Homer and Tricia (fictitious names) were doing well. Or so it seemed. Homer had a good paying government job and Tricia was self employed. They had a mortgage on a nice house and were making payments on a nearly new car. They carried credit card debt, but “so does everyone”, they reasoned. Then the unexpected happened: Homer had a heart attack. His prognosis was full recovery, but he would need to miss several months of work. The good news was that he had good health insurance. The not so good news was that he had accumulated very few sick days and even fewer vacation days. And zero emergency fund.

Homer was off work for six months. His income, from his sick days and vacation days, continued for that first month and then ceased. Tricia had to quit working to care for Homer. You guessed it. Once the income disappeared, they quit making car payments and borrowed from relatives, the local bank and all their credit cards in order to eat and make house payments. They hung onto their house, but the car was repossessed. Fortunately, Homer’s job was still waiting for him, but by the time he was able to return to work, Tricia has lost her clients. Her income loss, coupled with swelling debt payments, created a negative cash flow. This debt stress created real concern that Homer might have another heart attack.

This vignette clearly paints the primary purpose of an emergency fund;  if Homer and Tricia had maintained an emergency fund before the heart attack, much of their financial stress would have been a non issue.

Yes, the reality of life is that emergencies WILL come our way. None of us are exempt. But if piling up $15,000 or $20,000 so you can wait for the sky to fall is not a huge motivator, consider the following “side benefits” of your emergency fund:

Better marriage

In many marriages, the very discussion of establishing an emergency fund is a heated one. Why? Because one spouse (normally the wife) needs security while the husband craves the adrenalin rush of living on the edge. Therefore, in order to agree to an emergency fund, the husband must try to understand his wife’s emotions – or at least trust her even if he doesn’t understand her. This communication, albeit testy at times, will bring about a stronger marriage.

Crises become inconveniences

Do you remember that time your fuel pump died just when your house payment was due? And you HAD to have your car running so you could get to work? Crisis. Those times are gone forever when you have the money already set aside. Yes, those events still happen, but your emergency fund makes them mere inconveniences instead of crises.

Save on insurance premiums

OK Guys: if you accuse that emergency fund of not earning its keep, this one is for you. “How?” you ask. By raising your insurance deductible amounts and therefore lowering your premiums. A word of caution: if you are accident prone, stop here and read no further. If not, your emergency fund allows you to be slightly more self insured, which, over the long haul, puts more money in your pocket.

Here are some examples, with generic premium savings from my insurance agent:

• Auto Insurance: raising your collision deductible from $100 to $1000 could lower your premiums by as much as $500 annually. Do the math: if you can go accident free for two years you would save enough on auto insurance premiums to cover the higher deductible.

• Homeowners Insurance: raising the deductible from $500 to $1000 could cut your premiums by $100 a year. In this case, you would need to go five years without a claim to justify the higher deductible.

• Health Insurance: If your family is healthy, you should consider a High Deductible Health Plan (HDHP). You would save substantially on premiums and also take advantage of the tax deferred Health Savings Account. Your emergency fund could allow you to jump start your HDHP instead of waiting until you have saved that deductible amount.

• Extended warranties and protection plans: Your emergency fund will allow you to self insure instead of forking over $5-$10 each month for the rest of your life because you couldn’t afford to repair or replace whatever the plan covers. Saying “no” to protection plans is fun when you are self insured.

Homer and Tricia’s plight is a vivid reminder that your emergency fund is and always will be primarily for emergencies. However, that fund has other benefits: a better marriage, avoiding financial crises, and saving on your insurance premiums are three.

Readers: Do you utilize your emergency fund for purposes other than emergencies? How?

We have done a few things right and several things wrong in helping our four children get that first car. Hopefully, you can repeat our “rights” and avoid our “wrongs” as we explore the issue of helping your teen with his/her first car

Requiring your teen to work and save for her first car is a great life lesson.

purchase.  These tips should help:

Note: For this post, we will refer to your child as “Sam”… a name which works for young men and women alike.

1. Start early.

Discuss the car purchase early and often. Two of our children had no interest in owning their own car; they were content to drive Mom and Dad’s car.  The other two were fixated on having their own vehicle.  But, because all four knew well before their 16th birthday that mom and dad were not going to buy them a car, they also knew not to ask. If you are going to offer a match (see point 3), let Sam know early on.  Hopefully, he will start squirreling away his “car” money several years before he is ready to buy that car.

2.  Think “teachable moment”

Did we always think “teachable moment”? Not really. My wife and I did what we thought of at the time, but, looking back, we wish we would have.   Why?  Because that first car purchase could set a life long precedent for Sam. Consider:

• If you agree with him that he has to have his own car just because he has a driver’s license, you are teaching him that there is no difference between “wants” and “needs”.

• If you buy Sam a new car on her 16th birthday, you are teaching her that she should always have a new car, and that someone else should pay for it.

• If you buy him a used car, you are still teaching him that someone else should pay for his car.

• If you loan her the money, you are teaching her that the way to get what she wants is to borrow money for it. By participating in the loan, you are further cementing this lesson into Sam’s psyche…and probably pointing her toward more auto financing in the future.

• If you make him work and save for a car, you might be considered an ogre, but you will teach him the value of hard work, patience and saving money. I like this lesson best, don’t you? Did we require our kids to pay cash? I wish we had but we didn’t. Still, we didn’t do too badly; three of our four drive paid for cars today.

But…but…isn’t that asking a lot of a high school student?
Yes. So let’s move on with more tips:

3. Offer a match.

This isn’t for every parent, but matching whatever funds Sam saves for her first car will not only encourage her to work and save, but will also allow her to buy a nicer car…without debt of course. A word of caution: you may want to set a limit because some children will hear “free money” and work double hard to squeeze more from you than you can afford. If you can’t do a 50% match, consider 25% or even less. You will still be encouraging Sam to save…a great lesson.

We had never heard of this concept when our teens became drivers, but we probably wouldn’t have offered it anyway. Why? We simply didn’t have the money. I might add that we were very accommodating about allowing them to use our cars. Even in college, as long as they agreed to live at home and commute, we always supplied a car for them to drive.

4. Discuss repairs, insurance and maintenance.

Although we didn’t encourage it, two of our four purchased their own cars while still in high school. In order to teach them the cost of owning a car, we made them pay for their own repairs and maintenance. We agreed to pick up the insurance, partly because it was unreasonably expensive and partly because we were paying insurance for them to drive our cars anyway. This being said, in an effort for us to save on car insurance, we required them to pay their own traffic tickets and any increases in insurance the ticket may have caused. At times, a car needed to be parked for a while.

5. Don’t back down.

You will hear it. “Dad”, that is crazy! Do you honestly expect me to save up enough money to buy a car?” Your answer is “Yes.” Hint: it helps to know someone their age who has actually done what you expect them to do. For example, I know a 16 year old who recently purchased his first car — a 1989 Impala — for $400. It CAN be done.

6. Practice what you preach.

Sam will spot your hypocrisy if you require her to pay cash while you are deeply in car debt. So what are you to do? How about selling that car and buying one you can pay cash for? Yes, that seems a bit radical, but what better way to teach your teen that you are serious. My guess is that she will someday be proudly telling her own children of the time dad sold his high dollar car to buy a clunker. We are talking teachable moments here: this is your chance.

I hope this process will be a positive one for both you and Sam. Starting early, keeping expectations clear and holding your ground will all help. Hopefully, he will someday look back at this time in his life and thank you for teaching him how to avoid car debt.

That moment, a dividend of those teachable moments, is one that all parents dream of.

Have you helped a child with their first car purchase?  What additional tips would you recommend?

I want to thank Joy Paley, my guest contributor, for today’s post.  Knowing that Joy works in the health care career field, I requested an article explaining what impact the new Health Care legislation will have on salaries for health care workers.  Thank you, Joy, for your well researched post.

By: Joy Paley, a writer on medical assistant careers for Guide To Healthcare Schools

At over 1000 pages long, it’s unlikely you’ve read through the entire Patient Protection and Affordable Care Act that was signed into law in March. And while you know the bill greatly increases access to health care for millions of uninsured Americans, what about the doctors and other health care workers providing this increase in care?

The changes that are likely to affect doctors’ pocketbooks are reflections of the bill’s broader intentions: to expand access to health care and to increase efficiency in the medical world. In the coming years, the bill attempts to increase the number of primary care doctors, re-work how doctors get paid, and establish monetary incentives for physicians who provide quality, low-cost care.

More primary care doctors, less specialists

The new health care bill creates a whole new pool of patients that need doctors. This pool of the formerly uninsured contains many low-income individuals and families who will be coming into the doctor’s office looking for basic care. Instead of waiting in an emergency room to get a sick infant a check up or to learn how to care for hypertension, these people will need their own primary care physician.

This new demand for primary care doctors will change how many doctors end up in higher-paying specialized fields. Primary care doctors make a lot less than those who specialize; because of this, the number of medical school grads becoming primary care doctors has dropped to all time lows in recent years.

The health care bill is trying to counter this relatively low salary and meet the coming demand for physicians by creating a primary care training program that gives  a 10% increase in pay to new primary care doctors. The bill also provides for increased medical school scholarships and loan repayment help, in order to keep new doctors from feeling pressured to enter more lucrative specialized fields. Even with these incentives, the average salary for a doctor will be significantly lowered as these new primary physician spots become filled.

Medicare “bundling” programs—changing how doctors get paid

Another provision of the bill attempts to address the current pay-per-service system that insurance companies and Medicare use to pay doctors. This system, which pays doctors more for each separate test they run or treatment they perform, has created what many deem to be a system of misplaced incentives. With pay-per-service, doctors are encouraged to run useless tests, in order to bill more money from insurers.

With “bundling,” Medicare will pay doctors a lump sum for each episode of care, rather than per service performed. The bill calls for a starter program of bundling in select regions, in order to see how it affects patient care. The starter program will also help clear up questions about how bundling will affect doctors’ salaries overall.

Allocating bonuses to incentivize better care

Several sections of the health care bill call for innovative trial programs that use monetary incentives to persuade doctors to provide better and less costly care.

One such trial program creates “accountable care organizations” (ACOs), groups of doctors who have proven to provide good care for low costs over time. These ACOs will receive extra rewards for their work. Another section of the bill aims to reward better care in a wider area, by giving high-performing regions a 5% increase in Medicare rates.

On the whole, the health care bill attempts to redirect incentives and the flow of money to doctors in a way that aligns with providing more efficient care to more people. Only time will tell if it’s successful at its goal of balancing wider access to care and competitive salaries.

photo credit: a.drian

You have read those cost projections for raising children. MSN, back in 2001 projected a cost of $249,180 (over $350,000 in 2010 dollars) for a family with a $65,800 or greater income. The Baby Center web site tells us the cost of raising a child from baby to adulthood is $266,698. The Wall Street Journal estimated the cost at $222,360 last year.

While I am not one to dispute the research of such prestigious publications, I simply can’t believe that the average parent with the average baby one might encounter in an average grocery store or sporting event or church service is really going to spend a quarter of a million dollars raising that child.  Something somewhere is flawed.

It has been a few years since we raised our four children (our youngest is 30) but I can assure you that Janice and I didn’t spend an extra million dollars to raise them and I want to further assure you that it is OK to bring babies into this world even if you aren’t sitting on a huge nest egg. So…whether you are just getting started or already have several children, these ten money saving tips will help you keep a rationale perspective on how to afford your baby.

1. Have a budget.

You only have so much money, so a working budget is going to be your best friend. Because baby will require diapers, baby food, doctor’s visits and child care, you will need to cut back your current spending to keep your budget balanced. Whether it is eating out less, forgoing a car purchase or simplifying your vacation, you and your spouse need to be on the same page.

2.  Don’t assume baby needs a bigger house.

The biggest single expenditure from these studies is normally housing. This includes all extra you might spend on housing, utilities, and home furnishings because of the baby. If you can afford it and would like a bigger house, go ahead and get one. But don’t think that Junior will grow up needing therapy if he has to sleep in tight quarters or share a room with a sibling. Janice and I had a big house before our children came along and we still live in the same house. Yes, some brothers shared a bedroom, but they never seriously damaged each other and are great friends today.

3. Try cloth diapers.

At around $15 each, cloth diapers sound pricey, but when compared to using 6-10 disposables every single day, you can recoup your cost in a couple of months. Cloth diapers with Velcro fasteners are much more user friendly than in the days when I used to fold and pin them around my babies. You can buy one size fits all and also be environmentally responsible. Try the calculator on Diaper Pin web site to learn your savings.

4. Feed table scraps.

Yes, I really said that. Janice and I didn’t like the thought of putting the prepared green paste called “peas” into our baby’s mouth, so we bought a baby food grinder (still available for around $10) and fed our baby (within reason) the same food we ate. The little grinder requires no batteries and will grind vegetables, fruit and meat to a healthy consistency. Once we purchased our grinder, we never bought another jar of baby food. According to Wholesome Baby Food, our “table scraps” cost about $.03 per ounce compared to $.23 per ounce for store bought, an 87% savings.

5. Clothing at yard sales.

Guess what? Babies and toddlers do not wear their clothing out – they outgrow them.  You can therefore find baby clothes in pristine condition for nearly nothing at yard sales.  While you are there, you can also find strollers, car seats and playpens…often in new condition.

6. Day Care.

Yes, childcare can take a big bite from your budget, but check to see if your employer offers Flexible Spending Account and figure your childcare tax credit . Other thoughts: weigh your (or hubby’s) net income after deducting child care, travel expense to work, lunches out because of job, and clothing required for job. One of you might be better off staying home with baby, especially if you could develop a home income stream.

7. If possible, breast feed.

A study on Kellymom indicates a savings of between $714 and $3,164 for one year of breastfeeding compared to formula.

8. Have proper life and disability insurance in place.

Ask yourself this question: “If something happens to my spouse or me, how will the remaining spouse be able to care for our child and continue to pay the bills?” You probably spend more eating out in a month than life insurance and disability insurance premiums would cost, so you absolutely can’t afford to not have them.

9. Don’t select schooling you can’t afford.

If you can’t afford (meaning cash flow) a private grade school or high school, use a public school. If you can’t afford that prestigious college, let your child attend a community college and state college. No degree is worth ten or twenty years of debt payments.  Read my post 10 tips on how to graduate from college debt free for ideas and encouragement.

10. Make retirement investing a higher priority than college savings.

You may be tempted to start a college fund right away, but don’t sacrifice your retirement investments. Junior has lots of options to cover college expenses.    What alternatives to retirement do you have?

11.  Make a will.

I realize that I promised ten tips, so consider this one as a bonus…a very important bonus.  If both of you die without a will, the courts will decide who cares for your child. Is this what you want? Make a will so you can name the guardian that you want. Do it today.

Concluding thoughts

Yes, your new addition will take a chunk out of your budget, but don’t get psyched out about these exorbitant claims of how much they cost. If you want to have children, I think you should have children. God is the giver of life and if he decides to give you a child, he will provide a way for you to care for the child.

One more thing: whatever they cost, they are worth it.

Do you think $250,000 is a reasonable figure for extra money required to raise a child?  Why or why not?  Which of these tips is your favorite?  What additional tips can you share?

Our daughter Jaime recently called to tell us, through angry tears, that she learned from her mortgage company that her homeowner’s insurance policy had been cancelled.

Evidently, when the mortgage holder tried to make a payment from Jaime’s escrow account, the insurance company couldn’t accept it because Jaime was no longer insured. After cooling down and gaining her composure, she contacted her insurance company who affirmed the cancellation. The reason? She had filed three claims over a nine year period (nine years ago, seven years ago and eighteen months ago). “Why”, she asked, “didn’t anyone caution me that I was about to be dropped? And, pray tell, why didn’t you tell me when you dropped me?”

“We sent you a cancellation letter before the policy was dropped. It was returned to us as ‘non-deliverable’”, the agent stated coolly. “That is all we are required to do. If you didn’t get it, it is not our fault.” (Note from Joe: this makes no sense because Jaime still lives in the same “insured” house she had been paying premiums on all those years.)

With her mortgage holder breathing down her neck, Jaime contacted several insurance firms before finding one who agreed to a policy which cost twice as much as her previous one. She feels betrayed by her former company and unwilling to trust her new one.

Thus the reason for this post: what can we learn from this nightmare?

Should you even file the insurance claim?

“Of course!” is the logical answer. “Why should I pay for insurance if I am not going to use it?” Yes, that is good logic, but who says insurance companies are logical? The stark truth is that you may be better off paying the claim yourself.

Here are some guidelines:

When to file the insurance claim

• If it is a big one

When the size of the claim is small enough that you can handle it out of pocket, you probably should. However, when the big ones come, go ahead and file. This is why you bought the insurance. Tricky challenge: define what “big” is for you.

• If you have a first time forgiveness policy

Some policies offer a one time freebie, meaning that you will not be penalized by filing that claim. In many cases, this provision only applies if you have been accident free for a number of years.

• If you haven’t had any recent claims

This is similar to the first time forgiveness policy, but it is a good idea to communicate with your agent before filing the claim. At this point, you need to be coy about the incident. Why?  Because some agents are required to note in your file that you have had an incident even if you don’t file a claim. Ask hypothetically, as in “if I were to have an accident, would filing a claim raise my future premiums?”

• If someone was injured

If there is a chance that someone was injured in the accident, go ahead and file in order to protect yourself from a possible injury lawsuit.

When not to file the insurance claim

• If the claim amount is close to your deductible amount

There is no need to get flagged by your insurance carrier if you are going to be paying most or all of your loss out of pocket anyway.

• If you have had moving violations

Some auto insurers consider your driving violations as good cause to raise your premiums or drop you. Adding a claim to these violations will likely kick off some punitive action.

• If you have had other claims

Filing several claims in a short time frame is asking for trouble. You will certainly get your premiums bumped up and you may get canceled (although, as previously noted, my daughter’s three claims were spread over a ten year period.)

Some helpful hints on filing insurance claims

• Learn ahead of time

Talk to your agent now, while there are no claims pending, to learn the company’s policy on raising premiums and canceling policies. Ask your agent to explain the surcharge schedule, which shows how much rates will increase after a claim. The agent is more likely to be forthcoming when no money is at stake. Am I saying that agents may misrepresent those policies when there IS money on the line? Yes.

• Consider raising your deductibles

The larger deductible you can afford, the lower your premiums will be and the less likelihood you will file a “minor” claim, triggering a rate hike or cancellation. Hint: make sure you have a big enough emergency fund to cover those deductibles. Consider $1,000 on auto and $2,500 on homeowners.

• Get a CLUE

What is CLUE? Comprehensive Loss Underwriting Exchange. This quote from their website explains their services:  “The C.L.U.E. Personal Property report provides a seven year history of losses associated with an individual and his/her personal property. The following data will be identified for each loss: date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.

The C.L.U.E. Auto report provides a seven year history of automobile insurance losses associated with an individual. The following data will be identified for each loss: date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.”

Simply put, you have free access to the same accident and claim history your insurance carrier has. Knowledge is power, so get that knowledge.

Concluding thoughts

Insurance is aptly defined as a transferring risk. Because most of us don’t have the bankroll to finance our own risks, we need insurance. But the best plan for the long run is to maintain a big enough emergency fund to allow you to raise those deductibles, keep premiums down and file only big claims.

Have you ever had your insurance policy canceled?  Were you properly notified ahead of time?  What kind of hassle did you incur getting new insurance? Did you end up changing insurance companies?

Our normal anxieties in dealing with insurance companies are based on the concern that we won’t be sufficiently compensated.

However, not everyone fits this mold.  This post is based on an email from one of my clients (I will call her Carol) who, because she had been injured in an auto accident, is in the process of hiring an attorney to represent her in dealing with the insurance company. Although she was hospitalized, missed work and could have ongoing medical issues, Carol is struggling with the morality of “going after” the insurance company. Because of the trauma of the accident, she doesn’t clearly remember it, which creates some guilt issues. Carol is also concerned about the possible “greed” mentality many lawyers seem to have.

Here is a clip of her email:

“You helped with this when we talked, but I think I’m blanking on it and churning. Will you give me perspective on the accident claim again according to biblical teaching? I’m still struggling with what God really wants of us in this financial circumstance.”

This is my reply to Carol:

I wish I had great biblical passages to share with you about insurance. The best I can come up with is Exodus 21: 12-36, a section of the bible which tells us that those who are harmed should be compensated. The gist of this passage is just that: God expects people to be compensated for harm done to them. This is why you have insurance and why the other person in the accident has insurance. If the other person was harmed, I am sure you would be glad that you had insurance so she could be compensated. Just because the shoe is on the other foot (being you are the one harmed) does not make it any less right that you should be compensated. You are concerned about how this will affect the other person. This is something you have no control over, but she SHOULD be glad that her insurance is going to take good care of you. If she isn’t, that is her problem, not yours.

The issue of how much the claim should be…again, ask yourself, “What if the other person had to go through what I have been through?” Wouldn’t you want her to receive payment for her medical care AND for lost income AND for possible future medical care? Of course you would. It is only right. I agree with your attorney. This is not about greed. It is about an injured person being compensated for the harm done.

Another thought is this: we are commanded in Romans 13:1 to be subject to the governing authorities. I am not sure about Missouri, but I know Illinois requires auto insurance (liability as a minimum). In keeping with the laws of the land and Romans 13:1, you have auto insurance. The very legal system that requires you to have insurance will also have a judge who makes a determination as to the award of the case. As long as you aren’t doing anything un-Godly to tweak the system (which you aren’t), then I would say that God is using that judge to make a proper and fair determination. In reality, the attorneys for the insurance companies might settle out of court, but the point is that God requires insurance, so trust Him to see to the details.

One more thought. You have debt and you have been harmed financially by this accident, meaning you have not been able to work as much physically or emotionally. This is not your fault and you should not feel guilty about what you can’t control. But if you were to somehow sabotage this settlement, you might be turning away money that could go toward those you owe. I know this is a stretch, but allowing the process to play itself out could help some creditors get the money owed to them. I can’t see that is a bad thing. Without the accident, you might have been able to gain enough traction to start making some major payments through your income stream. But the accident DID occur, so you don’t really know what might have happened in your career if it hadn’t. All of this is part of compensating a harmed party (back to Exodus 21).

In the end, I think you should trust the process, trust your attorney (or find one you can trust) and trust God. That is the best way I know to put it in God’s hands. When you do so, you can feel good about the outcome whether it goes very well or very poorly.

I hope this helps.

Joe

Carol’s response:

“I won’t be able to tell you how much it means to have your counsel and how thankful I am….I’m breathing easier today because you took the time to think on this for me. I’m so thankful”

Readers: have you ever struggled with guilt or the feeling of greed when negotiating an insurance settlement? How did you handle it? What would you add or change in my response to Carol?

photo credit: Chasqui

In spite of what the title seems to infer, this post is not about the pros and cons of Long Term Care Insurance (LTCI); it is simply a post about Joe and Jan … and why they don’t have Long Term Care Insurance.

Some background

The year before I turned 60, I started researching Long Term Care Insurance. I read brochures; I asked questions; I solicited quotes and I asked questions about those quotes. Long Term Care Insurance, in case you don’t know, has many nuances and is quite complicated. Because I assumed that Janice would agree that we need this insurance, I wanted to make sure I clearly understood how it worked.

Did you get that word, “assumed”? With all of the grace of a bulldozer I laid my bulging LTCI file on the dining room table and commenced explaining how it worked and why we needed it and how much it would cost. Janice listened thoughtfully and then said, “No one in either of our families has ever needed nursing home care. I think it is a waste of money.”

“But…but…”, I stammered. “A prolonged nursing home stay will wipe out whatever nest egg we have. Is that OK with you?” As I listened to myself talk I realized that I sounded strangely like an insurance representative.

“Well, no.” Jan replied. “That is not OK. But it is worth the risk to me. I would rather hang on to that premium money than spend it year in and year out for the rest of our lives.”

Janice and I have an agreement: we don’t spend money on anything over $100 without both of us agreeing. In this case, we both didn’t agree so we didn’t spend the money.

Still, I was plotting to not give up easily.  I remember thinking,  “We don’t have to buy the long term care insurance right now. I will wait until before my 61st birthday and bring it up again.”

The Years Pass

I kept my word to myself. I brought up the issue before my 61st birthday, before my 62nd birthday and before my 63rd birthday. Each time Janice politely explained her views. Finally, in our most recent discussion, Janice’s voice had an edge to it, “I thought we had already settled this discussion. I understand our decision. I am willing to take the risk. I just don’t think we need to be spending that premium money for insurance that I don’t think we will ever use.”

We Negotiate

“OK Jan.” I countered, “I respect  your judgment, so let’s discuss a compromise. Would you agree to increase our investments? Realistically, we will never create a big enough nest egg to be self insured, but we could earmark the nest egg for Long Term Care and it would surely help if we need it. If not, then we still have our money.”

“Sure. We could do that.” she said.

So we agreed, once and for all, that we will not buy Long Term Care Insurance and that we will beef up our investments instead.

What is the Point?

You might not agree with our decision. That is OK. But even though I didn’t get what I wanted, I harbor no ill will about it. The point is that with this issue, as with any issue, we have a process: we talk it out and respect each other enough to listen and negotiate and come to an agreement. My wife is a wise woman, one I have great respect for. Someday, I suppose, we will learn which one of us was right. But there will be no “I told you so’s” – no matter what. WE talked and WE made a decision and WE are both on board.

In my mind, that is what a great marriage is all about. The best long term marriage insurance I can think of is a healthy process of talking things through, coming to an agreement and living with that agreement.

Even if things don’t work out the way we want, we will manage. We are a team. We do things together. We will figure it out. Together. That is the point.

Readers: How do you resolve money issues in your family setting? Which ones have been particularly difficult? What have you done right?

photo credit: Candida.Performa

photo credit: Brett L.

Allow me to preface this post by referring you to some other great posts on the health care legislation.  The Amateur Financier gives a balanced look at the legislation and what it means to us.  Other bloggers who have weighed in are Financial Samurai who is in favor,  Darwin of Darwin’s Finance who is convinced that we will have buyer’s remorse, Kevin of 20s Money who is certain (based on government’s history of underestimating projected costs) that it will be way more expensive than expected and Evan of My Journey to Millions who digs into whether the bill is even constitutional.

If you want a great summary of what the bill covers and which provisions kick in when, I highly recommend jumping over to this article provided by Health Insurance Providers.

What do I think?

Did we need health care reform?  I think everyone agrees that we did.  Me too.  But I also believe that this bill will ultimately result in poorer quality of health care for all of us.

Let me explain:

What will happen to Health Insurance Companies?

Imagine the following conversations:

Homeowner, “I need to purchase some homeowner insurance.”

Insurance Agent, “Tell me where you live so we can drive by and look your home over.”

Homeowner, “My address is 100 Main St, but my house burned to the ground yesterday.”

Or…

Woman, “I would like to purchase some term life insurance for my husband.”

Agent, “I will need to ask some questions.  How old is your husband?”

Woman, “He died yesterday.”

“Ridiculous!” you say.  “No insurance company is going to issue insurance against an event after the event has already happened.”  Right.  But, starting this year, the new health care bill requires insurance companies to extend coverage to children with pre-existing conditions.  By 2014, all pre-existing conditions must be covered for all ages and (get this), higher health insurance rates cannot be levied because of health, gender, etc.

“But…but…shouldn’t everyone have health insurance regardless of their circumstances?”

Good question.  One I don’t have an answer to.  But here is my question:  How can insurance companies stay in business if they are forced to insure all pre-existing conditions and not allowed to raise their rates?  Well, they can and will pass those increased costs on to other policy holders, but my prediction is that within five years all health insurance companies will have closed their doors, forcing the single payer government health insurance to be the only insurance in town (or in the nation).

What will happen to doctors?

Our government has promised to trim heath care costs and help save money on health insurance premiums.  While I haven’t read anything specific about the new bill monitoring pay for medical treatment, they will have to find ways to hold down health care costs if we default to the public option plan.  I envision them setting limited payments per procedure, effectively stifling doctors’ incomes.  With less income incentive, current doctors are going to start leaving the system and prospective doctors will think twice before spending $250,000 and 8-10 years of their lives for the privilege of working for a capped salary.

By 2014, the new bill forces all U. S. citizens to have health insurance or else pay a fine.  In effect, the 30,000,000 who are currently uninsured will then be insured.  Even if we keep the same number of doctors, each doctor will be seeing more patients thus reducing the quality of care.  If my theory is true about fewer doctors in the future, each doctor will be seeing even more patients,  further diminishing the quality of care per patient.

What will happen to pharmaceutical companies?

Pharmaceutical companies invest hundreds of millions of dollars in research to discover new cures for our health issues.  They must recoup these investments within the patent time period in order to justify future research.  Why?  Because once the patent has expired, any and every drug company will start selling the generic version for practically nothing.  For example, I pay only $10 for three months supply of the generic blood pressure medication.

The new Health Care Reform bill requires that, starting in 2011, seniors enrolled in Medicare Advantage or the Prescription Drug Plan will receive a 50% discount on brand name drugs immediately with additional prescription drug discounts to follow.  Now…ask yourself what will happen if the Pharmaceutical companies are not allowed to recoup their research investments because they are restricted in what they can charge.  Right.  They will simply stop doing the research.  We won’t notice for years, but, without the research, no new drug discoveries will be made.

Summary

I hope I am wrong, but it seems to me that the health care bill we passed is going to lower the quality of health care for all of us.   When the insurance companies close their doors, we will all have government run health care.  Because of our nation’s debt problems, restrictions could be capped on rates health care providers charge, which would discourage prospective doctors from entering the medical field.   The equation of fewer doctors and more patients equals metered care for all.  If pharmaceutical companies cannot profit from new medicinal discoveries, there will be no new discoveries.

An ironic silver lining: if the quality of health care is lessened, we might start taking better care of ourselves.  That would definitely be a good thing.

Please jump in and share your thoughts on the new Health Care Bill.   Do you agree that it will lower our quality of health care?  If so, is insuring the uninsured worth it?

This post has been included in the following carnivals:

Yakezie Carnival #6 hosted by Canadian Finance Blog

Baby Boomers Blog Carnival hosted by Baby Boomers US

Carnival of Financial Planning hosted by The Skilled Investor

Carnival of Financial Planning hosted by Green Panda Tree House

Long Term Care Insurance (LTCI) is for anyone who has assets they want to protect should extended nursing care occur. Therefore, unless you are very, very wealthy or have few assets, Long Term Care Insurance is something you should consider.

When I say very, very wealthy, I am talking about anyone who can handle $1 million or more out of pocket without blinking. Where do I get the $1 million number? A little math: the projected nursing care cost 10 years from now is $175,000 annually. That cost of care for six years is just over $1 million. As you might expect, Long Term Care Insurance is not inexpensive. Nor is it simple.

The following ten tips are meant to help you understand Long Term Care Insurance better and make a knowledgeable decision that is best for you when purchasing it:

1. Wait to buy long term care insurance

The younger you are when you take out the policy, the lower your premium will be. However, it is very rare for anyone under 60 to need nursing home care, so don’t pay for coverage you don’t need. On the other hand, the longer you wait, the higher your premium will be so don’t procrastinate once you reach 60.

2. Purchase the inflation rider.

Yes, your premium will increase substantially, but the coverage you buy today may not be needed for years. Assuming 5% inflation, today’s monthly care expense of $4500 will escalate to over $12,000 in twenty years. Inflation is reality. Plan for it.

3. Save by increasing the elimination period.

With LTCI, your deductible (called elimination period) is defined as the number of days you pay out of pocket before the policy starts paying. Longer elimination period means lower premium, so keep a big emergency fund, opt for longer elimination period and save on your premiums.

4. Shop around.

In most cases, you will be paying annual insurance premiums for the rest of your life, so don’t accept the first long term care insurance quote you hear. Let your agents know that you are shopping so they will work harder at getting you the best coverage for the least cost.

5. Don’t agree on more than two “triggering events”.

Your LTCI will kick in when the insured is unable to perform a certain number of Activities of Daily Living (ADLs). Common ADLs are bathing, continence, dressing, eating, toileting and transferring. The fewer of these that are required to trigger the insurance, the better for you. Therefore, make sure that all six of these ADLs are listed in your policy and no more than two are required to trigger your benefits.

6. Insist on dementia coverage.

Many who suffer with dementia can perform all of the ADLs, but nevertheless need nursing home care. Most LTCI policies automatically cover dementia, but double check just to make sure.

7. Check the financial stability of the company you’re thinking about buying from.

LTCI is a product you are going to have for a long time, so you need to check on the company’s stability before giving them your money. Several insurer rating services analyze the financial strength of insurance companies. Standard & Poor’s Insurance Rating Services, for example, is free but requires that you register. Once registered, you simply type in the name of the company you are inquiring about in order to get ratings, credit watch/outlook and recent articles about the company.

8. If married, consider a rider allowing you to share years with your spouse.

In general it works like this: suppose you buy a policy that covers three years of long term care for each of you. If one spouse needs the care for more than three years, the policy would continue covering this spouse for up to six years by applying unused years from the spouse who has not needed the care.

9. Understand what you are buying.

Ask questions…lots of them. Never buy anything you don’t understand. Because LTCI has so many variables and options, it is not easily understood. If the agent does not clearly explain the policy and take time to answer ALL of your questions, walk out.

10. Take advantage of the free-look period.

Most states give you 30 days to cancel the policy if, after purchasing, you decide you don’t want it. However, this “free-look” period changes from state to state, so you need to check with your state insurance department to learn how long it is in your state. The point is that you should scrutinize your policy after you buy it and, if you discover any discrepancies between what you were told and what you now own, cancel the policy.

I sincerely hope that you will never, ever need to use your Long Term Care Insurance, but having it will give you great peace of mind.  You are not only protecting your assets; you may also be protecting your children from the emotional trauma of determing how best to care for you.  If that time comes, they will greatly appreciate your foresight.

photo credit: simaje

photo credit: Mike Thoma

Welcome to our two part series on life insurance. As indicated in part one, my purpose is not to give an all inclusive explanation of life insurance but a primer which should help you better understand what you have and what you need.

In our previous post we covered the following topics:

• What are the different types of life insurance?
• What is the purpose of life insurance?
• Does everyone need life insurance?
• How much insurance is enough to buy?

Now…on to part two:

What is the best kind of Life Insurance?

In order to address this question, I am going to compare Whole Life vs Term Life, assuming the insured is a 30 year old male in good health. Dave Ramsey’s organization solicited actual Whole Life quotes from the five largest insurance companies for this fictional 30 year old. Averaging the quotes (which were very close), they discovered that a $125,000 policy would require a premium of $145 a month. A 30 year Term Life Insurance policy for $125,000 would cost $15 a month premium.

But, remembering that $125,000 is not nearly enough insurance to replace the lost income, let us assume a $50,000 annual salary and thus a $500,000 Term policy. The premium now becomes $35 a month. So what happens to the difference in premium? Remember that the Whole Life policy builds a cash value. In this case, the cash value will be $27,000 after 20 years and $66,000 after 40 years.

Sounds pretty good until you figure what a conservative investment would bring if this 30 year old bought the term and invested his savings in premium through an investment brokerage. If he only averaged an 8% return on this $110 a month ($145 – $35), he would have a nest egg of $65,000 after 20 years and $384,000 after 40 years. The following table shows this comparison:

*based on earning an 8% return by investing the difference in premium.

These numbers convincingly tell us that Term Life is a better buy for the money than Whole Life. One more detail about the Whole Life: when the insured person dies, the payoff from the insurance company is the face value of the policy only ($125,000 in the above example). What happens to the “cash value”? The insurance company keeps it.

What if you purchased a term policy but, because of health reasons, do not qualify to renew the policy after it expires?

Yes, it is possible that after the 30 year term, the insured person may have health difficulties that would make it very difficult to buy more life insurance. This contingency should motivate this person to work hard during these 30 years to be self insured. He should strive to be debt free and have a paid for house at this point in his life, and will not likely have dependent children. Besides, he will have the peace of mind during those 30 years of knowing that he has provided enough coverage to serve his family if needed.

What about Universal and Variable Life?

Universal and Variable are forms of permanent life insurance that correct some of the shortcomings of Whole life by offering options that allows for better investment returns and can include the cash value with the face value in the death benefit. Because the investment options are tied to money markets (Universal) or to stocks, bonds or mutual funds (Variable), the returns are not guaranteed. And inclusion of the cash value benefit will cost more in higher premiums. This being said, if permanent insurance is important to you, the Universal or Variable should be considered, making the same comparisons with Term as in the chart above.

What life insurance do you have?

That is a fair question. I cashed out my Whole Life Policy over 20 years ago and used the payout to purchase IRA’s for myself and my wife. We have used Term life ever since and have never regretted it. At 63 years old, I am three years from the end of a 10 year $500,000 term policy with a $78/month premium. We have no debt, a paid for house, an untapped IRA and three monthly pension checks for life. One of these has a 100% survivor benefit; the other two have 50% survivor benefits. We are close to being self insured, but we will weigh our options (whether to renew our policy and for how much) in three years when our current term policy expires.

Conclusion

My conclusion is that, with the affordable rates of term life insurance, there is absolutely no excuse for anyone who needs life insurance to not have it. By buying a cheap term life insurance policy, you will be buying your insurance from an insurance agency while making your investments through an investment brokerage; this is a clean and healthy distinction.  While it doesn’t make as much sense for 50-59 year old’s to have life insurance, in some cases it is warranted.   Meet with your financial planner to see what’s best for you and get the best term life insurance quote.