Sunday, September 23, 2012

Insurance Part 6b: Life



Insurance
Part 6b: Life

By Keith Bunn Jr.
September 23, 2012


Review

Before we start today, let’s review last week’s blog. Last week we learned that there are only two main types of Life Insurance, Term Life Insurance and Cash Value Life Insurance.

1. Term: Term Insurance is for a specified time or term. If you have a 10 year term policy, you only have the policy for 10 years. 20 year term policy, you only have the policy for 20 years, etc… it has no savings accounts built into it and it is much cheaper than the Cash Value policies.

2. Cash Value: Cash Value insurance is a continuing policy meaning, as long as you don’t cancel the policy and keep paying the premiums, you will have the policy as long as you live. It cost much more than Term policies because it has a savings (cash value) account built into the policy.

3. Better Deal: We also learned that even though Cash Values polices look good from the outside, when you look into the polices deeper and compare the math between the two, we found that Term Insurance is really a better deal for four main reasons.

·         Cost Less: Term Insurance is extremely cheaper than Cash Value for the simple fact you are not funding a savings account inside the insurance policy.

·         More for your Buck: You can get 2 to 3 times the coverage in a Term policy that still doesn’t cost as much as a $250,000 dollar Cash Value policy.

·         More when you Retire: If you just take the difference in what the two polices cost and invested it yourself in a decent Growth Stock Mutual Fund, by the time you retire, you’ll have millions of dollars invested instead of hundreds of thousands.

·         When you Die: If you have a Cash Value policy and you die, your family only gets the face value of the policy, NOT the cash value portion. The insurance company keeps that part.

How much to get

Now that we know what to get, the question is, how much do you need to get. And the answer to that is, you need to get a minimum of 10 times your annual income. So if you make $40,000 a year, you need $400,000 coverage in a 20 year level Term policy and this is why…

Let’s make up a couple named Joe and Suzie Smith. Joe and Suzie are a 30 year old couple that have two young kids that are 3 and 4 years old. Now if Joe is making $40,000 per year and the family is dependent on his income and he has a $400,000 20 year term policy in place, if unfortunately Joe dies 5 years later, Suzie will receive the $400,000. If she took that money and invested it in a decent Growth Stock Mutual Fund that gave her an annual rate of return of 10%, she would get $40,000 per year off those investments. Joe’s income is now replaced and the family will survive.

Now what about Suzie? If Suzie works, then she should also get 10 times her annual income in a 20 year Term policy. But if she doesn’t work, if she is a stay at home mom, then there should be anywhere from $250,000 to $450,000 of coverage on her then. The reason is, stay at home moms have an economic value too. From maintaining the household, grocery shopping, cooking, taking the kids to the doctors, to soccer practice, etc… If you had to hire someone to do that, it would cost a lot of money to do it. So don’t forget stay at home moms!


Who doesn’t need Life Insurance?

Let’s use Joe and Suzie again for this example. Let’s say Joe doesn’t die and he lives all the way to the end of the 20 year policy. If Joe and Suzie do what most Financial Coach’s say to do, in 20 years they will have become debt free which will probably include their home, they have an emergency fund established of 3 to 6 months’ worth of their household expenses, their 3 and 4 year old kids are now 23 and 24 and should be out of the home and living on their own, and Joe would have been investing 15% of his annual income for retirement into decent Growth Stock Mutual Funds that, instead of giving them an annual rate of return of 10%, they were making 12%. Now if Joe died 6 months after his 20 year policy expired, would Suzie be OK? Yes. Why? Because Suzie is debt free, has a paid for house, she has about $20,000 to $30,000 saved in case of emergencies, and over a half a million dollars in a retirement fund. Suzie will be OK. The same goes for Joe if Suzie dies. You see, they have become self-insured due to good financial planning.

Now if you’re single and no one is dependent on your income to survive after you die, then all you really need is a simple life insurance policy through your work that pays out enough to bury you. But if you want to get a Term policy, you can. There’s nothing saying you can’t.

You don’t take out big life insurance policies on your children. Most children don’t bring in an income, they normally cost money. So to put Term policies on your children is an over kill. A simple rider policy attached to your life insurance policy through your work should be good enough to bury them, God forbid.


What do you do if you have Cash Value Insurance and what Term?

If you have a Cash Value policy and you decide you want to get out of it and buy some Term instead, Make sure you have the Term insurance in place first. Because if for whatever reason, while you had the Cash Value policy, you became uninsurable because of some health issues, (meaning you can’t buy any new insurance), at least you still have the Cash Value policy to cover you when you die.

If that’s not the case, once you have the Term policy in place, you can then cancel the Cash Value policy. Also, you need some life insurance outside of work. Again, if you only have your work policy and you become uninsurable because of some health issues and then you lose your job, now you no longer have life insurance.


Bad Insurance plans! Don’t Buy Them!

1.    Credit Life and Disability: This is an insurance plan that is bought when you bought something on credit; it pays off that item if you were to die or be disabled. This type of policy is anywhere around 50 – 100 time the cost of what Term insurance will cost you. Not a good plan!

2.    Cancer and Hospital Indemnity: Don’t be pulled into this bad plan because of your fear of cancer. Your health insurance covers cancer. By buying both, you are doubling coverage and that is always a bad idea when it comes to health insurance because the insurance companies will argue who’s going to cover what and nothing will get paid.

3.    Accidental Death: You’re not double dead when you die by accident. I know these types of policies are not that expensive but you’re nickel and dimeing yourself to death with all these gimmick policies. Put that money towards something better like getting out of debt. Besides, if an insurance company only charges you a couple of dollars a year to cover something, that’s because the coverage sucks!

4.    Prepaid Burial Policies: If you are 40 years old, statistically speaking, you have a real good chance of reaching 80. And if you bought a prepaid policy that cost you no more than $3000 all the way to the day you died, that would have been $355,942.39 if you took that same $3000 and invested it into a Mutual Fund giving you a 12% rate of return for 40 years. Don’t prepay anything!

5.    Mortgage Life Insurance: This gimmick policy is kind of like the cancer one. “When I die, at least the house will be paid for!” That’s what people think when they buy this kind of policy. It is all based on fear of the “what if’s”. The only reason you should buy this policy is if you are un-insurable.

6.    Return of Premiums: This policy gimmick pledges that if go so many years without ever using the policy, they’ll give you all the premiums back if you just pay a little extra on the policy. If you take that little extra you’re paying on that policy and invest it yourself, you’ll have the premiums back whether you use the policy or not.

Well folks, this blog ended up to be way longer than I wanted but this information is just so important for everyone to know. Be careful, read the policies, do the math, ask for other peoples’ advice and input, and for goodness sakes, if you don’t understand how the policy works or even if it’s just a touch confusing, DON’T BUY IT!! Only buy it when you understand what you’re going to buy. Because insurance is an area where you normally don’t know you were ripped off until it’s too late. Only from knowledge and understanding can you prevent that from happening.

I hope my posts inspire you to look at what you’re doing financially and if needed, make some changes that will cause you to win financially. I also look forward to reading your views on any articles or postings that I may post. For more money news, facts and ideas follow me on Facebook, or Twitter. Thanks you!


Friday, September 21, 2012

integrity

This is what integrity means to me.

   How does integrity lead to winning in life & money.



http://www.youtube.com/watch?v=tq3CDttrG00&feature=youtube_gdata_player

Sunday, September 16, 2012

Insurance Part 6a: Life


Insurance
Part 6a: Life

By Keith Bunn Jr.
September 16, 2012

I have said it many times on Facebook, Twitter, and even on here that having Life Insurance is extremely important if someone counts on your income to survive!  And yet 30% of Americans don’t have it.

The purpose of Life Insurance is to replace income due to death. But the big question is, what kind do you get? The market is flooded with all kinds of different types of policies and it’s hard to figure out which ones are the good ones and which ones are bad. So let’s go over them.

Term vs. Cash Value

There are generally only two kinds of Life Insurance policies out on the market today, Term Insurance and Cash Value Insurance. Cash Value can also be called Whole Life, Universal Life, or Variable Universal Life. Term insurance is always called Term. The differences between the two are HUGE.

1.    Term: Term Insurance is for a specified time or term. If you have a 10 year term policy, you only have the policy for 10 years. 20 year term policy, you only have the policy for 20 years, etc… it has no savings accounts built into it and it is much cheaper than the Cash Value policies.

2.    Cash Value: Cash Value insurance is a continuing policy meaning, as long as you don’t cancel the policy and keep paying the premiums, you will have the policy as long as you live. It cost much more than Term policies because it has a savings (cash value) account built into the policy.

Looking at the two types like that, it’s almost like a no brainer on which one is the best kind to get. In fact, a lot of insurances companies that sell Cash Values polices compare the two like this. Getting Term Insurance is like renting a home, whereas Cash Value is like buying a home. Again, kind of like a no brainer. Let’s look at it a different way.

Let’s say a healthy 30 year old male buys a $250,000, Cash Value policy. His monthly premiums are $178, which includes paying into the cash value portion. By the age of 50, the cash value will have built up to $34,483 and by 70 it would have reached $124,041. Not too bad huh?

Now let’s say the same guy buys a $250,000, 20 year Term policy instead of the Cash Value. His monthly premiums are $13. That’s a difference of $165 per month. And then let’s say he took the difference and invested it himself into a decent Growth Stock Mutual Fund that gives him an average rate of return of 12%. By the age of 50, that investment would have built up to $164,859 and by 70 it would have reached $1,960,603. WOW! Almost $2 million! That’s a huge difference!!

Both examples the guy was spending $178 per month but the outcomes are totally different. It looks like it’s not so much of a no brainer after all. Now let’s get really crazy!

Let’s take the same guy, but instead of buying a $250,000, 20 year Term policy, he buys a $500,000, 20 year Term policy, twice as much. His monthly premiums go from $13 to $21. And he invests $157 per month instead of $165 into a decent Growth Stock Mutual Fund that gives him an average rate of return of 12%. By the age of 50, that investment would have built up to $156,866 and by 70 it would have reached $1,865,539. The end result is not quite as much but you have to remember that you have doubled your policy amount.

$250,000 + $1,960,603 = $2,210,603 compared to…

$500,000 + $1,865,539 = $2,365,539.

Now if this doesn’t convince you that Term Insurance is an all-around better buy, maybe this will. Taking the $250,000 Cash Value example from above, let’s say the guy dies at 70 years old. How much do you think the beneficiaries get? They get the face value of the policy, $250,000. You want to know where the $124,041 went that he had in the cash value portion of the policy? The insurance company keeps it! Where in the Term policy, you get the face value of the policy, the $250,000 or $500,000 in our example plus what was invested. How does that sound?

The only people that think these Cash Value policies are any good are the ones who sell it because they make a lot of money doing it. Money Magazine, Fortune Magazine, Kiplinger’s Magazine, and Consumer’s Report all say that Cash Value policies are the most expensive and less useful forms of life insurance.

“The right type of life insurance can be summed up in a single word: TERM.”
-Smart Money Magazine-

Because this topic is so big and it’s causing this blog to be too long, I will talk about this a little bit more next week in Part 6b. I will discuss who should get life insurance, how much should you get, what to do if you already have a Cash Value policy and want to change to Term, and what gimmicks NOT to get. I hope you all find this insurance series insightful and would really like to hear your questions as well your input.

 For more money news, facts and ideas follow me on Facebook, or Twitter. Thanks you!

The insurance cost and cash value based on the average of four actual quotes.



Monday, September 10, 2012

Insurance Part 5: Disability


Insurance
Part 5: Disability

By Keith Bunn Jr.
September 10, 2012

Have you ever had to file for either short term or long term disability? Chances are you have. In fact, you have a 1 out of 3 chance of being disabled 6 months or longer. And if you’re over 30 years old, you have a greater chance of becoming disabled than dying by the age of 65. Unlike Life Insurance, disability insurance is based on the type of work you do rather than your age or health. If you work with machinery, your disability insurance will be more expensive than for someone who works in an office because you have a greater chance of becoming disabled. So having disability insurance is a big deal!

What should you look for in a disability policy?

1.    Occupational or “Own Occ”: You want to have a disability policy that will pay you if you are no longer able to do the job you were trained to do. Those types of policies are called Occupational or “Own Occ” policies. For example, as most of you know, my primary job right now is that I’m a C.N.C. operator for a local manufacturing company. A few years ago I tore my meniscus in my left knee while playing racquetball and had to have surgery to fix it. After surgery, there was really no way I could do my job. So I was paid for being temporally disabled.

2.    Beware of Policies… :  Beware of short term policies that cover less than 5 years. 5 years or longer is Long Term Disability. 5 years or less is Short Term Disability. Some experts say that Short Term Disability policies are a gimmick and should not be bought. I partially disagree with that. I think if you are just starting this whole get out of debt plan and you are at the beginning of the Baby Steps, and you don’t have your 3 to 6 months’ worth of expenses (Baby Step 3)  saved up yet, you need some sort of Short Term Disability policy in place just in case something happens. But as soon as Baby Step 3 is in place, I would drop Short Term Disability as soon as you’re able to. I will explain why in a bit.

3.    65% of your Income: You want to look for a policy that will pay 65% of you current income. And you want to buy it with after tax dollars, NOT pretax dollars. The reason is, if you buy your policy with pretax dollars, your disability income is then taxable, but if you buy it with after tax dollars, your disability income is then tax free. And you can then live off of 65% of you earlier income.

How do you make disability insurance more affordable?

Over the past few years, “Own Occ” rates have greatly increased. So what can you do to make them more affordable for you?

1.    The best way to eliminate the high rates: Is to buy “Own Occ” for 2 years only. Using my knee surgery example above, if I had really messed up my knee or something went wrong during surgery and I was no longer able to do my C.N.C. job forever but I was able to walk. The insurance company would pay me disability for up to 2 years. Once the 2 years was over they would tell me “Get a job”, unless I was permanently disabled and in that case they would continue to pay for my disability.

2.    Increase the Elimination Period: The Elimination Period is the time between when you became disabled and the disability payments start. Let’s say from the time you were disabled to time the disability payments started was 30 days. You would have a 30 day Elimination Period. The Elimination Period is like the deductibles on your car or home. If you increase the amount of time between when you were disabled to the time the disability payments, the lower your rates will become. So if you have a 3 to 6 months emergency fund, you could do 2 things. (1) Drop your short term disability policy and use your emergency fund to fund your short term disability. This eliminates a premium you were paying. (2) If you increase your Elimination Period to up to 180 days, your rates will decrease.

I hope you have seen a pattern in these blogs so far. It is the BIG events that can cause serious financial harm to you and your family that you need insurance for. The smaller snags that life throws at you and your family are what the emergency fund is for.

I hope my posts inspire you to look at what you’re doing financially and if needed, make some changes that will cause you to win financially. I also look forward to reading your views on any articles or postings that I may post. For more money news, facts and ideas follow me on Facebook, or Twitter. Thanks you!


Sunday, September 2, 2012

Insurance Part 4: Health



Insurance
Part 4: Health


By Keith Bunn Jr.
September 2, 2012

It seems like healthcare has been a major topic in the news for some time now. And with medical bills being the number one reason for bankrupts in this country, along with Obamacare looming around the corner, it is more important than ever to know what your options are.
In my opinion, more and more people are going to have to provide for their own and their family’s healthcare. So this means that you are going to have to figure out what plans are good for you and your family, Figure out what you can do in each plan to make the plans affordable, for the most coverage needed, and finally, get your financial life in order so you can afford the plans that are out there.

Biggest Bang for our Buck

So what can we do to get the most out of every dollar we spend on healthcare?

1.         Increase your deductibles and/or your co-pay amounts. Most people today have an 80/20 insurance plan, which means if you need to use the insurance, your insurance company pays 80% of the bill and you pay 20%. Well if you were to increase your deductible and went to a 70/30 plan, you assume more responsibility and a greater risk than before and that will cause your premiums to go down.

2.         Increase your Stop-Loss without decreasing your Maximum Pay.  Stop-Loss is the maximum amount of out of pocket cost you’ll have to pay. Let’s say that you had a $10,000 Stop-Loss, you would pay your deductible, plus your 20% (if you had an 80/20 plan) up to $10,000. Everything above that, your insurance company would pay 100%. If you had a good 3 to 6 months saved in your emergency fund, you would be able to afford a $15,000 to $20,000 Stop Loss. Maximum Pay is the total amount your insurance company will pay. If you have a half a million dollar Max Pay and the total cost is above that, whatever the remainder is, you’re on your own. I would keep your Maximum Pay to be a minimum of $1 million.

3.         Another way to keep your family’s healthcare down is by using a Health Savings Account (HSA). An HSA is a tax-sheltered account with a high deductible. A typical HSA account has around a $5,000 deductible but has lower premiums than your typical PPO insurance plans. One of the good things about an HSA is that after you have reached your deductible, the insurance company pays 100% of the medical cost. So an HSA makes sense if you and your family fall into two different categories. If they are really, really sick or really, really healthy.

If you or your family member is seriously sick and you would burn through that $5,000 deductible easily each year, the HSA would be a good plan because all you would have to pay each year is the $5,000 deductible, plus your monthly premiums. That’s it! Your insurance company pays 100% after all that.

Now if your family is really health, meaning, you hardly ever go to the doctor at all. You can build up each year a tax deferred savings account by saving your deductible each year. This account can then only be used for medical reasons of any kind no matter what your income is. In a sense, this account, over time, will turn into another big hairy ‘medical’ emergency fund on top of your 3 to 6 months fund.

The only way an HSA doesn’t make sense is if you go to the doctor often enough to where you don’t reach your deductible limit but use enough of the savings to where you hardly have anything left.

Questions

·        Are there any of these things we just went over something you can implement today or the next time you can choose or change your benefits through your employer?

·        If your employer dropped their healthcare benefits package, would you be able to afford healthcare out in the open market?

·        If you’re married and both working someplace that has healthcare as part of your benefits package, have you compared the two plans to see which one is better?

·        Have you checked the open market to even see if there is a better deal out there than what your employer offers?

I hope my posts inspire you to look at what you’re doing financially and if needed, make some changes that will cause you to win financially. I also look forward to reading your views on any articles or postings that I may post. For more money news, facts and ideas follow me on Facebook, or Twitter. Thanks you!