Cover Your Exposure
My goal in writing this series of posts on Money Math is to give you some tools to make better decisions with how you will spend your hard-earned money.
As mentioned in Part 3, some debt can be useful, but you will make more money available for future use if you focus on reducing interest expenses and paying off any loan commitments well ahead of schedule. That will help your long-term cash flow.
This post is about protecting the accumulations from your smart financial decisions. It is very important to cover your exposure to major financial loss.
The Cost to Benefit for Coverage
There are many who are struggling financially who consider insurance unaffordable. They usually refer to health insurance. That subject gets a lot of press!
There is also evidence of other insurance coverages that are ignored. Someone dies and asks for help to cover funeral costs (Life). Then you notice a line item on your auto insurance policy for Uninsured Vehicles (Auto).
There are ways to make insurance more affordable. And, as you refine your money management skills and accumulate savings, you will find even better ways to cover your exposure to financial loss.
So, how do you measure the cost to benefit for insurance coverages?
Let’s look at the main lines of insurance coverages that most people carry and why they do. Then, I will offer some helpful Money Math.
Start with Your Health
When you go to work for a sizeable company, they will let you know that a health insurance plan is available after working a probationary period. That is the period they track your performance to see if you are worth keeping as an employee and for you to see if you are willing to commit to working there for an extended period.
If you were to, instead, seek out your own health insurance policy and compare the premiums to what the company offered, you would likely see considerable savings signing up for the company health policy. There is economy of scale for an insurance company to cover many people versus just one. The odds of paying a claim go down, per person, with a larger group of people, according to their actuary studies.
Now, let’s consider your options and calculations to create a greater benefit to cost in health insurance. The following are terms to make note of when assessing your costs and benefits.
The first term is Out of Pocket limits, the deductible amount. You should note that if the company offers a Health Savings Account, which has become more common in recent years, it must be tied to a High-Deductible Policy, meaning that you pay higher than normal out of pocket (your money) before the insurance coverage starts to pay. The low-deductible plans will have a higher premium. Ask your insurance agent for details.
If you are in good health, a high-deductible plan should work well for you. And, if they offer a Health Savings Account (H.S.A.), you should try to maximize your contributions to it! You make pre-tax contributions, which reduces your tax liability. A Win-Win!
The H.S.A. will prove to be one of your best financial moves. After you have accumulated enough to cover your Out of Pocket exposure to medical expenses, you can invest the excess as your balance increases, allowing your balance to grow even higher!
Read the fine print. Be sure to review your health insurance policy for coverage limits for Major Medical expenses. Most insurance companies will put a limit on their exposure, such as cancer, open-heart surgery, etc. I say that as a caution and say that exceptions may be possible, if you are willing to pay for it.
If the premiums for your health insurance policy seems too high, then ask about getting a reduction with a higher deductible!
Auto Coverage to Keep
Auto insurance policies can vary dramatically, depending on your driving record, including violations of traffic laws like speeding, DUI, or accidents. Violations become legal records available to any auto insurance company.
There are several line items to consider when looking at your auto insurance coverage. First is the deductible. A higher deductible will mean a lower premium.
Being a good saver will benefit you in many ways, including being able to cover the higher deductibles for lower insurance premiums, which will make more money available to save!
A deductible applies to full-coverage policies. And, if you have a loan on the vehicle, the bank will require you to have full-coverage!
If you have an older vehicle that is valued less than a deductible, you might consider just using Liability Coverage. That policy has a much lower premium. The problem for many is that they choose the cheaper policy and have an accident with no way to recover enough to get another vehicle.
A Full-Coverage Policy has four main items:
- Bodily Injury / Property Damage Liability—The liability coverage for injuries in an accident other than in your vehicle and any damage done by your vehicle.
- Medical Payments—For injuries to you and your passengers in an accident.
- Comprehensive—Less your deductible, which is losses from other than a collision.
- Collision—Less your deductible, which is damages from other vehicles.
Use this list to talk to your agent about what and how much is covered. You want adequate coverage if you cause an accident, especially with injuries!
There are some cheap additions to your auto policy which are worth considering, Emergency Road Service and Car Rental and Travel Expense. If you need a tow or have an accident while on vacation which leaves you stranded without a vehicle, you will be glad you had that coverage!
The key factors for your cost to benefit calculations are the age and mileage of your vehicle, the change in premiums at different deductible amounts, and your driving record. Your insurance agent can give you the range of values to use.
Property Needs Coverage Too
Your furniture, jewelry, kitchen utensils, appliances, bathroom supplies, food in the pantry, etc., all have more value than you realize if you must replace them after a fire or storm damage.
Hint: Take pictures of your property at least once per year to have a visual inventory to help you make a list of damaged property to be replaced. Seeing is believing for an insurance adjuster!
Whether it is renter’s insurance or homeowner’s insurance, the key factor for your protection is liability insurance. If your dog bites someone or someone slips and falls on your driveway, you will be glad you had liability insurance! The insurance company will come to your defense!
As for premiums, a good savings account will help you be able to raise the deductible and lower your premiums. That is a calculation your insurance agent can make for you!
Other Options for Covering Exposure
Disability Insurance will provide income replacement if you are unable to work due to an illness or injury.
Cancer Insurance will help cover related costs that are not covered by your health insurance policy, like transportation, etc.
Long-Term Care Insurance will help with long-term care in nursing homes. If you have any memory or physical issues, this could be a hedge to salvage your assets to pass down to your children. Long-term care facilities can cost as much as $10,000 per month, or more!
Due Diligence for Asset Protection
Insurance is your best tool to reduce the risks to your assets, your savings, and your investments. Make some calculations as to how many of your assets you can afford to protect.
In the last post of this series on Money Math, I will lay out some calculations for long-term planning. I will discuss such terms and formulas as Depreciation, Natural Resources, Appreciation, Taxes, Family Dynamics, and Raising Responsible Children.
You can learn to keep it simple, using simple Money Math. But persistence is key!