Ask Liz Weston

Get smart with your money

Insurance

Q&A: Shake, rattle and … roll the dice without earthquake insurance?

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Dear Liz: I live in Southern California and my homeowners insurance renews at the end of August. Should I consider buying earthquake insurance?

Answer: Insurance is meant to protect against catastrophic losses that we couldn’t easily pay out of pocket.

If you don’t have much equity in your home, or you’re willing to walk away from the equity you do have, then you can forgo earthquake insurance. Otherwise, you need the coverage.

The same is true for flood insurance, which is also not covered by the typical homeowners policy.

Q&A: Should your retirement savings plan include life insurance? Here are some pros and cons

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Dear Liz: Are indexed universal life insurance products worthwhile, and how do they compare to a Roth IRA?

Answer: Both offer the potential for tax-free distributions in retirement, but indexed universal life insurance is a complex product with high expenses that’s not a good fit for most investors.

With a Roth IRA, virtually all of your money can go toward your retirement investment. (Most investments have fees of some kind, but you can minimize those by using exchange traded funds or low-cost index funds.) With permanent life insurance, some of your money goes toward paying premiums for the death benefit and other administrative expenses, including commissions for the person who sells you the policy. The remaining cash can be invested in accounts that are tied to the performance of a stock market index. Your principal is guaranteed, but the amount you earn is subject to caps.

Financial planners generally recommend that you first max out other retirement savings options, such as 401(k)s and IRAs, before considering investing through a life insurance policy. Also, you should be someone who needs permanent life insurance — the kind that is meant to cover you for the rest of your life. (Term insurance, by contrast, is a much less expensive option meant to cover you for a set term, such as 20 years.)

Some people do need permanent coverage. Their estates may be large enough to incur estate taxes that they want to pay with insurance, for example. Or they may have a special needs child who will require ongoing support. If you need permanent coverage, consider hiring a fee-only financial planner to help you sort through your options.

Q&A: Vehicle insurance coverage limits

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Dear Liz: You recently answered a question from someone who lent a van to a friend for more than a year. You mentioned the borrower “may have benefited from free insurance coverage if you continued to pay those premiums.” Some insurance companies limit the time they extend coverage when a car is driven by someone other than the owner or immediate family. Our insurance has a four-month limit.

Answer: That’s a good point. Insurers often require that anyone who regularly uses a vehicle be added to the insurance policy as a driver. In addition, someone who borrows a vehicle and who is otherwise uninsured might want to consider getting a non-owner insurance policy. This wouldn’t cover damage to the vehicle but would provide liability coverage in case of an accident.

Q&A: Old uncashed insurance policies

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Dear Liz: What advice can you provide to people when they stumble on old life insurance policies that may never have been cashed in?

Answer: My siblings and I have personal experience with this after coming across two policies in our late father’s papers. We learned one policy had indeed been cashed in, but the second — purchased in the 1930s, with a face value of $5,000 — was still in effect.

You typically can use a search engine to determine if the insurer is still in business or if it has changed its name or merged with another company. (Not surprisingly, the insurer that issued the 1930s policy had been involved in several mergers in the intervening decades, but it took just seconds for us to find the current incarnation.) If you’re having trouble tracking down the company, contact the insurance regulator in the state where the insurer was originally located.

Once you have the current insurer name and contact information, you can call and ask if the policy is still in force. If the policy has value, the insurer can instruct you how to make a claim.

Q&A: Social Security is insurance

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Dear Liz: My wife died in March 2020. I receive nothing from her Social Security (other than $255) and will receive only a portion of mine due to the windfall elimination provision. Is there anything I can do since I am receiving none of what she paid into Social Security and only a fraction of mine?

Answer: In a word, no. If you’re receiving a pension from a job that didn’t pay into Social Security, the government pension offset reduces any Social Security survivor or spousal benefit by two-thirds of the amount of your pension. If two-thirds of the amount of your pension is greater than your survivor benefit, you don’t get a survivor benefit.

Is that an outrage? Perhaps, if you think that Social Security should act like a retirement account. In reality, it’s insurance. (The formal name for Social Security is Old Age, Survivors and Disability Insurance.)

With a retirement account, what you take out usually bears some relationship to what you put in. With insurance, that’s not necessarily the case. You may take out more than you put in, less or nothing at all.

Many people pay Social Security taxes for decades but ultimately get more from a spousal or survivor benefit than from their own work record. Then there are those, like you, who have their retirement benefit reduced, or a survivor benefit eliminated, because they have a generous pension from a government job that didn’t pay into the Social Security system. In these cases, it can feel like the Social Security taxes paid — the “premiums,” if you will — have been wasted even if financially you’ve come out ahead.

Q&A: Long-term-care insurance

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Dear Liz: I’d appreciate your thoughts about long-term-care insurance programs. Ours has just announced a 52% rate increase with a possible 25% increase next year. Although I realize that none of us can predict the future, are there any guidelines you can suggest for deciding whether, for example, an 80-year-old in good health needs the maximum 10-year coverage or can get by with a three-year coverage period?

Answer: Most people over 65 will need some kind of long-term care, but most need it for less than three years. You may want to err on the side of caution and opt for a longer coverage period if you have a family history of dementia.