HEALTH AND LIFE INSURANCE
I have outlined here my views on health insurance and life insurance, two critical components of a comprehensive personal financial plan. I have also covered Health Savings Accounts, which are available in conjunction with a High Deductible Health Plan, as well as long-term care insurance.
Health Insurance
Key points:
The majority of Americans obtain their health insurance through their employment. Larger employers typically offer more than one plan from which employees can choose, depending on the benefits that suit their needs and premiums that suit their budget. The HR benefits department should be able to provide information to employees on the features of the different plans offered. Smaller employers may only offer one plan. Most, but not all, employers pay a part of the premium, sometimes a large part of it, a benefit that is not taxed. If one’s employer does this, it is highly likely that the best value for money one is going to find in health insurance, is through an employer plan.
Those of us not insured via an employer (or an industry association) need to buy health insurance in the individual marketplace. One can do this online on the government health insurance “exchanges.” Before the Affordable Insurance Act (ACA), insurers could deny coverage if one’s health was poor - or charge higher premiums than they would for healthy individuals. This is no longer allowed so everyone can, and in my opinion should, (unless one is very wealthy) buy some level of health insurance. Getting run over by a bus might be, for even the healthiest among us, an experience that can bankrupt us; I question whether it is worth the risk. Government subsidies can assist with the premiums for those who cannot afford them.
If one is in the individual market and healthy, it is worth looking at High Deductible Heath Plans (HDHPs). These offer a sort of “catastrophic cover” but have much lower premiums than conventional plans. Furthermore, even if one expects to have thousands of dollars in medical bills over the course of a year, one should look into them. Sometimes the lower premiums can offset the higher out of pocket costs to meet the deductible and co-pays. One has to do the calculations to see what type of plan in the individual market makes the most financial sense.
Some employers also offer HDHP’s. If one works for an employer who pays a substantial percentage of health insurance premiums, a HDHP may not be the best solution. Again, one should do the calculations before selecting a plan.
One can also cushion the impact of the high deductible of a HDHP to some extent with a Health Savings Account (HSA), which I discuss below.
A few words on Medicare, which is now my primary health insurer. Medicare provides health insurance to people 65 and older. Medicare can seem rather complex. Having paid Medicare tax throughout one’s working life, upon turning 65 many of us assume Medicare will be “free,” to find that only Part A, which covers hospitalization, is normally covered by our Medicare tax payments. If one wants coverage for doctor’s visits (Part B) and prescriptions (Part D) one has to apply separately for this cover and pay a monthly premium, which the federal government will bill to you, or deduct from your social security benefits if you are drawing benefits. Although it is optional, I am a strong believer in taking out Part B and Part D coverage. If one doesn’t do it right away when one become eligible and then wants coverage later, it can be much more expensive. I did not wait.
I won’t go into the details, but Medicare Part B does not provide all the coverage one might want - there are gaps - so many people, myself included, also have a secondary policy from a private insurer to fill in some of the gaps in Medicare cover. These are sometimes called “Medigap” policies.
One can also cover Parts B and D with a Medicare Advantage plan (Part C), which is a private insurance plan subsidized by the government. Some Part C plans on offer have a high deductible and can be combined with a Medical Savings Account, as mentioned in the next section.
Many of us need help learning about Medicare and the many secondary plan options on offer when we reach 65. My town offers free classes once a year, for which I signed up. If a service like this is available in your community, take advantage of it. If not, there is a wealth of information on the internet, including publications provided by the Centers for Medicare and Medicaid Services.
Health Savings Accounts
Key point:
A Health Savings Account (HSA) is an account into which one can deposit a few thousand dollars every year to cover medical bills, but onlyif insured under a High Deductible Health Plan. (HDHP). IRS regulations determine what qualifies as a HDHP in terms of the minimum deductible and out of pocket limits. (The minimum deductible for a plan to qualify in 2020 is $1,400 for an individual, double that for a family.)
The IRS also determines the maximum annual contribution one can make to an HSA; it is $3,550 for an individual, $7,100 for a family in 2020. One can contribute an additional $1,000 a year over age of 50. The HDHP can be an employer sponsored plan or an individual plan, such as those one can buy on the various exchanges.
How do HSA’s work? The amount one contributes to an HSA is deductible from taxable income. One then uses the funds in the HSA to pay for qualified medical expenses not met by the insurance plan, such as the deductible and co-pays, but there is no tax payable on the funds withdrawn to meet these expenses. Also, one does not have to spend any of the money in the year it is contributed to the HSA, the balance can carry over indefinitely, even after going on to Medicare at age 65. What is not to like about that?
Some employers that offer HDHP’s also offer HSAs, usually managed by a third party. One can also easily open an HSA online. There are some that allow one to invest the funds in an equity index fund like a S & P 500 fund and enjoy the possibility of tax-free capital appreciation until one withdraws the money. (Equities can, of course, decline in value as well.) For anyone with a HDHP I would think seriously about opening an HSA to go with it.
Once one turns 65 and becomes eligible for Medicare, one can no longer contribute to an HSA, but one can continue to draw down the funds, even to pay Medicare premiums. There is, however, something called a Medical Savings Account (MSA), which works on similar lines to an HSA, for those over 65. MSA’s are not widely used as they are only available to those who opt for a Part C High Deductible Medicare Advantage Plan offered by a private insurer on behalf of Medicare. Anyone who has regular Medicare cover, as I do, is not eligible for an MSA.
Life Insurance
Key points:
Many of us do not like to think about our own morality if we can avoid it, and life insurance is therefore one of the more difficult aspects of a personal financial plan to contemplate. The fact is, for those of us with others who are dependent on our earnings – a spouse or partner, children or other family members, we probably need life insurance cover for as long as we estimate they will be dependent on us. For children this could mean at least until they are expected to complete their education and join the workforce; for a non-working adult it would depend on their circumstances. These are inevitably difficult predictions to make, as we could be talking decades, and the future is uncertain. The longer one needs life insurance, I should note, the more one can expect to pay in annual premiums, so this aspect is important. Everything else being equal, someone who needs life insurance until age 75 will pay more than someone who takes out the same cover at the same age, but only needs life insurance until, say, 65.
The next question is how much cover to buy, and what type of life insurance. For many of us, the amount of cover we buy will be determined by what we can afford to pay in annual premiums. I would suggest that, for most of us, it is best to take out as much cover as one can reasonably afford but, if you find yourself questioning whether you need as much cover as you can afford, obtaining professional advice may be a good idea. It is worth noting that the younger one is when taking out a life policy the lower the premiums will be. With every year that goes by, as a general rule, the more one will pay in annual premiums for the same amount of cover.
There are many different “life” insurance products, which offer a multitude of features. This is certainly not a subject in which I am expert. Drawing on all that I have read, I have stuck to simple “term insurance” whereby one buys a fixed amount of life insurance for a pre-determined period (say, twenty years) for a fixed annual premium. The benefit is paid upon death only; if you outlive the term of the policy you receive nothing (but you are alive!) Other types of life products (whole life, cash value life, etc.) have savings / investment features that can provide a return in addition to a death benefit. Personally, I am a believer in separating savings and investment from life insurance and buying straight-forward term insurance at the best price one can obtain from a reputable insurance company. A number of experts whose opinions I have read, seem to agree with this approach.
I have found that, with life insurance, it pays to shop around. Some large employers offer optional “group life” coverage, which is available to employees if they choose to sign up, often without a medical examination. With some companies, employees can select from several levels of cover that are offered, depending on their needs and the premiums they are willing to pay. One might think the premiums for a given amount of cover under a group policy will be cheaper than under an individual policy, but this may not be the case. This is partly because group policies cover people across the health spectrum from very healthy to not so healthy, and the premiums are usually the same for everyone of a given age. If you are in less than perfect health, you may well pay less under a group policy than you would buying an individual policy, which would require you to undergo a medical examination. The converse is true for someone who is in excellent health. I therefore suggest shopping around, it does not cost anything. This is what I did, and I ended up taking out an individual policy.
I recommend using a reputable life insurance broker to discuss one’s needs. The broker can then obtain estimates from financially solid insurance companies, subject to passing a medical examination. If one has the option of a group plan with which to make a comparison, so much the better. If one is thinking of obtaining life cover through an employer plan, it is also best to first find out what happens if one leaves. Can the group cover be converted to an individual policy? What happens to the premium?
A final thought: some people set up an Irrevocable Life Insurance Trust for their life cover, as this can avoid the payout upon death being included in one’s estate. The mechanics are a bit complicated and one needs an estate planning attorney to set up the trust and advise about the rules one will have to follow regarding premium payments and other matters.
Long-Term Care Insurance
Key point:
Most of us will require long-term care at some point in our lives, so taking out long-term insurance at a level we can afford should be considered as part of most personal financial plans.
I have seen estimates that 70% of people who live to age 65 will require some level of long-term care (LTC) during their lifetime. LTC is not medical care, it is assistance with daily activities like dressing, eating, bathing etc. This form of care, whether performed in the home or elsewhere, such as an assisted living facility, can be expensive, depending to some extent on where one lives, and it is not covered by health insurance. These costs can, however, be covered by separate LTC insurance, something I have had for many years.
LTC insurance is not cheap, however, an extended period of long-term care can be devastating financially so is it not better to have some level of coverage as part of one’s financial plan? One may not be able to afford all the insurance cover one might need down the road, but some cover is arguably better than none. The premium one pays depends on factors such as one’s age at the time of taking out the policy, the maximum daily benefit and the maximum length of time benefits will be paid. Most policies have a “deduction” that has to be met before any benefits are paid. Like most life insurance policies, if one maintains the same level of cover the premium stays the same from year to year.
As with life insurance it is best to shop around for the best rate using a broker, even if one works for a company that offers LTC insurance as part of its benefits package. Some life insurance brokers handle LTC insurance as well.
To me it is better to start LTC cover relatively early; perhaps around age 50 if one’s budget can accommodate the premiums, or even before that. The younger one starts the lower the premiums, partly because one is likely to be paying premiums for more years than an older person. Also, one never knows when we may need the cover; estimates suggest that 40% of people receiving LTC are under 65.
If one takes out LTC insurance, one may wish to consider increasing the cover in later years because of increases in the cost of care, or simply because one can now afford more cover. It should be borne in mind, however, that one will pay more for every dollar of additional cover as each birthday passes. This is because, as one gets older, premiums will be paid on the incremental cover for less years. The most important point I can make, however, is to avoid dropping cover as the premiums already paid will be wasted. To drop cover and start again later will prove expensive.
Health Insurance
Key points:
- Almost all of us should have health insurance as part of our personal financial plan.
- For many people a High Deductible Health Plan with low premiums will do fine.
The majority of Americans obtain their health insurance through their employment. Larger employers typically offer more than one plan from which employees can choose, depending on the benefits that suit their needs and premiums that suit their budget. The HR benefits department should be able to provide information to employees on the features of the different plans offered. Smaller employers may only offer one plan. Most, but not all, employers pay a part of the premium, sometimes a large part of it, a benefit that is not taxed. If one’s employer does this, it is highly likely that the best value for money one is going to find in health insurance, is through an employer plan.
Those of us not insured via an employer (or an industry association) need to buy health insurance in the individual marketplace. One can do this online on the government health insurance “exchanges.” Before the Affordable Insurance Act (ACA), insurers could deny coverage if one’s health was poor - or charge higher premiums than they would for healthy individuals. This is no longer allowed so everyone can, and in my opinion should, (unless one is very wealthy) buy some level of health insurance. Getting run over by a bus might be, for even the healthiest among us, an experience that can bankrupt us; I question whether it is worth the risk. Government subsidies can assist with the premiums for those who cannot afford them.
If one is in the individual market and healthy, it is worth looking at High Deductible Heath Plans (HDHPs). These offer a sort of “catastrophic cover” but have much lower premiums than conventional plans. Furthermore, even if one expects to have thousands of dollars in medical bills over the course of a year, one should look into them. Sometimes the lower premiums can offset the higher out of pocket costs to meet the deductible and co-pays. One has to do the calculations to see what type of plan in the individual market makes the most financial sense.
Some employers also offer HDHP’s. If one works for an employer who pays a substantial percentage of health insurance premiums, a HDHP may not be the best solution. Again, one should do the calculations before selecting a plan.
One can also cushion the impact of the high deductible of a HDHP to some extent with a Health Savings Account (HSA), which I discuss below.
A few words on Medicare, which is now my primary health insurer. Medicare provides health insurance to people 65 and older. Medicare can seem rather complex. Having paid Medicare tax throughout one’s working life, upon turning 65 many of us assume Medicare will be “free,” to find that only Part A, which covers hospitalization, is normally covered by our Medicare tax payments. If one wants coverage for doctor’s visits (Part B) and prescriptions (Part D) one has to apply separately for this cover and pay a monthly premium, which the federal government will bill to you, or deduct from your social security benefits if you are drawing benefits. Although it is optional, I am a strong believer in taking out Part B and Part D coverage. If one doesn’t do it right away when one become eligible and then wants coverage later, it can be much more expensive. I did not wait.
I won’t go into the details, but Medicare Part B does not provide all the coverage one might want - there are gaps - so many people, myself included, also have a secondary policy from a private insurer to fill in some of the gaps in Medicare cover. These are sometimes called “Medigap” policies.
One can also cover Parts B and D with a Medicare Advantage plan (Part C), which is a private insurance plan subsidized by the government. Some Part C plans on offer have a high deductible and can be combined with a Medical Savings Account, as mentioned in the next section.
Many of us need help learning about Medicare and the many secondary plan options on offer when we reach 65. My town offers free classes once a year, for which I signed up. If a service like this is available in your community, take advantage of it. If not, there is a wealth of information on the internet, including publications provided by the Centers for Medicare and Medicaid Services.
Health Savings Accounts
Key point:
- If one opts for a High Deductible Insurance Plan I would think seriously about also opening a Health Savings Account and funding it every year.
A Health Savings Account (HSA) is an account into which one can deposit a few thousand dollars every year to cover medical bills, but onlyif insured under a High Deductible Health Plan. (HDHP). IRS regulations determine what qualifies as a HDHP in terms of the minimum deductible and out of pocket limits. (The minimum deductible for a plan to qualify in 2020 is $1,400 for an individual, double that for a family.)
The IRS also determines the maximum annual contribution one can make to an HSA; it is $3,550 for an individual, $7,100 for a family in 2020. One can contribute an additional $1,000 a year over age of 50. The HDHP can be an employer sponsored plan or an individual plan, such as those one can buy on the various exchanges.
How do HSA’s work? The amount one contributes to an HSA is deductible from taxable income. One then uses the funds in the HSA to pay for qualified medical expenses not met by the insurance plan, such as the deductible and co-pays, but there is no tax payable on the funds withdrawn to meet these expenses. Also, one does not have to spend any of the money in the year it is contributed to the HSA, the balance can carry over indefinitely, even after going on to Medicare at age 65. What is not to like about that?
Some employers that offer HDHP’s also offer HSAs, usually managed by a third party. One can also easily open an HSA online. There are some that allow one to invest the funds in an equity index fund like a S & P 500 fund and enjoy the possibility of tax-free capital appreciation until one withdraws the money. (Equities can, of course, decline in value as well.) For anyone with a HDHP I would think seriously about opening an HSA to go with it.
Once one turns 65 and becomes eligible for Medicare, one can no longer contribute to an HSA, but one can continue to draw down the funds, even to pay Medicare premiums. There is, however, something called a Medical Savings Account (MSA), which works on similar lines to an HSA, for those over 65. MSA’s are not widely used as they are only available to those who opt for a Part C High Deductible Medicare Advantage Plan offered by a private insurer on behalf of Medicare. Anyone who has regular Medicare cover, as I do, is not eligible for an MSA.
Life Insurance
Key points:
- If one is a breadwinner, one should seriously consider life insurance to take care of dependents in the event of one’s passing.
- Deciding how much life insurance one needs, and for how many years, can be difficult; it is worth talking to a good life insurance broker or financial advisor.
- In most cases, I believe term life insurance is the most suitable solution.
Many of us do not like to think about our own morality if we can avoid it, and life insurance is therefore one of the more difficult aspects of a personal financial plan to contemplate. The fact is, for those of us with others who are dependent on our earnings – a spouse or partner, children or other family members, we probably need life insurance cover for as long as we estimate they will be dependent on us. For children this could mean at least until they are expected to complete their education and join the workforce; for a non-working adult it would depend on their circumstances. These are inevitably difficult predictions to make, as we could be talking decades, and the future is uncertain. The longer one needs life insurance, I should note, the more one can expect to pay in annual premiums, so this aspect is important. Everything else being equal, someone who needs life insurance until age 75 will pay more than someone who takes out the same cover at the same age, but only needs life insurance until, say, 65.
The next question is how much cover to buy, and what type of life insurance. For many of us, the amount of cover we buy will be determined by what we can afford to pay in annual premiums. I would suggest that, for most of us, it is best to take out as much cover as one can reasonably afford but, if you find yourself questioning whether you need as much cover as you can afford, obtaining professional advice may be a good idea. It is worth noting that the younger one is when taking out a life policy the lower the premiums will be. With every year that goes by, as a general rule, the more one will pay in annual premiums for the same amount of cover.
There are many different “life” insurance products, which offer a multitude of features. This is certainly not a subject in which I am expert. Drawing on all that I have read, I have stuck to simple “term insurance” whereby one buys a fixed amount of life insurance for a pre-determined period (say, twenty years) for a fixed annual premium. The benefit is paid upon death only; if you outlive the term of the policy you receive nothing (but you are alive!) Other types of life products (whole life, cash value life, etc.) have savings / investment features that can provide a return in addition to a death benefit. Personally, I am a believer in separating savings and investment from life insurance and buying straight-forward term insurance at the best price one can obtain from a reputable insurance company. A number of experts whose opinions I have read, seem to agree with this approach.
I have found that, with life insurance, it pays to shop around. Some large employers offer optional “group life” coverage, which is available to employees if they choose to sign up, often without a medical examination. With some companies, employees can select from several levels of cover that are offered, depending on their needs and the premiums they are willing to pay. One might think the premiums for a given amount of cover under a group policy will be cheaper than under an individual policy, but this may not be the case. This is partly because group policies cover people across the health spectrum from very healthy to not so healthy, and the premiums are usually the same for everyone of a given age. If you are in less than perfect health, you may well pay less under a group policy than you would buying an individual policy, which would require you to undergo a medical examination. The converse is true for someone who is in excellent health. I therefore suggest shopping around, it does not cost anything. This is what I did, and I ended up taking out an individual policy.
I recommend using a reputable life insurance broker to discuss one’s needs. The broker can then obtain estimates from financially solid insurance companies, subject to passing a medical examination. If one has the option of a group plan with which to make a comparison, so much the better. If one is thinking of obtaining life cover through an employer plan, it is also best to first find out what happens if one leaves. Can the group cover be converted to an individual policy? What happens to the premium?
A final thought: some people set up an Irrevocable Life Insurance Trust for their life cover, as this can avoid the payout upon death being included in one’s estate. The mechanics are a bit complicated and one needs an estate planning attorney to set up the trust and advise about the rules one will have to follow regarding premium payments and other matters.
Long-Term Care Insurance
Key point:
Most of us will require long-term care at some point in our lives, so taking out long-term insurance at a level we can afford should be considered as part of most personal financial plans.
I have seen estimates that 70% of people who live to age 65 will require some level of long-term care (LTC) during their lifetime. LTC is not medical care, it is assistance with daily activities like dressing, eating, bathing etc. This form of care, whether performed in the home or elsewhere, such as an assisted living facility, can be expensive, depending to some extent on where one lives, and it is not covered by health insurance. These costs can, however, be covered by separate LTC insurance, something I have had for many years.
LTC insurance is not cheap, however, an extended period of long-term care can be devastating financially so is it not better to have some level of coverage as part of one’s financial plan? One may not be able to afford all the insurance cover one might need down the road, but some cover is arguably better than none. The premium one pays depends on factors such as one’s age at the time of taking out the policy, the maximum daily benefit and the maximum length of time benefits will be paid. Most policies have a “deduction” that has to be met before any benefits are paid. Like most life insurance policies, if one maintains the same level of cover the premium stays the same from year to year.
As with life insurance it is best to shop around for the best rate using a broker, even if one works for a company that offers LTC insurance as part of its benefits package. Some life insurance brokers handle LTC insurance as well.
To me it is better to start LTC cover relatively early; perhaps around age 50 if one’s budget can accommodate the premiums, or even before that. The younger one starts the lower the premiums, partly because one is likely to be paying premiums for more years than an older person. Also, one never knows when we may need the cover; estimates suggest that 40% of people receiving LTC are under 65.
If one takes out LTC insurance, one may wish to consider increasing the cover in later years because of increases in the cost of care, or simply because one can now afford more cover. It should be borne in mind, however, that one will pay more for every dollar of additional cover as each birthday passes. This is because, as one gets older, premiums will be paid on the incremental cover for less years. The most important point I can make, however, is to avoid dropping cover as the premiums already paid will be wasted. To drop cover and start again later will prove expensive.
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