This is the last entry in my insurance series. I hope you found it helpful. Insurance may not be the most interesting financial topic, but it plays a crucial role in any plan.
To wrap up, I want to suggest three additional insurance supplements that you should add to your portfolio. The fundamental five – health, car, life, disability and home insurance – provide the foundation for your protection. These additions will help you thrive.
1) Health Saving Account (HSA)
What is it?
An HSA combines the features of a tax-advantaged savings account with a high-deductible insurance plan. It’s the only vehicle of its kind that offers triple tax savings.
- The contributions are tax-deductible
- The earnings grow tax free
- You can withdrawal the money tax free, if you use it to pay qualified medical expenses
Qualified medical expenses can include your deductible, co-payments for doctor’s visits and prescriptions, as well as dental and eye care. You can find a full list here.
You can also reimburse yourself for the money that Social Security withholds from your benefits to pay for Medicare Part B, Part D or Medicare Advantage (but not Medigap) premiums, or for a portion of your long-term-care insurance premiums.
For 2017, a high-deductible plan requires a minimum deductible of $1,300 for an individual and $2,600 for a family. You can make pretax or tax-deductible contributions in your account up to $3,400 a year if you have individual coverage or $6,750 a year for family coverage. Those age 55 and older can save an additional $1,000 per year. Keep in mind any contributions made by your employer on your behalf reduce the overall limit.
If you contribute up to the maximum these accounts allow, your tax savings can exceed hundreds or even thousands of dollars. For example if you’re a family in Illinois (3.75% state income tax) that is in the 28% marginal federal tax bracket, and you fully fund your HSA, you save $2,143 in income tax.
Not only do you save in taxes, most high deductible plans also offer lower premiums. And unlike a flexible spending account, you don’t have to use the money by the end of the year; it can grow tax-deferred in your account for later use.
Even though these accounts have many benefits, they do have some drawbacks, especially if you don’t use them wisely.
You have to pay ordinary income tax plus a 20% penalty if you use the funds for non-medical expenses and are below age 65. In addition, the investment options for your account may be limited to a low-interest savings account or a few mutual funds depending on how much money you have invested.
These limited options make sense since you want the money readily available to pay for medical bills that may arise in the near future. But if you’re looking for long-term investment gains, you may want to look elsewhere.
Lastly, some HSAs have high fees. So you will have to look at total costs before you set one up. Ben and I current use HSA Bank. I have also heard good things about accounts at Alliant Credit Union and Saturna Capital. Just do your do diligence when signing up for one.
2) Retirement Protection Insurance
What is it?
As the name implies, this type of insurance helps mitigate some of the risk that you will have to stop contributing to a retirement account if you become disabled. Your contributions may stop because (1) you need earned income to contribute to a retirement account, and (2) you may not have the extra cash to contribute without your ordinary income and extra medical expenses.
If you do become disabled, this insurance replaces the contributions that you and your employer were making towards your retirement account. The benefits become payable to a trust account that can then be invested at your direction.
The policy that I applied for is non-cancellable and guaranteed renewable until age 65. That means the overage I qualify for can’t be changed or cancelled, even if I decide to leave my job and/or stop contributing to my retirement account. I just have to keep up with my premiums. You can also purchase a Cost of Living adjustment rider to make sure your benefits keep pace with inflation.
The main advantage of this policy is that you can still build a nest egg if you become permanently disabled. Most long-term disability policies stop benefits at age 65. At that point, you will need other means to fund your lifestyle. Considering the minimal amount of social security that you can earn, contributing to a retirement account may be the only way to cover the rest of your expenses.
In addition, the coverage is fairly cheap. I was able to insure the maxing of my Roth 401k ($1500/month) plus an additional 2% match from my employer for $37 a month.
Lastly, if you die before age 65, the money in the trust will be distributed to your estate or your beneficiaries, so that you don’t lose the money that you have built up.
The benefits are based on your current contributions to your accounts. Unfortunately, many people are falling short of where they should be. You can purchase a Future Increase Option (FIO) to guard against the current shortfall. It will allow you to adjust your coverage as you increase your contributions.
Plus, the waiting period for benefits is six-months. The majority of people who become disabled will likely recover within that time frame. So you may not ever need this type of policy (which is not a bad thing).
Lastly, these policies are pretty hard to find. It’s a relatively new type of coverage, so many companies don’t even offer it. However, through the company that I use, Guardian, you can purchase the retirement protection policy on its own, rather than as a supplement to your disability policy.
3) Umbrella Insurance
What is It?
This policy can extend your liability coverage anywhere between $1 million to $5 million on your home, car and water craft insurance policies.
People with a high-net worth, significant assets or high income should consider umbrella protection. You may also want to consider this type of policy if you have a high likelihood of getting sued:
- You own things that have a higher likelihood of injury — like a pool, a trampoline, or an aggressive dog.
- You serve on a non-profit board, coach kids sports or participate in dangerous sports (skiing, surfing, hunting).
- You have a long commute or drive a lot during rush hour.
- You tend to have people over often.
This type of insurance protects your net worth. It provides additional coverage for liability limits on home, auto and insurance that you may have like boat or motorcycle insurance. Most plans cover you anywhere in the world. And it’s fairly cheap. Ben and I pay just over $200 a year for an additional $1M in coverage
In addition to property damage or personal injury you cause, these policies can also cover legal fees, false arrest, an invasion of privacy, libel and slander. Make sure to review your policy for specific details.
In order to obtain an umbrella policy you need a base amount of protection on your other policies – usually $250,000 on your auto policy and $300,000 – $500,000 on your homeowner’s policy. That additional protection may increase your premiums.
Additionally, umbrella insurance doesn’t cover your own injuries (that’s your health insurance) or your personal belongings (home, renter’s insurance). It also doesn’t cover any business related activities, although you can get a business umbrella policy. Lastly, it won’t apply to intentional or criminal acts (although you will like have greater concerns than umbrella insurance if you run into this kind of problem).
Again, I hope you find this helpful. Would love to hear from you. Do you have these types of insurances already? Have you have to do use them in any way? Email, Tweet or message me below.