Health, Disability, and Auto Insurance.
23 October 2009
This article is part of our 52 week journey through Bill’s latest book, The Graduate’s Guide to Life and Money. Each week, a full excerpt from his book will be presented from beginning to end. To get your copy of his book, visit www.TheGraduatesGuide.com.
One of the first decisions you will have to make when you start your first job is which health insurance to choose, if you are fortunate enough to have choices through your employer. In many cases, especially with smaller companies, you do not have a choice. If you do have a choice, it may just be the amount of your deductible or whether you want prescription, dental or vision coverage. You will have to evaluate the costs of these additional insurance options and compare the costs to what you are already getting with your basic health insurance coverage. If you are already covered on your spouse’s policy, rarely does it make sense for you to also get coverage for yourself, since you can only have something paid for once. Since, in many cases, it costs more to add your spouse to a policy than it does just to maintain your own coverage, it may actually make sense for each of you to have your own policy through your respective employers. If one of you loses your job, you can always add the other spouse since this is considered a life-change event (such as getting married, having a child, etc.).
Of course if one policy is significantly better than the other, maybe it still makes sense for both of you to be on one policy. Especially if the one policy covers a significant benefit you may need such as infertility coverage. Maybe one policy lets you choose you doctor and the other does not. That may be important enough to you to help sway your decision.
Whatever you do, please choose one of the health insurance options. You do not want to go without health insurance if you can help it. The presence of health insurance makes it necessary to have health insurance. If you go to the hospital for treatment and your health insurance will pay 80%, the treatment may cost your health insurance company $160 and you may pay $40 for a total of $200. That same treatment, if you do not have health insurance, may cost $500. How is that possible? Health insurance companies have a lot of power, and they have negotiated rates with ‘in-network’ providers. Thus, if the doctor or hospital is willing to be listed as ‘in-network’ they must agree to the negotiated rates. Someone without health insurance does not get the negotiated rate and must pay the retail rate for the service, which is much higher.
If you work for a small employer, and you have health insurance coverage through your spouse, you may want to ask your employer if you can be compensated for not choosing to use their insurance. Why would they do this? Well, most employers pay between 50% and 75% of your insurance premiums. So if you would have to pay $200 per month for insurance, your employer is probably paying an additional $200 – $600 per month to subsidize your insurance. Assuming your employer’s portion of the premiums are on the higher end, it may be cheaper for them to just pay you an additional $250 per month compensation for not using their insurance. They save money and you get more pay. It is a win-win situation. My wife and I got this deal with her very first job. It more than made up for the additional amount I paid for insurance through my employer by adding her to my insurance.
Healthcare Flexible Spending Accounts (FSA)
While this is technically not insurance, it falls within this section. While you are choosing your insurance, you can also select to have a portion of your paycheck taken out pre-tax, which you can use to pay for medical expenses not covered by insurance. Here is how it works: If you have $600 taken out of your paychecks for the year ($50 per month) then you will not pay taxes on that $600 (which will save you about $150 in taxes). The first $600 you spend on medical expenses not covered by insurance, such as your co-pay, your deductible, contact lenses, acupuncture, etc. you can submit to your FSA plan and they will reimburse you for it. Basically you saved taxes on money you were going to spend on medical expenses anyway.
The only disadvantage is that any money you do not use by the end of the plan year you will forfeit. So if you set aside $600 you will save $150 in taxes, but if you only use $300, then you actually would have lost money. I realize this is a guessing game, but you may be able to estimate your expenses by looking at your deductibles and figuring how much you will spend at the dentist, optometrist, family doctor, etc. (In my case, if I have a little extra at the end of the year, I usually buy a year’s supply of contacts or a new pair of glasses with it so I have never really lost any of my FSA money.) If you are planning to have a major medical expense such as laser eye surgery, you may want to put at least enough to cover the surgery (minus what your insurance may pay) so you can at least save some money in taxes to help offset the cost. Be careful, most cosmetic surgeries are not covered.
Let’s face it. At your age you are much more likely to get sick than become disabled, so that is why health insurance is your number one priority. On the other hand, at your age, you are much more likely to become disabled than die, so disability insurance may actually be more important than life insurance.
Disability insurance usually protects about 60% of your income, up to $100,000 per year. If you were to become disabled, your family would not get any life insurance (since you have not died), but you may not be able to work, so they are still without your income. You want to purchase ‘your occupation’ protection. The terminology may vary somewhat, but there is ‘any occupation’ protection and ‘your occupation’ protection. ‘Any occupation’ protection sounds better, but it basically means if you cannot perform any job, then you are covered. If you are a surgeon, and you qualify to serve fries, you may not qualify for benefits since you can perform some job. On the other hand, with ‘your occupation’ coverage if you can no longer perform your own job, you will be covered and will receive benefits.
With most policies you will have to consider the elimination period, which is the time between your disability (when the injury or illness occurred) and when your benefits begin. Usually there will be at least a 30-day elimination period. Of course, the more you have saved in an emergency fund, the longer you can stretch your elimination period and the more you can save on your monthly premiums. You also want to look at what the benefit period is (how long will you receive payments). There is a cap on most policies so see which one best fits your situation. Balance these two considerations with monthly premium and monthly benefit and you should be able to find the policy that best fits your needs.
Property and Casualty Insurance
Property and casualty insurance mostly encompasses when something happens such as an auto accident, a house fire, theft, etc. The two most common types are auto and homeowners (or renters) insurance.
Auto insurance is separated into different categories:
(1) Bodily Injury – pays for medical expenses for you and others.
(2) Property Damage – pays for other people’s property that you damage.
(3) Comprehensive – pays for damage to your car other than that caused by a driving accident (tree falls on your car, catches on fire, etc.).
(4) Collision – pays for damage to your own car in the case of an accident.
(5) Medical payments – pays for medical bills for you & any passengers, no matter who caused the accident.
(6) Extras include towing & road service, uninsured motorist coverage, no-fault (or PIP) and death & dismemberment.
Do not pay for towing or death & dismemberment coverage. They are not worth their costs. Once your car is worth less than $2,000 there is no reason to pay for collision and comprehensive coverage. You won’t get enough money out of a claim at that point.
To help keep your costs down:
(1) Increase your deductible to at least $500. Unless you have one accident every year, it’s almost always cheaper to have the higher deductible.
(2) Never file a claim for less than $750. Your rates usually increase, and since your deductible is $500, it’s not worth it (unless there is a personal injury involved).
(3) Ask for some of the standard discounts:
i. Multi-car or multi-policy (home and car) or both
ii. Antitheft equipment
iii. Air bags
iv. Anti-lock brakes
v. Low mileage (if you do not drive much)
vi. Good driving record
When you have insurance on your car, if you let a friend drive the car (on occasion, not as the full time driver), your friend is covered by your policy.
When reading an auto insurance policy, the numbers may look like: 40/60/30, meaning:
$40,000 for bodily injury per person (maximum)
$60,000 per bodily injury per accident (maximum)
$30,000 coverage for property damage (maximum)
When comparison-shopping for auto insurance, be sure to compare the same coverage for each company. Ask what happens to your rates after one accident, and after any points or moving violations (such as a speeding ticket). Some companies start with low rates but increase your rates substantially after just one claim or speeding ticket.
Homeowners and Renters Insurance
Homeowner’s insurance comes in six flavors. They are HO-1, 2, 4, 5, 6, and 8. HO-1 is a basic homeowner’s insurance, HO-2 (most common) covers a more broad range of claims, and HO-5 covers almost everything, unless specifically mentioned (such as nuclear accident, war, and floods). HO-4 is renter’s insurance, HO-6 is for condominium owners, and HO-8 is for older homes.
Most policies will cover your personal belongings up to half of the amount covered for the house. In other words a $100,000 policy on your home would cover up to $50,000 in personal belongings. If you wish to cover expensive items such as jewelry, fur coats and antiques, you normally must add a rider to your policy to specifically include these items.
Make sure you purchase at least 80% coverage. With 80% coverage you can get the full replacement of your home (up to the amount of your coverage), while anything less means you only get a percentage. For example: You have a $100,000 house with 70% coverage. If your house incurs $20,000 worth of damage, you will get $14,000 (70%). If you had 80% coverage you would have received the entire $20,000, because it still falls within the range of 80% of your total coverage. It may not make sense, but that’s the way it is.
Also, buy replacement value, not market value. Replacement value will actually pay to replace your belongings, while market value will pay to replace what the belongings were worth when they were lost, which includes age, wear and tear, etc. (For example, a $1,000 sofa may only have a market value of $500 after a few years).
Your policy not only protects you in the case of damage to your home, but it also offers you protection from personal liability. If someone slips on your property or your tree falls on someone’s car, your policy will cover you, up to some maximum limit.
If you rent, you should seriously consider buying renter’s insurance. Not only will it protect your belongings (television, bike, small appliances, clothes, etc.), but it will also offer you some liability protection (just like a homeowner’s policy) as well.
If you live in a flood plain, you should purchase flood insurance. Regular insurance policies do not cover flood damage.
If you have to file a claim, document your loss as much as possible. Make a list with descriptions and use any receipts or photos available.
Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit Debt & Ca$h and The Graduate’s Guide to Life and Money. Bill speaks at colleges to educate and entertain students about real-life issues in money, leadership, and success. His goal is to help students succeed personally and financially so they can improve the lives of those around them. You can learn more at www.ExtraCreditBook.com or www.TheGraduatesGuide.com.
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