Insurance

QUESTION: Nate began looking at life insurance policies after he and his wife had their daughter. During the medical screening, he learned he had cancer. After treatment the doctors declared him to be in remission, but he can’t find a life insurance company that will work with him on coverage beyond what his employer provides. Dave gives Nate some suggestions.

ANSWER: I would advise conducting a search of every “guaranteed issue” company and policy out there. The term, guaranteed issue, means they don’t do a medical check. The problem is these policies generally run 10 to 20 times more per thousand than those where you qualify medically. So, you’re not going to get a lot during this time.

Check at work, and see if you can buy more and add it to the coverage they already provide. Some employers provide a double-up option if you’re willing to pay for the additional coverage. If you can, and the price is reasonable, do it. If you have a mortgage, call the mortgage company and get mortgage life insurance. It’s gimmick insurance — and something I don’t normally recommend — but many times you can get it without medical clearance.

Once you get past that three- to five-year window where many insurance companies will work with you again, try to find a good, level term life insurance policy with coverage that’s 10 to 12 times your income, and drop all this other stuff. In the meantime, pick up anything else you can find – even if it’s those little $10,000 policies banks sometimes attach to your checking account for $20.

QUESTION: Some of Steve’s co-workers are buying into a new kind of supplemental insurance that protects against layoffs. It costs $30 a month per person and the full payout, once you’re vested, is $9,000. Dave thinks it’s a gimmick. He advises Steve to self-insure against this kind of thing.

ANSWER: Anytime insurance is there for something you could cover yourself, it’s a good idea to stop and remember that every insurance company is still a business. Statistically speaking, if lots of people cashed in on a policy like this an insurance company would go out of business. We’re talking about only $30 a month to cover $9,000. That alone tells you not many people cash in. It’s a gimmick.

On average, you’re losing money when you buy insurance of any kind. Again, on average, over the scope of your lifetime you’d be better off self-insuring against things like this. The only things I recommend buying insurance for are things you can’t afford to cover personally. But you can afford to cover a layoff by saving an emergency fund of three to six months of expenses.

If I’m in your shoes, I’m not buying that stuff.

QUESTION: Tanner has a whole life insurance policy with zero cash value due to the loans he took out per the advice of his agent. He now realizes this wasn’t a smart move, as he now owes premiums plus interest every year. Tanner asks Dave if he is still on the hook for the policy loans if he forfeits the policy to buy term insurance.

ANSWER: No. Get your term insurance in place first, then when you cancel the policy your cash value will offset your loans. They will not loan you more than your cash value.

It’s likely that you actually do have a cash value that is above your loan amount, so you could probably get a little cash back. It’s very seldom that they will loan you 100 percent of cash value.

But if they have, it’ll be an exact break even, and just canceling the policy means you cancel the interest, cancel the premiums. And your set of assumptions are correct — you got screwed over. It was bad advice to buy the policy, and even dumber advice to clean the whole thing out and sit there paying interest to borrow your own money and pay a premium to keep the loan open.

I recommend 10 to 12 times your income on a 15- or 20-year level term policy. During that 15 or 20 years, of course, you should be getting out of debt and building wealth so that you have a big pile of money and no need for life insurance.

QUESTION: Ben asks how to know when you should file an insurance claim on a homeowner’s issue versus just dealing with it and paying cash. Dave says it’s when you begin to feel the pain financially.

ANSWER: When it’s far enough above the amount of your deductible that you feel the pain. If you’ve got a $1,000 deductible, and you have a $1,100 issue, you pay the $100 out of pocket and don’t mess with it. But if you’ve got a $2,000 issue with a $1,000 deductible, that might be enough to get you to file a claim — depending on your financial situation, the expense of the house, cost of the insurance policy, and those kinds of things.

Somehow, we get the idea we make money on insurance processes. We don’t. Insurance companies make money, and consumers pay insurance companies. You don’t make money on insurance in the long-term. You may have a situation, once in a blue moon, where you come out ahead on a transaction versus what you paid in. But over the scope of your life, you don’t make money on insurance companies.

The point is this: If you turn in the claim, you’re going to experience a rate increase or cancellation somewhere — at some point — that offsets it. I only turn in substantial claims, meaning claims that are substantially above the deductible. I don’t want to have to deal with cancellations or rate increases, and I don’t want to be questioned about that stuff. I’ve turned in a few homeowners claims in my life and a couple on cars, too.