7. Protect What You Have

Once you have something, you have something to lose.

Insurance can help protect against catastrophic losses that could wipe you out financially. But you want to buy insurance wisely, since it’s easy to wind up paying too much for coverage you don’t really need.

It’s come to my attention that insurance would be a wise idea. (I do have a term policy that needs to be upgraded.) So I met with two different agents, and we discussed a whole life insurance policy and an indexed universal life insurance policy. The whole life insurance had a guaranteed 4% return, while the universal was indexed based on the market. I’ve heard that universal life is typically not recommended, but the agent said this policy was different. Is he blowing smoke? What are your recommendations?

A: You didn’t answer the most important question, which is, do you really need life insurance?

The mere fact that you now have a few bucks in some retirement accounts isn’t a reason to buy life insurance. The time to buy life insurance is when you have people who are financially dependent on you, such as minor children or a partner who needs your income to pay the mortgage.

If you do have financial dependents, the most important factor isn’t which type of policy to buy. The most important factor is making sure you get enough coverage.

You can use life insurance calculators to figure out the appropriate amount. (Bankrate has a good calculator at www.bankrate.com/calculators/insurance/life-insurance-calculator.aspx.)

Only when you know how much coverage you need should you consider which type of policy to buy. The cash value policies the agents are promoting combine a death benefit with an investment component. The investment component is designed to accumulate value over time that the insured person can withdraw or borrow against. Cash value policies are often called a type of “permanent” life insurance, since they’re designed to cover you for life rather than for a designated period.

But buying enough cash value coverage to provide adequately for your dependents can be prohibitively expensive because premiums for cash value insurance can cost up to ten times as much as premiums for a similar amount of term insurance. Term insurance provides a death benefit if you die during the “term” of the policy. Term insurance provides coverage for a limited time, such as 10, 20, or 30 years. It has no cash value otherwise, and you can’t borrow money against it.

Term insurance also pays agents much lower commissions than cash value policies, which may explain why the agents suggested you “upgrade” your current coverage.

If you’re convinced that you need life insurance and can afford to buy the appropriate amount of cash value coverage, take the competing policies for analysis to a fee-only financial planner who has no vested interest in which policy you buy. The planner can point out the costs and potential downsides the agents are unlikely to mention and help you make the right choice.

You also might ask the planner about the wisdom of investing in your own company’s stock. Having both your job and a chunk of your portfolio dependent on one company is considered pretty risky. Your planner is likely to suggest that you keep your company stock investments to no more than 5% to 10% of your total investments.

A: Long-term care policies can indeed be problematic, since the premiums can soar just when you’re most likely to need the coverage. So if you need life insurance for another purpose—to take care of financial dependents if you die or to pay taxes on your estate—a life insurance policy with a long-term care rider may not be a bad idea, says Laura Tarbox, a fee-only Certified Financial Planner in Newport Beach, California, who specializes in insurance.

But buying life insurance when you don’t need it just to get another benefit, such as long-term care coverage or tax-free income, is often a costly mistake. “The golden rule is that you do not buy life insurance if you don’t need life insurance,” Tarbox says. “It would probably be better to invest the money and have it earmarked for long-term care.”

If you decide you want to buy this insurance, don’t grab the first policy you’re offered. Shop around because premiums and benefits vary enormously. The financial strength of the insurer matters as well. You want the company to still be there, perhaps decades in the future, in case you need the coverage.

And don’t rely on guidance solely from someone who is going to make a fat commission if you buy what he or she recommends. “Get two or three proposals from different agents,” Tarbox says. “A fee-only financial planner can help you sort through them.”

So here’s the problem: a pet! I have had my cat, Jackie, for nearly 14 years. Jackie has a growth on her neck that has been growing since last fall. Last week, I took her into a pet clinic that offered free first visits. The vet’s suggestion was to remove it and have it tested for cancer. The cost was $450 just to remove it, with another $150 to have it tested. Ouch! If it is cancer, I can’t afford the treatment.

The vet says Jackie seems remarkably healthy and could live another five or six years. Do I spend that extra money for a possible negative assessment of something I can’t afford to cure, or do I just let her live out her life with the growth continuing? I feel like I’m not being a good parent.

A: A pet may feel like a family member, but your cat is not your child. Although most parents would willingly bankrupt themselves to save a child’s life, you don’t face a similar obligation to extend a pet’s life.

You do have an obligation to make sure a pet doesn’t suffer, and you may have more options for treatment than you think. Discuss your situation with the vet who assessed Jackie to see if more affordable diagnostic and treatment options are available. If you’re willing and able, your vet may consider allowing you to work off a bill by cleaning kennels or answering phones, according to Humane Society of the United States.

If not, contact your local animal shelter to see if it can recommend a veterinarian willing to discount his or her services. A number of national and local organizations also provide financial assistance to pet owners in need. You can find a list at the Humane Society’s Web site, at http://nationalhumane.com.

If you get another pet down the road, consider buying a health insurance policy for the animal. The American Society for the Prevention of Cruelty to Animals estimates a typical policy for a cat at about $175 a year, although premiums vary based on deductibles and what the policy covers. Veterinary costs have spiraled to the point that these policies can provide real protection against catastrophic bills.

A: Going bare really isn’t smart, since a single accident or illness can bankrupt you. And you typically have to exhaust your COBRA coverage before you (or your wife) can be eligible for continuing coverage under HIPAA, the Health Insurance Portability and Accountability Act, which requires insurers to cover people even if they have pre-existing conditions. Canceling your COBRA coverage prematurely could make it tough or impossible to find replacement coverage.

You’ll want to check out CoverageforAll.org, a site run by the Foundation for Health Coverage Education. The site’s quiz can help you identify your health insurance options and provides links to start your application. Your wife may be eligible for a policy of her own through a state-run high-risk pool. She can check out the possibilities at Heathcare.gov.

Your best option (other than finding a job with health insurance benefits) may be to choose a high-deductible policy. You’ll have to pay for most health care out of pocket, but you’re protected from catastrophically high expenses if you or your wife become injured or sick. You might want to seek out an experienced insurance agent who is familiar with plans in your state for more advice.

A: Eating healthful food, exercising, maintaining an appropriate body weight, and investing in preventive health care can lower health care costs on average. Much of what the U.S. spends on medicine wouldn’t be necessary if our citizens weighed less, drank less, didn’t smoke, and got more exercise. Obesity and smoking alone add $100 billion to $150 billion a year to U.S. health care costs.

But no individual, no matter how vigilant, is immune from an accident or illness that can result in catastrophic medical bills. Even if you escape a disease like cancer, you could easily be hurt in a car crash or a fall. (Trauma is the second-largest category of health care spending, after heart disease, according to the U.S. Department of Health and Human Services.)

So you’re right that people who voluntarily go without health insurance are deluding themselves. They’re pretending that they have the sole power to determine their future health, when that’s clearly not the case.

My husband and I have coverage at work, although it would not make us whole if we got disabled. Together we make more than $350,000 a year. We have two homes and pay private tuition, so we have a lot of bills to pay. But is the insurance worth the money we spend every month?

A: You may have read some scary statistics about the likelihood you’ll face a disabling injury or illness. One often-quoted statistic has you facing an 80% chance of serious disability, one that would prevent you from working for 90 days or more, before age 65.

But it’s not clear how accurate those statistics are. Columnist Ron Lieber of the New York Times tried to find the facts behind insurance industry proclamations about disability and found little agreement. One source pinned the risk of serious disability at closer to 30%. If you have a white-collar job, you may well face less risk than someone who does physically dangerous work.

The reason you buy insurance isn’t to cover likely events, in any case. It’s to cover events that could have a catastrophic financial impact if you didn’t have the policy. That certainly describes most people’s risk when it comes to disability. The Social Security system provides limited payments to only the most disabled workers, and workplace policies are often limited and may not cover disabilities that aren’t work related. An individual disability policy can be a good idea because it provides more coverage.

You can’t expect any disability policy to make you “whole,” however. Many insurers won’t replace more than about 60% of current income because they don’t want to give you an incentive to fake a disability.

Consider asking an independent source, such as a fee-only financial planner, to review your workplace disability coverage to see whether you need to hang on to your individual policies. If the cost of the coverage is an issue, this planner can help you research your options, such as choosing a longer waiting period before coverage kicks in or limiting your benefit period to three or five years instead of through age 65. An experienced independent insurance agent can help you compare policies as well.

A: Replacing a phone that’s lost or stolen can cost considerably more than what you originally paid. That’s because the initial purchase is subsidized by the carrier to get you to sign a contract. You don’t get the same deal on a replacement, unless your contract has expired and you’re eligible for a new, subsidized phone. Otherwise, a smartphone that cost you $100 or $200 up front could cost you $600 or more to replace.

Still, you shouldn’t use insurance to cover costs that you easily could pay out of pocket. And if you couldn’t afford to replace your phone out of pocket, you’re spending too much on your phone.

Insurance is best used to protect against catastrophic expenses, not minor costs. When you use insurance to cover incidental expenses, you typically pay too much for the coverage—and that’s particularly true for cellphone insurance, which is ridiculously expensive for the protection you get. Plus, cellphone coverage is notorious for loopholes and exclusions that make it tough to make a claim if your phone is lost, stolen, or destroyed.

A: Annuities are complicated, often expensive investments that typically offer handsome commissions to the people who sell them. Before you buy one, you should thoroughly research what you’re getting into.

As you know, the federal government doesn’t issue annuities. Each state has created a guaranty association to protect life, annuity, and health insurance policyholders in case an insurer becomes insolvent, but the guaranty associations don’t cover any portion of a policy in which the individual bears the investment risk, such as a variable annuity. The guaranty associations also don’t cover fraternal benefit obligations and may or may not cover guaranteed insurance contracts (GICs). For other annuities, every state provides at least $100,000 in withdrawal and guaranteed cash values.

Even after doing your homework, you may have questions about whether an annuity is right for you. Instead of accepting advice from a salesperson, which is what your “financial advisor” probably is, consider consulting a fee-only financial planner. These planners are compensated only by the fees you pay and do not accept commissions for selling financial products. You can find fee-only planners who cater to middle-class investors at GarrettPlanningNetwork.com. Another resource is the National Association of Personal Financial Advisors, at NAPFA.org.

That gray area forces us to grit our teeth and recommend that our clients buy the damage waiver endorsement when they rent the car. The rental companies charge an insane daily rate, but what can you do? I personally do not usually follow my own advice and decline the coverage. Maybe I’m ahead, but maybe I’ll be stung some day.

A: The conventional wisdom has long been that you can turn down the rental car company’s coverage if you have your own auto insurance and you charge the rental to a credit card that picks up the tab for anything your policy doesn’t cover.

Unfortunately, rental car companies have been tacking on extra fees to the costs you owe after an accident. These fees include “loss of use” charges, for the time the car spends in the shop and can’t be rented, and “administrative” charges for handling the paperwork.

These fees can become a hot potato between the rental car companies and the credit card issuers. Some card issuers that pick up other charges refuse to pay for loss of use or administrative costs. Other issuers want to see logs from the rental companies that prove they didn’t have other cars available to replace the damaged one—and the rental car companies often refuse to provide those logs.

You don’t want to get stuck in this tug-of-war or find out after the fact that you weren’t covered for damages when you thought you were. So the first step is to call your auto insurance company to make sure you’re adequately covered for rentals. If you’ve dropped collision and comprehensive coverage on your own car, you won’t have it on rentals, so you’ll probably want to buy the coverage from the rental company unless you have what’s called “primary” insurance from a credit card. Only Diners Club cards offer no-cost primary coverage, which means the card picks up the costs for an accident and you don’t have to file a claim with your car insurance. American Express offers the same benefit, called Premium Car Rental Protection, for about $25 per rental.

Other cards may offer secondary protection, which means they pick up the costs your auto insurer doesn’t, such as the deductible. You’ll want to check the benefits guide that came with the card (if you’ve lost it, ask the issuer to send you a new one). The guide outlines restrictions on coverage, which typically include requirements that you use the card to pay for the entire rental cost, that you decline the rental company’s collision damage waiver option, and that the rental be 15 days or less (31 days or less in a foreign country). Credit card coverage also typically doesn’t apply to antique or luxury vehicles (with the definition varying by issuer), motorcycles, trucks, and vans.

If your credit card doesn’t say that it covers loss of use, consider using a card that does. If you don’t have that option, consider accepting the rental car’s coverage. The rental companies’ waivers can be expensive—$15 to $25 a day is typical—but it may be better than paying hundreds of dollars out of pocket for an accident.

A: If you have nothing to lose—you don’t own a house or any investments, and your income is low—then the minimum coverage is fine. Otherwise, you’ll want to upgrade.

The minimum liability coverage required by states is typically very low. In California, for example, it’s just $15,000 for the death or injury of any one person in any accident and $30,000 total for all people involved in the accident; property damage is limited to $5,000. It wouldn’t take a horrific crash to exceed those limits. In such a case, the people you hurt could sue you for the difference between what the accident cost them—in medical bills, lost work time, or pain and suffering from the untimely death of a loved one—and what your insurance covers.

Many insurance experts recommend at least 100/300/50 coverage, which translates into $100,000 of bodily injury to one person, $300,000 total per accident, and $50,000 in property damage coverage. Consider higher limits if your net worth is substantial or if you have a high income. It’s a smart idea to get liability coverage at least equal to your net worth; getting an amount that’s twice your net worth gives you more protection for not much more cost. If you’ve maxed out your current policy’s liability limits, you can buy an individual, or “umbrella,” policy to provide additional coverage.

A: Homeowners insurance typically doesn’t cover damage caused by many natural disasters, including earthquakes, hurricanes, and floods. When deciding whether to buy the extra coverage, you must ask yourself, do you have the cash on hand to rebuild your properties if they’re destroyed by a natural disaster? If not, would you be comfortable walking away from the properties, including any equity you have in them and any mortgages you owe on them?

If the answer to these questions is no, then buying disaster insurance is a prudent move. The deductibles often are substantial, but the point is to protect you from the catastrophic expense of rebuilding.

You can probably get somewhat lower deductibles, by the way, if you’re willing to pay higher premiums. The CEA has a 10% deductible, as do a few private insurers that offer coverage.

Either way, you should try to keep a cash reserve equal to the deductible, or at least have access to an adequate line of credit established in advance. When the Big One hits, you won’t be able to get a home equity line on your rubble.