Planning for Trouble

Jane Bryant Quinn is the voice of personal financial planning for a generation of Americans. On the following pages the author of a bookshelf of bestsellers, Newsweek columnist and popular AICPA PFP conference speaker gives AICPA members a glimpse of her new book, Smart and Simple Financial Strategies for Busy People, which is just hitting the shelves of stores around the country. This excerpt is from the chapter “Your Safety Net.”

or all of us there’s the life we’re living and a potential, different life. Our normal days—filled with work, family, friends, shopping, movies, sports, books—are the ordinary way of the world. But down in the dark lies another life that we might have to face if something goes awfully wrong. Fire, accident, sickness, premature death—you hate to think about it and so do I. But even during crises, good financial-backup systems can support your hopes and dreams. Here, you’ll find the most practical ways of weaving yourself a safety net.

L IFE I NSURANCE
You buy life insurance for just one reason: to support the people who depend on your income if you die prematurely. Based on that test, it’s easy to answer the question “Do I need insurance?” No , if you’re single with no children or other dependents. And no , if you’re married and your spouse would be self-supporting if you died. But absolutely yes , buy life insurance, lots of it, if someone relies on you to pay the bills—children, spouse or anyone else you help support.

What kind of insurance should you buy? You want term insurance—coverage that lasts for a certain period of time (or “term”). It’s plain, simple and so cheap that you can buy as much of it as your family needs.

How much do you need? I vote for the rule of thumb offered by the Consumer Federation of America: Married couples with two small children need eight times their joint annual income to cover future living expenses for 20 years (nine times earnings for 30 years). Add a fund for college on top of that. Subtract any insurance you get automatically at work. The total gives you the amount to buy. Is this exact? No. But the future is unknowable, so this simple rule is close enough. If you’d like to try a Web calculator, you’ll find good ones at choosetosave.org and tiaa-cref.org .

Should you buy term insurance through your employer? Large companies offer you some free insurance—often an amount that equals one year’s salary. You can buy more through payroll deduction, but should you? Yes, if you’re in poor health—it’s probably the best deal you can get. Otherwise, I give this idea a qualified maybe. Buy the coverage only if (1) its price is low (compare it with the cost of individual insurance, using the online quote services term4sale.com or insure.com ), and (2) you can take it with you when you leave your job. If your health turns bad, a portable policy may be the only insurance you can get at a decent price.

What should you look for in an individual policy? The industry has made buying term insurance super easy today, thanks to the Web. Here’s a quick checklist:

The policy term. Most term insurance today is sold for fixed periods of time, ranging from five years to 30 years. It’s called “level-term” insurance. The longer the term, the higher the annual premium (the premium is the price you pay). Buy coverage for the longest period you can imagine needing it—usually until retirement. During the years that you hold the policy, your price won’t change.

The annual premium. Insurance companies offer term at wildly different prices. You can save thousands of dollars by comparison-shopping on the Web. As an example, take a 35-year-old man, a nonsmoker in excellent health, buying a 30-year term policy worth $500,000. A low-priced insurer might charge him $564 a year. A high-priced insurer might charge $1,189—and for exactly the same product!

Renewing your term policy. You might need life insurance for longer than you thought. Maybe you married late and have young children. Maybe you lost your savings through bad luck or bad investments and have to keep working to help support a spouse. If you want to extend your coverage after the term expires, you have three choices, two of them fine and one for desperation only:

If you’re in good-enough health: Shop for new level-term insurance. There’s a medical exam, but a policy is still affordable.

If you’re in poor health: Convert your term policy to cash-value insurance, with no medical exam. It’s more expensive, but you can cap the cost by buying less of it. Good timing is important! You must convert within the period that the policy allows. If you wait too long, you’ll lose your chance.

If you’re in poor health and missed your chance to convert to cash-value coverage: You can renew your expiring level-term coverage without a health exam but only at incredibly high premiums.

H EALTH I NSURANCE
If you get health insurance at work, you’re a lucky duck. The amount you pay toward the cost will keep on rising. But at least you’re covered, which is more than 46 million other people can say.

With no employee plan, you face a harsher world. Premiums are high. Past or present illnesses may be excluded from coverage. Yet without health insurance, an accident or illness that fells you, your spouse or your child could wipe you out.

Most health insurance comes in three main types.

HMOs (health maintenance organizations). Good for young families who need routine care and are happy with the group’s network of doctors.

PPOs (preferred provider organizations). The best deal for people who want to see specialists and get medical tests without referrals. PPOs offer larger networks of doctors and charge higher premiums.

Catastrophic coverage. For people who can’t afford a comprehensive plan but want to protect themselves from a wipeout. You pay all your medical bills up to a certain ceiling—say, $2,000 to $10,000. The insurer picks up most of the rest. The higher the deductible, the lower your monthly premiums. Parents often buy high-deductible coverage for young-adult children who can’t afford health insurance on their own.

Tips for People With Company Plans
Slash your out-of-pocket costs with a health-care flexible spending account. Most larger companies offer one. You contribute tax-free dollars to the plan and use the money to pay medical expenses. That cuts your costs by 15 to 35 percent (and sometimes more!).

Use COBRA to maintain your health insurance—for yourself and your family—when you leave a group plan. COBRA lets you continue your current group health plan for a limited period of time while you hunt for other coverage. You pay the premiums out of pocket at the group rate plus 2 percent. Generally, you’re entitled to COBRA if you work for the government or for a company that employs 20 people or more. You don’t get it, however, if you’re insured through a trade association.

COBRA coverage lasts for up to 18 months if you quit your job, lose it or go part time. You get up to 29 months if you’re totally disabled. Divorced spouses, widows and widowers, and their dependents, get up to 36 months. You have a limited number of days to tell the insurer you want COBRA. If you wait too long, you’re out of luck.

Safeguard your access to future health insurance if you have a health problem (or someone in your family does) and you leave your job. This is critical! If you have, say, diabetes or serious allergies, and you leave your group health plan, another insurer might not want to pick you up. A law known as HIPAA (the Health Insurance Portability and Accountability Act) protects you from health discrimination. A new insurer can’t turn you down, charge you more or impose long waiting periods for coverage when your health is poor. But to qualify, you have to show that you’ve been without group insurance (or COBRA) for no more than 63 days.

Your proof is a “Certification of Creditable Coverage” that you get from your former company when you leave the job. Don’t lose it. Your new insurer will check it to see how much protection you’re due. It also covers spouses and children who lose coverage after a divorce or when a parent dies.

Tips on Buying Individual Coverage
Shrink your health-insurance premiums by buying high-deductible catastrophic coverage. If you’re self-employed or have no employee plan, this may be the only policy you can afford. You’re covered for serious illnesses but have to pay lesser bills yourself. The higher the upfront deductible (usually anywhere from $2,000 to $10,000), the lower the premium you pay.

Shop the Web. Many state Web sites list health-insurance companies and compare their premium costs. You can get sample quotes at ehealthinsurance.com .

Look at a Health Savings Account (HSA) if you’re self-employed. It combines catastrophic health insurance with a tax-favored savings plan. You choose a sum that you’re willing to pay out of pocket for medical expenses. The insurer pays most of the bills over that amount. You meet your own costs by making tax-deductible contributions to the HSA and using that money, tax-free, for medical bills. Any unspent money stays in your HSA for future use.

HSAs work best if (1) you’re rarely sick and can build up big reserves, or (2) you can afford to pay medical bills from your current income and will treat the HSA as if it were a tax-favored retirement account.

Turn to an insurance agent if you’ve had poor health. An insurance company may reject you, or charge you more, for reasons that astound you—say, seasonal allergies, an old knee injury or current treatment for depression (so much for “Prozac Nation”). You need an insurance agent who specializes in “impaired risks.”

D ISABILITY I NSURANCE
Your earning power is your most important asset. If you fall off a roof and wind up in a wheelchair, how are you going to pay the bills? That’s what disability insurance is for. It pays you a regular benefit—say, $3,000 or $5,000 a month—if you’re too sick or injured to earn a paycheck or can’t earn as much as you did before. If you have to work for a living and have no disability insurance, you don’t have a financial plan. You’re a circus act without a net.

In employee plans, you may be able to buy group long-term disability coverage at an attractive price. Group plans have a couple of drawbacks, however. You usually can’t take your policy with you if you go to another job. Also, after the first two years, it might pay only if you’re totally disabled, not if you can work part time. If you can afford it, go for individual coverage. Here are the main points to consider:

How much coverage do you need? Enough for a decent standard of living if you couldn’t work. Single people need more than working couples.

When are you considered disabled? This is critical. Low-cost policies pay only if you’re totally disabled and can’t work at all. But most disabled people can theoretically work at something, whether they find a job or not. So your claim may be denied. No good. You want a policy that pays if you can’t work in your own occupation.

How long will the policy pay? Ideally, you want to be covered until retirement age, usually 65. If that costs too much, a policy that pays for five years will cover most ills.

What if you can work only part time? Your policy should pay residual benefits, giving you, say, half a disability check if you’re working half time.

How long do you have to wait before the policy pays? Three months is the most popular waiting period, although you can lower the cost by agreeing to wait for six or 12 months.

You also have some automatic coverage. There’s Worker Compensation for work-related injuries; veterans’ insurance, if your disability arose at least partly from something that happened while you were on active duty, and Social Security, if you’re totally disabled.

L ONG-TERM-CARE I NSURANCE
Long-term-care policies help pay the (very high!) nursing-home cost if you need constant care. They also cover care in your home or in an adult day-care center. There are two reasons to own LTC insurance: (1) you don’t want to use your own savings to pay the nursing-home bill, and (2) you want to be able to pay for quality care in the private market rather than depending on rickety government programs.

What should you consider in a policy? Find out what local nursing homes cost—probably $150 to $250 a day, depending on where you live. Many buyers insure for the full amount. You might also insure for less and pay the difference out of your savings. Add automatic inflation protection so your benefit will keep up with costs. Pick a waiting period before payments kick in: A policy with a six-month wait costs less than one with only three months. Insure for the longest period of care you can afford, typically three to five years. If you stay longer, you can fall back on personal savings (or Medicaid, if you’re out of money). Include home-care coverage, but don’t buy a policy that’s home care only. You may be forced into a nursing home, and that’s the catastrophic cost.

W RITE I T D OWN !
Every time you make a decision about a safety-net product, write it down. Why did you buy that much life insurance? What’s the deductible on your medical insurance? Just a couple of sentences will do, filed with the documents they refer to. Soon you’ll forget why you made those particular choices (everyone does, me included). When you wonder if you’re really OK, your files will give you the answer: Yes!