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Module 5

Insurance
by

MD Rahat

on 18 May 2016

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Transcript of Module 5

How does insurance work?
You pay some money every year premium
If something bad happens the insurance company would step in and cover your claim (loss)
Disability Insurance
How does disability insurance work?
Hypothetical example… Jane
She is single and her fixed expenses are $4000 a month
So Jane needs to buy a disability policy that would pay her a benefit of $4500 a month
I know people that didn’t have long term care insurance and it financially wiped them out
May affect your parents or you down the road
It’s not for people who are sick
You have a choice with insurance
You can self insure (go without insurance)
So let's go through some of the different types of insurance that are out there
I want to give you some perspective on the key issues with this insurance stuff!!!

You pay a premium for this just like life insurance
If you pay for the disability premiums with after tax money, then the benefit – if you collect disability - would be tax free
If your employer pays the premiums, the benefit you receive would be taxable
Many people think that they wont need long term care insurance
According to the US Dept. Health and Human Services
- 70% of people turning age 65 can expect to use some form of long term care during their lives
Here’s how long term care insurance works
Homeowners
mistakes that people make when they buy homeowners or renters insurance
2 – People think that all of their personal property is covered under their policy no matter what happens to it
Coverage depends on what happens and how it happens
Coverage may differ if there is a fire, or theft, or vandalism, or if you lose it, or it gets damaged
You may want to consider buying a personal article floater policy
You may need to “schedule” or list the valuables with your insurance company
Hypothetical Example – ring worth $10,000
Most people will flake out and never get the jewelry appraised
What happens if you get hurt or sick and you can’t work?
No work = No income
If you can’t make money and you still have expenses.. You’re screwed…
Unless you have money in the bank or passive income
- You have to pay for any losses that you or your dependents have
LIFE INSURANCE
If you were to get hit by a bus and you have people, family that depend on you, then you probably need to buy some life insurance
If you die, the insurance company pays out a death benefit to your heirs
How much life insurance should you buy?
Most people buy life insurance so that if they die and their family depends on that income, the insurance money will be enough to replace that loss of income
4 things you need to know when trying to figure out how much life insurance you should buy
1 – How much money your heirs or beneficiaries would need to live on every year
2 – How long would your heirs need that money
There are 2 major types of life insurance you could buy
1 – Term Insurance
2 – Permanent Insurance
Term Insurance
You buy life insurance for a certain period of time
After that period, the insurance coverage expires
You pay premiums every year
If you stay alive, you get nothing at the end!!!
Level term insurance = the premiums are fixed for the entire term of the policy
Increasing term = the premiums go up over time
I see a lot of insurance agents selling increasing premium term life insurance
You need to know what you are buying…
Hypothetical Example with Increasing Term
- Year 1 = $1000
- Year 5 = $1500
- Year 10 = $2000
- Year 15 = $3000
- Year 20 = $3500
Level Term = $2000 fixed for 20 years…
Permanent Insurance
Permanent insurance is designed to cover your life forever
It will eventually pay out to your heirs when you die
But you have to keep paying the premiums to keep the policy in force
The odds of your heirs collecting this type of insurance are virtually 100%
The odds of you dying during the term insurance policy period are much lower
The premiums you pay for permanent insurance are more expensive
You could earn some interest on the policy if you keep it long enough
CASH VALUE
Great way to fund your retirement
Or pay the premiums on your permanent policy down the road
Main reason why people buy permanent life insurance?
3 basic types of permanent insurance
Whole Life Insurance
Has a guaranteed cash value every year
Premiums are usually the same
Sometimes pays dividends
- Non taxable
- Allows you to buy more insurance
- Or you can use the dividend money to pay your premiums
Universal Life Insurance
- Death benefit could change over time
- More flexible than whole life
- You can choose the timing of premium payments
- You have to watch this policy to make sure it will last
- Generally offers cash value guarantee
Variable Life Insurance
- The cash value varies
- Tied to mutual funds or sub accounts
- You get to pick the mutual funds and the cash value is tied to the performance of the mutual funds
HEALTH INSURANCE
Top 7 mistakes that people make when they deal with health insurance
1 – Not using your Flexible Spending Account (FSA)
- If you sign up for this, you can put a certain amount of money into this on a pretax basis
- Expenses that are not covered by your plan
- You can use it to pay for out of pocket healthcare expenses
You have to use the money that you put in the FSA by the end of the year …. Or you lose the $
This is a general review
Review the specific terms of your FSA with your employer
2 – Buying health insurance with too high of a deductible
Sometimes people want to get a really low monthly premium
They end up paying for a ton of healthcare expenses before their coverage kicks in
This may be right for you but review this stuff with your benefits department or your health care insurance broker
3 – Forgetting about mail order drugs for filling prescriptions
If you take the same medication on a monthly basis, you can do mail order delivery and save some money if you do this
Depends on your plan
Call your plan and ask about this
4 – Not submitting claims to your insurance
company to meet your deductible
Many people forget to do this
The way to meet your deductible is to fill out the claim form and send it to the insurance company
Applies if you are seeing out of network doctors
5 – Brand vs. Generic Drugs
Using brand when generic could be cheaper
Consult your doctor and ask her/him if you can take a generic drug instead of the brand drug
If you take the generic, the copay or cost of the drug could be cheaper
Make your own decision whether you are comfortable with a generic drug
Call your health insurance company and see what they offer
Many insurance carriers only pay for generic drugs now
If you want a brand drug, you usually have to pay the generic co-pay
Plus the difference between the brand and generic cost
6 – Going to out of network doctors vs. in network doctors
In network doctors usually cost less
Many people go to a doctor that they get referred to without seeing if the doctor is in network
Go online to your health plan to see or you can call the doctor and ask them
7 – Trying to buy health insurance on your own
If you are self employed or choose not to enroll in your company’s health plan – or one isn’t offered, use a health insurance broker to shop plans for you
You don’t pay them
They get a commission when they sign you up to a plan
All of this info is general in nature
Review your specific situation with a health insurance broker
Call your health insurance company
For those of you who don’t have gazillions of dollars in the bank, you may need to consider buying disability insurance
Her variable expenses are $3000 a month
Her total monthly nut is $7000 a month
Her new monthly nut if she were to be disabled, would be $4500
She could buy this through her employer or through an insurance agent
If she buys a disability policy with after tax money, the benefit she receives will be tax free
If the employer buys the policy and pays her premiums, the benefit to her will be taxable
If you call your employer and you find out that they buy it for you, you need to calculate what the benefit would be after you pay taxes on that
So in this example, let's say Jane’s employer buys the policy, and the benefit is $4500
Because it’s taxable, she’s only going to really get around $3100
So she is short by $1400
Remember her monthly nut is $4500
Jane may also get some state disability insurance
But it probably won’t come close to making up the difference on what she will need to live should she become disabled
Some state disability programs pay benefits on a short term basis
State disability benefit may not be high enough
Average disability lasts 3-5 years
That’s why people buy regular disability insurance – better and longer coverage
You will most likely have the same fixed expenses
Maybe you would have some variable expenses
Attention!!! Mucho importante!!!
If you buy disability insurance through your employer!!
If you leave your employer and try to take the policy with you, you need to see if the premium will be the same
Or see if the insurance company has the ability to raise the premiums on you
Which would totally stink!!!
You need to know how the insurance company defines disability
But your insurance company says you can perform a similar job sitting down
So they deny paying your disability claim
It all comes down to how disability is defined
Disability definitions
Any Occupation
- You can’t perform the duties of any job which you are reasonably qualified to do by experience, education, or training
- Sitting at a desk
- Washing cars
- Flipping burgers at McDonalds
Ask your insurance professional to explain to you the definition of disability
So that you really understand what type of policy you are buying
Insurance companies are no dummies
They want to know how healthy you are before they insure you for life insurance or disability insurance
If you can’t work
If you can’t make any money
You have expenses
People depend on you
Go over this stuff and consider buying disability insurance with your insurance pro
LONG TERM CARE
INSURANCE
So what is long term care insurance all about?
Its for people that…on their own
- Can’t get dressed
- Can’t eat
- Can’t go to the bathroom
- Can’t get in and out of bed
- Can’t walk
You pay premiums for a benefit down the road
In most cases if you can’t perform 2 or 3 activities of daily living ….
The insurance company is going to pay you a benefit for a certain amount of time
The premiums you pay are usually fixed
The insurance company does have the ability and option to raise premiums on you
So you are spending money to cover yourself down the road
The premiums could be really expensive
But they can also be much cheaper than the out of pocket costs that you could pay for long term care
The benefits from your long term care insurance policy can provide the money to allow you to stay in your home
In most cases it doesn’t mean that you have to go into a nursing home to collect benefits
People buy long term care insurance because they want to protect their assets in retirement
There are so many changes going on in the long term care insurance industry
Review your long term care insurance options with your insurance pro
Get a second opinion before you buy this type of policy
AUTO INSURANCE
3 mistakes that people make when they buy auto insurance
1 – Many people are underinsured
Call your insurance agent and have them do an analysis of what your coverage amounts are especially for liability and property damage
Liability part, bodily injury part, and the property damage part
2 – Many people have their auto policy with one company and their homeowners/renters policy with another insurance company
Bring everything under one roof
Many insurance companies offer their customers discounts if they have more than one type of coverage with them
3 – The part of the auto policy that covers you when you have to rent a car
When we get in an accident and it’s our fault, and we have to fork out some $$$
You need to know how many days your car insurance will pay you for a rental car
You need to know how much money your car insurance will pay each day
That car is $35 a day
So you are out $10 a day for 2 weeks
You’re out $35 a day for the 3rd week that you are not covered for
That could be a lot of money that you have to spend on top of having to pay your deductible
Call your insurance agent, make sure that you are adequately covered
&
Renters Insurance
3
Some people think that the liability portion only covers claims at their house or apartment
Covers claims that you are responsible for no matter where you are
If you have valuables, call your insurance company and ask them what is and isn’t covered
Usually covers your valuables under certain circumstances
You will pay an extra premium for this coverage
Usually no deductible
You insure them for what they are worth
When you schedule it, you need to give your insurance company an appraisal and then they will insure it
If they do, they forget to fax in the appraisal to the insurance company
3 – People think that if an earthquake or flood happens, that their home is covered
Most homeowner insurance policies don’t cover earthquakes and floods
You need to buy separate policies
Many people don’t buy earthquake insurance policies because they’re very expensive and they have high deductibles
If you have major equity in your house, you should consider this…
If there is a major catastrophe and your house is wiped out, and you don’t have any insurance, then you could be wiped out
Review this stuff with your insurance agent
Renter’s Insurance
Many renters don’t buy renters insurance because they feel like they don’t have to insure their possessions
Renters policy covers their personal liability as well
Renters insurance is pretty cheap and most people should consider having this
nsurance
The more insurance you buy, the larger the premium you have to pay
Deductible – part of the claim that you have to pay first before the insurance company pays any money
- You save money by not paying the premiums
- When something bad happens, you have to put up all of the money to pay for it
4 – A rate of return that you think someone managing the life insurance proceeds could make after
- Inflation, fees, and taxes
Ask your financial advisor or insurance professional for help
You’re basically renting life insurance for a certain period of time
The longer the period of time that the insurance covers you, the more expensive it is
The younger and healthier you are, the cheaper the life insurance premiums are
As long as:
- You pay enough premiums
- Or the cash value of the policy can pay the premiums
- The insurance company is still around
The cash is called cash value
- You can take the cash out any time you want
- You can use it as collateral to borrow from your policy
- Over time the cash value builds up
- They want a sure thing
- A guarantee that their heirs will get some money when they die
- That way, they can spend their money more freely in retirement
(not spending kids inheritance)
- Cash value in the policy can also be a way to fund their retirement
- Death benefit also depends on the performance of the underlying investments
- Before you buy any type of life insurance, review your needs, your goals, your objectives with your insurance agent
- You don’t want to buy something that you don’t understand or isn’t just right for you
Jane doesn’t get income from anywhere else
So what she needs to do is buy a supplemental policy from her insurance agent with a monthly benefit of $1400
She will use her own money to buy it
The benefit in this case would be tax free
What happens if you get disability insurance from your employer… and you leave the company?
You need to find out of the policy is portable
See if you can take the policy with you and own it on your own
Let’s pretend you are a personal trainer and you work at a gym
You get sick and you can’t stand on your feet all day
So you file a claim for your disability
- You can’t perform the duties of your job
- The insurance company will pay you if you can't perform your job
- They won’t make you go flip burgers at McDonalds
They will go through your medical records
Interview you over the phone
They even come to your house to do a blood and urine analysis
Review this disability stuff with your insurance professional
It’s custodial care
It covers the care that generally isn’t provided by traditional health insurance
Medicare usually does not cover a large portion of custodial care and neither does Medicaid
Let’s say you need a rental car for 3 weeks because your car is totaled
Your car insurance will give you 2 weeks for a rental
Daily limit is $25
You have 3 kids and you need a 3rd row and a big car
State disability programs
Vary state by state – review your state’s program
Usually pays a benefit for 1 year
Hypothetical example
1 – Sometimes people are underinsured on the liability portion of their policy
So you’re probably thinking of how much of a benefit to buy for your disability policy
For most people, the fixed expenses stay the same, and some of their variable expenses go down by a little bit
Go back to your spending and savings plan and review your expenses
- Own Occupation
For specific advice pertaining to your situation, please consult with your own insurance agent or insurance company
This is general advice for you to think about and review
1 – How much money your heirs or beneficiaries would need to live on every year?
2 – How long would your heirs need that money?
3 – Are there any additional expenses that your spouse or heirs would have if you were not around? And for how long?
- Child care, day care
4 – A rate of return that you think someone managing the life insurance proceeds could make after: inflation, fees, and taxes
Ask your financial advisor or insurance professional for help
Full transcript