How can I be underinsured?

Perhaps you are familiar with the T-shirt that asks “How can I be out of money, I still have checks left?”

In a very similar way, the amount your home is insured for has little relation to how much you paid for the home itself.

As far as a mortgage company is concerned, if you have enough coverage to pay off the loan you have sufficient coverage. However, from the perspective of actually replacing the house you may be in for a surprise. The difference is best explained by remembering that you are dealing with two different markets when you purchase a home and when you build a home.

When you by a home, there are a lot of factors that go into the price. What people call market value is determined in negotiation between the owner and the buyer usually with the help of a real estate agent, appraiser and the mortgage company.

When you go to build a home however, you are talking to a contractor and then you are looking a different type of market. Labor and material costs, permits; a whole new world.

In the area I live in, $100 per square foot for building is not an unusual amount to hear quoted. Perhaps a little more, perhaps a little less. So when you have a home that is 1,600 square feet, you get two different values. On the market, you can sell it for $130,000 but if it burnt to the ground, you would need $160,000 to $185,000.

That is the difference. Many people are insured for enough to pay the mortgage but not the cost to rebuild. This puts the client in a difficult position should they lose everything.

What is the difference between the two costs: In the prices I menitoned above,  would you believe $25 to $30 a month?

Contact your insurance agent, make sure you are not underinsured and make any appropriate adjustments needed.  That way, if your house does burn to the ground you can breath a sigh of relief when you realize “I have that covered.”

Do not Fear the High Deductible

I do not know know why it is, but many people tell me, “I do not want a high deductible.”

It could be that they are used to the old plans offered at work where the deductible was $500 and you paid $25 or less to see the doctor. The problem is that as the costs have been rising in the world of individual plans, they have also been rising in the workplace too. In order to save money on these plans for their employees, employers have also been raising the deductible in order to lower the cost of the plans. Employees are being asked (or not asked) to shoulder more risk.

Some, as they have seen the employers raise the deductible have sought my help to find a cheaper plan as an individual. Let me help you out. If your employer is paying for health insurance, they are paying at least 1/2 of the employee’s cost. As a single person, this means, you are not going to find a cheaper plan out there in the individual market unless you do choose a much higher deductible and maybe not even then. I would not recommend a higher deductible in that case.

However, if you are buying insurance as an individual, by all means consider the higher deductible plans because they will save you money. I recommend Health Savings Accounts (HSA) because you are allowed (isn’t our government gracious) to save money in that account to use for medical expenses. These plans are a Tax deduction for you. Unlike the FSA plans where you have to use the money each year, the HSA allows you to continue to accrue both deposits and interest for as long as you have a qualified plan. After that, the money is still yours but you should use it for medical costs to avoid penalties.

Most individuals do not use even $2,500 deductible every year. The savings in monthly costs from a $5,000 HSA plan and a regular PPO plan can be significant. That saved money can cover the costs, save on taxes and…if you do not use it, then be saved  for future time. You don’t need to stuff your HSA full of money each year, most people will be fine adding money until they reach $5,000-$10,000. Then you can stop the contributions and start again if you need to. The fact is you can plan on having a medical cost, just not predict WHEN the cost will come.

For families, especially large families, the HSA is almost the only way to go. They are FAMILY deductibles not individual deductibles. So if one accident meets that deductible, although it is true that you will pay the deductible, no one in the family will pay for any covered cost including Rx for the rest of the year!! It truly is a good deal in that respect.

The savings and paying in cash can help you negotiate with your doctors and dentists. Do not assume that just because insurance pays some of it, that you cannot request a lowered bill for a prompt payment. Worse case scenario on a $10,000 deductible that you take out of your HSA account is that you pay the $10,000! However, it is non taxed money, so you saved on taxes and most doctor’s if you ask will discount  so you save there too.

If you shop around, make sure that you include the HSA plan as part of your shopping experience, that way you can have confidence that you have it covered.

What difference can a driver’s education course make?

There are two main reasons why going through the hassle of taking a driver’s education course can be worth it. Most of you will know that a driver’s education course is a way to keep points off your driving record. It does not avoid the cost of the ticket and the class itself cost money too. Some are fairly inexpensive, others are pretty expensive.

The first reason to take the class is because if you do not, you are almost certainly locked into your current carrier. Why? Because when you go to get comparative rates, the new agent will pull your DMV report and Viola! you will be a higher risk than a driver with a clean record. This means you will not get the best rates.  Assuming that you keep a clean record the points will drop off in 3 years.

The second reason is because if you get another incident on your record, your rates will go up! While most companies have what they call ‘accident forgiveness’ and will overlook a first infraction, a second infraction will undoubtedly result in a significant increase.

If your misfortunes happen one after the other, like mine did, you may wish you had paid the $50 for the class when your rates go up $100/month. Of course, your rates will come down in 3 years but wow….that is an expensive decision.

One last thought, minor accidents that are not needing to be reported to the police, and therefore to your insurance company, may be best dealt without reporting it to your insurance company. Avoiding that single report can keep you from even needing to take a class.

Next time you have an accident and someone asks what you are going to do you can say….I have it covered.