Armchair Millionaire

Going It Alone on Health Insurance

Question of the week:I just started a new job and my new employer doesn't offer health insurance. I'll only be covered by my old employer' plan for a few more months. I've always been in employer plans before--where should I turn?
--Healthy But Worried in D.C.

Dear Healthy,

Whatever you do, don't become one of the 43.6 million Americans (or 15 percent of the population, according to the U.S. Census) who are without health insurance altogether. With medical costs as high as they are today, even a small injury or brief illness could have a catastrophic effect on your finances. According to a Harvard University study, an inability to pay medical bills is one of the leading reasons people declare bankruptcy.

Certainly if you are soon to be without health insurance, you have every reason to be anxious. And if the comments we recently heard in the Armchair Millionaire community are any indication, even people who still have health insurance are plenty worried. Here are a couple of examples:

"My husband is a cancer survivor at age 24 and so he has to work for a big company that has health coverage for everyone. Now, there is no way we could afford private health insurance for him on our own because of his history. As is, we can barely afford the out-of-pocket expenses." --Meg H. in Idaho

"I have health insurance provided by my employer which costs me $150 month for me and my children. It's a pretty good plan, no real complaints. However, my out-of-pocket cost has gone up every year over the past four years and it's going up again next year. When I think about being able to handle a temporary period of unemployment, I feel pretty confident that I can handle it for six months or so, but what I fear is not having health insurance coverage for me and my children." --Mattchiavo

The good news is that there are still plenty of choices in private health insurance plans for individuals. And although there's been talk in Washington lately of offering tax assistance to individuals who buy their own health insurance, for now you're going to have to foot the bill on your own. My guide will point you in the right direction for getting your own policy.

The Armchair Millionaire Guide to Obtaining Individual Health Insurance

• Cast a broad net. Leverage the Internet to help you compare lots of different plans quickly. eHealthInsurance.com and insweb.com are two places to start. If you'd rather deal with a human being, go to an insurance broker who represents several different companies, not an agent who sells for just one company.
• Decide if you'll pay now or pay later. Policies with the lowest premiums have the highest deductibles and co-pays, and may not offer coverage for anything beyond the basics, like prescriptions or mental health care. Higher premiums will get you better coverage. Either way, you'll pay--it's just a matter of when.
• Get coverage that fits. Before you buy a policy, check carefully to see which providers (doctors and hospitals) and services (for example, cancer screening or well-baby care) that it covers, and that you're happy with those options. If you end up going to a doctor who is not part of your plan, you'll probably pay extra.
• If you have a medical issue, be prepared to improvise. Unlike when you are covered by a group policy from your employer, individuals applying for their own insurance must provide a detailed medical history. If you've had a medical problem in your past, the policy may specifically refuse to cover that problem, or you may be declined coverage altogether. If that's the case, find out if you live in one of the 29 states that offer "high-risk pools," or coverage for residents who can't otherwise get insurance. You can find a list at www.cobrahealth.com.

THE BOTTOM LINE: Once you're on your own with health insurance you should be prepared to pay more for your health care--in addition to your insurance premium--than you ever did under your employer's group plan. However, health insurance is simply essential that you simply can't be without.

Deciphering Life Insurance Lingo

Question of the week:With two young children, we know we need life insurance, but are a bit intimidated by all the choices. What's your opinion about the best type? --J. and P., San Diego Dear J and P., I find that there's a lot of confusion around all the options in life insurance, but that once you know the basics it will soon become clear which one is right for you. As you can see from these recent comments from members of the Armchair Millionaire community, these folks hold clear, strong opinions: "I have term life insurance. I think whole life insurance is a waste of money because you don't have control over where that money is being invested. Buy cheap term life insurance and invest your money elsewhere." --Tiffany "Our polices have investment components. Otherwise, it is pretty much just a waste of cash if you live to be a ripe old age!" --1 So what exactly are these people talking about? And how can they have such contrary opinions? To start, it's helpful to understand that there are two broad categories of life insurance: temporary (commonly called term), which lasts for only a set amount of time, and permanent (also called cash value), which lasts for your entire life. Another key difference is that term insurance simply pays a benefit if the insured person dies while the policy is in effect, while permanent insurance includes an investment component so that a portion of your premium is invested. This is where the major differences of opinion arise. The people who argue for term insurance (this includes me) generally believe that they can get a better return on their money by investing on their own, while fans of permanent life insurance believe the insurance/investment mix can be a valuable combination. Unfortunately, beyond these basic distinctions, it gets a little more complicated, and this is where some people get lost. To help you make an informed decision, my guide will help you decipher the lingo. The Armchair Millionaire Guide to Life Insurance Choices Term insurance. This is the cheapest, simplest kind of life insurance. Buy a policy for a set term (typically 10 or 20 years) and if you die during that time, your beneficiary will receive the benefit. Whole life. This is the simplest type of permanent life insurance. Your premiums remain the same throughout the life of the policy, and a portion of each premium is invested by the company, allowing you to accumulate this money (the cash value) on a tax-deferred basis. Universal life. This has the same basic features as whole life, but is a bit more flexible. If you choose, you can pay in amounts above your regular premium, and adjust the death benefit relative to the cash value amount. Variable life. With a variable policy, you get a choice of different funds where the company will invest your money for you. Generally, if the investments do well you'll have a higher death benefit and greater cash value. It they don't do well, you'll have a lower death benefit and cash value, though some policies guarantee a minimum death benefit. Variable universal life combines the flexibility of adjusting the amount of the death benefit and premium (as in universal life) with the ability to take a little more risk in investment choices in the hope of getting a bigger return (as in variable life). THE BOTTOM LINE: While complex at first glance, life insurance need not be overly confounding. If you understand your choices and are clear about why you're buying life insurance in the first place, the right option for you will be obvious.

Driving Down the Cost of Car Insurance

Question of the week:My car insurance premium has just gone up (again!), even though I have a perfect driving record. What can I do to get these auto insurance bills under control? --Kim T. Dear Kim, You're certainly not alone. According to the Insurance Information Institute, the cost of auto insurance premiums is expected to rise by about nine percent this year, which breaks out to about an additional $60 per vehicle. And as evidenced by recent comments from members of the Armchair Millionaire community, others are feeling the auto insurance premium pinch. This comment was typical: "I have a perfect driving record (not a single at-fault accident or moving violation), and yet I pay a ridiculous premium. Just because I am young and male and live in NJ (the worst possible combination in the US), I am penalized to the fullest. Just horrible..." --Alexander K. Reducing your coverage and increasing your deductible are obvious moves, but there are many other common sense steps you can take to ensure that your premiums don't spiral out of control. My checklist provides just a few. The Armchair Millionaire Checklist for Keeping a Lid on Car Insurance Costs Shop around. Prices do vary greatly from one company to another, so it pays to comparison shop. Keep in mind that insurance companies may sell their policies in one of three ways: through their own agents, through independent agents who offer insurance from several different companies, and directly to customers over the phone or Internet. It pays to get quote from each type. Also, check with your state's division of insurance--many offer free price comparison guides through their Web sites. Get every discount you can. Depending on what your insurance company offers, you may be eligible for a number of different discounts, including: Safe driver discount: If you have not had an accident or moving violation for a set period of time, or if you have recently taken a defensive driving class. Multiple car discount: If you are insuring more than one car with the same company. Car and homeowners: If you buy both auto and homeowners insurance from the same company. Discount for safety and anti-theft devices: For cars with specific safety devices (such as anti-lock breaks), or theft deterrent systems. Low mileage discount: If you drive the car fewer than a specified number of miles each year, typically 7,500. Other discounts may be available for long-time customers, students with good grades, college students away from home, and drivers over the age of 50 or 55. Be sure to ask. Check out the car before you buy. The cost of your car model, how much it costs to repair, its safety track record and its attractiveness to car thieves all affect your premium. Before you buy your next car, compare the insurance losses for different models you may be considering. This information is available from the Insurance Institute for Highway Safety on its Web site at www.hwysafety.org. Explore group policies. Some employers and associations (such as alumni and professional associations) offer group auto insurance policies at a discount to what you would otherwise pay. THE BOTTOM LINE: If you drive, common sense (not to mention your state law) demands that you have car insurance. But that doesn't mean that you have to be a victim of ever-rising premium costs. With a little hunting around, you can find the best possible coverage for the lowest possible rate.

Dealing With the High Cost of Long-Term Care

Question of the week:My financial advisor suggested that I get long-term care insurance, but it seems like this might be just another expense I don't need right now. What's your take on it? --Jesse T.

Dear Jesse,

Consider that the cost of a long-term care policy can be downright cheap compared to the cost of long-term care. According to the United Seniors Health Cooperative, the national average cost in 2000 for a nursing home was $153 a day, or over $55,000 per year. In some areas, the cost can be much, much higher.

But will you end up in a nursing home? A study by the U.S. Department of Health and Human Services found that people at age 65 have at least a 40 percent lifetime chance of entering a nursing home, with about 10 percent staying there at least five years. So while you might never need long-term care, the longer you live, the greater your chances are that you will.

We asked members of the Armchair Millionaire community about the reasons they have purchased long-term care insurance and got some great, common sense responses:

For peace of mind. "We bought our policies in our early 40s so that we would know that we are prepared for whatever happens. We wish that we had taken policies for our parents years ago!" --B. in Alabama

For financial security. "As part of my overall financial plan, I purchased a long-term care insurance policy when I was 34. At that age, the premiums are dirt cheap." --Bob S.

For asset protection. "My mother-in-law has been in a nursing home for two years and the cost is $5,000 to $6,000 a month, so slowly but surely her assets are being spent down. I do not want that to happen to everything I worked for my entire life." --Tom from Buffalo Grove

To make a wise decision about buying this all-important insurance, use my quick overview of long-term care coverage.

The Armchair Millionaire Guide to Understanding Long-Term Care Insurance

Policies provide for care in a nursing home, and often also pay for at-home nursing care, physical therapy, and home health aids. And many policies cover the cost of assisted living and adult daycare.

Any policy you consider should include an "outline of coverage" that describes the policy in detail and helps you compare it to others. There are three major things to understand about any policy:

• The benefit amount and period. This is the amount that the policy will pay each day you require care and the total number of days the policy will pay for covered services.
• The elimination period. Like a deductible, this is the number of days you require care before the policy begins to pay benefits. Elimination periods of zero days are available.
• Inflation adjustment. This is an increase in the benefit to offset inflation. Five percent inflation protection is common.

It all depends on the level of benefits you choose and your age when you buy the policy. A typical policy costing $900 a year at age 50 could easily be double that at age 65. And premiums do vary quite a bit between insurance companies. A nice thing about long-term care insurance, though, is that your premium does not increase as you age (unless your provider chooses to raise its rates for all its policy holders).

You want a reputable, financially strong company without a history of major rate hikes. Your insurance agent should be able to give you company ratings and rate histories. Your state insurance department can also be a valuable resource, providing the names and ratings of companies licensed to sell insurance in your state and maintaining public records of complaints against companies.

• What does it cover?
• How do I choose a policy?
• How much does it cost?
• How do I find a good insurance company?

THE BOTTOM LINE: For protecting your assets and offering peace of mind, there may be no better deal than long-term care insurance. But policies and options are complex, so research carefully before you buy and consider consulting a financial advisor specializing in long-term care policies.

Baby Makes Three

Question of the week: I've gotten married and had a baby all within one year. For the first time in my life, I'm thinking about all the people who depend on me. Do I really need life insurance? If so, what kind is best? —Brand New Mom Dear Brand New Mom, You've asked two important questions that stir up strong opinions among different people. Here's a sampling of the views about life insurance from the Armchair Millionaire community: Only get it if you need it. "I'm working my first job after graduating college and have no dependents, so I don't need life insurance at this point in my life." —Morgan S. Buy term and invest the rest. "Life insurance can be very expensive, so it should be used only for dependents. Buy term, then invest through IRAs and 401(k)s." —MW Pass up the investment. "I believe in term life insurance-just paying a basic fee for basic insurance coverage. I don't need or want my insurance company investing any money on my behalf or making promises to me about its ability to get great returns." —Roger My own approach to life insurance is simple: First, when do you need it? If you have dependents, you need it. If no one is depending on you for financial support, you don't need it. Second, how much do you need? You need enough to replace any income your family would lose if you weren't around earning a living—usually a lump sum that will be spent down during your children's growing-up years. Buy a plain-vanilla term life policy and keep it only as long as you have dependents. As a new parent, the coverage you need doesn't stop here. While it's important to protect your family with life insurance, it's just as important to have the insurance that will keep your financial life on track when you're faced with those relatively minor unexpected events, like a fender-bender or knee-crunching crash on the ski slopes. The key is to put together a package of insurance that includes the right types and amount of coverage for your situation at a price you can afford. My checklist covers some basic steps for doing exactly that. The Armchair Millionaire Checklist for Family Insurance Coverage Get disability. While too often overlooked, anyone who needs their paycheck to pay bills should consider disability insurance. This is especially important for anyone who is the sole breadwinner in the family. Shop around. You can save some money by comparison shopping, but cost should not be your only consideration. It is well worth it to spend a few extra dollars to buy your insurance from a highly rated company that provides fast, convenient claims processing. Raise the deductible. As long as you can cover your out-of-pocket costs, think about raising the deductible on your car, health and homeowner's insurance. A higher deductible basically means that you're taking on more of the risk yourself, so the insurance company gives you a break on your premium. Ignore the hype. There are a few types of insurance that are heavily marketed but often simply not worth the money, including mortgage life insurance and credit card insurance. These can cost far more than they're worth and you will usually have the same or similar coverage through your life and disability policies. The Bottom Line: Insurance is the only investment I know of where you hope you'll never see a return. However, when the unexpected does happen, your family will be able to focus on much more important matters if you've planned ahead and chosen the right package of insurance.