Dear Liz: I recently inherited around $200,000. I’m on track for retirement, so my broker is encouraging me to consider buying a policy for long-term care. He recommends a flexible-premium universal life insurance policy that requires a one-time upfront payment and provides a death benefit as well as a long-term care benefit. It does appear to me to be a better option than buying a long-term care policy in which I pay a certain amount every month, which can of course increase greatly as time goes on, with no guarantee of ever needing or using the benefits and no hope of money paid in becoming part of my estate.
Answer: 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 should you die or to pay taxes on your estate — then a life insurance policy with a long-term care rider may not be a bad idea, said Laura Tarbox, a fee-only Certified Financial Planner in Newport Beach 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 said. “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, if you should need the coverage.
What you don’t want to do is take guidance solely from someone who is going to make a fat commission should you buy what he or she recommends.
“Get two or three proposals from different agents,” Tarbox said. “A fee-only financial planner can help you sort through them.”
Dear Liz: Due to lack of work over the last few years, I finally began my Social Security benefits this year. I can afford only catastrophic health insurance, so I hardly ever see a doctor anymore.
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. Their 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 am not being a good parent.
Answer: 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. There are also a number of national and local organizations that provide financial assistance to pet owners in need. You can find a list at the Humane Society’s website.
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 would cost about $175 a year, although premiums vary based on deductibles and what the policy covers. Veterinary costs have spiraled to the point where these policies can provide real protection against catastrophic bills.
Dear Liz: My husband and I are in our late 60s and debt free. We recently were informed of a $200 annual increase in our auto insurance. Our insurer explained we have too many credit cards (all paid in full each month) and too many department store credit cards (including some we haven’t used in years, and all with a zero balance). What does car insurance have to do with credit cards? Can the insurer do this? Should we close some cards?
Answer: Only three states — California, Hawaii and Massachusetts — prohibit insurers from using credit information when calculating premiums. In other states, the practice is common, since insurers have discovered a strong correlation between people’s credit histories and their likelihood of costing an insurer money. (The worse the credit, the more likely they are to file claims, essentially.)
The states typically don’t regulate how insurers use credit information, so behavior that might not affect premiums at one company could jack them up at another. Closing credit cards might not help, because that could inflict its own damage by changing the credit-utilization portion of your insurance score with that company.
This is yet another reason it’s important to shop around occasionally for insurance: You can often find a better deal if you look.
Dear Liz: I really enjoy the columns you’ve written about living frugally and especially appreciate when you discuss healthcare expenses. I find it extraordinarily frustrating when people who promote a frugal lifestyle answer that they keep healthcare expenses down by “eating healthy.” I recently experienced a serious medical situation even though I maintain a healthy weight and otherwise take care of myself. It is in this area, I believe, the frugal community lacks understanding. Some believe that you get sick only because you don’t take care of yourself, or assume that their emergency fund will get them through a rough patch of health issues. Those that believe this are setting themselves up for disappointment should they have the unfortunate experience of a healthcare problem. Thank you for drawing attention to the importance of healthcare and making sure your family is covered.
Answer: Eating healthful food, exercising, maintaining an appropriate body weight and investing in preventive healthcare can lower healthcare costs on average. But no individual, no matter how vigilant, is immune from an accident or illness that can result in catastrophic medical bills.
So you’re right that people who voluntarily go without health insurance are deluding themselves. They’re pretending they have the sole power to determine their future health, when that’s clearly not the case.
Dear Liz: My husband and I have individual life and disability policies. We have two teenage children and have had some health issues in the past. I think the life insurance is important, but I’m not sure about the disability insurance.
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 there are a lot of bills to pay. But is the insurance worth the money we spend every month?
Answer: 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. Last year, 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.
Dear Liz: I read an article in which you recommended getting rid of cellphone insurance. Why? I thought that the insurance would be beneficial if something should happen to my phone.
Answer: 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 should your phone be lost, stolen or destroyed.
Dear Liz: I recently purchased a variable annuity. I researched the investment only after the fact and discovered that my new advisor had not disclosed its pitfalls. I came to him with all my questions afterward, but he was defensive and unprofessional. I feel completely deceived! Do I have any recourse? I feel like I made a huge mistake.
Answer: The fat commissions that many annuities pay can tempt unethical or poorly educated advisors into painting an unrealistically rosy picture of these financial products. Variable annuities are complicated, combining investments with an insurance component, and often come with high fees and surrender charges that make them an unsuitable option for many investors.
“Unsuitable” is the word you need to remember when you report this salesman’s behavior to the insurance company and to your state’s insurance commissioner. In the letters that you write to both entities, make it clear that you weren’t informed of the annuity’s disadvantages and outline how the investment is not a suitable choice given your needs. Ask that the annuity be “unwound” and your money returned. If you don’t get satisfaction from either the insurer or the commissioner, you may need an attorney’s help.
Dear Liz: I’m 29 and growing my assets. I’m contributing 6% to my 401(k), which doesn’t have a match, and maxing out my Roth. I’ve also been investing in shares of my company (which is privately held).
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?
Answer: You didn’t really 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 actually need life insurance, the primary consideration isn’t term versus cash-value or whole life versus universal life. (As you know, term insurance provides just a death benefit, while cash-value insurance, like the policies you’re considering, combines death benefits with an investment component.)
The primary consideration is: How much do you need? Someone with a couple of children may need coverage equal to five to 10 times his or her annual income. Buying that much cash-value insurance can be prohibitively expensive for many families, because premiums for cash-value insurance can be up to 10 times as much as premiums for a similar amount of term insurance.
If you’re convinced you need life insurance and can afford to buy the appropriate amount of cash-value coverage, then take the competing policies for analysis to a fee-only financial planner — one 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 you keep your company stock investments to no more than 5% to 10% of your total investments.
Dear Liz: I read your answer about how Social Security payments can be sent to Americans who retire to other countries. You failed to mention that Medicare coverage is generally not available overseas. For many retired people, medical coverage is more important than Social Security coverage. Is there a way to address that problem for Americans who want to spend their retirement years abroad?
Answer: The good news is that many countries (although obviously not all) offer high-qualify healthcare that’s less expensive than in the U.S. Still, it’s smart to have insurance coverage.
Kathleen Peddicord, author of “How to Retire Overseas,” says you typically have two options: in-country and international policies. In-country policies tend to be less expensive (some cost as little as $100 a month) but may be tough to qualify for if you’re in your 60s or older. International policies are more expensive but you can qualify as a new client if you’re younger than 75. Furthermore, international policies will cover you if you move from country to country; an in-country policy won’t.
As you research your retirement destination, contact expatriates who live there to ask about their health insurance coverage, as well as about other details of their lives. You can start with Peddicord’s site, LiveandInvestOverseas.com, but also check out International Living (internationalliving.com and find country-specific sites by typing the name of the country and the word “expat” into an Internet search engine.
Dear Liz: Is affordable healthcare insurance an oxymoron? I am nearing the end of my 18 months of COBRA continuation coverage for health insurance. I benefited from the federal government’s 65% premium subsidy but that has ended, so I’m faced with paying $991 a month, which I can’t afford. The individual policies that I have looked at will insure me, but not my wife, who has a pre-existing condition, or my daughter, who is a full-time student but over the age limit. I’m not too worried about my daughter, who is eligible for a health plan through her college. It is my understanding that I will receive a “certificate of creditable coverage” upon canceling the COBRA policy and I have only 63 days to purchase either an individual policy and/or HIPAA coverage. I know I’m not the only one with this dilemma. I’m honestly considering running with no coverage. Not too smart? Opinions? Suggestions?
Answer: 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.
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 healthcare out of pocket, but you’re protected from catastrophically high expenses should 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.