Insurance

You want to protect your family from harm. Whether it's fire, serious illness, accidents or the financial harm they cause, wouldn't it be great if someone else handled the risk? Insurance does just that. You pay the insurance company a payment called a premium and the insurance company spreads its risk among many clients. When something happens that you are insured for, you get paid for your financial loss.

Insurance protects again four kinds of losses:

  1. Financial loss
    Example: You die, but your family is financially taken care of through life insurance.
  2. Disaster Loss
    Example: Your house or car is damaged by fire, burglary or weather. The insurance pays for repair or replacement.
  3. Liability
    Example: You cause an auto accident and the other person is hurt. Your insurance covers the other person's health care.
  4. Sickness and death
    Example: Your spouse becomes sick and needs an operation. Your health insurance covers the expenses.

Car Insurance

The Big Picture

How your premium costs are linked to your deductible—the higher the part you'll pay yourself, the lower your monthly payments. Your premium payment may give you some other benefits, too.

Driving in Canada and Mexico have separate rules for insurance, as do rental cars.

Car insurance covers liability, bodily injury, insurance for uninsured or underinsured motorists, collision, comprehensive and more. Know what you need and how much is a minimum amount.

There are many ways to get insurance, find a company that works for you and is a good buy, too.

Automobile insurance is a major expense; you'll need to figure it into your budget.

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Long-Term Care Insurance

One life event that you may have to consider is whether you will need the services of a nursing home, or of a nurse to visit your home. To protect your assets, you should consider purchasing long-term care insurance given that the average cost of a nursing home stay is $54,000 per year (MetLife survey; 2005).

Long-term care is the assistance given to an individual who is unable to care for himself or herself due to a prolonged illness or disability. The myriad long-term care services can include therapeutic services to help an individual recover from an accident or illness, skilled nursing care in a nursing home, assistance with shopping, cooking, feeding, dressing or bathing, and many other types of services that help meet the physical, medical and social needs of the recipient.

Whether it is a temporary need or a permanent need, chances are pretty high that the longer a person lives, the more likely he or she will need some form of long-term care. Generally, if a person is unable to perform the basic activities of daily living (commonly known in the long-term care insurance market as ADLs), then that person is considered a likely candidate for long-term care services. The six basic activities of daily living, as indicated by the National Association of Insurance Commissioners, are bathing, continence, dressing, eating, transferring and toileting. Another factor that may qualify an individual for long-term care is cognitive impairment. Cognitive impairment is a loss in intellectual capacity that results in the need for continual supervision.

Most long-term care insurance policies are marketed for nursing home care, assisted living, and home health care. Nursing home care pays for full-time medical assistance for those that cannot perform at least two of the activities of daily living. Assisted living facilities provide services on a part-time basis. Home health care services are also provided on a part-time basis by a visiting specialist inside one's private home. Individuals can purchase long-term care insurance policies for a set period of time (number of years or lifetime) at a set daily (or monthly) amount.

The passage of the Health Insurance Portability and Accountability Act of 1996 has provided a greater means for individuals to obtain private long-term care insurance. Employers, groups or individuals are able to deduct the premium payments and exclude benefit payments from their income tax returns. Both plans are tax qualified with income tax-free benefits. Some states offer limited tax credits for LTC insurance premiums.

While you may consider this protection to be old people's insurance, the coverage should be an important consideration in your portfolio. The younger you are when you buy it, the less expensive it will be over your lifetime. Also you may be interested in understanding the options your parents have.

Medicare will not cover long-term care costs. Long-term care insurance is a growing industry. Americans are living longer, and the longer you live, the more likely you are to need long-term care. Between the ages of 65 and 80, there's a 1-in-4 chance that you will need long-term care; once you are over 80, the chances are 1 in 2.

Financial planners are recommending that people purchase long-term care insurance between the ages of 55 and 70. The cost increases as the age of the purchaser increases.

There are many factors to consider when you look into long-term care insurance.

Shop wisely, compare the benefits and costs of policies from three companies, and check each company. A.M. Best Company (http://www.ambest.com) and Moody's Investor Services (http://www.moodys.com) are two rating services that you can use to check the financial stability of companies you are considering.

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Life Insurance

The Big Picture

Life insurance helps provide for your family if you die. You can buy several different types of insurance, some provide a payout only if you die, some serve as an enforced savings plan in addition to covering your income in case you die.

There are special kinds of life insurance for the military. There are special rules about them, and paperwork you will need to fill out.

How much insurance do you need to protect your family? There are different types of insurance, and you may choose more than one.

Review your insurance coverage regularly to see if you need to change the policy. Umbrella coverage or personal coverage might be a good way to cover items that need separate insurance.

Life insurance replaces the loss of your income to your family. Two main types of life insurance are term and whole life. If you plan to buy a large policy on your life, you will need to pass a medical test.

Term Life Insurance provides death benefit protection for a specified period of time. Term life insurance is a good choice if you are young, can't afford the much-higher costs of whole life insurance, and have financial obligations that will disappear in time, such as a car loan or mortgage.

Whole Life (Ordinary Life) Insurance provides protection for your entire life. The premiums are much higher than for term insurance, and they are stretched out over a period of time. Once your policy is paid up, the insurance company invests excess dollars for you. In addition to providing protection, the policy becomes part of your savings plan.

Two online sources of information about life insurance are http://www.lifeinsuranceindepth.com and http://www.insure.com.

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Term Life Insurance

The important thing to remember is that the death-protection-only element of term life insurance makes term coverage less expensive than the same face amount payable under ordinary life-often 3 to 10 times cheaper. Anyone with a need to replace a large loss of income in the event of your death will most likely want a term life plan because it's cheaper.

The main advantages of the ordinary life plan are that it provides premium payments that stay the same and have the additional benefit of creating a savings. Term life insurance premiums increase as you get older and may become too expensive. If you have to cancel term insurance because it is too expensive, your heirs will be left without benefits.

Term life insurance provides the face amount of the policy upon the death of the insured. If the insured does not die, then the term life insurance ends. It also may offer an option to renew up to a certain age, regardless of your health, but typically at a higher premium or lower face amount.

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Ordinary Life Insurance

Ordinary, or whole life insurance, pays the face amount to your beneficiary when you die. You can name anyone, even a trust, as a beneficiary. Tax consequences to the beneficiary vary, depending upon who the policy owner is. See Estate Planning for information on estate planning and tax consequences for various assets.

Defining Ordinary Life Insurance
What makes ordinary life insurance different from term life insurance? An ordinary life insurance policy is a combination of a term insurance policy and a "savings account." The policy owner pays a level premium, which is usually higher in the early years, and excess amounts are used to fund the savings account (also known as the cash value). Ordinary life insurance allows the policy owner to choose one of the following options, even if the insured doesn't die.

Types of Ordinary Life Insurance

Ordinary Life Insurance. An ordinary life insurance policy combines the term life insurance policy with the savings account where the cash value grows based on a set interest rate. Most insurance companies will provide a minimum (or guaranteed) interest rate and a "current" (usually higher) interest rate. Be careful of the guaranteed and current interest rates because if they are under today's inflation rate, you will ultimately be losing money.

Universal life insurance. You can pay either a full premium that includes the savings portion, or only the minimum required to pay the death benefit. If you also pay for the savings element, then you can miss some premium payments in the future and still keep the policy in force.

Eventually, however, the savings portion can run out, and you must then pay the minimum premium for death protection to keep the policy in force. Generally, universal life insurance pays a higher interest rate on the savings element than ordinary life policies pay, but not necessarily in times when interest rates on government and highly rated corporate bonds are low.

Universal life insurance offers the possibility of a larger death benefit than that available with whole or ordinary life insurance. The savings element can be added to the face amount as an additional death benefit at the death of the insured. The cash value savings portion of whole or ordinary life insurance pays only the policy's original face amount, which includes the savings portion.

Variable Universal Life. Variable universal life has many of the same characteristics as the universal life policy, including additional death benefits from the savings portion when the insured person dies. Instead of guaranteeing a minimum interest rate on the policy's savings portion, it is invested in the stock market. While it is unlikely that an insurer selling this type of policy would allow all of its stock market investments to lose all their value, there is the possibility that it could happen, and this would affect the final death benefit payable to a beneficiary.

Over a long period of time, investments in the stock market will likely exceed the value of fixed-dollar investments like bonds, mortgages, and money-market funds. That makes the death benefit potentially more from a higher savings element of the variable universal life insurance over straight universal or ordinary life insurance. This type of policy is not recommended, however, if you want to guarantee a specified death benefit for your heirs.

Death Benefit At Low Cost
You'll want to get a guaranteed death benefit at the lowest cost possible. That usually means buying term life insurance. If you can afford to buy the amount of insurance you need by buying one of the ordinary life alternatives with a savings element described above, look into several insurers and compare their premiums and their cash values after 10 and 20 years.

CAUTION: Many life insurance agents will push ordinary life insurance because of the high commissions they receive from your premiums. Ask questions if you do not understand the policy.

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How Important is Renter's Insurance?

Even if your landlord does not require it, you may want to purchase renter's insurance, which covers losses to your belongings as a result of fire or theft. In most cases, renter's insurance costs less than $350 per year for $50,000 coverage. Often called a "Tenant's Package Policy," renter's insurance also covers you if your negligence causes injury to other people or property damage to the landlord's property or to yours. Once you obtain renter's insurance, it is helpful to provide the landlord with proof of purchase. You can find information on acquiring renter's insurance at libraries and rental agencies, on the Internet, or even from your landlord.

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Flood Insurance

To purchase federal flood insurance, your community must participate in the federal National Flood Insurance Program. Everyone who lives in areas at great risk for flooding (called special flood hazard areas, or SFHAs) is entitled to buy federal flood insurance. To receive a federally backed housing loan, the National Flood Insurance Act requires borrowers who want to live in an SFHA to purchase flood insurance. Conventional loans on property within coastal barrier resources system areas do not require flood insurance, but lenders are required to notify borrowers that their property is situated in an SFHA, and borrowers are entitled to purchase federal flood insurance.

Limits to Flood Insurance
The following limits apply to flood insurance:

30-Day Waiting Period
Although you can apply for coverage at any time, no coverage is available, with few exceptions, until a 30-day waiting period after you have applied for coverage and paid the premium. To be covered, flooding must be a general and temporary condition during a period when the surface of normally dry land is partially or completely inundated, so that two or more acres or two adjacent properties become flooded.
Perils covered by flood insurance:

Federal Disaster Area
Note that if a community is declared a federal disaster area, assistance in the form of no- or low-cost federal loans may become available (awarded less than 50 percent of the time), but this does not relieve you of your responsibilities on your original mortgage.

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Personal Umbrella Insurance

In today's litigious environment, lawsuits can run into the hundreds of thousands of dollars or more if you or those living in your home or operating machinery or vehicles you own are determined to have been negligent. Your automobile and homeowner insurance policies will typically cover you up to the first $300,000 of a covered claim. To cover your risk up to $1 million or more, you can usually purchase a personal umbrella policy from the insurance company that insures your home and/or car.

Do You Need Umbrella Coverage?
Umbrella policies are more important when you have significant assets to protect. People with less than $250,000 of net worth should not purchase an umbrella policy. (If you have up to $250,000 of net worth, you should have at least $300,000 liability protection on your auto bodily injury per accident and your homeowners/renters/condominium liability.)

Combine insurance for a price break
When you purchase both your homeowner and automobile insurance from the same insurer, you typically receive a discount on the premiums of both policies.

Ask about minimums
The personal umbrella policy often requires a minimum of $100,000/$200,000 of bodily injury liability protection and $50,000 of property damage liability protection under the motor vehicle liability section of your automobile insurance, and $300,000 of comprehensive personal liability under your homeowner insurance. If you also own a watercraft, there may be a combined single limit for marine liability as well.

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