Insurance - Winning the Game Without Getting Sick, Dying or Going Broke
There are worse things in life than death. Have you ever spent an evening with an insurance salesman?
All You Need To Know
This is going to be a real quick chapter because I hate insurance—you are paying for something that only pays off if you have an accident, get sick or die. No thanks. First, here are the insurance products you DO NOT need, right now anyway.
Life Insurance-No, no, no. If you are single or married with no children, no. If you’re single and die who cares except your parents and they don’t need the money. If you’re married and no kids and you die, your spouse has a job and will miss you, for awhile.
Renters Insurance-Just starting out, you don’t have a lot of valuable stuff and the odds of somebody breaking into your apartment and stealing your non-existent stuff is slim, so don’t buy it.
Collision and Comphrehensive Auto Insurance-If your car is paid for and a beater, don’t carry collision or comphrehensive. Also raise your deductible on your liability insurance after your emergency fund is funded. This lowers your premium, a lot. If you have a loan on the car, the lender will require you to carry comphrehensive and collision so pay off the car fast.
Umbrella Insurance-this insurance protects you against lawsuits if somebody slips on the ice on your walk and sues you. First, you don’t have a walk and you don’t have any money so lawyers will not bother to sue you. Don’t buy it.
Other Types of Insurance-there are all kinds of stupid insurance products out there, even hole-in-one insurance for golf events. And burial insurance. If you die, let them throw you out in the street, you don’t care.
DO BUY these coverages.
Medical Insurance-Your company will probably offer some kind of insurance or a variety of choices. Get the one with the lowest cost and highest deductible assuming your emergency fund is funded.
Liability Insurance-this is car insurance that pays to fix the other guys car when the accident is your fault.
Insurance is a fact of life but one of the more confusing facts and needlessly so.
Any kind of insurance is a bet, a bet between you and the insurance company. You are betting that you might, might have an accident or an illness sometime and are willing or required to get protection against that event by paying a reasonable(?) fee for that protection. The insurance company is betting that you do NOT have that accident or illness so they can pocket the premium. Also, insurance companies are not stupid and they don’t cover stupid things like floods. That’s right folks—most of those people in New Orleans did not have insurance because the insurance companies did a little thinking and concluded that houses built twelve feet BELOW a lake are not good risks.
So to figure your insurance needs and costs to protect yourself, you need to figure out your risk tolerance. We will go into a little more depth on the insurance you don’t need and then on to the levels of insurance you do need.
Life Insurance does not protect you. It protects those dependent on you from financial ruin when, and if, you get run over by a bus. But you don’t have any dependents right now so you don’t need the insurance. Your company may provide some life insurance but unless it is free, decline. Not suprisingly, the insurance industry has an argument for buying life insurance even when you don’t need it. The rationale is that you should buy insurance now when you are young because when you do need it you will be 1) older and 2) you may not qualify from a health viewpoint. The counter argument is that, yes, the policy may be a bit more expensive because you are older but they are ignoring the fact that you saved five to ten years of premiums by not buying the stuff when you were 22. As far as the health issue goes you probably will be healthier when you are 30 than you are now just because you’re not running all over town at 30.
The bottom line is don’t buy life insurance now unless you feel a life threatening disease coming on or you don’t have any other use for the money. You DO need life insurance when you have a non-working spouse and two or three screaming kids running around the house but we will leave that for later.
Renter’s Insurance Most thiefs concentrate on targets that have something worth stealing unless they are in training. Since you don’t have anything really worth stealing, weigh the cost of insurance against the odds of a break-in. This is an example of determining your tolerance for risk.
Collision and Comphrehsive Auto Insurance There are three types of auto insurance. Collision pays to fix your car if you have an accident and it is your fault. Comprhrensive pays to fix your car if a tree falls on it or you get caught in a hailstorm or some other kind of natural disaster. Liability pays to fix the other guys car if the accident is your fault. You have to have liability by law in most, if not all, states.
You should consider canceling collision and comp if your car is paid for and it is old. Remember, insurance is a bet. You are betting that you will have an accident and the insurance company is betting that you won’t. If you are a safe driver and have not had an accident that was your fault, you may want to agree with the insurance company for once and decide to cancel collision. Plus, if you think the chances of a tree landing on your car or getting stuck in a hailstorm are slim then you may want to cancel the comphrehensive. There is an additional, more compelling reason for canceling both. If you have an accident or the tree does fall and you incur $8,000 in damages, the insurance company will not pay $8,000. They will pay if the car is worth over $8,000 but if the car is worth only, say, $2,500 they will pay you $2,500 (less your deductible) and you are on your own to find a replacement for old Betsy.
Again, this is an example of determining your risk tolerance and weighing the cost of coverage against the possibility of an event and the payoff if the event occurs.
Umbrella and other types of insurance aren’t even worth talking about at the moment.
The Two Insurance Products You Do Need Are Auto Liability Insurance and Medical Insurance
Auto Liability Insurance pays to fix the other guys cars if you cause an accident. It is required by law in most states as a condition of getting auto registration but some people still find ways around this and drive without insurance. Conversely, if the other guy causes the accident his/her insurance will pay to fix your car and pay your medical bills. The goal here is to avoid being in an accident and avoid being in an accident with somebody that does not have insurance. There is no way to tell but practice some auto profiling and give a wide berth to people that weave in and out of traffic, have dragging tailpipes and large plumes of smoke trailing out the back of the car.
Most states require a minimum of $50,000 coverage per occurrence. Get $300,000 and think about $500,000. This is one rare area where getting more than the minimum is applicable.
Car insurance, like all insurance, is confusing but armed with this knowledge you should be able to at least talk with an agent. I recommend you use a major company but one that does a majority of their business over the phone or internet like GEICO. GEICO is owned by Warren Buffett (trivia—Margaritaville’s Jamie Buffett is Warren Buffet’s nephew) and Warren is not out to make money by offering shoddy service. I don’t use GEICO but have been covered by AMICA for a long time so start with these two. Check them out at GEICO.com and AMICA.com and try a few others to get comfortable with the terminology and costs.
Medical Insurance--you know something about this but have probably never dealt with it as you were covered by your parent’s plan or didn’t go to the doctor much.
Here are facts that you need to know—
1) You need insurance in case you get in a major accident or come down with a major illness.
2) Your company probably provides some kind of coverage but they don’t like it and you will be paying more for your coverage as time goes on.
3) Since you are young and relatively healthy, you should look for the plan that has the lowest cost which means you will pay more when you visit the doctor and have a higher deductible but you will have a lower monthly cost. Look for Health Savings Accounts plans, commonly knows as HSA’s.
4) If your company only has one plan, look at the cost and get quotes from private outside insurance companies for comparison.
Fact One—Because you are young, you should not be getting sick much and you should not be going to the doctor very often, if at all. Having worked for a pharmaceutical company I learned a lot about the cost of illness and the one statistic that stood out was that 90% of a person’s medical bills are incurred in the year of death. The corollary is that young people should not have much in the way of medical costs. So if you are relatively healthy you want coverage for the catastrophes, known in the insurance world as catastrophic coverage. Catastrophes are pretty much limited to major accidents and catastrophic illness. Both have low probabilities so your cost of coverage should be low.
Fact Two—Your company may very well offer a wide variety of medical plans. Be on the lookout for the word “Cafeteria.” A cafeteria plan is based on the food concept-go in, look around and pick out what you like. Unless you have some chronic reason for going to the doctor and you need a lot of drugs, the legal variety, you should be looking for a high deductible, low cost plan.
If there is only one plan then look around at your co-workers and look at the cost of the plan because you are paying the same amount for coverage as the obese guy that sits next to you and smokes two packs of cigarettes a day in between Twinkies. Check the cost of the company plan versus private companies that offer medical insurance on the open market and compare costs. Remember that building wealth is about stopping leakage and if you are paying a lot out for medical insurance that you don’t need, you are leaking a lot.
Fact Three—Health Savings Accounts are a great place to start. Your company may offer them so jump on it. If not, you will have to do a little work but it is all on the Internet so google HSA. HSA’s work like this-low cost, high deductible with tax free savings that build up over time to pay the deductible if, and when, you incur medical expenses. Put another way, you save $50 a month in a savings account funded out of your paycheck. The savings and the interest income are NOT included in your taxable income. You pay $50 a month for medical insurance instead of $150 under a regular plan. BUT you pay a $500 deductible instead of zero. BUT when you do have to pay the deductible, you use the money from your savings account. Sound confusing? Kind of but it is the wave of the future so get on board and figure it out. Remember, insurance is all about risk tolerance.
Fact Four-See Fact 3 for details.
Finally, if you do go to the doctor ask if they give a discount for cash. My doctor knocks 30% off the bill for cash.
We’re done with insurance.