Insurance Basics

[Tortoise]

Based on a conversation I had this weekend, I decided it would probably be a good idea for me to go back and review insurance basics from a personal finance perspective, to make sure I have the right kinds of insurance with the right coverage amounts.

Several years ago I read The Bogleheads' Guide to Investing, which includes a chapter on being well-insured. I recall it was a good introductory resource, but I think I might be looking for something a little more detailed and in-depth than that single chapter.

Any recommendations on your favorite books or articles that summarize the types of insurance that most people need, along with good rules of thumb for reasonable coverage amounts?

[moda0306]

Life
Disability
Homeowners
Auto liability
Umbrella
Health
Maybe long-term care

Details to come .

[MachineGhost]

Life
Disability
Homeowners
Auto liability
Umbrella
Health
Maybe long-term care

Details to come .

You only need life and disability if you have children and/or a housewife or househusband.  Homeowners (or renters) and auto seems self-evident.  Umbrella is only necessary if you have more assets than the other forms of insurance will cover; its also an low-cost alternative to offshore asset protection.  Health is mandatory now; no point in debating that one.  Long-term care I believe is a scam because you won't get the promised benefits when you actually need them besides the fact the premiums skyrocket every year you get older AND your continual ability to keep it depends on your continual ability to pay AND rampant inflation from excess demand for LTC is whittling away the true value.  It truly is a sucker's bet.  I fully expect the government is going to have to step in to deal with the crisis of a lack of LTC from the Baby Boomers in a few years.  No one can really afford LTC long-term except those self-centered rich jerks living on the Upper West Side.

[Kshartle]

Life
Disability
Homeowners
Auto liability
Umbrella
Health
Maybe long-term care

Details to come .

You only need life and disability if you have children and/or a housewife or househusband. yeap Homeowners (or renters) and auto seems self-evident. yeap  Umbrella is only necessary if you have more assets than the other forms of insurance will cover; its also an low-cost alternative to offshore asset protection.  Health is mandatory now; no point in debating that one the debate is.....am I better with the penalty and then sign up if I get really sick? Can I just do that? .  Long-term care I believe is a scam because you won't get the promised benefits when you actually need them besides the fact the premiums skyrocket every year you get older AND your continual ability to keep it depends on your continual ability to pay AND rampant inflation from excess demand for LTC is whittling away the true value Yeap .  It truly is a sucker's bet.  I fully expect the government is going to have to step in to deal with the crisis of a lack of LTC from the Baby Boomers in a few years. gold is the insurance if the government is going to pay with printed dollars  No one can really afford LTC long-term except those self-centered rich jerks living on the Upper West Side.

[MachineGhost]

debating that one the debate is.....am I better with the penalty and then sign up if I get really sick? Can I just do that?

No, I think they were smart about that.  You can only sign up during the open enrollment period with only very limited exceptions outside of the open enrollment period.  Seriously, if you waited until you were dying of a catastraphobic disease and there was an exception to the open enrollment period requirement for that, you'd be saving the taxpayers a lot of money anyway!  The penalty is pretty prohibitive anyway (starts at 1% and increases to 6% I believe),  so I can't imagine where its more cost effective to pay the penalty then just be in the risk pool.  The major downside that I can see is that all the plans on the exchanges seem to be those chain-gang HMO's.

Now that the Republicans have accepted the reality that Obamacare is a success and is here to stay, they are finally coming out with legislation to improve the many faults.  About time!

[moda0306]

Life
Disability
Homeowners
Auto liability
Umbrella
Health
Maybe long-term care

Details to come .

You only need life and disability if you have children and/or a housewife or househusband. 

I disagree. Especially on disability. With your ability to work, you have a risk on your balance sheet to your financial security, no matter who is dependent on you. It is big enough to be worth transferring. Disability events can be extremely financially devastating at worst, and very disruptive annoyances at best... In fact, especially if you don't have a spouse to help you through it .

With life insurance, if you are likely to need it in the future due to a spouse and/or child, you can lock in your health class by securing it now. If you have a spouse that also works, there could still be a very large financial risk to a premature death of either spouse.

Imagine a couple earning $50,000 each and spending $80k per year at age 30. Never having kids. If a spouse dies, you now have $50,000 per year of income coming in, but you don't spend half as much to live the same lifestyle. In fact, the rule of thumb is 75%. So now you have someone earning $50k, now having to adjust his/her lifestyle by $1,600 per month to keep saving only $10,000 per year now (instead of $20,000).

This represents a pretty sizable need for life insurance IMO.  Life insurance is very efficient at transferring risk. If you look at a "decision matrix" on the cost/benefit of it, most people would pick the "insurance" option.

Homeowners (or renters) and auto seems self-evident.  Umbrella is only necessary if you have more assets than the other forms of insurance will cover; its also an low-cost alternative to offshore asset protection. 

Not really. If the need for robust auto liability is self-evident, then why isn't umbrella?  In many states, when juries decide damages, they don't know how much you have in assets or insurance. Any judgement above and beyond your insurance and unpayable by your assets can be garnished.  In my state, max garnishment is 25%.




Regarding long-term care, I'll leave that one alone. I don't think it's a "scam," but it is somewhat inefficient and unstable. I tend to like the idea of building up a decent state partnership benefit, at least.

[Reub]

Also, do not forget flood insurance. It is usually cheap and can be vitally important. Homeowner's insurance will not cover flooding.

[MachineGhost]

I disagree. Especially on disability. With your ability to work, you have a risk on your balance sheet to your financial security, no matter who is dependent on you. It is big enough to be worth transferring. Disability events can be extremely financially devastating at worst, and very disruptive annoyances at best... In fact, especially if you don't have a spouse to help you through it .

That's a good point.  So how much does disability insurance cost for those disability categories that Social Security doesn't cover (since filing for private disability insurance makes you go through the SSD process first so they can fob you off onto the government, if at all possible)?

With life insurance, if you are likely to need it in the future due to a spouse and/or child, you can lock in your health class by securing it now. If you have a spouse that also works, there could still be a very large financial risk to a premature death of either spouse.

So as opposed to LTC, you can lock in your "health class" with life insurance?  What does that mean exactly?  Premiums never rise?

Not really. If the need for robust auto liability is self-evident, then why isn't umbrella?  In many states, when juries decide damages, they don't know how much you have in assets or insurance. Any judgement above and beyond your insurance and unpayable by your assets can be garnished.  In my state, max garnishment is 25%.

I meant self-evident as in a legal requirement.  I'm sure most people don't know about umbrellas because its not advertised widely because its not much of a profit center for insurance companies.  Heck, I knew all the ins and outs of offshore asset protection long before I ever heard of umbrella insurance!  Are you saying that even umbrella insurance won't fully cover judgements?  Wow.

Regarding long-term care, I'll leave that one alone. I don't think it's a "scam," but it is somewhat inefficient and unstable. I tend to like the idea of building up a decent state partnership benefit, at least.

Yes, I have a flair for the dramatic.   What is a "decent state partnership benefit"?

[MachineGhost]

Also, do not forget flood insurance. It is usually cheap and can be vitally important. Homeowner's insurance will not cover flooding.

Aye, and earthquake insurance!

And both flood and earthquake insurance seems to be the Federal government's responsibility now.

[Kshartle]

Seriously, if you waited until you were dying of a catastraphobic disease and there was an exception to the open enrollment period requirement for that, you'd be saving the taxpayers a lot of money anyway! 

How does that save the taxpayers money? Wouldn't I have been the one saving all the premium dollars?

[Kshartle]

debating that onethe debate is.....am I better with the penalty and then sign up if I get really sick? Can I just do that?

No, I think they were smart about that.  You can only sign up during the open enrollment period with only very limited exceptions outside of the open enrollment period.  Seriously, if you waited until you were dying of a catastraphobic disease and there was an exception to the open enrollment period requirement for that, you'd be saving the taxpayers a lot of money anyway!  The penalty is pretty prohibitive anyway (starts at 1% and increases to 6% I believe),  so I can't imagine where its more cost effective to pay the penalty then just be in the risk pool.  The major downside that I can see is that all the plans on the exchanges seem to be those chain-gang HMO's.

Now that the Republicans have accepted the reality that Obamacare is a success and is here to stay, they are finally coming out with legislation to improve the many faults.  About time!

Actually, that is not true. Any 'qualifying life event' makes you eligible at any time outside of open enrollment. And one of those qualifying events is simply moving to another state. Inconvenient? Maybe, but if you faced catastrophic medical bills, relocating seems like a no-brainer loophole.

Hmmm...I already live in Florida and like it here.

I guess I'll have to get my cancer treatments in Hawaii.

[MachineGhost]

How does that save the taxpayers money? Wouldn't I have been the one saving all the premium dollars?

Well, end of life care is the most expensive cost center, so the shorter you're on it, the less taxpayer money you're exploiting wasting using.

But alas, looks like I was wrong.  What an incredibly stupid loophole.  I hope the Republicans patch that.

[doodle]

How does that save the taxpayers money? Wouldn't I have been the one saving all the premium dollars?

Well, end of life care is the most expensive cost center, so the shorter you're on it, the less taxpayer money you're exploiting wasting using.
But alas, looks like I was wrong.  What an incredibly stupid loophole.  I hope the Republicans patch that.

Money obfuscates the underlying reality of an economy. I prefer to think about this in terms of real resources. Do we have enough hospital beds and doctors.....there will always be enough money.

[Kshartle]

How does that save the taxpayers money? Wouldn't I have been the one saving all the premium dollars?

Well, end of life care is the most expensive cost center, so the shorter you're on it, the less taxpayer money you're exploiting wasting using.
But alas, looks like I was wrong.  What an incredibly stupid loophole.  I hope the Republicans patch that.

Money obfuscates the underlying reality of an economy. I prefer to think about this in terms of real resources. Do we have enough hospital beds and doctors.....there will always be enough money.

And if you allow the profit motive there will be more doctors and more hospital beds. There may be a limited supply today, but we can have more tomorrow.

We won't though, because the government will drive the price up so high as the single payer it will have to institue it's own price controls in the form of rationing.

[Kshartle]

How does that save the taxpayers money? Wouldn't I have been the one saving all the premium dollars?

Well, end of life care is the most expensive cost center, so the shorter you're on it, the less taxpayer money you're exploiting wasting using.

But alas, looks like I was wrong.  What an incredibly stupid loophole.  I hope the Republicans patch that.

i guess I was hoping to start up treatment when I discover I'm sick, not dying. hopefully there's time for the government to save me, and with me saving all those premium dollars in the meantime

It doesn't make sense to pay for insurance for routine stuff like an annual checkup or a cold (which I never get anyway thanks to a healthy diet, exercise, low stress and Florida sunshine).

[MachineGhost]

It doesn't make sense to pay for insurance for routine stuff like an annual checkup or a cold (which I never get anyway thanks to a healthy diet, exercise, low stress and Florida sunshine).

It doesn't make sense to pay for health insurance for practically anything short of castraphobic actually, but Obamacare has decided that you too shall pay for those routine medical expenses for yourself and others.  This is probably the biggest screwup of extending health pricing plans with mandated categories of coeverage to everyone instead of true risk insurance.  We could have adopted the Switzerland or South African model and let the free market sort it all out, but no thats too common sense for bureaucrats and politicians thats just have to fvcking meddle with things to justify their useless jobs.   We need so much reform at all levels of government, its a tragic farce.

In fairness, Obamacare is a conservative 1989 ideology...  that's really dated compared to what we know today.  But jeeze, I think term limits are in serious order...

[Mountaineer]

We need so much reform at all levels of government, its a tragic farce.

Oh my.  Another agreement with MG.  I must be losing it! 

... Mountaineer

[Reub]

We need so much reform at all levels of government, its a tragic farce.

Oh my.  Another agreement with MG.  I must be losing it! 

... Mountaineer

I'm surprised they haven't gathered a committee to investigate it.

[Tortoise]

Thanks for the ideas, everyone. As I suspected, it sounds like I probably want to look into life insurance a bit more.

Life insurance was actually the topic of the conversation I had this past weekend that I mentioned in the opening post. One of my relatives is an index universal life insurance agent, and he was trying to convince my wife and me that we should ditch our 401(k)s and IRAs and instead get an index universal life policy with his company.

I'm a bit skeptical of universal life insurance, because I've read (and I believe MediumTex even told me a while back on this forum) that term life insurance gives you a lot more bang for your buck. But I guess my relative thinks that one of the key benefits of his policy is that it has the side benefit of being a great wealth-transfer vehicle since it's transferred tax-free as cash to beneficiaries (as opposed to 401(k)s and IRAs, which are subject to estate tax).

I haven't verified the various claims my relative was making, but he was basically saying that index universal life insurance plans are the best thing since sliced bread, that they are the wave of the future, and that 401(k)s and IRAs are going to prove to be an unmitigated financial disaster on a national level. He's a persistent guy, so I'd at least like to educate myself so that if I turn down his offer, I'll have a good rationale to support my decision.

[MachineGhost]

I'm surprised they haven't gathered a committee to investigate it.

Don't hate me 'cuz I'm beautiful.

[MachineGhost]

Life insurance was actually the topic of the conversation I had this past weekend that I mentioned in the opening post. One of my relatives is an index universal life insurance agent, and he was trying to convince my wife and me that we should ditch our 401(k)s and IRAs and instead get an index universal life policy with his company.

Wow, that's crossing the forbidden zone into never mixing blood and money.  He should be ashamed of himself for being a greedy prick.  Trust me, he doesn't have you and your wife's best interests at heart at all.  He's concerned with about how much he can make or he's simply brainwashed by the corporate spiel if he's young.  But it could have been far worse, he could have been pushing whole life insurance which is an even bigger expensive proposition if you use it for anything other than a portion of the cash allocation.  Universal or whole is a scam in terms of the front-end and/or back-end fees the salesman makes off of you until you break even (which can take up to 20 years to finally earn more than alternative investments).

All insurance skips estate tax.  You can easily setup whats called a "remainder trust" so that you or your estate purchase term life insurance to specifically pay any estate taxes and then your 401(k) and IRA can pass tax unmolested to your heirs.  If that's what you really care about.  It's not really much of a marketing schtick for insurance to anyone but the naive.  And there's many other strategies you can use to deal with the inheritance question.  It goes without saying, but insurance salesmen are not qualified estate planning attorneys.

All types of insurance (term, whole, universal, annuities) have their place; but never to replace retirement plans.  That's just silly.

[Kshartle]

Thanks for the ideas, everyone. As I suspected, it sounds like I probably want to look into life insurance a bit more.

Life insurance was actually the topic of the conversation I had this past weekend that I mentioned in the opening post. One of my relatives is an index universal life insurance agent, and he was trying to convince my wife and me that we should ditch our 401(k)s and IRAs and instead get an index universal life policy with his company.

I'm a bit skeptical of universal life insurance, because I've read (and I believe MediumTex even told me a while back on this forum) that term life insurance gives you a lot more bang for your buck. But I guess my relative thinks that one of the key benefits of his policy is that it has the side benefit of being a great wealth-transfer vehicle since it's transferred tax-free as cash to beneficiaries (as opposed to 401(k)s and IRAs, which are subject to estate tax).

I haven't verified the various claims my relative was making, but he was basically saying that index universal life insurance plans are the best thing since sliced bread, that they are the wave of the future, and that 401(k)s and IRAs are going to prove to be an unmitigated financial disaster on a national level. He's a persistent guy, so I'd at least like to educate myself so that if I turn down his offer, I'll have a good rationale to support my decision.

I read this book a while back on the concept and still have it on my shelf. http://tax-freeretirement.com/

I'm not sure about index universal life, this one is about Variable universal life. I think there are ways to keep the policy in the letter of the law and get all the money tax free through loans that youtake while livingand then pay off with the death benefit. The book is an easy read. I actually have considered getting a policy myself but I am 35 with no need for a death benefit or any related premiums. There would be fewer investment options and certainly fees but the tax savings probably outweighs all of that.

You should definately pick up this book. It's a quick and easy read that you won't put down.

[MachineGhost]

I'm not sure about index universal life, this one is about Variable universal life. I think there are ways to keep the policy in the letter of the law and get all the money tax free through loans that youtake while livingand then pay off with the death benefit. The book is an easy read. I actually have considered getting a policy myself but I am 35 with no need for a death benefit or any related premiums. There would be fewer investment options and certainly fees but the tax savings probably outweighs all of that.

That sounds like the Infinite Banking concept, but with the wrong type of insurance.  Here's a thread on it from last year: http://gyroscopicinvesting.com/forum/pe ... g-concept/

[moda0306]

I disagree. Especially on disability. With your ability to work, you have a risk on your balance sheet to your financial security, no matter who is dependent on you. It is big enough to be worth transferring. Disability events can be extremely financially devastating at worst, and very disruptive annoyances at best... In fact, especially if you don't have a spouse to help you through it .

That's a good point.  So how much does disability insurance cost for those disability categories that Social Security doesn't cover (since filing for private disability insurance makes you go through the SSD process first so they can fob you off onto the government, if at all possible)?

With life insurance, if you are likely to need it in the future due to a spouse and/or child, you can lock in your health class by securing it now. If you have a spouse that also works, there could still be a very large financial risk to a premature death of either spouse.

So as opposed to LTC, you can lock in your "health class" with life insurance?  What does that mean exactly?  Premiums never rise?

Not really. If the need for robust auto liability is self-evident, then why isn't umbrella?  In many states, when juries decide damages, they don't know how much you have in assets or insurance. Any judgement above and beyond your insurance and unpayable by your assets can be garnished.  In my state, max garnishment is 25%.

I meant self-evident as in a legal requirement.  I'm sure most people don't know about umbrellas because its not advertised widely because its not much of a profit center for insurance companies.  Heck, I knew all the ins and outs of offshore asset protection long before I ever heard of umbrella insurance!  Are you saying that even umbrella insurance won't fully cover judgements?  Wow.

Regarding long-term care, I'll leave that one alone. I don't think it's a "scam," but it is somewhat inefficient and unstable. I tend to like the idea of building up a decent state partnership benefit, at least.

Yes, I have a flair for the dramatic.   What is a "decent state partnership benefit"?

State "partnership" programs in LTC allow you to raise your Medicaid eligibility amount to the amount of LTC insurance benefit you've used.  So it basically protects money for your spouse or family.

Cost of disability is all over depending on definitions of disability, age, gender, duration, premium structure, health, riders and occupation class. It's so all over depending on those factors.

Life insurance has like 12 health classes. If we are talking term, your "mortality curve" determines your premium. That curve varies GREATLY (from a cost-of-insurance standpoint) depending on which health class you end up with. A drop of one health class in some instances can raise your premium by almost 30%. This mortality spread increases with your age.  There are generally two kinds of term insurance... Level term, and yearly renewable term. YRT is often very efficient for younger people, and level becomes more attractive as you get older, but that aside, both are going to be more expensive as your health class drops. YRT rises in price every year, and, like LTC insurance, the company has the ability to raise rates, but unlike long-term care events, mortality has improved over time, so most good insurance companies have never raised YRT rates from their scheduled increases since their inception in the 1800's.

So if I'm 25, and 4 years out from making babies, but 30 years out from likely wanting to drop life insurance, and I'll probably need about $1.5 million, locking in $500k-$1 million of that in my current health class is "insuring my insurability," or at least locking in my current health class for a pretty lucrative marginal benefit for the 26 ongoing years my coverage would be in force.




Regarding permanent insurance, this is a topic I've been meaning to bring up here, because I see some benefits to at least understanding when it could be strategically beneficial in an overall plan, but my PP mind conflicts and reinforces it at the same time. (Moreso the former)

I think I may do a post on it soon.

I don't like variable universal life, but the other products (whole, universal, index) CAN be good if structured and used correctly for minimum fees and maximum performance... Or if used in conjunction with a conversion of someone's term policy who is NOT in good health.

Life settlement is also an EXTREMELY interesting concept that I'm just beginning to dive into.

[MachineGhost]

I don't like variable universal life, but the other products (whole, universal, index) CAN be good if structured and used correctly for minimum fees and maximum performance... Or if used in conjunction with a conversion of someone's term policy who is NOT in good health.

Good stuff!  What's wrong with variable?  Doesn't that just mean you get the upside gain of the market with downside protection?  I remember reading an article about where insurance companies were way too generous with varaible in the beginning and a cottage industry sprung up to take advantage of it.