Health Insurance

Picking a health insurance policy is a confusing and stressful experience for most of us. Personally, I'd rank it up there with assembling furniture or trying to figure out how to fix anything in my apartment. But enrolling in the right health plan can save you a great deal of money and even affect the quality of your medical care, so it's important to make your decision carefully.

Most Americans can choose from a variety of health insurance policies, which primarily differ based on their flexibility in coverage and associated costs.

Flexibility in Coverage

Two main factors determine the level of flexibility of your health insurance coverage: 1) the doctors you can see, and 2) whether you need a referral from a primary care physician to visit a specialist.

Health care providers are usually categorized into two buckets — in-network and out-of-network. Doctors that have contracts or relationships with a particular insurance company are considered “in-network,” and all other doctors are considered “out-of-network.” Plans also differ based on whether you need a referral from a primary care physician to see a specialist who focuses on a particular area of medicine, such as an endocrinologist, allergist, or dermatologist.

What You Pay

Health plan costs differ based on what you pay upfront before coverage kicks in (i.e., deductibles), what you pay on an ongoing basis for care (i.e., monthly premiums, copayments, co-insurance), and how much in total you may have to pay in a year (i.e., out-of-pocket maximums).

When you choose a plan with less flexibility, you may be able to pay lower overall costs for your health care.² On the other hand, if you require more flexibility in your health care options, you may pay higher upfront and ongoing costs for that optionality.

How to Decide

Most US consumers covered by an employer plan are enrolled in one of five types of health insurance policies:

• Health Maintenance Organization (HMO) plans
• Exclusive Provider Organization (EPO) plans
• Preferred Provider Organization (PPO) plans
• Point-of-Service (POS) plans
• High Deductible Health Plan (HDHP) plans

Each policy type has its own advantages and disadvantages. For example, HMOs offer the least optionality among the various policy types because they only cover in-network medical care and require referrals for specialist visits. But on the plus side, they generally cost the least across the board. PPOs, which provide the most flexibility, cost the most for the average policyholder. And HDHPs charge the lowest premiums, but come with high deductibles and high out-of-pocket maximums. See Table 14.2 for a summary of flexibility of coverage by health plan.

When selecting a health plan, you're trying to balance flexibility and cost-effectiveness in a way that best accommodates your personal needs. While your exact health care plan options may vary, you'll want to ask yourself the following questions:

• Do I need or want the flexibility to see out-of-network providers?
  • If yes, consider a PPO, POS, or HDHP.
  • If not, you may want to save some money and consider an HMO, EPO, or HDHP.
• Do I care about having to see a primary care physician before being able to see a specialist?
  • If yes, consider an EPO, PPO, or HDHP.
  • If not, you may want to save some money and consider an HMO, POS, or HDHP.

I encourage you to run some numbers to figure out which plans available to you best align with how you use health care. Many companies or their insurance providers have calculators you can use to model out different scenarios.

Disability Insurance

If you get sick or injured and are unable to work for a period of time, would you and your family be able to cover your living expenses? Disability insurance is meant to protect you against financial hardship in such a scenario — either on a short-term or long-term basis, depending on the policy type you're enrolled in.

Employer-Provided Coverage

If you work for a company, you likely already have some amount of employer-provided coverage. Employer-provided short-term disability policies typically last up to six months, and cover an average of 60% to 80% of your salary. Long-term disability kicks in after short-term coverage ends and could last up until your full social security retirement age (read: into your 60s). Long-term disability policies generally cover a lower percentage of your salary than short-term disability.

If you work for a company, be sure to verify your disability coverage and confirm the following before enrolling in a supplemental plan:

• Coverage Amount: What percentage of your salary does the company cover? Is the coverage based on your total salary (base, bonus, equity), or just your base salary?
• Coverage Length: When do short-term and long-term disability coverages begin and end, and how long could each last?
• Elimination Period: How long do you need to wait before your benefits kick in? (You can think of the elimination period as similar to a deductible, except instead of being based on some amount of spend, the elimination period is time-based.)
• Pretax or Post-Tax Dollars: Would your disability benefits be taxed? This is typically the case for employer-provided short-term disability; however, long-term disability benefits may not be taxed if you use after-tax dollars to pay for ongoing premiums.

  If you have a choice, pay for your long-term disability premiums with after-tax dollars rather than having the company pay the premiums. This will allow you to receive your disability benefits without being subject to federal income taxes, helping your benefits go toward your living expenses, rather than to the government.

Next, look back at the work you did in Chapters 4 and 5 to see what percentage of your salary you need to cover your daily living expenses. If the disability policies you receive through your employer provide a lower percentage than you need, you may want to explore supplemental disability policies while also examining whether you may have flexibility to decrease your living expenses, either now or in the event of a disability.

How to Choose a Disability Insurance Policy

When shopping for a long-term disability insurance policy, you'll want to confirm the following provisions:

• Premium: The amount you'll pay on a monthly or annual basis. While your premium will depend on the specific features of your policy, Policygenius estimates the yearly cost to be 1% to 3% of your annual salary in most cases.³
• Benefit Amount: The amount you'd receive each month if you needed to exercise your coverage.
• Benefit Period: The length of time you'd be able to receive benefits.
• Elimination Period: The amount of time you'd need to wait before your benefits kick in.
• Disability Definition: The terms dictating when you'd qualify as being disabled and be able to collect benefits, which typically fall into the categories “own occupation” and “any occupation.” “Own occupation” means if you could not perform your particular occupation, you would be eligible for benefits, even if you could perform other occupations. “Any occupation” means you could not collect benefits unless you were unable to perform any “gainful occupation.”

Property Insurance

Whether you rent or own your home, you need to have insurance to properly protect your personal belongings and home from fires, robberies, windstorms, and other not-so-fun events. Property insurance policies may differ in what they protect you from, so you'll want to examine the conditions of each option as you're shopping. For example, basic coverage generally excludes earthquakes and floods from its list of protections.

With that said, both renters and homeowners insurance provide coverage for:

• Personal Belongings: Insurance would protect most of your belongings, including your furniture, clothing, and electronics, but be sure to read the fine print because some policies may have limitations for jewelry, art, rugs, and tapestries, among others.
• Additional Living Expenses: If you were forced from your home because of a covered disaster, insurance would pay for the additional costs you'd incur while your home was being repaired, including hotel bills and restaurant expenses. However, note that not all disasters are considered “covered” disasters, such as a bed bug infestation.
• Liability Insurance: Insurance would protect you if someone were injured on your property, or you were sued for damaging another person's property.

Homeowners insurance includes the additional coverage of:

• Dwelling: Homeowners insurance would protect your home, garages, and sheds if damaged in certain events.

Replacement Cost versus Actual Cash Value

When seeking out either type of property insurance, you'll be able to get coverage based on the actual cash value or replacement cost of your personal property and housing. Most homeowners insurance policies will cover the structure of your home (i.e., the “dwelling” portion of your plan) based on replacement cost, and your personal property coverage will be limited to some percentage of your dwelling coverage, typically 50% to 70% according to the Insurance Information Institute.⁴ Erik Chiprich, an insurance agent at State Farm Insurance, notes that in his 10 years in the business, he has never sold a homeowners insurance policy based on actual cash value. With that said, it's always good to confirm the type of coverage you're purchasing.

The difference in coverage matters. Replacement cost coverage will reimburse you for the full cost to replace your property, while actual cash value coverage will take into account the age of the item and any wear and tear, and reimburse you for the full cost to replace your property, less depreciation. Another way to think about actual cash value is the amount someone would have been willing to pay for the item before the damage occurred.

To figure out the amount of personal property coverage you need, create an inventory of your belongings in a spreadsheet, along with an estimated value for each item. For your most significant items, such as furniture and electronics, take and keep photos of those items, and store them along with your inventory list using your preferred cloud storage provider. The pictures and inventory list will be helpful if you ever need to make a claim.

Auto Insurance

If you own a car, you're required to have car insurance, which helps to protect against damage to your car and because of your car. Each state has its own minimum requirements for auto insurance policies, which may include coverage involving 1) liability insurance, 2) personal injury protection, and 3) uninsured or underinsured motorist coverage.

It's important to understand each component of your auto insurance policy and whether your current coverage is adequate based on your personal situation. For certain types of coverage, such as personal injury protection, the state minimum coverage may be sufficient, especially if you have existing health and disability insurance. On the other hand, if you have significant assets, the minimum required liability insurance may not be enough for your situation.

As with other insurance policies, you'll want to balance monthly premiums with when your coverage kicks in. Your monthly premium will decrease as you increase the amount of your deductible.

Umbrella/Liability Insurance

While you may have some liability insurance coverage through your property and/or auto insurance, it may not be sufficient to cover large claims and fully protect your financial assets. That's where an umbrella policy comes in.

An umbrella policy provides you with additional liability insurance above and beyond coverage from other insurance. For example, let's say you caused a car accident and you were on the hook for a $1 million claim for bodily injuries and the other driver's lost wages from being unable to work. Unfortunately, your auto insurance policy only covers the other driver up to $400,000. Having an umbrella policy would help fill the $600,000 gap, protecting your hard-earned savings from being depleted.

Umbrella policies are typically sold in $1 million increments with minimum coverage of $1 million. For the amount of coverage you get, these policies are pretty affordable. A $1 million policy may set you back just $100 to $300 a year. The rule of thumb is to choose an umbrella policy sufficient to shield your net worth. I'd recommend evaluating your coverage at least once a year to ensure you increase your umbrella policy coverage as your net worth grows.

Life Insurance

Life insurance provides a safety net so that people who rely on your income could support themselves and pay for their living expenses in the event of your death. Getting a life insurance policy is a must if anyone depends on you financially, including a partner, children, or other family members. If you have substantial assets that may be sufficient to support your dependents after you're gone, you may not need life insurance.

Those who work for a company are probably already enrolled in an employer-sponsored life insurance policy. Company life insurance policies often offer at least $50,000 of coverage, with the option to add coverage above that amount based on your salary or total compensation. There are a few catches, though: the amount of coverage you're able to secure may not be sufficient for your needs, and once you leave the company, you may or may not be able to take the policy with you.⁵ In the cases where you are able to port or convert your coverage into an individual policy, the amount of your coverage and your premium could be significantly different (translation: much higher), depending on the coverage type, your age, and health status, among other factors. So if someone else counts on your salary and you are not independently wealthy, it may make sense to buy a life insurance policy that is not tied to your employer, especially if your path to reaching retirement or financial independence is still a number of years away.

Term Life versus Permanent Life

Life insurance policies generally fall into two main buckets: term life and permanent life. Term insurance works by insuring your life for a temporary period of time, typically 1 to 30 years. If you were to pass away during this time, the insurance company would pay the amount of the death benefit to your beneficiary. Let's say you enrolled in a 20-year term life policy with a death benefit of $1 million. If you passed away at any time during the next 20 years, your beneficiary would receive $1 million. However, your beneficiary wouldn't receive a penny if you passed away after 20 years.

Permanent life insurance, on the other hand, is more permanent and covers you for your whole life, hence the name. In addition to providing a death benefit, permanent life insurance also has an investment component, known as cash value, which builds over time and can be borrowed against. There are many variations of permanent life insurance, including traditional whole life, universal life, variable life, and variable universal life.

When deciding whether to get term or some form of permanent life insurance, you should consider the following factors:

• Is my need temporary or permanent? If you're like most people, you may only have a temporary need for life insurance to enable your dependents to pay off the mortgage and/or replace your income for some period of time. In those cases, it may make sense to simply push forward with a term life policy. In certain cases, if your need for life insurance is greater than 30 years or you have a unique tax and planning situation, then a permanent life policy may make sense to explore.
• How long will I need the policy? If your need is temporary and you're targeting a term life policy, the answer to this question should reflect how long you need to protect your income for your beneficiaries. Families with young children typically choose to take out policies that will protect them through when their last child finishes college. Others may choose to protect their income stream through their target retirement date, at which point, any dependents will have likely saved enough money to cover their living expenses.
• How much of a benefit do my survivors need? The size of the benefit should reflect: a) the living expenses of your surviving beneficiaries, 2) how long they will need to cover those expenses, and 3) any other major expenses or savings goals they will need to fund.

  Ongoing Needs
  (1) Annual Income Needed
  (2) Annual Income of Survivor
  (3) Annual Income to Fund (1–2)
  (4) Number of Years to Replace Income
  (5) Total Ongoing Needs to Replace (3x4)
  Upfront Needs
  (6) Funeral Expenses
  (7) Mortgage Balance to Pay
  (8) Non-Mortgage Debt to Pay
  (9) College Funding and Other Unfunded Needs
  (10) Other Upfront Needs
  (11) Total Upfront Needs to Fund (6+7+8+9+10)
  (12) Estimated Life Insurance Needed (5+11)

  Table 14.3 incorporates these three variables to help you estimate the amount of life insurance you may need (also available at www.workyourmoneybook.com). When inputting the numbers for your situation, confirm you are not double counting expenses by including the same expense in your ongoing and upfront needs. For example, if you allocate money to pay off your entire mortgage, make sure to subtract the monthly mortgage payment from the annual income needed. Lastly, be sure to confirm this calculation with a financial professional before taking out a policy.

• Do I need an investment component to my policy? Term life is pure insurance, while a permanent life policy combines life insurance and an investment component. If you plan to follow the savings and investment guidance presented in earlier chapters, then you may not need an investment component with your insurance. However, if you need a forcing function to get you to save money, the investment component of a permanent life policy could serve in that capacity.
• How much can I afford? Regardless of what policy may be the best fit for your needs, cost may end up being the deciding factor. According to NerdWallet, a 30-year-old male may pay $9,283 a year for a $1 million whole life policy (a type of permanent insurance), but just $657 a year for a $1 million, 30-year term life policy — making the whole life policy 14 times more expensive in this example.⁶ In addition to being more expensive, some people may simply not have an extra $9,000 (or whatever the larger amount is) lying around to divert to a permanent life policy.

While there are certainly some cases where getting a permanent life policy may make sense, a term policy is typically sufficient for most people. David Oransky, financial planner at Laminar Wealth, says, “I have yet to recommend permanent life insurance to any of my clients. For nearly everyone, they would be better off taking out a term life policy and investing the difference.”

Wills

All of us are familiar with the concept of a will. Wills allow you to control who would receive your stuff if you were to pass away, like the money in your checking and taxable brokerage accounts, as well as your espresso machine, that fancy Herman Miller desk chair, and your five-year-old futon.

Wills also enable you to determine who would serve as a guardian for any children and pets you have, and to establish trusts for those you care about, including minor children. By creating a trust for minor children, you can avoid two unfavorable situations – your children receiving a large inheritance outright when they turn 18 and having the state become the guardian of your assets in the event that both you and your partner died.

Lastly, you'll also name an executor – someone you trust who will be responsible for carrying out the instructions in your will.

Health Care Proxies and Living Wills

Health care proxies and living wills are estate planning tools that you can use to help ensure that medical decisions are carried out for you in a particular way if you were unable to communicate or make them yourself. Specifically, a health care proxy allows you to spell out who would make medical decisions for you, while a living will allows you to spell out what medical decisions you would want in various circumstances. You could choose to have both a health care proxy and a living will, or only one.

If you plan on working with an estate planning lawyer, seek their advice regarding which health care planning options would make the most sense for you. If your situation requires minimal estate planning, you may be able to use standard online forms (most states offer these) to complete your health care proxy and living will.

Power of Attorney

There's no escaping the bills we pay – even in the tragic event of a medical emergency. A power of attorney allows you to determine who would take care of those financial matters for you if you were unable to do so. You can authorize this person (or people) to carry out a range of actions on your behalf, such as selling property, signing legal documents, closing or opening accounts, or executing business transactions.

Beneficiary Designations

Many accounts allow you to designate a beneficiary, who would inherit your account if you were to pass away without the estate first needing to go through probate. Accounts with beneficiary designations include:

• Retirement Accounts and Life Insurance: You can use beneficiary forms to denote a beneficiary for retirement accounts (e.g., 401(k)s, 403(b)s, IRAs), life insurance policies, annuities, and education savings accounts (e.g., 529 plans).
• Transfer-on-death Accounts: Beneficiaries can be added to bank and brokerage accounts as well. A bank account with a beneficiary is known as a payable-on-death account, while a brokerage account with a beneficiary is called a transfer-on-death account.

Titling of Accounts and Property

Certain joint titling of accounts or property⁷ allow those assets to pass outside of probate, including titling accounts or property as joint tenants with right of survivorship (JTWROS) or tenants by the entirety. In both cases, if one owner passes away, all of the assets would pass to the other owner without going through probate. Tenants by the entirety works in the same way as JTWROS, except tenants by the entirety is only available in certain states and for married couples.

Living Trusts

Living trusts allow you to specify exactly how your assets should be distributed after your passing without the cost and hassle of probate. As an added benefit, living trusts enable the details of your estate to remain private. That's the good news.

The downside? Establishing a living trust requires extra legwork and more upfront costs that may be unnecessary for some people. According to Ford, “For many people – particularly young professionals and married couples – there are easier ways to avoid probate, like using joint titling and beneficiary designations.”

However, a living trust could be helpful in certain scenarios. For example, people who own real estate in more than one state and whose estate may otherwise be subject to probate proceedings in several states might use a living will to avoid this situation. If you're considering a living trust, I'd recommend consulting with an estate planning lawyer first to understand the pros and cons for your situation.