Are You Protected?

I’ve had a few questions lately about insurance.  Particularly about Umbrella and Long-term Care policies.  I’ve had this post in draft mode for about six months so I thought I’d dust it off and put it out there for y’all.  Hopefully it’s a quick scan if you think you’re in good shape or a careful read if there are some things you need to look after.

Insurance is best used to protect against low probability, high cost risks.

Low probability means the bad thing you are protecting yourself against doesn’t happen often.  If it did happen often, we couldn’t afford the premiums to protect against it.

High risk means the bad thing you are protecting yourself against would be financially devastating for you.  What is financially devastating for each of us is different and could change over time.

And our need for insurance changes over time.  As we age and add dependents, property or just wealth, our needs can change.  So what insurance do we need as we get older?

The Roaring 20’s

Sorry, but even in your 20’s you have to do some #adulting. Dealing with insurance is about as grown up as you can get.

Auto Insurance

If you own a car, you need auto insurance.  Your state may require certain minimum coverage.  You’ll need personal injury and medical payments (pays for your medical needs), bodily injury and property damage liability coverage (pays for someone else’s losses), uninsured motorist (covers your losses if the other driver has inadequate coverage).

If the loss of your car would be financially devastating, you’ll want collision which repairs or replaces your vehicle after a collision and comprehensive which repairs or replaces your vehicle after damage not caused by a collision like if a tree falls on your car.

I wouldn’t drop collision and comprehensive until I had money extra in my emergency fund to replace my vehicle . . . with cash.

Best way to save money on your auto insurance – increase your deductible.  Going up to a $1,000 deductible could save you up to 40% on your premiums.  But don’t increase the deductible until you have that extra $1,000 in your emergency fund.

You can get quotes on line for your auto insurance and there is often a discount if you insure your home and auto with the same insurer.

Renter’s Insurance

In our early 20’s, we should have renters insurance.  While at college, you should make sure this this is covered by a parent’s policy.  If your apartment burns down, renters insurance replaces your stuff, will often provide temporary housing, and provides liability coverage.

You may think you don’t have much stuff to insure but renters insurance covers more than your stuff.  If your dog bites a neighbor–renters insurance will cover your legal fees plus the neighbor’s medical costs and any legal bills.  If you neglect to remove the snow from your stairs and someone falls–again renters insurance covers the costs.  Don’t underestimate the value of the liability coverage and the legal defense-lawyer’s are expensive!

Review your policy each year and update the insured values as you transform your junky stuff to fancy stuff.  Some policies provide replacement coverage which allow you to replace your junky, old stuff with equivalent new stuff.  Some policies provide actual cash value coverage which means you’re shopping at garage sales to find equivalent, junky stuff.

I recommend replacement coverage.  If you want to save some money, increase your deductible.

Homeowner’s Insurance

When you buy your first home, you’ll ditch the renter’s insurance and buy homeowner’s insurance.

The loss of our home, for most of us, would be financially devastating so we should insure it.  If you have a mortgage, your lender will require it.

Homeowners insurance typically replaces your home if it is damaged by insured perils like fire and hail but often do not cover damage caused by flood or earthquake without purchasing additional coverage.  If you are unable to live in your home, your additional living expenses are often covered as well.

Homeowners insurance also covers your belongings in the home (and elsewhere) up to a  percentage of your insured home value.  Coverage for some items like jewelry, art and cash is limited but you can purchase an additional coverage rider for these items.

These riders can cover perils (like mysterious loss) that your homeowners policy does not. We have a rider for my wedding ring though it doesn’t meet the high cost, low risk requirement that we should have insured.  That rider replaced my diamond when it cracked (who knew that could happen???) and it continues to give me peace of mind.

Like Renters Insurance, some policies provide replacement coverage and others cover the actual cash value of your belongings.  I recommend replacement coverage.

Included in your policy is liability protection that covers you and your family members if you cause damage to others.  If your dog bites a neighbor–Homeowner’s insurance will cover your legal fees plus the neighbor’s medical costs and any legal bills.  If you neglect to remove the snow from your walk and someone falls–again homeowner’s insurance covers the costs.  Don’t underestimate the value of the liability coverage and the legal defense-lawyer’s are expensive!

Be sure to review your insured values each year and update them as the cost to rebuild your home or replace your belongings grows.  Keep in mind the cost to rebuild your home may be very different from how much you could sell it for.  You may need more coverage because construction costs are higher than real estate values.  Or you may need less coverage because you won’t have to replace the land, or likely, the foundation if your home is damaged or destroyed.

Health Insurance

You probably have health insurance through your or your partner’s job or through Medicare.  If not, Obamacare requires this coverage and you can get it through your state exchange.

If you aren’t offered health insurance through your job, you may be covered on your parent’s health insurance policy until you turn 26.

We have a high deductible, HSA eligible plan through Obamacare.  Because our out of pocket limits are so high, we’ve supplemented it with an accident policy.  We are very active–mountain bikers, hikers, skiers, bikers, rafters, and pickleball players and we feel our likelihood of being injured is much higher than our likelihood of being treated for disease.  This policy covers our out of pocket costs if we are injured with a $100 deductible.  The premium is $383 per year for both of us.  Though it doesn’t fit the high cost requirement for insurance, it gives us peace of mind.

Under Obamacare, you’ll receive subsidies to purchase insurance through your state’s exchange if you have a low income.  For single folks, the subsidy is available until your Modified Adjusted Income reaches the mid $40,000’s.  For married folks, the limit is in the mid $60,000’s.  But keep in mind, Modified Adjusted Income is your income after retirement and HSA contributions so you may be able to manage your income and your retirement/HSA contributions to get under these limits.

Life Insurance

If anyone depends on your income or your services in the home, you should have term life insurance.  Here’s a great article from Mama Fish Saves on why you want term rather than whole life or any of the hybrids that are available.

How much do you need?  Enough to pay off your debts, get your kids through college and supplement your partner’s income so they can stay in your home and have a similar lifestyle without you.  Here’s a good article on how much coverage you need.

How much do I have?  None.

We had small life insurance policies through our jobs. We purchased additional insurance early in our marriage when we owed more on our home than we had invested.  Because we have no children, life insurance was no longer necessary when we had significant savings and were living well below our incomes.

I used to joke that we had plenty of money for one of us to retire, just not enough for both of us to retire.  That money meant we didn’t need life insurance.

The Dirty 30’s

Review the Roaring 20’s information above to make sure you have appropriate Auto, Renters, Homeowners, Health and Life insurance.  If you reach any of those milestones during your 30’s, add coverage.

As your income and your family grows, review your life insurance coverage.

As the value of your home and your belongings change, review your homeowner’s or renter’s coverage.

Disability Insurance

Disability insurance is a coverage that is often overlooked when we are young.  But if you were unable to work, how would you pay your bills?  Many people in the U.S. skip coverage because they mistakenly believe they can just go on Social Security disability.  It is difficult to qualify for Social Security disability and the benefits are very low (the average payment was $1,166 per month in 2016).  So private coverage is worth exploring.

Coverage is typically expressed in terms of a percentage of your income when you worked.  60% or 66% of your income is pretty common.  These percentages should be plenty.  So long as you pay your own disability insurance premiums, the payments to you are tax free.  This means you don’t have to insure 100% of your income in order to cover a similar lifestyle.

We were fortunate to have long-term disability insurance provided by our employers through payroll deductions.

Umbrella Policy

As your net worth grows, it may be time to add an umbrella policy.  Umbrella coverage sits on top of your other insurance coverage (like an umbrella!) to provide additional protection against liability and the cost to defend a lawsuit.

Imagine if your tree falls on a neighbors house, your kid is in a car accident and kills someone, or your dog bites a neighbor.  These scenarios are awful enough without thinking about the financial impact.

Your homeowner’s or renter’s policy includes some liability coverage.  The limit depends on your insurance company and your coverage but the default coverage may be as low as $100,000 and the most coverage you can get may be $500,000.

Your auto policy probably covers about $100,000 of liability.

If your net worth (what you own minus what you owe) exceeds these limits, you’ll be on the hook for losses.  I just read a story about a woman who was wiped out financially when her child was at fault for a car accident that resulted in a death.  13% of personal injury awards exceed $1,000,000.

Umbrella coverage should be purchased up to your net worth.  The good news is it is relatively cheap.  $400 a year will buy your first $1,000,000 of coverage and you can add $1,000,000 increments of coverage for under $200 a year.  Your insurance company may require you to increase liability coverage in your underlying policies (auto and homeowners) when you add the umbrella policy.

The Fabulous 40’s

Review the information above to make sure you have appropriate Auto, Renters, Homeowners, Health, Life, Disability and Umbrella insurance.  If you reach any of those milestones during your 40’s, add coverage.

As your income and your family grows, review your life and disability insurance coverage.

As the value of your home and your belongings change, review your homeowner’s or renter’s coverage.

As your net worth (what you own minus what you owe) grows, increase your Umbrella coverage.

Might it be time to reduce your life insurance?  As your net worth grows, you may find that your family is adequately protected with less life insurance.

The Nifty 50’s

Review the information above to make sure you have appropriate Auto, Renters, Homeowners, Health, Life, Disability and Umbrella insurance.  If you reach any of those milestones during your 50’s, add coverage.

As your income and your family grows, review your life and disability insurance coverage.

As the value of your home and your belongings change, review your homeowner’s or renter’s coverage.

As your net worth (what you own minus what you owe) grows, increase your Umbrella coverage.

Might it be time to reduce your life insurance?  As your net worth grows and your children become self supporting, you may find your family adequately protected with less life insurance.

Long-term Care Insurance

Your fifties are when you should make a decision about Long-term Care Insurance.

Nursing home care is expensive–the national average for a shared room was $77,000 a year in 2014 and the cost of care is rising faster than inflation.  Medicare only covers 100 days in nursing care and only if you are recovering from an illness or injury.  You’re responsible for the cost beyond that until you spend down most of your assets. Once you’re close to owning nothing, Medicaid will cover your care.

Long-term care insurance used to insure your estate.  You did not have to spend down your assets until Medicaid would kick in.

But it no longer insures your estate because typical policies cover only three to four years of care.

When you’re being sold a long-term care policy, you’ll be shown alarming statistics.  70% of Americans who reach 65 will need some long-term care.  But the sales person won’t tell you what the Center for Retirement Research found:  the average stay for a man is a year and for a woman is a year and a half.

So do you need Long-term Care Coverage?  There’s a rule of thumb.  If your net worth (what you own minus what you owe) is between $200,000 and $2 million, you may want this coverage.  With less, you can’t afford the premiums and Medicaid will cover you.  With more, you can pay your own way.  I don’t know that I agree with this rule of thumb.

Here’s a typical LT Care quote and some of my concerns:

An insurance company provides the coverage.  That insurance company needs to survive until you need the benefit and needs to continue to offer LT care coverage. That benefit could be 30 or 40 years away.

A typical premium for a healthy couple in their early 50’s is $3,000 per year–with no premium guarantee.  The premium can increase to a level where it is no longer affordable.

The policy covers three years of care–so it doesn’t cover the worst case scenario–decades of care for dementia.

The daily benefit is $150 and the benefit escalates at 3% per year–nursing home costs have actually gone up more than 3% over the recent five year period.  It doesn’t take long for higher inflation rates to erode the value of this benefit.

I don’t take these concerns lightly, especially the lack of a premium guarantee. My father in law dutifully paid his premiums for years and, when he reached his early 80’s, the premium was increased to a level he could no longer afford. So by the time you’re needing the care, you’re likely to have dropped the coverage.

We don’t have it and we don’t intend to purchase it.  I look at LT Care as something we are self insuring for.

Our decision was solidified after reading the articles linked below. But this is big decision; do your research.

Retirement Manifesto – Why we aren’t buying Long-term Care Insurance
Money Magazine – Do You Really Need a Long-Term Care Plan?
Long-Term Care Insurance: Beyond the Sales Pitch
Long-Term Care Insurance: Why We Aren’t Buying It

The Swingin’ 60’s, Super 70’s, Big 80’s and Grungy 90’s

Review the information above to make sure you have appropriate Auto, Renters, Homeowners, Health, Life, Disability, Umbrella and Long-Term Care insurance.  If you reach any of those milestones, add coverage.

As your income grows or shrinks, review your life and disability insurance coverage.

As the value of your home and your belongings change, review your homeowner’s or renter’s coverage.

As your net worth (what you own minus what you owe) grows, increase your Umbrella coverage.

Might it be time to reduce your life and/or disability insurance?  As your net worth grows and your children become self supporting, you may find that your family adequately protected with less insurance.

If you have enough assets for one of you to retire, you may no longer need life insurance. Or this may be a time to add life insurance coverage if you or your spouse receive a pension that will terminate or be reduced when the recipient dies.

The company you insure with matters.

We learned early in our marriage that having a solid insurance company is critical. 22 years ago, Mr. Ms. Liz arrived home mid-afternoon to find our front door kicked in, our garage door open and our cats missing.  I remember his phone call as if it were yesterday.  We were cleaned out: computers, tools, stereo equipment, TV’s, cameras, jewelry, bedding, and clothing, including underwear, gone. About $20,000 of stuff–this was a TON of money for us 22 years ago!  We were treated so well by our insurance company, we are still with them.

When comparing coverage and cost between companies, be sure to review the insurance company’s financial strength and customer satisfaction.

Other policies

Insurance is offered for lots of things that don’t meet the low probability, high cost test.  But, I carry two policies that don’t meet this test–my wedding ring rider and our accident policy.  You’ll want to make decisions that balance your peace of mind against the cost of coverage.  It’s not always smart to do the smart thing!

Typically, very specific insurance policies are not a good value–cancer insurance, burial insurance etc..  Shop around, compare coverage, price and insurer strength and make sure you get a good value.

Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

4 thoughts on “Are You Protected?”

  1. Liz, happy to see that “amazing minds think alike”. I agree that LTC is a very serious issue that everyone needs to evaluate for themselves, glad my words are having an impact. Great article on the broader issue of risk management, and nice approach to review each type of risk/insurance by age. Well done!

    1. I’m honored to be in the company of your amazing mind Fritz! I have several friends who have purchased LTC recently and I don’t think they understand what it really covers and what the inherent risk is with the coverage. I’m hoping our articles can help.

      Thanks too for the reminder that life insurance can be necessary when pension benefits change upon the death of one spouse.

      I hesitated posting this article because insurance is such a snore but I suspect many of my readers are under insured for liability and unformed on LTC. Hopefully this helps. Your kind words mean a lot to me–thank you!

  2. Great article Ms.Liz! What a terrific primer for twenty somethings and the rest of us! Here is my personal perspective on Long Term Care Insurance that might impact some folks who are considering a purchase:

    A word about Long Term Care Insurance (LTCI) that fits into the “peace of mind” category. Given:

    1) The average married couple in the U.S. has an age difference of two years with men older than women.

    2) At around 50 years old, women have an average life expectancy of about 4 years more than men (this gap changes with age).

    So women often end up being the caregiver to their men who tend to convalesce or die while the women are still living.

    Picture this in your future: you will both be making decisions about doing care at home and saving money, or putting dear old hubby in a facility to spoon feed him. Even with sufficient financial assets to pay for professional care, there will be incentives and real pressure to trade the woman’s quality of life for financial savings. If the woman provides a couple hours of care each day, lots of money will be saved! And gradually, the woman is chained to the home, much less able to enjoy many of her own remaining mobile and healthy years.

    In this context, my wife and I think of LTCI as a policy to cover the person who is not sick. The funds cover the sick person’s care, but they provide a huge benefit to the person who is not sick by freeing them from the likely choice to sacrifice a portion of their remaining good years playing nurse to the sick one.

    Contrary to the rule of thumb, I think buying LTCI in your 50s is a no-brainer choice for people of moderate wealth (with a net worth of $1.5 million to $6 million) who will be tempted to trade their own time to save dollars.

    If I expected to outlive my spouse, I would be damn sure my spouse was covered with LTCI, especially if we have tended to make frugal financial decisions for the past decades.

    1. You bring up some really good points Mitch. Yes, it will be very tempting to provide care to my aging husband both to minimize guilt and to save money. With our age difference plus the longevity of women, I am very likely to be the caregiver to Mr. Ms. Liz.

      I’m wondering, if I self funded an account that was specifically for long-term care, if it would be easier to spend the money. In the first article I linked to, Fritz is doing just that. Since we have no children, dying with a bunch of money isn’t a goal of mine. I’m thinking I would be able to spend the money so long as the need occurs at a fairly advanced age. If one of us needed care in the next decade or so, it would be much more difficult.

      Thanks for your insightful comment and kind words!

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