Insurance
Your financial security blankets
When should you buy life insurance?
Make sure the why is there before you buy - Why would you need life insurance? Life insurance is not an investment. It is to replace the income that would be needed if you were no longer here, and the goal is that by some time in the future (say 65 or so), you will have enough assets to be self-insured and will no longer need life insurance.
You might not need life insurance if you are young and do not have other people relying on your income, or if you are older, and no longer have young children to care for or a spouse relying on your income as you own assets that can take care of them financially if something happened to you.
You might need life insurance if you have a family or others that you are taking care of or that are relying on your income. Typically, people buy life insurance after they get their first mortgage or after they have their first child.
How Much Life Insurance Should You Need
It is recommended to have 10-12 times your annual income in a Term Insurance policy.
For stay-at-home parents, Dave Ramsey recommends getting a term life insurance policy valued between $250,000 - $400,000. (per 2023)
Insurances everyone should look into:
Home, Health, and Auto Insurance – Are you adequately insured in these?
Flood Insurance – Important if you live in a flood-prone area, however, this could cover other freak flooding accidents as well, so depending on cost and coverage, it may be worth looking into even if you are not in a flood-prone area.
Life Insurance – Should have 10x to 12x’s your annual income in TERM life insurance. For stay-at-home parents, Dave Ramsey recommends $250,000-$400,000 (per 2023) in TERM life insurance.
Long-Term Disability Insurance – They say people are more likely to become disabled leaving people in need than they are to die leaving people in need.
Health Savings Account (HSA) – Not everyone is eligible for an HSA, but it is worth considering if you are. HSA’s have triple tax advantages (your money goes in pre-tax, grows tax-free, and can be pulled out tax-free). You need to be enrolled in a high-deductible health plan to qualify.
Long-Term Care Insurance – Dave Ramsey recommends waiting to buy this until after 60 years of age. Choose what is right for you.
Umbrella Insurance –This is recommended if you have assets to protect, especially rental property. Dave Ramsey recommends umbrella insurance if you have a net worth of over $500,000, but Farmers Insurance doesn’t recommend this until you have a net worth of over $1 million. Once you start acquiring sufficient assets, this could be good to look into.
Insurances to probably avoid:
These insurances may be expensive and redundant (meaning they may already be covered with your health, auto, and/or life insurance plans).
Everyone’s financial situation is different, so be sure to do your research. You may find you might be better off saving these premiums to put toward your emergency fund, pay off debts, or invest.
Credit Card Insurance – May not be necessary because
1.) Credit card debt should not exist!
2.) Debts after death are usually paid from the estate.
Pet Insurance – Your emergency fund might be better to use for emergency pet care rather than sinking lots of money into pet insurance premiums.
Disease/Cancer Insurance – Specific disease/cancer insurance may not be necessary, as these could be covered by health insurance, life insurance, and/or long-term disability insurance.
Accidental Death and Dismemberment Insurance – This risk is low for most, and if the risk is significant for you, it may be covered by your life insurance or long-term disability insurance.
Accident and Short-term Disability Insurance – It may be better to use your emergency fund to cover accident/short-term disability. Your emergency fund should be sufficient enough to last until your long-term disability insurance kicks in.
Hospital Indemnity Insurance – Similar to accident insurance, this is specific to cover a major payment to a hospital or other hospital-related services. Using your emergency fund would be better for this.
Gap Insurance – You shouldn’t need gap insurance unless you have an auto lease or a loan that is more than the value of the car. A lease may require gap insurance, but if you have a loan, then decide if your emergency fund is sufficient enough, or if you will be okay taking on this liability by evaluating your loan amount and the actual value of the car. How big is the difference? Will you be better suited to save this premium instead?
Rental Insurance – Some auto insurance companies/plans have rental car insurance built into them. Some credit card companies also have rental car insurance coverage if the vehicle is rented on that credit card. Be sure to check your auto insurance and credit card benefits before paying for rental car insurance.
Flight Insurance – Normally, this falls in the gimmicky category, but be sure to check your current coverage and compare it to what you think your risk might be.
Mortgage Life Insurance/Mortgage Protection Insurance – This type of credit insurance covers your mortgage if you pass away. This may be necessary if you cannot qualify for life insurance but be sure to weigh all your life insurance options before looking into mortgage life insurance. Mortgage life insurance can be more expensive than term life insurance, and the premiums can fluctuate.
Home Warranty – It’s a warranty, not insurance. Be sure to read what is covered before signing up as this could be expensive and not necessarily cover what you may need. Using your emergency fund may be better for this.
4 Recommended Family Care Investment Account
(ChooseFi – Fire Community Podcast)
1. Able accounts (for families with disabled children)
2. Health Savings Account (HSA) (for medical expenses)
HSA’s have a triple tax advantage meaning:
the contributions are pre-tax dollars, or the contributions can be deducted
it grows tax-free, and
the money can be withdrawn for medical expenses at any time tax-free.
Money from HSA’s can also be withdrawn without penalties for non-medical purposes after age 65, however, it will be subjected to income taxes.
2022 HSA’s max contributions
Single/Individual coverage = $3,650
Family coverage = $7,300.
3. Dependent Care (for daycare/preschool expenses) or / Flexible Spending Accounts (FSA) (for qualified healthcare expenses)
An FSA is a type of saving account that is set up by an employer for an employee to save for qualified healthcare-related expenses with pretax dollars. This will also lower your annual tax liability; however, these contributions must be used by the end of the plan year or you will lose your contributions.
2022 FSA’s max contributions
2022 = $2,850
(If married, your spouse can also put aside that limit through his or her employer.)
Employers can choose to contribute to an FSA for their employees, but they do not have to—if they do, their contribution does not reduce the amount that you are permitted to contribute.
4. Custodial Roth’s (for children or minors).
REMINDER
Review your insurance coverage and premiums every few years to ensure you still have adequate coverage.
As inflation goes up, so does the price of everything.
Reviewing your insurance coverage and premiums at least every few years will help ensure you have the coverage necessary to replace things that might be lost and ensure you are not overpaying for what you need.
Click the link below to see a Dave Ramsey video on why this could be important.
Your Credit Score Can Affect Your Insurance Premiums
Per Experian, they say that your credit score and your credit-based insurance score are different, however, both types of scores will usually indicate similar behavior. They say if you have a high credit score your credit-based insurance score is probably also high, and if your credit score is low, then your credit-based insurance score is probably low also.
Here are tips to help improve your credit score:
Pay your bills on time every month.
Decrease your credit utilization rate by paying down credit card debt.
Check your credit report to ensure all the information there is accurate and up to date.
Be aware of how actions affect your credit score such as closing old accounts or opening new ones, and how holding a variety of different accounts can positively affect your credit score.
When deciding between a high-deductible insurance plan with an HSA or an employer health insurance plan.
Do the math:
What is the difference in premiums?
What is the difference in cost every year?
What is the tax benefit?
Can you afford the high deductible plan?
Can you afford to cover health costs and let the HSA invest for you?
If your employer offers a great insurance plan, then that might be better to go with depending on how the math works out for you.