Mitigating Risk with Insurance

07/27/2020

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Part 2: Health & Life

Insurance mitigates three broad categories of risk:

  • Your assets, which includes homeowners and vehicle insurance
  • Your liability, which includes homeowners, vehicle and umbrella policy
  • Your finances and your family, which includes health, life and disability insurance

We covered homeowners, vehicle, disability and umbrella policies in Part 1. In Part 2, we look at the basics of life and health insurance.

Health Insurance: The Basics

There are three general categories of health insurance plans:

Employer sponsored plans

  • “Traditional” health plans (PPO, HMO, etc)
  • High deductible (HDHP) plans with health savings accounts (HSAs)
  • Limited to what your employer offers

Self-employed → healthcare marketplace

  • Long list of insurers based upon the state in which you live
  • Traditional plans to high deductible plans
  • Range of premiums, coverage options, deductibles, out of pocket expenses…

Job disruption

  • COBRA (continuation of coverage) or healthcare marketplace

Chances are your circumstances will dictate that only one of the three category options is available to you. In many cases, dental and vision coverage are also available. While not generally essential, they’re nice to have.

Health Insurance: How to Evaluate

The big three financial costs to consider

  • Premiums
  • Deductible
  • Out-of-pocket maximums

This is a case where you’ll have to break out the calculator and make some assumptions. What routine care, such as check-ups, are you and everyone else on your policy likely to need over the next 12 months? What prescription coverage do you need? Can you manage the impact of the maximum out-of-pocket expenses of one policy versus another?

If the maximum out-of-pocket expenses of a given policy would put you in a serious financial hole, it might make sense to put up with, say, slightly higher costs for office visits or prescriptions in return for being protected against financial catastrophe. There’s no single right answer, and with all of the unknowns this is a bit of a gamble. Do your homework and calculations to tilt the odds in your favor. Remember that the purposes of health insurance are to get you and your family the care you need while protecting you from serious financial trouble.

How to choose a plan

  • Family situation
  • Monthly cost – premiums
  • Deductibles and out of pocket maximums
  • Prescription drug coverage
  • In-network vs out-of-network coverage
  • Traditional plan vs high deductible plan

There are many factors to consider when choosing a healthcare plan. An HMO with many services available in one building, for example, may cost less. But are the facilities convenient to where you live and work? What are your care options if you travel out of the area? If it’s important to you to develop relationships with primary care physicians and specialists, will you be able to at the HMO? If you need specialized treatment, where and how is it available?

Health insurance is complicated, and for most people the only opportunity to choose a plan is during an open enrollment period, or when starting a new job.

Life Insurance: The Basics

There are two basic categories of life insurance.

Term

  • Coverage ends after a determined “term” (time period), such as 10, 20 or 30 years
  • More bang for your buck (more coverage for less)

Permanent

  • No set term (as long as premiums are paid)
  • More expensive but can have cash value
  • Types:
    • Whole life
    • Universal life
    • Variable life

Term insurance is almost always the least expensive type of life insurance. Term insurance is just what it sounds like: you buy a life insurance policy that has a set term, such as 20 years. The premium is based on your age, health, the amount of coverage and the term. At the end of the term, the policy lapses unless you choose to renew. In some cases, term policies can be converted to whole, universal or variable life policies before they lapse.

The other types of life insurance work more like investments. You’ll generally pay a higher premium, but there is no set term. As long as you pay your premiums, your policy will remain in force. Over time the value of your policy will increase. Generally, you can borrow from it, and you can redeem your policy and receive some cash. Policies vary widely when it comes to investments, guaranteed rates of return and fees.

In most cases, term insurance makes the most financial sense. Run the numbers with your financial planner to decide how much you need to cover potential expenses such as college, mortgage, debts, and retirement.

Also, do some research on the financial stability of the insurer before buying a policy. If you’re counting on the proceeds of your policy decades in the future, you want some assurance that the insurer will still be in business and be able to pay.

Insurance and Finances

One final tip: bundling policies, or having multiple policies with the same insurer, often results in savings. Homeowners and vehicle policies are typically bundled; vehicle and umbrella policies are often combined as well.

Keep in mind that insurance is an integral part of financial wellness and your overall financial plan. Work with your financial planner to appropriately protect yourself and the people and things that are most important to you. Make sure you get the coverage you need, rather than just the lowest premium.

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