Insurance Column

Insurance is never a fun topic, as you’re essentially preparing yourself for some future calamity, but it’s something every responsible adult needs to tackle every once and a while. Whether it’s auto insurance, health insurance, or something more morbid like life insurance, if the article relates to the topic it’ll appear in this column.


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Buying Your Father’s Term Life Insurance Policy

Over the holidays, Reader John emailed me a question about secondary sales of life insurance policies. He had learned that his father was going to cancel his term-life insurance policy at the end of the month and he was considering “buying” it off his father by paying the premiums and collecting the death benefit. We didn’t get into the numbers but he said that the premium was increasing over the next three years, until his father hits 65, and then the value is cut in half. He ran the numbers and believes there’s a 5% annual return if he passes within 28 years (by age 91). He wanted to know if I thought this was a good idea.

It’s always tricky when it comes to family and money and it’s especially tricky if it involves death, family and money. All of the problems I see with this plan have to do with relationships and navigating those issues are going to prove more challenging than navigating the financial aspects of this idea.

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What are Life Settlements?

A life settlement is where the owner of a life insurance policy sells it to a third party. In general, the owner will sell it for more than its cash value, which the owner can get from the insurance company, but less than its payout at death. It sounds a little creepy, to be buying life insurance policies, but it’s something that can make sense for both the buyer and the seller. In many cases, the seller may not want to continue the policy or may not be able to make the payments on those policies. They can get cash from the life insurance company or they can sell it to a third party, who would become the new owner and continue making payments on the policy. By making a life settlement with a third party, they can extract more of the value out of the life insurance policy after years of premiums.

As you’d expect, this business is loosely regulated and I only happened upon it because the SEC was considering classifying life settlements as securities, which would put them under more scrutiny. Right now there is little and inconsistent regulation of life settlements, which makes many people, both in and out of the life insurance business, uneasy.

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Over-The-Counter Not Eligible for Flexible Spending Accounts in 2011

The Patient Protection and Affordable Care Act signed by President Obama in March made a bunch of major changes to health care in America and one of them was to flexible spending accounts. Starting in 2011, over-the-counter products will not be eligible for flexible spending accounts. In fact, they will not be reimbursable under FSAs, health savings accounts (HSA), or health reimbursement arrangements (HRA) unless they are prescribed by a physician. There is only one exception and that’s for insulin.

This means that the days of loading up on band-aids, Tylenol and Advil, and other products you pick up in the drug section of your supermarket are no longer eligible unless your doctor prescribes it. While the rules on what is necessary documentation for reimbursement have yet to be introduced, this might start introducing additional paperwork at the doctor’s office. Advising to take two aspirin and calling it a day might have to come with a prescription.

Also, annual contribution limits to your FSA will be limited to $2,500 a year.

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Rule of Thumb on Insurances To Avoid

Here’s the rule of thumb I use on whether or not an insurance policy is worth getting – if they are willing to sell you insurance without knowing anything about you, don’t buy it.

Think about how much information you have to provide if you’re buying any kind of “traditional insurance.” With life insurance, you have to submit yourself to a physical. For auto insurance you have to offer up your car’s history, your credit history and your driving history, which is being tracked by a third party. For homeowners insurance, you have to provide a history of claims on your home (don’t worry, it’s tracked by a third party), your own credit history, and home details.

When you buy travel or trip cancellation insurance, they don’t need anything except your money. When you buy cell phone insurance, they don’t need anything except your money. Extended warranties? Just send in a check.

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How to Lower Your Car Insurance Premiums

WrecksWhen it comes to saving money in this economy, it appears that many people are dropping or lowering their auto insurance policies. It’s a bit of a gamble but adjusting your insurances, whether it’s homeowners or auto or anything else, can be a way to save a few more dollars if things are looking tight. However, the subject of how to lower your auto insurance costs has been covered a near infinite number of times already and everyone knows the basics – shop for alternatives, increase your deductibles, drop comprehensive and collision on older vehicles, package together policies for a discount, etc.

I would like to that think you all know that you should shop around for insurance, just as you would shop around for anything else. I would also hope that you understand the relationship between your premium payments and your deductible. Hitting those points really just smashes the some tired old ideas back into your brain and, honestly, wastes your time. So, this post will be about the more novel ways to lower your car insurance costs. Chances are you may not use any of these ideas but it may spur you to think of some clever ideas of your own (that you can share!).

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Consider Self-Insurance Against Calamities

Burning BMWLast week, as I was research the “catch” on a return of premium life insurance policy, I wondered if it was possible for you to self-insure your life. The idea behind self insuring is that you take a lower level of insurance protection and save the difference into an account. With auto insurance, you could take away comprehensive insurance coverage, rental car coverage, or raise your deductible and put the savings into a high interest savings account.

I do this today with my auto insurance. For my Acura Integra, I didn’t carry comprehensive insurance and was able to saving hundreds of dollars a year. When it was totaled, through no fault of my own, I rolled the savings over to do the same thing with my current car, a Toyota Celica. As I’ve gotten older and the premium on excluding comprehensive insurance decreases, I’m tempted to add comprehensive again and pay for it with the fund. I’m able to because of good driving and good fortune, but I think that self-insurance is something everyone should consider.

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What is Return of Premium Life Insurance?

Life insurance policyLife insurance sucks. If you outlive your policy, you spent a lot of money for not much of anything. If you don’t outlive your policy, well shucks you didn’t waste your money on premiums… but you’re dead.

So when my insurance company sent me a package detailing one of their newest offers, a “return of premium life insurance” policy, I was intrigued. The basics of the policy are simple – you pay premiums for term life insurance and if you outlive your policy, your premiums are returned to you. If you outlive your policy, you haven’t wasted your premiums. If you don’t, then the premiums were “worth” it.

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Life Insurance Benefits Aren’t Taxed (Usually)

I was poking around on the internet the other day when I saw one of those morbid life insurance policy ads. You’ve probably seen them before too. They usually have someone kneeling at a grave or a kid wearing all black at a funeral. They ask you the pointed question of – “If you died today, who would take care of your family?” I suspect they’re trying to tap into your fear of the unknown, how your kids won’t be able to fend for themselves or how your husband or wife is going to be lost without your financial support.

First of all, my lovely wife is quite capable and she can take care of herself. I bet she’d miss my sparkling personality but after a while she’d probably be OK with it. :)

Second, our dog Tobey is the fiercest beagle in all the land. He’d do fine finding his own rawhide cow ears and kibble. Just the other day we left some food on the table and he managed to to jury-rig a Rube Goldberg-contraption just to get at it.

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