Insurance: Sometimes You Need It, Sometimes You Don't
You've already learned to think big when it concerns insurance. Forget the little stuff, even if it's tempting because it doesn't seem to cost very much. In many cases, the same coverage offered with “specialty” policies, such as mortgage life insurance or flight insurance, is already provided for in your regular life insurance policy.
If you buy a lot of little insurance policies hoping to cover every possibility for loss, you'll end up spending a lot more on the policies than you would fixing the things that go wrong. If your computer does break down, by the time you pay the deductible, spend an hour or two filling out the claim, and try to cut through the inevitable red tape, you're probably better off having it fixed on your own. Make no mistake about it. You can buy as much insurance as your heart desires. You can insure your stereo equipment, your mountain bike, your drum set, your cell phone, and your snowboard if you want to. You can pay anywhere from $12 to $40 a month to buy health insurance on your five-year-old golden retriever. Before you start buying insurance on everything you own, however, consider what you really need.
Insurance companies pay out an average of 60 cents in benefits on every dollar they pull in for premiums. Some policies, though, such as repair plans, average less than half of that amount. Skip the little stuff and worry about the big stuff.
The types of insurance you need depend on where you are in your life. A thumbnail sketch of the types of policies you may need follows:
- Single with no dependents At this point in your life, you need health insurance, auto insurance, homeowners insurance, and enough life insurance to cover your burial, final expenses, and any outstanding loans. If you rent, consider getting renters insurance. Disability insurance also makes sense for you now.
- Married with no kids Now you'll need some life insurance, especially if your spouse doesn't work or if you own a home. Auto and homeowners or renters insurance is necessary, as are health and disability insurance.
- Married with kids Kids bump up the amount and types of insurance you need. If you don't have life insurance yet, you'll definitely need it now. Term life insurance, where you pay a certain amount per year and your survivors receive a certain amount if you die (more about this later in the chapter), is probably your best bet. You'll still need health and disability insurance, too, along with auto (pay special attention to that one once the babies get to be teenagers and start driving!) and homeowners insurance. It's a good idea at this point to re-examine all your policies to make sure you're adequately covered. Having kids makes you responsible for them, and you want to make sure they'd have sufficient resources if you were to die or become disabled.
We're going to concentrate on the types of insurance necessary for people in the first two categories: single with no dependents and married with no kids. We'll also touch briefly on what you need if you're in the third category: married with kids.
Show Me the Money
A co-pay is the amount an insured person is expected to pay for a medical expense at the time of the visit. It can also refer to the difference between what your doctor charges and what your insurance company will cover for a particular service.
In the past few years, health-care insurance has become a hot political issue, a topic of discussion at dinnertime and parties, front-page news, and a growing headache for many Americans. The United States spends more of its gross domestic product on health-care than any other major industrialized nation, according to the Washington, D.C.-based National Coalition on health-care (NCHC), and patients are being asked to pay more and more out of their pockets while an increasing number of people are uninsured.
If you get health insurance through your employer, breathe a big sigh of relief. Even though many companies have started requiring that employees co-pay (that means you contribute a portion of your salary to offset the employer's cost for your insurance plan) and pay higher deductibles, you're still better off than having to buy insurance on your own. If you do need to buy your own health insurance, be sure you get a plan that covers the big stuff. You need to be covered for hospitalization, physician costs, and charges for things such as X-rays, lab tests, and diagnostic tests. If you're a woman who plans to have a baby in the not-too-distant future, look for maternity benefits, too.
If you're leaving a job where you have an insurance plan, look into the possibility of extending your coverage when you leave. COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) requires your employer to continue your health coverage after a job loss, death of an employee, divorce, or attaining a certain age (as when a child reaches an age when he or she is no longer covered under the plan). Your employer is required to offer COBRA coverage for 18 months after you quit your job, or 36 months for other situations (such as divorce). You have to pay for the insurance, but at least you'll be covered and your insurance won't lapse.
It used to be the general rule of thumb—and still is, in some states—that you could probably get a better rate with a health maintenance organization (HMO) or preferred provider organization (PPO) plan, both of which limit your choice of health-care providers, than on a plan that lets you see whomever you want. The health insurance arena is changing, however, and HMOs and PPOs aren't always available in all areas, or always the most economical types of plans.
Dollars and Cents
If you're buying your own health insurance, take the largest deductible you can afford, which is an amount you'll be required to pay before the insurance company will pay a claim, to keep the cost down. Also, consider a co-payment option, in which you'd pay a percentage of your health costs. Make sure the co-payment option includes a maximum out-of-pocket limit though.
If you can get an HMO or PPO plan in your area, go ahead and check them out. They may still be your best deal. Don't reject HMOs and PPOs because you think they limit your choice of doctors. Many HMOs and PPOs probably include your current doctors, so ask to see a list of which doctors are included as providers before you make your decision.
Check out a big health-care insurer such as Blue Cross Blue Shield if you're shopping for a policy. They normally can get better rates from health-care providers and are more stable than many smaller companies. Look for a plan that has the highest lifetime maximum benefits you can find and is guaranteed to be renewable.
Show Me the Money
Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are health plans that restrict your choice of health-care providers. As a result, these plans often—but not always—cost less than those that don't restrict providers.
Because health-care insurance changes so often and so quickly, and the regulations vary greatly from state to state, shopping for a policy can be extremely challenging. If you need to find your own insurance, consider the suggestions that follow:
- Go online. If your state enables you to choose whatever health-care plan you want, you can get immediate quotes online from sites such as eHealthInsurance.com and DigitalInsurance. com. These sites can at least give you an idea of what's available and how much it will cost.
- Find a health insurance broker. Using a broker can be helpful because he or she should be able to guide you not only on price, but also on the ins and outs of whatever company you're looking to insure with. The National Association of Health Underwriters, located on the web at www.nahu.org, can lead you to a broker in your area.
Dollars and Cents
If you're having a difficult time finding insurance because of a medical condition, check to see if your state has a high-risk insurance pool.
- Check out your state insurance department's website. Most of these sites include the names of companies that offer policies within your state and some information about them. State sites may also include a record of complaints against various companies.
Some innovative folks have joined together and obtained small group insurance on their own. In some states, members of these small groups may be eligible for group policy rates, which can cost 20 to 50 percent less than individual rates. You might also check in your area to see if you can join an organization that offers group health-care benefits, such as a chamber of commerce.
Another option for certain people is a medical savings account. As the name implies, this is a savings account created for the purpose of paying for medical expenses. It works in conjunction with qualified major medical insurance and can be used to help pay deductibles and expenses that insurance doesn't cover. Generally, these plans are options for people who are self-employed, who work for a company with 50 or fewer employees, or who employ 50 or fewer workers. The Internal Revenue Service offers a form on medical savings accounts. You can access it by going to the IRS website at www.irs.gov and clicking on “Forms and Publications”; the form number is 969.
More on: Family Finances
Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
To order this book visit the Idiot's Guide web site or call 1-800-253-6476.