Money 402: Insurance

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Money 401: Investing

The entire purpose of insurance is to transfer risk

  • There are other ways to be prepared for certain emergencies
  • Certain losses without insurance will bankrupt you
  • It is a defensive strategic method
  • Only pay insurance on risks you cannot handle losing
  • It is not a good way to gain investment income

Before you pay for insurance, make sure you have several highly qualified professionals

  • Since insurance is about transferring risk, the most affordable insurance is to have competent people guiding you
    • These professionals are necessary for any financial decisions, and they are the safest protection of your wealth
    • The money they save you in the risks they protect you from are the greatest per-dollar protection
    • Always have your paperwork in order and categorized when you walk in, or you’ll get charged for them to organize it
      • Make sure you have ALL your paperwork beforehand, since it will often slow down the entire process
    • You need to understand everything that professional is saying, so don’t be afraid to ask questions
  • Even if you’re a professional in one of them you’ll need the others
    • Financial advisor (must be an IFA, or Independent Financial Advisor)
      1. Research them through FINRA
        • A bad financial advisor will cost you a significant amount of gain, and the worst ones are con artists
      2. Agree on how you’ll work together and on both of your expectations
      3. Gather the relevant information and set goals
      4. Evaluate your financial status and create a strategy
      5. Understand their recommendations and possible alternatives
      6. Have them carry out what you both agreed upon
      7. Periodically, maintain your progress with them and re-evaluate your goals and the arrangement with them as necessary
      8. If you ever have any uncertainties about any potential investment product, take their marketing materials to a certified IFA
    • Accountant (should be CPA certified, or Certified Public Accountant)
      1. Find an accountant and a tax preparer that works with a reputable firm
        • A bad accountant or tax preparer will cost you thousands in either missed tax benefits or a discrepant audit later
        • When you are filing your taxes, consider having a professional preparer (which isn’t always a CPA) do your taxes if you want to save some money
        • Make sure you have a reputable tax preparer and not a chop-shop speedy-tax preparation service
      2. Have a healthy understanding of how taxes work to avoid some common mistakes
        • Time your December/January activities to land in the best tax brackets for a given tax year
        • Be sure to report ALL income, including stock sales
        • Find out before you go in what you can claim, and only claim deductions and credits that you are certain you qualify for
          • Coordinate with your spouse to see what your options are
            • If you have children, you can claim multiple deductions and credits
          • You can deduct job search expenses
          • Any legal fees relating to alimony can be deducted
          • There are tax deductions and credits if any of the filers or dependents are going to college or a trade school
          • There are multiple renewable energy credits
          • Reinvested dividends can be taken away from taxable income
          • Increase your itemized deduction by donating to a charity
          • Sell a loss on securities to offset your capital gains income
          • Some government bonds’ dividends are not taxable
          • There are many things that are tax-deductible if you have a business, which may be worth starting for deduction reasons
            • Accounting fees
            • Advertising
            • Automobile & transportation expenses (partially)
            • Bank charges
            • Commissions and sales expenses
            • Consultation expenses
            • Continuing professional education
            • Contract labor
            • Credit and collection fees
            • Delivery charges
            • Dues and subscriptions
            • Employee benefit programs
            • Equipment rentals
            • Factory expenses
            • Gifts (partially)
            • Home office (partially)
            • Insurance
            • Interest paid
            • Internet subscriptions, domain names, and hosting
            • Laundry
            • Legal fees
            • Licenses
            • Maintenance and repairs
            • Meals and entertainment (partially)
            • Office expenses and supplies
            • Pension and profit-sharing plans
            • Postage
            • Print and copy
            • Professional development and training
            • Professional fees
            • Promotion
            • Rent
            • Salaries, wages, and other compensation
            • Security
            • Small tools and equipment
            • Software
            • Supplies
            • Taxes paid in the prior year or current year
            • Telephone
            • Trade discounts
            • Travel
            • Utilities
      3. Have your taxes prepared off-season (February and March) to have an easier appointment scheduling with your tax preparer and have more time to get paperwork you missed
        • Though you can file for an extension, you will still have interest incurred on any unpaid taxes
      4. Every year have the accountant or tax preparer review your income taxes
      5. Ask for advice about the coming tax year to maximize tax benefits
      6. Continue updating them on any major financial decisions that you have made
    • Attorney(s) (passed the bar exam)
      1. Look for a general attorney and an attorney focused on your specific needs
      2. Find a reputable attorney by looking online at their other clients’ reviews
        • A bad attorney will cost you immeasurably if they are not paying attention to the legal environment that you or your business is in
      3. High-profile attorneys will charge for the initial consultation, but younger attorneys that need to build clientele will provide a free consultation
      4. Bring your entire situation to them during the consultation
      5. If they are knowledgeable for what you want, consider paying a retainer for them to help you later
      6. Keep them updated about any legally-affecting decisions you make, including other legal counsel
    • Banker (affiliated with a bank)
      • This person allows you to make more complex banking decisions more easily
    • Realtor (licensed and able to access the MLS, or Multiple Listing Service)
      • This isn’t only vital if you want to buy a house, but also if you want to purchase business property
    • Insurance agent (sells insurance)
      • By having an actual agent, you can often get better service than online-only insurance
      • Try an independent insurance agent who has the freedom to look at different companies’ insurances

Insurance that you can purchase is made of several parts

  • Deductible – the amount you have to pay out-of-pocket before the insurance company starts paying
    • Do a break-even analysis to find out how much you should pay
  • Premium – the payments you’re making every month to keep the insurance
  • Limit – the most that the insurance will cover, given the circumstances the policy covers
  • Copay/copayment – a certain percentage or amount that the insurance company will pay, which is technically a type of deductible
  • Every insurance policy makes their pricing the same way
    1. Takes many legally measurable circumstances that can affect the risk of them paying out including
      • Body type
      • Age
      • Health history
      • Accident history
      • Ethnicity
      • Religion
    2. Calculates the probability and cost of loss(es) across a duration of time
    3. Adds a little extra to increase the chances of a profit
    4. Divides the total amount out into month payments

Keep your insurance information in order in a single document

  • Type of insurance
  • Company
  • Plan ID#
  • Coverage amounts
  • Agent’s phone/address
  • Monthly premium

Try to save on insurance

  • Avoid features like
    • Extended warranties
    • Low deductibles
    • Savings plans
    • Features you don’t fully understand
  • Shop around for it every year or after every policy ends
    • Try to find discounts for the group insurance policies your workplace offers
    • Bear in mind that staying with an insurance company for a few years can sometimes give a discount
    • Online-only insurance companies are generally cheaper
  • Try to have multiple policies from the same company
  • Pay the premium up front to get a discount or avoid admin/interest charges
  • Buy insurance with after-tax dollars to ensure that the payouts are after-tax
  • Sign up for automatic payments to get a discount
  • Outside of what the law requires, insurance never has to be a permanent solution
    • Always do your own research before starting or ending a policy
    • Be sure there are no gaps in coverage across time
    • Don’t buy what you don’t understand

Types of insurance

  • Auto insurance
    • If your emergency fund is full, raise the deductible
    • Carry an adequate amount of liability
    • If it’s an older car, think about dropping collision coverage
    • There are sometimes discounts
      • Hybrid/electric vehicles
      • ABS, passive restraints and other safety features
      • GPS trackers, anti-theft box and other anti-theft devices
      • Keeping the vehicle garaged overnight
      • Low mileage
      • Good GPA in school or staying in the education system
      • Not getting a ticket or in an accident
      • Defensive drivers who prove themselves by going through an authorized course
      • Welcome bonus for leaving a current issuer before the policy expires
  • Homeowner’s/Renter’s Insurance
    • On homeowner’s insurance, guaranteed replacement cost if at all possible
      • Have the coverage include the natural disasters common in your area
    • Get renter’s insurance, it is unbelievably cheap
      • If you rent a home that burns down, the owner’s insurance will not cover you!
    • Consider an umbrella policy once you really start acquiring wealth
  • Identity Theft Protection
    • Avoid paying for ID theft protection that only monitors credit reports
    • Good protection services assign a counselor to clean up the mess
    • It takes an average of 800 hours to clean up identity fraud
  • Health Insurance
    • The number one cause of bankruptcy in the West is medical bills
    • Try to bring the insurance costs down if you’re healthy
      • Increase your deductibles/copayments/stop-loss
      • However, never decrease the maximum pay as it would be too much risk
    • You can usually have a health insurance company completely reimburse the cost of a gym membership
  • Disability Insurance
    • Designed to replace income lost due to a disability
      • Aim for 65% of your current income
    • Based on occupation, but doesn’t consider age
    • Buy it if you run the risk of becoming disabled at doing the job you were trained to do
      • Lower your premium with a longer elimination period (time to start getting paid out)
    • The best disability insurance will come through the workplace
      • Usually called occupational insurance, and is usually only available in 2 year policies
    • Don’t pay for policies that last less than 5 years
  • Long-Term Care Insurance
    • Will pay for nursing home, assisted living facilities and in-home care
    • Absolutely necessary for anyone over 60
      • There is a 69% chance of needing it
      • Get it the day you turn 60
    • This is safer to get than not, especially as you age
    • Medicaid and other government programs are dicey at best in their reliability
    • The last 6 months of a person’s life is where 80% of the medical expenses of their entire life go toward
  • Life Insurance
    • Technically, it should be called death insurance as it replaces income lost due to death
    • Most people are unaware of what their life insurance policy is
      • Term Insurance
        • Significantly less expensive
        • For a specified period
        • No savings plan built into it
      • Whole Insurance
        • Much more expensive
        • For life
        • Funds a savings plan
    • As stated before the need for life insurance, contrary to insurance salesmen, does not have to be a permanent solution
      • Whole insurance is a complete waste of money because insurance returns are always lower than pretty much everything else
      • The additional costs can more effectively fund a personal savings plan
    • Children only need burial expenses
  • Other Insurances
    • Credit Life Insurance & Credit Disability Insurance – a waste of money because that money is better spent actually paying off creditors
    • Supplemental Health Insurance – that’s the whole point of the health insurance itself
    • Accidental Death – a gimmick
    • Prepaid Burial Policies – saving should be ready for that
    • Mortgage Life Insurance – pay off the mortgage instead
    • Weird gimmicks
      • Return of premium
      • Waiver of premium
    • Generally, the more complex the insurance the less useful or beneficial it becomes for the price you’re paying
Next: Money 403: Passing The Wisdom On