Ask Liz Weston

Get smart with your money

Insurance

Q&A: The pros and cons of converting life insurance to an annuity

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Dear Liz: I have a life insurance policy that is worth $16,000 if I cash out. Our agent says if we convert this to an annuity, we would eliminate our monthly fee of $25. The policy is worth $35,000 if I should die with it still in effect. We purchased this only for the purpose to have me buried. Is converting this to an annuity a better option?

Answer: Possibly, but you’ll want to shop around to find the best one rather than just accepting whatever rate your current insurer offers. You can compare offers at www.immediateannuities.com.

Converting to an annuity through what’s known as a 1035 exchange means you’re giving up the death benefit offered by your current policy for a stream of payments that typically last the rest of your life. You don’t pay taxes on this conversion, but taxes will be due on a portion of each withdrawal to reflect your gains.

If you cash out, you’ll get money faster — in a lump sum — but will owe taxes on any gains above what you’ve paid in premiums.

The face value of your policy is far beyond the median cost of a funeral and burial, which the National Funeral Directors Assn. said was $7,181. Before you dispose of the policy, though, you should make sure your survivors will have other resources to pay that cost and that they won’t otherwise need the money.

Q&A: How much liability coverage is enough?

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Dear Liz: We are looking to get umbrella insurance coverage to increase the personal liability limits on our homeowners and auto policies. Is there a rule of thumb on how much umbrella coverage is appropriate? Enough to cover one’s entire net worth? Or a portion thereof? Granted, no amount of coverage would prevent a lawsuit exceeding that coverage. We have never had a liability claim but are looking for an extra degree of safety and peace of mind. The house (no mortgage) is worth about $2.5 million and we have financial assets of an additional $3 million. The maximum our carrier offers in umbrella coverage is $5 million, with a premium under $1,000 a year.

Answer: Walking the line between prudence and paranoia isn’t easy when you’re trying to predict the risk of being sued.

A report by ACE Private Risk Services noted that most auto and homeowners liability coverage maxes out at $500,000, but 13% of personal injury liability awards and settlements are for $1 million or more.

That means the vast majority of lawsuits result in six-figure payouts or less, but a spectacular few can cost more.

Insurance experts say trial attorneys typically settle for a liability policy’s limits. There are exceptions, though, particularly if the person being sued has substantial assets and income but not a lot of coverage.

One rule of thumb is to get liability coverage at least equal to your net worth, with a minimum of $1 million. A $5-million policy in your case would not be overkill, but you should discuss your situation with an experienced insurance agent to get a better assessment of your risk and options.

Q&A: Health insurance subsidies

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Dear Liz: We’re living on a very tight budget and often have to put groceries and unexpected expenses on a credit card that’s in my husband’s name only. I have no personal income. My husband is on Medicare, but I’m too young to qualify and need to find low- or no-cost healthcare, (I haven’t had any insurance since 2007.) They are using my husband’s total income and coming up with high rates that are supposed to be lowered by tax credit, but we don’t pay income tax because our income is too low. Should they be using what the IRS considers our income to be? Or could I apply using my zero personal income?

Answer: By “they,” you presumably mean a health insurance marketplace where you shopped for policies offered by private insurers. HealthCare.gov is the federal marketplace and many states, including California, offer their own. When you shop for a policy through a marketplace, you can qualify for subsidies that can dramatically lower the cost of your coverage.

This subsidy, also known as a premium tax credit, is based on your household income, not your individual income. The tax credit is refundable, which means you get it whether or not you owe federal income taxes, and you can opt to have the subsidy paid in advance to the health insurer to lower your premiums. You don’t have to wait until you file your taxes to get the money back.

You’ll want to act quickly, though, because the penalty for not having coverage is rising. The penalty for 2016 is the greater of $695 per adult or 2.5% of income. You still have a short window to avoid that hit: The enrollment deadline is Jan. 31.

Q&A: Shopping for insurance

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Dear Liz: I pay about $670 per month for insurance for four cars, our home and a $1-million umbrella policy. We’ve been with the same well-known national insurance company for over 30 years. About five years ago, I checked with another well-known national insurance company about the estimated total premium, which was not significantly different from what I paid.
We filed a claim for a very minor accident about two years ago. My 21-year-old son, 17-year-old daughter, my wife and I drive these cars.

Should I have my coverage reviewed by another company?

Answer: Of course you should. And you should check with more than one.

Premiums can differ dramatically, particularly for younger drivers. A recent Consumer Reports investigation found that although some companies doubled or even tripled auto insurance rates for a teen driver, others barely budged.

Premiums also can change over time as insurers try to build or protect their profits. Insurers will lower premiums to attract more business and raise them to cut losses.

Price isn’t the only thing you should consider. Customer service is important too, so review your state’s complaint survey to see which insurers tend to draw customer ire.

Shopping for insurance isn’t fun, but saving hundreds or even thousands of dollars is. You should make the effort at least every few years.

Q&A: Co-pays and collections

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Dear Liz: My primary care physician referred me to a gynecologist for a medical issue. I called the office three times and asked that the appointment be made as an annual exam.
During the appointment, the doctor was rude and critical of my body and lifestyle. (I am obese.) I left the appointment in tears before it was over.

Five months later, I got a $160 bill for the appointment. My insurance denied the claim twice, saying the doctor was double charging, but the office fought back, saying the charge was for the referral, not the annual exam.

I have tried to work with the doctor’s office and my insurance, but now the bill has gone to collections. It’s knocked my FICO score from 780 to 680 in a matter of months.

Part of me does not want to pay the bill because of the abuse I received from the doctor. However, this is affecting my finances. Would it help my FICO score if I negotiated with the bill collector and then repaid a part of the bill? What are my options?

Answer: Your best option is to ask the doctor’s office, politely, to take back the collection account in exchange for your paying the bill in full.

The doctor should not have been rude to you. But you shouldn’t have tried to get a referral for a medical issue treated as an annual exam. You were probably trying to avoid a co-pay, because health plans typically cover this type of preventive care, but that’s not why you were there.

You could ask whether the bill collector will delete the account from your credit reports. You would almost certainly have to pay the bill in full to win this concession, and even then the odds are against it.

That’s why it’s better to ask the medical provider to take back the account. In many cases, medical providers place accounts with collectors on assignment and have the ability to pull them back if they want.

The latest version of the FICO credit scoring formula ignores paid collections and treats unpaid medical collections less harshly than other collections. But that formula is just starting to be adopted, and the more commonly used previous version, FICO 8, ignores only collections worth less than $100.

As you’ve seen, even one dispute can lead to a big drop in your scores. If you feel an issue is worth pursuing, it often makes sense to pay the disputed bill and then seek justice in Small Claims court.

Q&A: Term life insurance

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Dear Liz: My husband doesn’t qualify for term life insurance because he is overweight and pre-diabetic. Although he’s working on getting in shape, I’m afraid something might happen. I should add we have a 3-year-old daughter, and he is the main breadwinner.

What would you suggest we do to ensure we are covered if something were to happen?

Answer: Just because your husband was turned down by one insurer doesn’t mean others won’t accept him. Even people who are obese or who have diabetes can find coverage, so your husband shouldn’t accept that he’s uninsurable.

Look for an independent agent or broker who works with several companies rather than a captive agent who works for just one or two. A fee-only financial planner may be able to help you find a good agent. The planner also could recommend an appropriate amount of coverage.

Your husband also should investigate any coverage he might have through his job. Many employers provide a base amount of coverage as a benefit (frequently $50,000 or one year’s pay) and often allow workers to buy additional coverage without requiring medical exams.

The downside of employer-sponsored group life insurance is that he may not be able to buy as much coverage as he needs. He may need 10 times his annual salary, for instance, but his group policy may max out at five times his salary. Also, the policy may not be portable — it may end if he’s laid off or quits, for example.

The best strategy will depend on the costs he faces. But one approach may be to buy as much employer-provided coverage as possible and supplement it with an individual term policy purchased on his own.

If his health improves, he could boost his individual coverage while buying less of the employer-provided kind.