FINANCING LIFE
Fall 2015
Session #6 – Insurance
Life is full of surprises. Many of them are good but, unfortunately, some of them are BAD! As
you journey along your personal life path there are a number of potential events that can have
serious financial consequences (to say nothing of personal costs.) Effectively planning for and
“financing” your life often means finding ways to protect yourself against the worst of these bad
events. No one likes to talk about insurance. Indeed the prospect of an evening with an
insurance agent is seldom a cause for joy. Still, good financial planning includes buying
insurance of various kinds.
I – LOSS OF INCOME: You should be prepared for unexpected events that can suddenly cut off the
regular flow of income that you use to support your living expenses. That can have devastating
effects. Expenses continue; income ceases; big problems follow.
Life Insurance
Life insurance is something you buy for the benefit of people you love. It pays a sum of money
(the face value of the policy) to a person or persons that you designate as beneficiaries if you
should die during the term of the policy. Obviously you personally do not benefit financially.
Life insurance is to assure that other people for whom you have been providing financial support
have the resources necessary to finance their lives after you are gone. There are two general
forms of life insurance.
Term insurance involves a contract for a period of time, say 10 years. During that time you
pay a (usually) fixed premium and if you should die before the contract is up, your
beneficiary receives a lump sum payment of the face value of the policy. If you do not die,
there is no payment or cash value in the policy and the contract simply expires. Term
insurance is generally renewable indefinitely though the premiums will rise with age.
Whole life policies are a mixed savings and investment vehicle. You contract to make
premium payments over your lifetime (or until some advanced age). Part of the premium is
invested, earning a slowly increasing cash value in the policy. If surrendered, or if you
survive to a certain age, you can collect the current cash value (less than the face value). If
you die, your beneficiary receives the face value of the policy. Premiums on whole life
policies are higher than for equal amounts of term insurance, often enough higher that if you
took the difference and invested it wisely yourself, you would earn a higher return.
Disability Insurance
An automobile crash, complications from childbirth, knee replacements, etc. can happen to
anyone. There is actually a greater probability of suffering an extended period of disability
during your working years than there is of your dying. In both cases your earnings cease. With
disability, unlike death, you are there to experience the consequences. You can reduce the cost of
a policy by extending the waiting period, i.e., the time you must be out of work before the
payments begin, but you should not extend it so far that you will have inadequate resources to
carry you through.
Disability insurance is one benefit that should be paid with after tax dollars. If taxes are
paid on the income used to buy the policy, benefits are tax-free. If taxes were not paid on
the income, the benefits will be taxed.
Sponsored by the Center for Women & Financial Independence
FINANCING LIFE
Fall 2015
II – CASUALTY: There are other life events that are harmful because they entail sudden, unavoidable,
and often very high costs. If you do not have sufficient savings to “self-insure” against these costs
you should have insurance to cover all or part of them.
Health Insurance
This is a must in the modern world. The costs of treating a serious illness or an extended
hospitalization can be catastrophic to any financial plan. Most Americans get health coverage
through their employers. If the employer pays the premium the value is an “exclusion” for
income tax purposes so it is doubly valuable—more coverage for less net cost. If you lose your
job you can extend the insurance for a period of time under a federal law (COBRA) but it will
likely be expensive. Once that period expires, or if the COBRA cost is prohibitive, or if you are
not covered by an employee policy you will have to seek out an individual policy. Under the new
Affordable Care Act, individuals without employer or private policies can buy, hopefully
affordable, insurance through government “exchanges.”
Homeowner’s (or Renter’s) Insurance
Ask the folks in New Orleans and California—fires burn, floods flow, earthquakes shake, thieves
steal, dogs bite, and so on, and so on, and so on. If your home and property are damaged or lost
the costs of replacement can be very high. (Remember our data on the price of homes in various
communities) For a very small premium, renters can also insure their personal belongings should
they be lost by fire, theft, etc.
Being a homeowner also creates other potential liabilities—the letter carrier falls on your porch,
your dog bites the neighbor child, your tree falls on the neighbor’s house. In the U.S. the
response to that is likely a lawsuit. Homeowner’s insurance also provides liability coverage up to
some limit for casualties like that.
Auto Insurance
In most states you are legally required to carry insurance that will cover the damage you may
cause to other persons or property in an automobile accident. If your car is financed you may be
required by the lender to carry collision and theft insurance as well in order to protect their
collateral. Even if you are not required to carry insurance in almost all cases it is important to do
so.
There are a number of financial issues that need to be resolved for each policy you buy — deductibles,
copayments, waiting periods, etc. As unpleasant as it is, a serious regular review of your insurance is an
important part of effectively financing your life.
Sponsored by the Center for Women & Financial Independence