In-state tuition, room, board, books and transportation for college presently averages $6,185 annually. Private schools cost about $23,712 per year. Which do you want to fund?

4. Final expenses: Include a small amount for your funeral, approximately $10,000. The average funeral today costs $5,000 to $7,000, but expenses can exceed $10,000.

5. Family income: Estimating a young family's income needs is very challenging. To ease the mental strain, use seven times your adjusted gross income as a rule of thumb. A more accurate prediction requires either a financial calculator or a computer program.

6. Emergency fund: No one can forecast the exact amount a surviving family will actually need, but this category does absorb a potential miscalculation. Most gaps are filled by using 10% of the total of the other five line items: debts, mortgage, education, final expenses and family income.

Now that you have an estimate of how much your family needs, compare the total with your current assets. Include only the assets the surviving spouse can use for expenses. So do not include your house because your spouse needs someplace to live; your car because transportation is essential; or your retirement assets, which the surviving spouse will need during retirement. Nor should you count any inheritance. The old adage is true: Don't count your chickens before they hatch. This category is the total of your current life insurance and all investment assets.

The easiest math remains: Your Total Future Financial Needs minus Your Current Assets equals The Current Risk you may want to insure against. To determine how much life insurance the other spouse should carry, trade places as the first to die and rerun the numbers. Clearly, if the bottom line is positive, you've done something right and either you have enough life insurance or you are self-insured. Congratulations. If the bottom line is negative, thankfully you still have time to take action.

Financial planning is a lifelong process that covers multiple areas, including investments, insurance and taxation. Reviewing all of your financial affairs periodically with a trustworthy advisor who sits on your side of the table will ensure that you achieve your financial goals. 

Life Insurance Advice from Dave Ramsey

Here's Dave Ramsey's take on life insurance:

The only people that have a real need for life insurance are those on whom people are depending for their livelihood. They should carry about 10 times their annual income on 20-year term life insurance.

Here's my take:

1. This is straight-down-the-middle advice, and it's what I do myself personally (for the most part -- see next point.)

2. Insurance on me is about five times my annual salary but that's because: 1) our annual living expenses are FAR below my annual salary (my life insurance is about 12 times our annual living expenses) and 2) we have a good level of investments that could help to support the family in case something ever happened to me.

3. I know there's a contingent of universal life, whole life, etc. readers on this blog, and I've got something to say on these offerings as well: 1) Most of these are VERY expensive, 2) they aren't good options for MOST people, 3) in certain circumstances, they are advisable, and 4) I'm working on having an agent write a post on when these forms of insurance are good deals. More to come.

For more of my thoughts on insurance, check out these posts:

• Buy Term and Invest the Difference

• 12 Ways to Save on Insurance

• What to Do When Your Term Life Insurance Expires

15 Money Moves for Tough Times

Yahoo lists 15 money moves for tough times. Here are some of my favorites along with some corresponding Free Money Finance articles on the same subject:

3. Consider cutting back (rather than cutting out) some expenses. Depending on your current situation and concerns, it might make more sense to just scale back.

"It's much more effective if people cut back rather than cut out," says Cunningham, "because it's the change in behavior that's so tough."

Some ideas:

• Save on Comcast Cable, DirecTV and a HDTV: Two More Examples of Saving Money by Asking for a Discount

• How To Save Money On Your Vet Bills

• Two Examples of Saving Money by Asking for a Discount

4. Safeguard your current job. Remain engaged and enthusiastic, keep a high profile and network, network, network.

Analyze how much you save or produce for the company, stay current with the latest developments, [and] participate in at least one local professional organization.

Some thoughts:

• How to Hunt for a Job Without Letting Your Current Employer Know You're Doing So

• Career Reminder: Very Few Jobs are Worse than Unemployment

• What to Do When You Have a High-Paying Job You Hate

10. Re-examine your insurance. You don't want to be underinsured or overinsured. The key is to have enough to cover you at the best rate you can find. Shop your policies, set your deductibles at the highest amount that you can comfortably pay out of pocket and make sure you're getting credit for everything appropriate, like having car alarms, air bags and a good driving record, says Cunningham.

My adds:

• 12 Ways to Save on Insurance

• 10 Commandments of Personal Finance, Commandment #7: Thou Shalt Protect Thyself Against Risk

• Buy Term and Invest the Difference

Don’t Let Disability Sideline Your Financial Health in 2008

The following is courtesy of ARA Content.

Homeowners with subprime mortgages won’t be the only ones facing foreclosure in 2008. Each year, 50 percent of all mortgage foreclosures are the result of the financial toll exacted by disability, according to the medical journal Health Affairs.

In fact, loss of income due to disability causes 350,000 personal bankruptcies every year, the journal reports. And three in 10 workers entering the workforce can expect to become seriously disabled during their lifetimes; one in seven will be disabled for five or more years, according to the Social Security Administration.

“Clearly, getting financially fit by preparing for disability should be high on the New Year’s resolution list of every working American,” says Robert Taylor, president of the nonprofit Council for Disability Awareness (CDA). “Not being able to work because of an illness or accident can be incredibly costly and personally devastating. Planning for disability is an essential, but often overlooked, part of the financial planning process.”

Under the best of circumstances, disability can place a financial hardship on families. But many American families are more financially at risk than ever, with 44 percent spending more than they earn, according to the Federal Reserve, and average credit card debt approaching $10,000, as reported by Parade Magazine.

“Disability does not have to equal financial disaster,” Taylor says. The CDA offers the following tips for getting financially fit – and preparing for disability – in 2008:

1. Make a list of your essential monthly living expenses. These include costs like rent or mortgage payments, utilities, food and medical insurance that would continue if you lost your income. Eliminate extras that you could live without if you had to, such as entertainment and vacations. This list of essentials will give you an idea of how much money you absolutely must have each month in order to make ends meet.

2. Get familiar with your employer’s sick pay and/or long-term disability policies. Can you count on your employer to continue at least some of your income while you are disabled? Many do not. Knowing in advance what, if anything, you can expect from your employer and how long you can expect to receive it, can help you determine how much income you’ll have to replace in the event of disability.

3. Identify other sources of income that might help you cover expenses during a disability. Can your spouse work to replace some of your lost income? How long would your savings cover those expenses if you had no income? Would you want to tap into your retirement savings? Could a second mortgage or support from family members and friends be an option?

4. The average length of disability is 30 months. If your income during disability and savings wouldn’t carry you for at least that long, you’ll need to increase your savings or line up other sources of income.

The road to financial fitness begins with thinking ahead and good planning. You need to plan for disability just as you plan for an unexpected major medical expense or save for retirement. With good planning, the financial impact of disability can be much more manageable.

Taylor’s organization, the Council for Disability Awareness, is a nonprofit group focused on helping the American workforce become aware of the growing likelihood of disability and its financial consequences. The Council’s Web site, www.disabilitycanhappen.org, offers tools and tips to financially prepare for disability and how to help prevent disability before it happens.

For more on disability insurance, see these posts:

• Why You Need Disability Insurance and How to Save on It

• 12 Ways to Save on Insurance

• One of the Greatest Financial Mistakes

How I Create a Home Inventory for Insurance Purposes

Nickel asked his readers if they have a home inventory -- a listing of what's in their home. Such a list would be used to get reimbursed by your insurance company in case fire, flood, etc. damaged all or most of what's in your home.

We don't have a listing of what's contained in our home (that would take quite some time to complete!), but we do have a home inventory. The summer before last, I videotaped our home room by room, detailing what we owned, where any especially valuable items were kept, and so on. I then took the take to work and keep it in my desk. If anything ever happens to our home, I can review the tape with the insurance company and decide upon replacement costs.

The video was much easier to make than a list of everything in the home -- it took me less than an hour (imagine showing someone your home, though in a bit more detail, and you'll know what I have on tape.) Though this reminds me that I probably need to update the video this year. After all, things change a bit in that amount of time.

How about you? Do you have a home inventory for insurance purposes?

10 Commandments of Personal Finance, Commandment #7: Thou Shalt Protect Thyself Against Risk

Bankrate offers a list of the 10 commandments of personal finance that I'll be sharing with all of you as well as providing my thoughts on their selections. The commandment for today:

VII. Thou shalt protect thyself against risk

There are numerous risks in this world, many of them financial. Sweeney believes it's important for people to have the right insurance, such as health, life and disability, to protect themselves and their families. In addition, they need car, home and even renters insurance. A new survey by Apartments.com indicates that 58 percent of their respondents do not have renters insurance.

I agree. Having insurance is a key part of sound money management. The types of insurance you'll need include:

1. Disability insurance.
2. Life insurance.
3. Homeowner's insurance.
4. Car insurance.
5. Umbrella insurance.
6. Medical insurance.

Did I miss any? (Maybe long-term care insurance?)

For related thoughts on this topic from Free Money Finance, see these posts:

• 12 Ways to Save on Insurance

• Insurance: Use It for the Big Losses in Life

• Costly Insurance Mistakes

Click here to read part 8 of this series.

Click here to read part 1 of this series.

How Much Would It Take for You to Give Up Your Health Insurance?

Here's an interesting piece of information I found in the February issue of Money magazine:

25% of people say they'd give up their health coverage at work if their employer gave them $25,000.

Wow. I know it's not a large percentage, but 25% isn't small either.

Maybe there's a seed of an idea here. I can see a time in the future where some employers buy out employees' health coverage as a way to lower costs/limit potential losses.

I'm not sure what it would take for me to give up my health coverage, but it's a lot more than $25,000. How about you? Would you trade your health coverage for $25k? If not, what would it take for you to consider such an option?

Minor Minivan Fender-Benders Can Cost You a Fortune

Here's an article from my neck of the woods that details how expensive minor fender-benders in a minivan can be. The details:

Repairing damages to minivans involved in low-speed crashes of 3 to 6 miles per hour could range from $483 to more than $3,500, according to test results released Thursday by the Insurance Institute for Highway Safety.

In the "olden days" when I was a kid, our car could hit a tree at 25 mph and not show any signs of wear. Then again, that car probably got two miles-per-gallon as it was as heavy as a tank. ;-)

It's not only minivans either. When I was backed into this summer (at a low rate of speed, as you can imagine), the total bill for the insurance company was $2,000. Yikes!

Maybe this is yet another reason to ride my bike to work instead of driving. ;-)

Buy Term and Invest the Difference

I've written a couple times about buying term life insurance and investing the difference (see Insurance and Investing: Buy Term and Invest the Difference and Former Insurance Agent: "No Way" is Permanent Insurance Better than "Buying Term and Investing the Difference"). For those of you unfamiliar with the phrase "buy term and invest the difference," it simply suggests that you do not buy permanent life insurance and instead by the cheaper term life insurance and invest the money you saved doing so. If you do this, you'll end up having more money in the long run as well as life insurance during the time you need it.

Turns out that Money magazine's "Mole" agrees that buying term and investing the difference is the best option for most people:

If you are a disciplined saver, I strongly recommend buying term and investing the rest. If you need a forced savings vehicle and you can't find that vehicle elsewhere, then you may want to consider a permanent policy. But either way, make sure you understand what it is you're buying and how much it's costing you.

He hit this one exactly on the head in my opinion. If you are disciplined enough to actually invest the difference (and not spend it), then buying term and investing the difference is probably for you. But if you're not able to save on your own, permanent insurance, though much more expensive, is likely a better option for you.

My Company is Moving to a Health Savings Account

Wouldn't you just know it? A few days after I posted Fund Your HSA to Cover Retirement Healthcare Costs, my company announces that we're changing our medical insurance as of January 1 and going to a Health Savings Account (HSA) plan. Great! This gives me a new subject to write about! ;-)

Here are the details of our plan:

• Our new medical insurance has a $4,000 deductible. Yikes!

• The company is going to fund $4,000 per employee per year (covering the entire deductible)! Hooray!

• With this amount, we pay for doctor's visits, prescriptions, etc. at the negotiated rate by our health care provider. (in other words, no more $20 co-pays for a doctor's visit, we're now on the line for $100 or so a pop.)

• Once the deductible is met, our medical costs are covered at 100%.

• Any amount of the deductible we don't spend is ours to keep. The account then gets re-funded with the total amount the next year. For example, let's say my account gets funded with $4,000 and I only spend $1,500 in year 1. My unspent $2,500 carries over and I get another $4,000 put in my account. I'll then be up to $6,500. You can see that the account can really build up value over time for a healthy family.

• The amount noted above is mine -- it does not belong to the company -- so I can take it with me if I leave (and spend it on a variety of health-related costs.)

• I can make additional contributions (which are tax deductible) up to a certain point (somewhere in the $5,600 total range -- they still need to get us that information.)

• If my HSA gets over $3,000 in it, I can have those funds invested in any of eight mutual funds (I don't have the list yet) to make my money work as hard as possible.

• While our dental and optical plans are not changing, we can use money from our HSAs to cover out-of-pocket costs in these areas, such as glasses, braces, etc.

They gave us an "HSAs for Dummies" mini-booklet that I'll be reading and sharing with all of you as time goes on. But at first blush, it looks like a great plan.

If you want to know more about HSAs, check out Fund Your HSA to Cover Retirement Healthcare Costs for now.

Complications From Diabetes Can Significantly Impact Americans’ Financial Stability

The following article is courtesy of ARA Content. I decided to run this one because my grandmother is facing this very issue -- diabetes is impacting her finances. She's older and is no longer working, but for younger workers, situations like the ones described below are the reasons we all need disability insurance.

Diabetes is one of the fastest-growing health crises in the United States. One in four Americans, or about 75 million people, has diabetes or is at risk of developing type-2 diabetes.

As with other chronic diseases, the financial consequences and economic impact of diabetes can be devastating. According to the American Diabetes Association (ADA), one out of 10 health care dollars is now being spent on diabetes and its complications while people living with diabetes spend nearly $11,000 more per year on medical expenditures compared to those without diabetes. Furthermore, the Milken Institute estimates that this year diabetes will result in over 140 billion dollars of lost wages and productivity costs. Fortunately, just as there are lifestyle actions people can take to manage and even prevent diabetes, there are steps people can take to prepare for the impact of diabetes on their financial security.

“Often, the financial implications of chronic diseases such as diabetes are overlooked,” says Robert Taylor, president of the Council for Disability Awareness (CDA). “It is important to understand that complications from diabetes may hinder people’s ability to earn a living, jeopardizing their present and future financial security. Wage-earners should be thinking about the financial measures they need to have in place to protect their financial lifestyles.”

Financial preparedness in case a disability happens is a critical responsibility for all wage-earners, particularly as disabilities among the work force continues to grow. A good starting point in the planning process is to estimate the monthly living expenses that would continue during an income limiting disability and determine your potential sources of income. From there you can develop your own plan for protecting your financial lifestyle.

The CDA Web site offers a financial review form that helps users to see how a disability could affect their financial situation, and a guide on how to prepare for that possibility. Also available at www.disabilitycanhappen.org are facts and figures about disability, real-life stories, and tips for healthy living that can reduce your chances of suffering from a chronic disease like diabetes.

Medicare Medical Savings Account Plans

The following is provided courtesy of Marotta Asset Management.

Medicare Medical Savings Account (MSA) Plans are one of the newest Medicare Advantage Plan options. Private companies began offering these accounts in 2007. Like Health Savings Accounts, a Medical Savings Account puts you in control of your own health care dollars.

If you are in good health and want to limit the maximum you would need to pay in a medical emergency, you may want to consider a Medicare Medical Savings Account plan during your retirement years.

When you choose a Medicare MSA plan, you are still participating in one of Medicare's plan options. A Medicare MSA plan is a "Medicare Advantage Plan," also known as Medicare Part C.

A Medicare MSA has two parts: a medical insurance plan and a savings account. The medical insurance portion is a high-deductible health care plan which covers your medical expenses only after you have met a high out-of-pocket deductible. But before you receive coverage, you'll have to pay all of your health costs until you reach your deductible. However, to help you pay the out of pocket costs, the Medicare deposits money into your savings account each year. You can use this money to pay your health care costs before you meet your deductible.

To purchase the Medicare MSA coverage, you probably won't have to pay an additional premium. In keeping with the Medicare Advantage Plan system, you'll simply have to pay the Medicare Part B premium. The costs of Part B are dependent upon your yearly income. In 2008, seniors will pay $96.40 per month if they are married filing joint and reported $164,000 or less in income. Monthly premiums climb as high as $238.40 if you are in the highest income bracket.

With a Medicare MSA, you can keep all the money you don't spend on health costs. In fact, you may do better than break even each year. The annual amount you are given will not cover the gap until you meet your deductible. But if you spend less than the amount you are given, your account could grow in size. You may be able to accumulate enough money in your account to cover all of your health care costs up to the amount of your deductible. And like a true savings account, anything you don't spend one year carries over to the next. With an MSA, it's your money.

As an example, the Anthem MSA plan in Virginia has an annual deductible of $3,000 and an annual deposit $1,300. In short, you pay all medical costs up to $3,000. But to help you cover those costs, Medicare will deposit $1,300 at the beginning of the year into your medical savings account.

If you don't need all of your savings for medical expenses, you can spend your account on what you do need. Withdrawals for Medicare covered expenses are tax-free and count toward your deductible. Withdrawals for qualified medical expenses that are not Medicare covered (such as dental, vision and prescription drugs) are tax-free but do not count toward your deductible.

Qualified expenses may also include items which may or may not count toward your deductible. The IRS has approved a long list of qualifying expenses. In addition to doctors visits, hospitalizations, lab tests and the like, the list also includes prescriptions, some over the counter drugs, vision and dental costs.

You can withdraw and use a portion of the money in your Medicare MSA for non-medical reasons (such as groceries and utilities) without penalty. You will still need to pay income tax on non-medical withdrawals, just as you would with a traditional IRA. The limit you can withdrawal without penalties is equal to your account balance on December 31st of the prior year minus 60% of your policy's deductible. Withdrawals above that for non-medical expenses will be taxed as income and slapped with an additional penalty.

A Medicare MSA can also be a good solution if you have very high out-of-pocket costs under your current Medicare program. Unlike the plain vanilla Medicare Part B which could leave you paying 20% of all your medical costs with no limit, a Medicare MSA account caps your liability. Once you've met your annual deductible, your insurance plan will cover 100% of your Medicare-covered health costs.

Consumer-driven health care plans may help shape consumer behavior and keep health care costs from spiraling out of control. Contrast Medicare MSA plans with other Medicare Advantage Plans. Generally HMOs pay for medical services. Doctors dictate which services are given, and patients are the ones who actually benefit from these services. With Medicare MSA plans, consumers pay, dictate and benefit from services. They are empowered to make their own healthcare decisions.

Those covered by a Medicare MSA plan should be more likely to engage in healthy behaviors and to get annual check-ups. They should also be more likely to inquire about costs and less likely to consume health care they don't need. If this sounds like you, you may be a good candidate for a Medicare MSA.

Medical Savings Accounts offer you the opportunity to take more control of your health care spending. The money you save on your medical expenses is really yours and can be used to pay whatever bills you might have in retirement, even if those bills are not Medicare covered expenses.

Enrollment in a Medicare MSA is limited to one percent of Medicare recipients on a first come first serve basis. If you are interested, I suggest you sign up early. Open enrolment for Medicare MSA plans begin November 15th and ends December 31st every year.

For related articles, see the following:

• How Medicare Works

• Fund Your HSA to Cover Retirement Healthcare Costs

How Medicare Works

The following is courtesy of Marotta Asset Management.

Many seniors look forward to saving on medical insurance costs by enrolling in Medicare at age sixty-five. However, navigating the Medicare system is not for the faint of heart. Medicare is an alphabet soup of plan choices. Currently Medicare is organized as parts A through D.

Medicare Part A provides hospital insurance to seniors. For the majority of seniors who have paid into the plan, enrolling in Part A comes at no cost. Part A covers hospital stays, home health care services, and hospice care. However, if you just need a check up, you'll need to resort to Part B or Part C to help with those costs.

Part B helps to cover doctor's services, some outpatient care, and routine preventative services. However, unlike Part A, you'll have to pay a monthly premium to buy the coverage. The costs of Part B are dependent upon your yearly income. In 2008, seniors will pay $96.40 per month if they were married filing joint and reported $164,000 or less in income. Monthly premiums climb as high as $238.40 if you report lots of income in retirement.

However, unlike Part A, Part B may require you to first pay the $135 deductible before Medicare will pick up the tab. For other services, Medicare will cover 80 percent of your medical costs, requiring you to pay the other 20 percent. Still in other cases, you'll wind up paying both the $135 deductible plus 20 percent of the remaining costs.

Don't try and save a few bucks by skipping Part B coverage. If you fail to enroll in Part B at age 65, you'll be slapped with a 10% penalty for each year you delayed enrollment.

Your Part B insurance will provide you with some free services such as a flu shot, diabetes and cancer screenings, and 'Welcome to Medicare' physical exam. If you take advantage of these services you may avoid more costly and more dangerous conditions.

Most seniors sign up for the Original Medicare plan, a combination of Parts A (hospital insurance) and B (medical insurance). However, if Uncle Sam's doesn't provide you with sufficient coverage, you may be better served by a private insurance company offering a Medicare-approved insurance plan.

Part C, also known as Medicare Advantage Plan, includes coverage for parts A and B through private insurance companies. The plans are usually offered in the form of a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO). Your premiums, co-payments, coinsurance and deductibles will vary based on your specific plan benefits. And, although offered by private companies, Medicare Advantage Plans are approved by Medicare.

Choosing a Part C plan may mean you already receive prescription drug benefits. If your prescription drug coverage is deemed "creditable" by Medicare, you won't have to pay an additional premium for the Medicare prescription drug plan, also known as Part D.

Part D, the Medicare Prescription Drug Plan, is the newest of all the Medicare programs. However, Medicare does not provide the insurance directly. Instead, each state has contracted with insurance providers to offer the drug coverage. If you are a senior, you must decide if you should sign up, and then which plan you should purchase.

Most states offer at least 40 different drug plans. Premiums average $28 per month, depending on the level of coverage and the types of drugs covered by the plan. If you are enrolling in the Original Medicare or don't already have "creditable coverage", you'll need enroll in Part D, or face a penalty. If you fail to enroll at age 65 but decide to enroll at a later date, you'll pay a 1% penalty for each month you delayed enrollment.

The costs of Part D vary, and if you don't think you will need the coverage you should find the lowest cost Part D to avoid the penalties. That way, if you need the coverage later, you won't be stuck with premiums inflated by penalties. You can always change providers at a later time, if you decide different coverage suits your situation better.

If your income and assets are low enough, you may be able to save money on your Medicare costs. This assistance is done through your State Medical Assistance and is often called Medicaid. Call even if you aren't sure if you qualify. The Virginia Medicaid office can be reached at 804-786-7933. Call 1-800-MEDICARE to get the telephone number for other states.

The initial enrollment period begins three months before your sixty-fifth birthday and ends three months after your birthday. Be sure you enroll to avoid unnecessary penalties.

You can get more information by visiting Medicare on the web or by calling 1-800-MEDICARE.

Fund Your HSA to Cover Retirement Healthcare Costs

The following is courtesy of Marotta Asset Management.

Health Savings Accounts (HSAs) can provide inexpensive medical coverage if you maintain a healthy lifestyle. With your healthy lifestyle you may not spend anywhere near your high deductible insurance and consequently save on your medical costs. Even if you do not need to, we recommend funding your account with the maximum allowed. If your HSA builds up it may help you cover any extra medical expenses during retirement.

An HSA is a tax free savings account. As long as funds are spent on qualified medical expenses, all contributions, capital gains, and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

But to qualify for one of these tax-free savings accounts, you must have a high deductible health plan (HDHP). Now, you may be thinking your insurance plan has a high enough deductible already. However, to qualify as a high deductible health plan, your insurance deductibles must be a minimum of $1,100 for individuals and $2,200 for families in 2007.

The good news is, once you meet your out-of-pocket deductible, most HSA-eligible high-deductible plans cover 100 percent of most medical expenses like emergency room visits, hospitalization, lab tests and prescriptions. Still, these deductibles are nothing to joke about. Paying a couple grand out of pocket before your insurance chips in may seem like financial suicide.

HSA-eligible high-deductible premiums are only a fraction of the cost of a traditional medical insurance plan. As an HSA owner you’ll likely do better than break even each year. With the savings on your insurance premiums, you should be able to accumulate a sizeable nest egg in your HSA.

Unlike your traditional health care plan, your HSA funds are not subject to a "use it or lose it" policy. Anything you don’t spend one year carries over to the next year. After all, it’s your money. While you’re on a roll, why not check out the invest options offered by your HSA bank?

Some people put only enough into their HSA each year to fund their medical expenses. This is shortsighted. We would recommend making the maximum HSA contribution each year, after covering your other financial needs.

In 2007, you can contribute $2,850 for individuals or $5,650 for families. If you are 55 or older you can make an extra $800 catch up contribution. In 2008, you can contribute $2,900 for individuals or $5,800 for families. If you are 55 or older you can make an extra $900 catch up contribution.

One you enroll in Medicare (typically at age 65) you can't make new contributions to your HSA. But any money left in your HSA will continue to accumulate tax free. It is a good idea to over fund your HAS while you are young so that during your retirement you will have some extra tax-sheltered dollars to use for medical expenses. After enrolling in Medicare, you can't contribute to an HSA.

Any HSA withdrawals that are not for qualified medical expenses are counted as taxable income and subject to a 10% tax penalty. The tax penalty does not apply, however, if you are 65 or older, or are permanently disabled. However, the withdrawals are still taxable at ordinary income rates.

In other words, any excess contributions you make to your HSA can be withdrawn after age 65 without penalty. Just like a traditional IRA, when the funds are used for non-qualifying medical expenses you will have to pay tax on the withdrawals, which is no different than other retirement savings option.

The law is currently silent on what happens to your HSA when you reach 70 1/2. We expect that the IRS will treat your HSA like an IRA and therefore require minimum distributions, but this has not been settled.

When you die, your surviving spouse inherits your HSA and it is treated as their HSA if they are named as the beneficiary. Otherwise, your HSA ceases to be an HSA and is included in the federal gross income of your estate or the named beneficiary.

There are three strategies that you can use to grow your HSA large enough to cover your retirement years. First, make the maximum allowable deposit to your HSA each year. Second, if your medical plan includes the option, invest your HSA in mutual funds instead of keeping your account entirely in an FDIC-insured savings account. And third, delay reimbursing yourself from your HSA account as long as possible to profit from its tax sheltered compounding interest.

You can reimburse yourself for qualified medical expenses at any time, but you also have the option of leaving the money in your HSA so that it continues to grow tax free. You can save all your receipts in a shoe box for decades and then decide to withdrawal your reimbursements at any future date when you need the money. This allows the growth on these funds to continue to compound tax-free.

Once you turn 65 and enroll in Medicare you can no longer fund your HSA. Medicare will pay for the majority of your health expenses during retirement. There are some expenses, however, that Medicare will not cover that your HSA can. In retirement, your HSA can cover proactive health screenings, unconventional treatments for terminal illnesses and nursing home expenses. Your HSA can even cover long term care expenses if you decide to self insure, or pay your long-term care insurance if you decide not to. None of these expenses will be paid by Medicare.

Another option during retirement is to enroll in a Medicate Medical Savings Account. This account is similar to an HSA, but funded in retirement by Medicare contributions. If you select a Medicare MSA during retirement, you can use the funds in your HSA until you build sufficient value in your Medicare MSA.

Maximizing your contributions to an HSA may secure your health care spending for life. Even if you end up not needing it, you can pay income tax and withdraw it without penalty after age 65 just like a traditional IRA.

12 Ways to Save on Insurance

Insurance is a funny thing.  You’re paying for something you hope you’ll never use to replace things you already have.  In some cases, insurance is required.  But these days you can buy insurance for everything from autos to vacations.  How do you know what to insure and how much to spend?  Here are 12 tips to help you get the coverage you need without spending a fortune:

• Question yourself.  Before buying insurance, ask yourself the following questions:  Why am I insuring this?  Out of fear or necessity?  What is the replacement value?  Is the cost of insurance greater than the value?  Your answers will bring you back to the purpose of insurance, to pay for something you cannot afford to replace otherwise, and keep you from paying for anything else.

• Shop around. Review information offered by your state’s insurance division, then call around to several companies for their rates. Every time you get a premium notice, contact at least two other insurance companies to ask for competitive quotes.

• Get discounts. Ask your insurance agent about discounts. Most policies give discounts for safety features, for example anti-lock brakes and air bags in cars and alarm systems and smoke detectors for homes/apartments. Some insurance companies offer discounts for nonsmokers, good drivers – even non-drinkers. If you park your vehicle in a closed garage instead of a carport or driveway or drive a limited number of miles, you might qualify for a discount.

• Raise deductibles. A higher deductible leads to a lower premium. Keep in mind, the purpose for insurance is to make sure you have coverage for a disaster.  Fender benders on your car or slight damage to your house can be paid out-of-pocket.

• Reduce claims. Only make a claim when the cost/damage is substantial. Minor repairs should be funded out of your emergency fund.  Insurers are notorious for increasing the premiums of those who have cashed in on even low cost claims come renewal time.

• Don’t overinsure. Drop collision or comprehensive coverage on older cars. Determine how much your car is worth using the Kelly Blue Book. If it’s less than one thousand dollars, you may end up paying more for coverage than you would be able to collect on a claim. For life insurance, only insure for the amount needed to replace the income of the one being insured – not so the family of the deceased becomes suddenly wealthy.

• Avoid insurance coupled with investments. There are several life insurance products that mingle insurance and investments (they develop a cash value). Usually, these are very expensive insurance policies and not as good of performers as other options. It’s better to buy term life insurance and invest your extra money elsewhere.

• Don’t forget disability insurance. It’s much more likely that you’ll be disabled than it is that you’ll die during your working years.  Yet many Americans only consider life insurance. Be sure you have a solid disability policy in place – especially for the primary bread winner in your household.

• Buy smart. Purchase a car with a good repair record and low theft rate. Insurance will generally be less expensive.  Also buy reliable brands of electronics and appliances and forego the extra insurance at the register.

• Check the price. Double check your insurance policy after you receive it and make sure you’re getting the price you were quoted.

• Combine policies. If you own a home, consider a combined premium option, where you get insurance on both the home and your cars from the same insurance company. You can typically reduce your premium costs by 10 percent or so by simply having both policies with the same insurer.

• Pay annually. Pay your premiums once a year, rather than quarterly. That way you avoid the typical $5 to $10 “service fee” you get stuck paying each time you send in a payment every few months.

Use these tips to spend only what you have to on insurance.  Keep in mind the purpose of insurance, for protection rather than provision, and you’ll be sure that every cent you spend on insurance is well worth the cost.

One of the Greatest Financial Mistakes

Here's one of the greatest financial mistakes people make: they don't have disability insurance (or enough of it.)

And, unfortunately, many people make this mistake.

Why is it a mistake? Consider the following:

1. Your ability to earn an income is your single biggest financial asset. If it goes, you're probably in deep do-do financially.

2. The chances of becoming disabled are far greater than other potential disasters people pay to protect themselves from -- such as death. Yes, it's much more likely that you'll become disabled than die and that's why you need disability insurance as much as you need life insurance. (Note: I'm NOT saying you need disability insurance and not life insurance -- I think you need both.)

This issue was brought to my attention again recently when Country Financial emailed me their latest survey, this one dealing with disability insurance. Here's what they found:

With disabilities among American workers rapidly growing and government reports that 3 in 10 workers will suffer some type of disability before retirement, a new shows that only 17 percent indicate they have enough disability insurance to replace most (14 percent) or all (3 percent) of their income.  Further, 35 percent say none of their income would be replaced if they were to become disabled and unable to work. 

In fact, for many Americans disability insurance falls low on the priority list.  Sixty-two percent of Americans value other forms of insurance protection, such as homeowners (43 percent) and auto insurance (19 percent), over disability insurance.  Just 22 percent value disability insurance most.

Other survey highlights include:

• In the short-term, one-third (33 percent) say they could not maintain their lifestyle if disabled and out-of-work for 90 days, and another 18 percent are unsure.

• If they were disabled, one quarter (26 percent) say they either do not know where their income would come from or their income would come from no where.

• Nearly one-in-three (31 percent) expect their disability income to come from the government, despite Social Security Administration reports that less than half of all disability claims are approved.

Basically, a very large number of people are playing Russian roulette with their finances -- taking the chance that they won't ever be disabled and need to replace their income. Or, almost as bad, many are counting on the government to help them out if they become disabled. Let me say this about the government's help in this area: the chances of them providing a good amount of your income through disability coverage is about the same as them replacing a good amount of your pre-retirement income through Social Security (which is not good at all.)

For more on this topic, see Why You Need Disability Insurance and How to Save on It.

What to Do When Your Term Life Insurance Expires

As you probably know, I'm a believer in buying term and investing the difference when it comes to life insurance. I know others disagree (mostly those who are in very special circumstances), but this is what I'm doing. My plan is to cover my earning ability/life for the next 15 years or so (that's what's left on my 20-year policy) and in the meantime build a nice net worth that will allow me to self-insure myself past that.

But there will be a point when my term insurance runs out. It will be the same for many of you. And what should you do at that point -- simply let it expire or get a new policy? Here's what Smart Money suggests to help you decide:

To make sense of these or similar situations, ask yourself one fundamental question: Will your death cause unmanageable financial hardship for the people you leave behind? Odds are you have more savings and fewer people relying on them today than earlier in life, so you may not need to hedge against death at all. "The traditional, old-fashioned reason to buy life insurance is to replace earnings," says Joseph Belth, editor of the Insurance Forum in Ellettsville, Ind. "By the time you are retired, you are supposed to have accumulated some reserves, and presumably, your children are independent."

This is where I hope to be. My kids will be grown and through college and my savings should be significant (especially after a couple more decades of saving and compounding), so I'm thinking I'll be fine. In fact, much of my planning will need to center on keeping my estate low enough and managing it correctly via estate planning not to get hit by a big tax bill when I pass on. That's a good problem to have, huh? ;-)

What about you? What are your plans regarding life insurance for the future?

Why You Need Disability Insurance and How to Save on It

Here are a couple piece from Bankrate. The first gives some good reasoning on why you need disability insurance while the second offers some suggestions on how to save on it. First, some thoughts on why you need it:

For most people, their most important financial possession is their stream of income, meaning their job. Now wouldn't it be nice if there was insurance to cover that? And there is -- disability insurance. Disability insurance saved my life. When I was 48, I came down with tuberculosis and the insurance company started delivering to me $3,000 a month, which was a lot of money then, and it came tax-free.

They go on to provide a few more details:

Yes, [people often] get disability insurance from the company, but that's always limited. I believe that people should have their own disability policy, and that it should be "own occ," meaning it's your own occupation. You cannot do the profession that was interrupted. If a dentist becomes disabled, he shouldn't have to go to a restaurant and become a waiter. I believe that the policy waiting period (before you make the claim) should be a significant length of time. There are waiting periods of 30, 60, 90 and 120 days. The longer the waiting period, the lower the premium. It's like a deductible. You are generally limited to 60 percent of your salary in the amount you can apply for. And when you pay for your own disability insurance, the money you receive is not taxable to you, where the money you receive from your company's disability policy is taxable to you if the company is paying for it. The number-one star insurance is disability.

And here's the biggest money saving tip I've seen when it comes to saving on disability insurance:

Elimination period is the amount of time that must elapse before your benefits kick in. The longer you can go before taking benefits, the more you can save on premiums.

I've said it before, but it's worth repeating:

"Yeah, it's pricey insurance, that's for sure. But think about it -- why is it pricey? Because it covers a hugely valuable asset (your income) and there's a decent chance (at least better than many other insurances you pay for) that you'll need it. These are just the reasons you shouldn't be without it."

For more on why disability insurance is a must for us all, see these posts:

• Why You Need Disability Insurance

• Why I Buy Disability Insurance

Props to AAA Car Insurance -- They Took Care of Me

A few weeks ago, I was sitting behind a huge truck at a stop sign when he pulled out to make a left-hand turn. Realizing he couldn't make it in time, he stopped and started backing up. I thought he'd surely stop before he hit me, but as he kept on coming back it appeared maybe he wouldn't. I laid on my horn and yet he kept coming back -- running right into my car. It seemed like minor damage but as anyone who's ever needed body work can attest, looks are deceiving. This one, small bump ended up costing around $2,000 to repair! Yikes!

Michigan is a no-fault insurance state which means my car insurance company would have to handle the repair. The guy who hit me would have to pay my deductible and it wouldn't count against me as far as future insurance rates go (since it wasn't my fault), but still I had to deal with all the issues -- faxing the other driver's confession to my insurer, getting an estimate, having the car repaired (it took four days!), and getting the money from the other driver (he opted to pay the deductible himself so it didn't impact his insurance rates -- and he took his sweet time in doing so, but that's another story.)

Our car, house, and umbrella insurance is with AAA. They are among the cheapest (if not the cheapest) insurers in our area -- and we should know as we regularly price out our insurance to make sure we're getting good rates. Better yet, they have great service. My agent made the process flow as smoothly as possible, got me a repair shop close to my house, and answered all my questions in a timely manner. Just wanted to give them a nod publicly. I certainly don't hesitate telling you all when I have a bad experience with a company, so I want to be sure and tell you the good stories as well. AAA took care of me and I thank them for doing so.

Another Advantage of Being Rich

I saw this and just had to post it. An insurance company hired a private fire crew to protect some houses it insured in the path of a wild fire. The details:

A private fire crew dispatched by a national insurance company that caters to wealthy clients is guarding 22 high-end homes threatened by the Castle Rock Fire, a blaze that has forced the evacuation of hundreds of million-dollar homes west of Ketchum.

The crew will protect only homes insured by AIG Private Client Group, an insurance company that offers "loss-prevention services" to its wealthiest customers. A truck and two-man crew sent by AIG from Montana arrived in Ketchum about 2 p.m. Wednesday to start dousing properties with Phos-Chek, the same fire retardant dropped from U.S. Forest Service aircraft.

"We're not going out there to fight the fire," said Dorothy Sarna, vice president and national director of risk-management services and loss prevention for the New York-based company. "We're out there to protect our clients."

Properties insured under the Private Client Group are all worth more than $1 million, or their owners pay more than $10,000 annually in premiums. AIG says it's not aware of any other insurance companies that offer private fire protection.

A few thoughts:

1. Membership (in the wealthy club) has it's privileges. ;-)

2. This is simply a business decision by the insurance company. Better to pay for a fire crew than fork over $22 million (or more!) to rebuild the homes.

3. $10,000 in annual insurance premiums? Yikes!

Five Types of Insurance You Must Have

When I first set up this blog, I thought about what principles I wanted to highlight as I wrote. That's how I came up with my set of five financial principles to live by. Since one of those principles is to protect your assets through insurance and estate planning, I thought sharing Bankrate's piece on the five types of insurance you must have was a natural. Here's their list:

• Life insurance
• Disability insurance
• Health insurance
• Homeowner's/renter's insurance
• Auto insurance

Here are my thoughts on these as well as some other insurance-related topics:

1. Life, disability, and health insurance are all designed to make up for the loss of your greatest financial asset in one way or another. What is that asset? Your career. Whether it's death, injury, or illness, each of these types of insurance works individually and collectively to make sure you and/or your family is covered financially in case something happens to your ability to earn a living.

2. We have life insurance on both me and my wife. Mine is to replace my income while the amount for her is to replace costs our family would incur if she passed away. These are both term policies and they expire in 15 years or so at this point -- well after the time our kids will be out of college and we should be self-insured. We're definitely in the "buy term and invest the difference" camp.

3. My company doesn't provide disability insurance, so we buy it for me. Yes, it's expensive, but the reason it costs so much is that 1) it covers a HUGE asset (your earning potential) and 2) it's much more likely to be used than life insurance is. If you don't have disability insurance, go get some -- you need it.

4. My company does have a decent health plan, so much of our medical costs are covered here.

5. Of course, we have both homeowner's and auto insurance. We tend to have high deductibles and use the insurance only for major losses -- we'd certainly self-insure for anything minor.

6. I'd add umbrella insurance to this list for most people. With the way America is today, people seem to sue at the drop of a hat. And for very little money, you can cover yourself for a $1 million or so from someone looking to score big or as extra coverage to one of the policies above. It seems like a prudent investment.

7. We still shop around and compare prices annually, but the best company for us over the past few years has been AAA. Most people don't know that they offer insurance, but they do, and offer it at a good price.

8. For some more thoughts on insurance, how to save on it, what to buy and not buy, and so on, check out my insurance category here at Free Money Finance.

Working Women Less Prepared for Income-Limiting Disability

Here's a piece courtesy of ARA Content on the need for disability insurance among working women:

Working women are experiencing serious disabilities at an increasing rate and much faster than working men. In fact, the rate of disability among working women in the United States has grown almost twice as fast as among working males during the past decade (more than 60 percent compared to 32 percent respectively) according to Social Security Administration data.

And although a recent survey conducted by the Council for Disability Awareness (CDA) revealed the majority of working women are more aware than men of the threat that disability poses to them, women remain less likely to take the necessary steps to financially prepare themselves in the event a disability strikes.

According to the survey, nearly half of female workers expressed concern that they might suffer a disability of three months or longer. However, only 38 percent of those women surveyed indicated they had discussed how they would financially manage the onset of an income-limiting disability.

By failing to financially prepare for an income-limiting disability, working women risk serious financial repercussions down the road, especially as accountability for personal financial security continues to shift away from social programs and employers and toward the individual worker.

“Between higher medical bills and lost income, an accident or illness that causes a working woman to experience a long-term absence from work can substantially drain a family’s savings,” explains Bob Taylor, executive director of the CDA. “This situation underscores the critical need to inform working women about the steps they can take to protect their finances in case a disability occurs.”

An executive summary of the “2007 Disability Awareness Survey” is available on the CDA Web site. In addition, the site offers information and tools to help working Americans and their families financially prepare for an income-limiting disability.
----------------------------------

For more information on why disability insurance is so important, see these links:

• Why You Need Disability Insurance

• Why I Buy Disability Insurance

Costly Insurance Mistakes

The following is a post from a reader who's a CFP and blogs at Swimming Upstream to Wealth:

Having lived in Florida, I have witnessed how the insurance companies look for any little violation to deny a claim. Numerous homeowners in Florida were denied a claim after the slew of hurricanes hit in the last few years.

While insurance is probably the most boring topic in the world, it becomes awfully important when you file a claim. Here are a few items that can catch you off guard.

Rental Car Coverage

Most people know their existing car insurance will cover them in a rental car so they decline the expensive insurance offered by the rental car companies. As rental car income dropped due to savvy customers declining this coverage, the rental companies changed their contracts.

If you read the contract now, you will see that, if in an accident, you agree to let the rental car company pick the repair shop, and you agree to pay for the lost rental value of the car while in the shop. Typically, your personal auto insurance company will reimburse you the amount it would cost to repair the damage in one of their approved repair shops. 

So let’s say you back into a street light in a rental car and smash the bumper. Your insurance company provides you with $1,000 because that is what they would pay one of their approved repair shops. The rental car company may choose a repair shop, usually an internally owned shop, that charges $1,200 for the same bumper. Guess who pays the extra $200—you do.

And, the rental company alerts you that it will take 10 days to repair the bumper, which costs you $50 a day due to the lost rental income. Of course, the 10 days are probably 3 or 4 more than what it should take to repair the bumper. As much as it pains me to say it, you may want to purchase the rental car insurance the next time you rent a car.

Inadequate Home Coverage

Most homeowners are under-insured when it comes to their homes. You probably put the policy in place years ago when you bought the house and haven’t revisited the policy in some time. Like some, you probably think your friendly agent reviews your policies periodically to ensure you are adequately covered. Don’t count on it.

The biggest area most homeowners are under-insured is the replacement cost. If your home burned to the ground, how much would the insurance company reimburse you? The best policy is guaranteed replacement cost. This means the insurance company will pay whatever it costs to rebuild your home. Most folks have policies where the replacement cost is well below the actual cost to rebuild. Or they have coverage for 80% of the replacement cost. With the average cost to build a home at $125 a square foot, that 20% could cost you thousands.

This is even a bigger problem for folks that have older homes since these homes were often built with more expensive woods and stone than today. Older homes can cost $300 per square foot to rebuild.

Remember, insurance should only be used to cover catastrophic losses, but you need to review your policies to make sure a catastrophe won't break your bank.

Insurance: Use It for the Big Losses in Life

Here's how we handle all types of insurance in our house:

1. We get a good policy with a trusted company.

2. We set the deductible as high as possible (companies have limits on how high deductibles can be.)

3. We bump up our emergency fund savings to cover these higher deductibles so we have the money needed to pay for them in case we do have to use the insurance.

4. Anything minor (small fender-bender, easily fixable wind damage to the house, etc.) we fix ourselves -- out of our own pockets.

5. We will use our insurance for only major catastrophes. And hopefully, we'll never need to use any of our policies at all.

Doing the above has the advantages of costing us the least possible while still protecting us from major financial hits. I was particularly reminded about the wisdom in paying for small repairs yourself when I saw Bankrate's piece on six ways to avoid home insurance snafus. They stated that small claims can cost more than large ones (and thus insurance companies will raise your rates accordingly.) The details:

"The conventional wisdom (among consumers) is that if you file one really big claim, you're thought of as being a 'bad' customer for the insurance company," says Michael Braun, assistant professor of marketing at the Massachusetts Institute of Technology's Sloan School of Management. "However, we've found that people who file larger claims are not necessarily bad customers."

Instead, small claims -- the ones that are not particularly catastrophic -- are disproportionately expensive for an insurer to process. This is because smaller claims bear the same administrative costs as large ones. "Companies have to staff a call center to answer the phone when people call, they have to have adjusters ready and they have to have people reviewing all of the claims to make sure they are legitimate," says Braun.

Smaller claims are also more expensive if they happen frequently. "If a claim was made because lightning struck a house, the likelihood of (lightning striking twice) would be small. It would probably not deter a competing insurance company from offering a competitive quote on that house," says Young. "But if that house had a series of burglaries, it could deter an insurance company." Premiums would likely increase substantially unless the homeowner could prove that significant protective devices were installed to reduce the chance of loss, she adds.

One way you could view the "expense" we incur by saving additional monies in our emergency fund versus putting them into higher-paying investments is that this extra money is "free" to us -- especially now that we've had several years of paying much lower than normal premiums. The amount we've saved in insurance costs is several times higher than the extra amount we have in our emergency funds to cover any possible deductible. Seems like a good deal to me.

How to Keep Your Valuables Safe

Here are a few tips I found in a recent promotional copy of Bottom Line Personal on how to keep your valuables safe from burglars. The magazine asked reformed burglars on their top tips for keeping valuables safe, and here are the ones that stood out to me:

Don't hide valuables in the bedroom. It's the first place burglars look. We used to spend 15 minutes or less in each house that we robbed. More than half that time was spent in the bedroom, checking the usual hiding places -- the underwear drawer...under the mattress...high closet shelves, etc.

Keep money or jewelry you rarely wear in a safe-deposit box. Hide other valuables in places where burglars don't think to look -- in the garage, for example, or above removable ceiling tiles. Or hide valuables in the freezer or in fake soup cans made for this purpose.

Don't hide all your valuables in one place. A burglar is less likely to get everything if you put items in different places.

A 100-pound Rottweiler or German shepherd might look scary, but burglars know better. Most big breeds, unless they are trained as guard dogs, aren't barkers. What you want are "yappers," small dogs that make a lot of noise. Breeds such as Chihuahua are better deterrents than large dogs.

A few thoughts on these:

1. Here's another alternative: don't have any valuables. Other than my wife's engagement ring, our jewelry, watches, etc. probably add up to $300 or less. We don't really have a big need to decorate ourselves. ;-)

2. Our real valuables are our documents -- passports, unused checks, Social Security cards, etc. and we keep those in a locked, fire resistant safe in a non-bedroom part of the house.

3. My parents hide cash in socks. Guess they'd be hit hard in a burglary.

4. What's the purpose of having expensive jewelry if you don't wear it that often? Seems like a waste to me.

5. The surest way for me to lose something is to put it in an obscure place. I can just see us putting a nice necklace in the garage. I'd NEVER remember where I put it. Unless I put a note to myself and kept it in the bedroom. ;-)

6. Oh yeah, a fake soup can. That's just the recipe to turn some poor person into a lottery winner. I can just see us collecting cans for a church food drive, putting in the "safe" can, and someone at a food bank collecting it. When they get home and go to use it, they discover they've won the food bank lottery!!!!

7. Yeah, I can see how scattering a dozen valuable pieces throughout your house can make it really fun to try and retrieve them. Maybe we could just make our own treasure map and bury them outside in various locations.

8. Ha! The small dogs rule!!!!! (At least in this respect.) But can you put up with the noise the 99.99999% of the time they are yapping and there isn't a burglar?