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.

6

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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43

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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

48

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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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