Money 402: Insurance

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Money 401: Investing

The entire purpose of insurance is to transfer risk

There are other ways to prepare for emergencies (more on this much later)

Certain losses will bankrupt you without insurance

Insurance is a defensive strategy

  • Insurance is a terrible way to gain investment income

Only get insurance for risks you can’t handle losing

Before getting insurance, get connected to several highly qualified professionals

Insurance is about transferring risk, and the most affordable insurance is to have competent professionals guiding you

  • Professionals are necessary for any financial decisions and are the safest protection of your wealth
  • The money they save you in avoiding risks is the greatest per-dollar protection
  • Organize your paperwork together when you walk in, or they’ll charge you to organize it
    • Gather all your paperwork beforehand to avoid delaying processing
  • You must understand everything the professional is saying, so ask plenty of questions
    • If they are offended by your questions, find another professional

Even as a professional, you’ll need others in their respective fields

Financial advisor (must be an IFA, or Independent Financial Advisor)

  1. Research them through FINRA
    • A poor financial advisor will cost in lost returns, 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 lousy accountant or tax preparer will cost you thousands in missed tax benefits or a discrepant audit
    • Save your money when filing your taxes with a professional preparer (who isn’t always a CPA)
    • Have a reputable tax preparer unaffiliated with 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
    • Report ALL income, including stock sales or gambling winnings
    • Find out before you go in what you can claim, and only claim deductions and credits that you know 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
      • You can deduct any alimony-related legal fees
      • 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 aren’t taxable
      • A business has many tax-deductible expenses and may be worth starting for that purpose:
        • 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. Prepare your taxes off-season (February and March) to seamlessly schedule appointments with your tax preparer and to have more time to obtain documents you may have missed
    • Though you can file for an extension, you will still incur interest 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 significant financial decisions you make

Attorney(s) (Must have 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 sloppy attorney will cost you irreparably by not paying attention to the legal environment of you or your business
  3. High-profile attorneys will charge for the initial consultation, but younger attorneys that need to build clientele will provide a free consultation
  4. During the meeting, tell them your entire situation
  5. If they are knowledgeable in what you need, pay a retainer for them to assist you later
  6. Keep them updated about any legally-affecting decisions you make, including other legal counsel

Banker (Will be affiliated with a reputable 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)

  • Beyond buying a house, you need a realtor to purchase business property

Insurance agent (licensed to sell insurance)

  • With a human agent, you can often get better service than online-only insurance
  • Try an independent insurance agent with the freedom to compare insurance from different companies

Keep your insurance information together in a single document

Type of insurance

Company

Plan ID#

Coverage amounts

Agent’s contact information

Monthly premium

Insurance is made up 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 and how long until you’ve paid the value of the insured property

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

  • A copay is technically a type of deductible

Every insurance policy uses the same calculation

  1. Measure as many legally measurable circumstances as possible that can affect the risk of a payout
  • Body type
  • Age
  • Health and psychological history
  • Family’s history
  • Accident history
  • Ethnicity
  • Religion
  • Residence history
  1. Have an actuary calculate the probability and likely cost from payouts across the term of the policy

  2. Add a little extra to increase the chance of a profit

  3. Divide the total amount into monthly payments

Save on insurance

Buy insurance with after-tax dollars to ensure after-tax payouts

Avoid extra features

  • Extended warranties
  • Low deductibles
  • Savings plans
  • Features you don’t fully understand

Shop around for insurance every year or right before each policy ends

  • Look for group insurance policies your workplace offers
  • You can sometimes get a discount for staying with an insurance company for several years
  • Generally, online-only insurance companies are more affordable

Take advantage of built-in policy discounts

  • Try to have multiple policies from the same company (multi-line discount)
  • Pay the full premium at the beginning instead of every month
  • Sign up for automatic payments

Outside of legal requirements, insurance never has to be permanent

  • Research before starting or ending a policy
  • Don’t allow any gaps in coverage by beginning policies later than another policy’s end date
  • Don’t buy what you don’t understand

Types of insurance

Auto insurance

Raise the deductible if you have a fully funded emergency fund

Carry an adequate amount of liability

Consider dropping collision coverage if you have an older car

Look for auto insurance discounts

  • Hybrid/electric vehicles
  • ABS, passive restraints, and other safety features
  • GPS trackers, anti-theft box, and other anti-theft devices
  • Keeping the car garaged overnight
  • Low mileage
  • Good GPA in school or staying in the education system
  • Staying accident-free and not getting a traffic ticket
  • Defensive driving proved with an authorized course
  • Welcome bonus for leaving a current issuer before the policy expires

Homeowner’s/renter’s insurance

On homeowner’s insurance, keep the guaranteed replacement cost if at all possible

  • Include coverage for natural disasters common in your area

Renter’s insurance is unbelievably cheap and always worth paying for

  • If you rent a home that burns down, homeowner’s insurance will not cover you

Consider an umbrella policy once you start acquiring wealth

Identity theft protection

It takes an average of 800 hours to resolve identity fraud

Don’t get ID theft protection that only monitors credit reports

  • You can monitor your credit for free with several popular services
  • Good protection services assign a counselor to clean up the mess

Health insurance

In the West, the number one cause of bankruptcy is medical bills

Try to bring insurance costs down if you’re healthy

  • Increase your deductibles, copayments, and stop-loss
  • Never decrease the maximum pay, since it’s too much risk

A health insurance company will often wholly reimburse the cost of a gym membership

Disability insurance

Disability insurance is designed to replace income lost due to a disability

  • Aim for 65% of your current income

Disability insurance is based on occupation but doesn’t consider age

Buy it if you run the risk of becoming disabled from performing your profession

  • Don’t get policies that last less than five years

Lower your premium by making the elimination period (time to start getting paid out) longer

The best disability insurance will come through the workplace

  • It’s usually called occupational insurance, which is often only available in 2-year terms

Long-term care insurance

Long-term care insurance pays for a nursing home, assisted living facilities, and in-home care

Long-term care insurance is necessary for anyone over 60

  • There’s a 69% chance of needing long-term care
  • Get it the day you turn 60

Medicaid and other government programs aren’t very reliable at long-term care

80% of a person’s lifetime medical expenses will go toward the last six months of a person’s life

Life Insurance

Life insurance is technically death insurance and replaces lost income due to death

Most people are unaware of the details of their life insurance policy

  • 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

The need for life insurance, contrary to the insurance industry, doesn’t have to be a permanent solution

  • Whole insurance is a complete waste of money because insurance returns are always lower than a conventional investment
  • Additional life insurance costs can instead fund a personal savings plan instead of using a built-in one

Children’s life insurance is only for burial expenses

Other Insurances

Credit life insurance and credit disability insurance

  • Pay off the creditors instead of buying insurance against the debt

Supplemental health insurance

  • Redundant insurance that covers what health insurance is supposed to cover

Accidental death and dismemberment

  • A gimmick, since it only covers certain types of death

Prepaid burial policies

  • A well-funded emergency fund should cover any burial needs

Mortgage life insurance

  • Pay off the mortgage instead of buying insurance against the debt

Weird gimmicks like “return of premium” or “waiver of premium”

Generally, the more complicated insurance becomes, the less useful or beneficial and more expensive it gets

  • As always, never buy what you don’t fully understand
Next: Money 403: Passing The Wisdom On