Maximum Benefits

It’s open enrollment season for employee benefits.  To maximize your benefits, review your health, life, disability, pre-tax savings plans and retirement account options carefully. Use this checklist from the Financial Planning Association for tips on selecting benefit options.

In particular, focus on your health insurance benefits.  The Wall Street Journal reports that many companies are selecting plans with higher deductibles together with Health Savings Accounts (HSAs).  If your health care plan is changing, you may need to adjust your HSA contributions.

The National Association of Insurance Commissioners (NAIC) reminds consumers to make health care selections carefully. In most cases, you won’t have a chance to make changes again until this time next year.  Learn more about open enrollment from the NAIC.

 

The Answers: to 7 Key Questions About Life Insurance

I recently spoke with Matt Healy, a very nice guy who happens to be an expert on life insurance. I know what you’re thinking: He sells it, right? Yes, he does, but with a twist. He’s an attorney whose “aha career moment” led him to leave his law practice to educate and advise clients about the insurance products that would help them achieve their family protection and estate planning goals. Matt is a VP at Woodruff-Sawyer & Co., specializing in business succession and estate planning.

Everyone talks about how important life insurance is, but I wanted to dig a bit deeper without getting a sales pitch. Here are some of the most interesting and helpful things I learned from our conversation:

Who needs life insurance? That’s simple: anyone who will suffer financially if you die. That includes stay-at-home parents who don’t receive a paycheck. If you died, your services would need to be replaced by a chauffeur, cook, housekeeper, personal shopper or errand service and home manager, to name just a few. How would your surviving spouse foot the bill for all that?

Of course, life insurance is also used to replace the income of wage-earners, covering living expenses and other financial goals such as college expenses for your children, too. Business owners can use life insurance to buy the ownership of a deceased partner or to provide cash to run the business until it can be sold. It can even be used to pay estate taxes when the significant assets are illiquid – a business or real estate, for example.

When should I buy life insurance? How about now? Usually it takes a life-cycle event like marriage or the birth of a child to propel people into a life insurance agent’s office. But even if you don’t have children, life insurance is a valuable safeguard if you’re buying a home (which in California means taking on staggering debt), launching a business, planning for one spouse to leave the workforce or even if your income increases significantly.

How much insurance do I need? This is a question that often trips up clients. Most people are underinsured because they don’t quantify their needs. When you really look at your financial goals and add up your mortgage, college expenses, childcare costs and income replacement, coverage amounts in the Bay Area will easily be in the multiple millions for a family with young children, a house and a mortgage. Matt shared his rule of thumb – $1 million of coverage per child. The good news is this level of coverage can be very affordable using term insurance. He also counsels that life insurance provided by or through your employer should only be considered “icing on the cake.” While this type of coverage is easy to get – requiring no health screening – it is typically more expensive than a personal policy (if you’re in good health) and may not be portable if you change jobs.

What is term insurance and why is it so inexpensive now? Term insurance provides a death benefit for a fixed amount of time (the term) for a fixed annual cost. It is the cheapest way to cover a large financial need over a fixed period of time. It is inexpensive because only 2% of policies result in claims – most people don’t die during the term. Term insurance pricing is currently at historically low levels. There’s more competition, for one, and people are living longer than ever before. The average American woman will live to nearly 81 and the average American man to nearly 76, according to the United Nations. If you choose term insurance, consider a company that offers the option to convert term insurance to permanent insurance, a benefit if your health should deteriorate.

How should I buy life insurance? Approach buying life insurance with the same scrutiny you’d put into any major purchase. Ask trusted friends for referrals and interview at least two or three agents. Look for someone who sets you at ease by answering your questions honestly and not pushing you to buy before you’re ready to make a decision.

You’ll be best served by someone who represents multiple companies, Matt says. That way they can shop the market for competitive offers and you can choose the policy that best meets your needs. Also look for a company with an established history so you’ll feel confident they’ll remain in business.

It is possible to buy insurance online from established carriers. But a big part of choosing the right policy is tapping the expert advice of an agent, and that’s not always available with online purchases.

What are the mistakes people make when buying insurance? Hands down, the biggest mistake is basing the decision on price alone. When you’re considering several policies, ask yourself (and your agent) which company/policy represents the best overall value, Matt says.

How does insurance fit in with my overall investment plan? Since life insurance is designed to replace income and cover expenses, the need for life insurance decreases as retirement assets accumulate, mortgage is paid off and children graduate.  So a 20-25 year term plan is a good fit for most people.   For some, keeping a reduced policy for the long haul provides additional security, especially if the policy includes a living benefit to cover long-term care expenses.

Financial Self-Care for Moms

When I share with people that my passion for financial planning centers on empowering other moms and their families, I am often asked, “what is different about women?”

This list sums it up, from “This is Not the Life I Ordered” by Jackie Speier, Jan Yanehiro, Deborah Stephens and Michealene Risley:

  • Women are first in America’s growing hunger class.
  • We tend to live seven to nine years longer than the men in our lives.
  • Fifty percent of us will become widows by the age of fifty-three, and 50% of us will divorce in our lifetimes.
  • When we divorce, we are five times more likely to live in poverty after retirement than married women.
  • For every year that we leave the workforce to care for children or aging parents, it will take us five years to make up the difference in our retirement and pension plans (US Labor Department, 2004).

Consider also that moms take on most of the child rearing and home duties, add in volunteer positions and a job. Self-care often falls to the bottom of “the list.”These are compelling statistics. Move self-care to the top of the list and take action now. Here are four tips for busy moms:

Make your money work hard for you: Women tend to be more conservative with their investments, but we can ill-afford this mistake. Inflation and taxes are certainties. In order to beat these headwinds, we need to include growth oriented assets like stocks and real estate in our investment mix.

Life insurance: Quantify the coverage that will fund your family’s financial goals (college costs, retirement) if you or your partner dies. For most families, term life-insurance is an affordable solution. Checkout www.lifehappens.org for educational materials and calculators.

Financial support network: Research shows that women learn best with and from other women. A financial support network could take the form of an investment club, money club (www.wife.org) or a group of friends. “This is Not the Life I Ordered,” mentioned above, includes inspiring stories and tools for creating a “kitchen table” support group.

Be in the conversation: Perhaps most importantly, discuss goal-setting and money decisions as a family. Don’t completely delegate investment decisions to one spouse.

With best wishes for financial health,
Emilie