luke erickson m.s., afc university of idaho extension educator, personal finance madison county...

Luke Erickson M.S., AFCLuke Erickson M.S., AFCUniversity of Idaho Extension University of Idaho Extension Educator, Personal Finance Educator, Personal Finance Madison County Extension OfficeMadison County Extension Office(208) 359-6215(208) 359-6215erickson@uidaho.eduIdahostwocenttips.com

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There are worse things than death. If you’ve spent an evening with an insurance agent,

you know what I mean.- Woody Allen

Avoid Risk

• Read #1 on Page 81And

• Do Exercise 6A

Transfer Risk

• The purpose of insurance is to transfer or share risk!

• Read #4 on pg. 81.

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Avoid Debt

• The purpose of insurance is to transfer risk

• The RESULT of insurance is avoiding debt!

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No insurance = Debt

• Medical debt is one of the leading causes of bankruptcy.

• Insurance is a tool for avoiding debt.

• With 3 to 6 months of income in an emergency savings, and inexpensive high deductible insurance plans, debt can be much better avoided.

Emergency Savings

• 3-6 months of expenses– Covers deductibles– Self Insurance– No “administrative costs”

• Insurance companies charge large fees to process small claims

• With a higher deductible (lower insurance premiums) your emergency savings can grow faster.

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The first $1,000 is the most expensive to insure.

• Why?– Administrative costs

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Rule of Thumb

• High deductible.-$1,000 or more in most cases. -Lowers the premiums significantly

• Use your 3-6 month emergency savings to cover the gap. – Statistics say that you will not need it, but if you do

it’s there AND has been MAKING YOU MONEY in the mean time.

• Use the saved premiums to build up your emergency savings quicker.

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Insurance is expensive!

• 60% payout (as a percentage of premiums). Money, March 2007

• State Farm – 66.6%

• Farmer’s – 56.9%

• All-State – 43.5%

• Claim denials are at an all time high.

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Insurance is expensive! (2)

• It is hard to compare policies and “fight the company” when you are wronged.

• “Insurance companies are paying out less in claims relative to the premiums they collect than at any time in the past 20 years.” – Money Magazine, March, 2007.

• Insurers have been posting 20%-plus gains in earnings.

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Insurance is expensive! (3)

• Keep Good Records

• Be Frank – be completely honest in your application. Otherwise there may be grounds for claim denial later on.

• Read the Fine Print

• Be a Boy Scout – Pre-approve anticipated procedures.

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Insurance is expensive! (4)• Do your homework – Don’t automatically

accept the insurers estimate. • Keep your cool • Challenge coverage decisions if

inadequate.• Get help – Turn to your state’s department

of insurance for help. • Weigh your last resorts – Don’t sue unless

there is big potential for payout.

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Insurance is expensive! (5)

• Remember: The first $1,000 is the most expensive to insure. – Why? – Administrative costs

• Use high deductible plan, and build emergency savings account.

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C.L.U.E. – Comprehensive Loss Underwriters Exchange

• Is like a credit report for insurance.

• Your insurance (claim) history is recorded and kept on record for up to 5 years.

• Small claims can cost the insurance companies much more in administrative costs. – They will count this against you and possibly

raise your premiums.

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Insurance

• Need for insurance – To insure you or you

loved ones from devastating financial loss.

– To prevent the need to go into debt or declare bankruptcy.

– Protect your quality of life.

• Want for insurance– To avoid any

possible risk of financial loss no matter how small.

– This is a luxury• And very expensive!

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• Health

• Dental/Vision

• Life

• Disability

• Auto

• Homeowner’s

• Renter’s

• Umbrella

• Long-Term Care

Health Insurance

• Read “Health Insurance” pg. 90.

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Health Insurance (2)

• 1/3 of Americans do not have access to health coverage through work.

• Private Insurance is expensive but can be reduced through the use of a high deductible.

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Health Insurance (3)

• Reduce Premiums– Increase deductible.– Increase co-pay

• 80/20• 70/30

– Increase stop loss• Maximum out-of-pocket.

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Health Savings Account (HSA)

• Contributions not taxed

• Automatic deduction from paycheck

• Used with high deductible plans!– Reduces administrative costs.

• Investment options in some HSAs

• If you don’t use it, you keep it!– Not to be confused with annual “use it or lose it”

cafeteria plans or medical savings accounts (MSA).

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Avoid Double Coverage

• Only one company can pay your health costs.

• If you have two health policies, both companies will fight over who pays– In the end neither will pay.

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Dental/Vision• These are often included as employee benefits

in employer health plans.• Individually these types of insurance do not

make much sense.– Insurance company will keep 40% of premiums, and

payout will be lower that total pay-in on average.

• Major orthodontic work is often excluded anyway.

• Much more effective to divert these premium payments to the build-up of your 6-month emergency fund.

Life

• Read “life insurance” on pg. 90.

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Life (2)

• Cash Value plans simply have a savings component built into them.

• BUT the savings component can never beat your own private investments.– Because insurance companies only pay

out 60% of the premiums they take in.

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Life (3)

• Term life insurance is cheaper than ever.

• Financial Planners – “Term life is the cheapest most effective coverage.”

• Insurers don’t push them– low commission product

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Many other life insurance products:

• Universal 4.3% avg., Variable 7.4% avg.– (Avg. Index Mutual fund. 10-12%)

• Accidental death, returned premiums, etc.– Just gimmicks. If you invest those premiums

yourself you will be much better off.

• Often sold by your friend, brother-in-law, or a “salesman,” not an actual insurance expert.

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Life: Many products

• But they all boil down to either cash-value or term policies.

• The need for life insurance is fluid and temporary.

• Term is the most effective tool to fill these temporary needs.

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Never spend your money on something you don’t understand.

• Most people do not understand their life insurance products.

• The goal is to become to self-insured.

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Cash Value Vs. Term• Premiums for $125,000 coverage for 20

years. • Cash value = $100 per month• Term = $7 per month.

• If you invest $93 a month for 20 years at 10% = $356,052

• Cash value at $100 per month after 20 years = about $50,000.

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Difference of $300,000!

• At this point you don’t need a policy any more because you have more than enough to be self insured!

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Insure a non-working spouse?

• Yes, this spouse provides value to your household.

• How could you work if the children’s caretaker was no longer there.

• Meals, Laundry, Etc.

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Insure Children?

• Just Burial

• Do not use a cash-value to save for children’s college.

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Disability

• Read “Disability” on page 90.

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Disability

• You are 3 times more likely to become disabled than to die if you are in your 30’s.

• Own Occupation Disability – if you can’t do what you are trained to do.

• Might make sense with white collar job• Usually very expensive for blue collar jobs. • Buy Long-Term coverage.

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Reduce premiums for disability.

• Coverage will usually be for 50-65% of your current take home pay. More than that is very expensive.

• Elimination Period – Deductible might include increasing the

number of days before the policy coverage kicks in.

– 90 days is a decent deductible.– With emergency savings you can increase

your elimination period.

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Good places to buy disability insurance.

• Though employer– Cost can be as much as 75% cheaper than

in the open market.

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Why do we needauto

?

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Auto

• Factors that affect the cost of auto insurance: pg 85.

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Auto

• 3 parts– Liability– Collision– Comprehensive

Insurance 3

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Auto

• Did you know, your address can make a big difference in auto premiums?

• Liability is a very inexpensive part of total auto insurance costs.

• If you have paid cash for a car – collision/comprehensive is optional.– It is a want because borrowing money for a

car is a want!

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Homeowner’s

• Read “property insurance” pg. 90.

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Homeowner’s

• Liability and Property Insurance in one package.

• Replacement cost coverage. – Need to adjust every 5 years or so as the

value of the home rises.

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Homeowner’s

• Reduce premiums– Fire alarms– Smoke detectors– Home security system.

• Some things are not covered– Floods– Earthquakes

Insurance 4

Renter’s

• Read “property insurance” on pg. 90.

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Renter’s

• Covers possession, but not the apartment itself.

• You can often get a significant discount if you already have auto, or other policies.

Umbrella

• Read “liability insurance” on pg. 90.

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Umbrella

• Big Liability Policy– Over Auto and Homeowner’s

• Very inexpensive dollar coverage. – One of the best buys in the insurance

world.

• Protects against lawsuits.

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Long Term Care

• 60% of people over 65 will have some form of long term care in their remaining life.

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Long-Term Care• Do not need to buy until about age 60.

– Before this time, simply invest for your own care.

• Largest expense facing the baby boom generation is not their kids’ college, but rather their parents’ care.

• Kids must approach their parents about this topic.– Responsibility eventually falls on the kids.

Insure anything!

• Read “You can insure just about anything” pg. 91.

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Insure anything! (2)

• Almost always bad deals– Extended Warranties

• extra warranty coverage that must be purchased

– Credit Insurance• Credit Cards• Mortgage

• Very Expensive!

Life stages

• Read 2nd paragraph on pg. 92.

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Young and Single

• Shop for auto insurance.– Premiums may vary by company by

hundreds of dollars. – Renter’s insurance is cheap.– Individual health insurance with a high

deductible and HSA (Health Savings Account).

– Don’t need life insurance.

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When Kids Arrive• Buy lots of 20-30 year flat rate term insurance.

– Coverage = 10 times your annual salary. – Rates in 2007 are about $30-$40 a month for a

$500,000 policy.

• Disability insurance. • Reassess health care coverage.• Maximize discounts

– Good grades– Multiple policy discounts– Good driving records.

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Empty Nesters

• When kids move out auto rates drop and need for life insurance decreases.

• Long Term Care premiums are less when you are younger.

• Downgrading your house size can also save in homeowner’s.

• Shop again for good rates on Auto.

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Retirees

• Check for senior citizen discounts.

• Supplement Medicare coverage with private insurance if necessary.

• Consider Long-Term Care coverage.

Gone in 60 Seconds

• Quiz on pg. 80.

Teen Risks

• Exercise 6A pg. 81.

Did you know?

• “Did you know?” Pg. 85.

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erickson@uidaho.edu

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Evaluation

Questions

Luke Erickson M.S., AFCLuke Erickson M.S., AFCUniversity of Idaho Extension University of Idaho Extension Educator, Personal Finance Educator, Personal Finance Madison County Extension OfficeMadison County Extension Office(208) 359-6215: erickson@uidaho.edu(208) 359-6215: erickson@uidaho.edu