Health Insurance for Young Adults

A few days ago, we talked about the new individual mandate for health insurance. This might have the largest impact on those in their 20s. According to one source, forty-five percent of those ages 19 to 29 were uninsured for at least part of last year.

If you or your children are under 26 and currently uninsured, you may be interested in the coverage options provided by the new healthcare bill, some of which have already started.

This is especially important for recent or soon-to-be graduates, many of whom may be facing life without certain employment and/or benefits and may have previously been dropped from mom and dad’s plan after life as a student ended.

The options

• Your own plan: The health care bill does not force you give up the insurance you have now. If you are offered health insurance at work, you can keep your existing policy or sign up for a new one. If you prefer and can afford a traditional private policy, you are also welcome to begin or continue to go that route. Coverage and premiums vary drastically.
• Your parents’ plan: This is perhaps the most sweeping change. If your parents’ policy covers dependents, the insurer must extend that coverage to children 26 or under. This applies to both employer-sponsored AND private insurance plans. The insurer cannot charge any more than it currently charges for dependents, and cannot offer different levels of coverage. This applies regardless of the child’s residency, financial or marital status and regardless of being in school and/or a dependent for tax purposes. Until 2014, this does not apply to a child offered insurance through his/her own employer. After 2014, this applies to ALL children under 26, even if insurance is offered elsewhere. Keep in mind that while this does extend to married children, it does not require coverage for that child’s spouse or children. This provision officially becomes law in September of this year, but many insurers have agreed to start coverage immediately (scroll to bottom of linked page for names). This is excellent news for recent graduates who were previously looking at a coverage gap between now and September. The government currently estimates this option to cost close to $3,400 per year for each added young adult dependent. But if your plan is simply “employee plus family” and you currently cover other dependents, your costs actually may not go up at all.
• The government plan (under-30): CNN discusses a provision of the bill that calls for a new plan administered by state-sponsored exchanges and targeted at those under 30 who do not have employer-sponsored insurance or qualify for Medicare. Details are still fuzzy, and this would likely not be enacted until 2012. The plan looks to be structured as a high-deductible plan, and experts are currently predicting monthly premiums at between $100 and $140.
• The other government plan (Medicaid): Medicaid has previously been targeted at children, pregnant women, the elderly and the disabled. As a result of the new healthcare law, Medicaid benefits will now extend to anyone who makes less than 133% of the poverty level, including childless adults. That currently amounts to $14,400 for a single adult or $29,300 for a family of four. This provision is not currently scheduled to be enacted until 2014.
• No plan: Of course there’s always the option of forgoing health insurance altogether. If you get sick or hurt, you’ll have to shoulder all costs yourself, but if you don’t, you save the money on insurance premiums. Starting in 2014, this option will come at a cost.

Making the choice

In the short-term, there aren’t many options – the Medicaid expansion hasn’t started yet and neither has the government-run under-30 plan. The biggest current change is a parent’s ability to add coverage for children under 26. If the child is not offered his own employer-sponsored plan, that option is likely to be the most cost effective for the family unit, except for forgoing coverage altogether since there is currently no penalty. But if you can afford even a basic plan, purchasing it is a pretty effective risk management strategy as few people can cover astronomical hospital bills should an emergency strike.

In the end, you will have to run the numbers on each option to see what works best for you and your family. As the years go by, more pieces of the bill will be enacted and the options will expand. And of course there’s always the possibility that the whole thing could be repealed or massively changed. But for now, take the information you have and make the best of it. Remember that medical expenses are one of the leading causes of bankruptcy, and do your best to find a policy that works for you!

Be sure to check out the entire health care series:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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My grandparents are part of the 31% of seniors living only on social security in their retirement (defined as 90% of income coming from social security alone, study by National Academy of Social Insurance). They don’t have a pension, they didn’t save for retirement, and unfortunately they have all ready spent the little inheritance they were given by my grandmother’s first generation Hungarian immigrant mother.

Medical problems and perhaps lack of financial knowledge meant that they applied for social security benefits as soon as they were eligible instead of holding off in order to maximize their retirement savings. I don’t know if they did not have the money to save (although I would always argue that no matter what, you can save something), or if they thought that social security would be enough to take care of them. But let me tell you, they are spending their retirement sitting at home, in front of a television, and stressing when property tax, income tax, and other large expenses come in the mail. 

Seniors who find themselves on a social security fixed income suffer through medical conditions as well, and they need prescription drugs just like others; however, paying for the prescription medications sometimes leads to deciding between food and medication. As such, I am always happy to hear when my grandparents will be getting a letter in the mail that is not a bill, but rather a check! I am also particularly excited to report that the new healthcare reform means slowly eliminating the current “doughnut hole” many Medicare enrollees face.

Read on to see if you will be one of the recipients of the $250 Medicare donut hole check.

Why a $250 Donut Hole Check Could be Coming Your Way

There are two dollar limits in the Medicare Part D (effective in 2006) that people care about: the first is the prescription drug coverage limit, and the second is the catastrophic coverage threshold. In between these two limits is what is known as the Medicare Doughnut Hole, which is basically a no-man’s land for drug coverage. If you are stuck in this hole, meaning you have spent your prescription coverage limit for the year, but have not spent enough money on prescription drugs to be at the catastrophic level yet, then you are on your own to pay for the entire cost of your prescription drugs. This can be particularly troublesome for senior citizens who tend to take more drugs than the rest of the population, and especially maintenance-type drugs that are permanent for ailments such as blood pressure, arthritis, diabetes, etc. This chart shows the breakdown of what you pay versus what Medicare pays, the doughnut hole, and the catastrophic coverage.  

With the passage of the Patient Protection and Affordable Care Act of 2010, this doughnut hole will be phased out beginning in 2011 when people stuck in the doughnut hole will receive a 50% discount on brand name drugs and a 7% discount on generic drugs (this discount in the doughnut hole will rise over the years until a 75% threshold is met with a complete phaseout by 2020). In the meantime, people on Medicare who fall into this doughnut hole will be given a $250 rebate check in order to help costs.

The first batch of checks was sent on June 10, 2010 to about 80,000 people.

Who Will Get a $250 Check?

Roughly 26% of people on Medicare reach their prescription limits and fall within the doughnut hole, without ever reaching the catastrophic coverage threshold.

According to the chart in the link above, this means these enrollees have paid a $310 deductible, 25% of the first $2,830 on prescription drugs, and then a varying amount of $3,610 before the $6,440 catastrophic limit is met. The Department of Health and Human Services estimates that this equates to 4 million people who will be eligible to receive this checks this year.

How to Get Your Medicare Donut Hole Check

As Medicare people reach the doughnut hole throughout 2010, they will be mailed this $250 rebate check from the Centers for Medicare and Medicaid Services (CMS). CMS will automatically send you a check. No forms are needed in order to receive the rebate.

Stay tuned for a closer look in our entire health care series, including:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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Health Care Bill Individual Insurance Mandate

One of the most controversial provisions of the new healthcare bill is also the one that will have the largest impact on the state of the insurance industry. It could also have a financial impact on you if you do not currently carry insurance. It’s the healthcare mandate.

Beginning in 2014, all Americans will be required to carry some form of health insurance or pay a penalty for not doing so.

Health Insurance Mandate Penalties

• Beginning in 2014, those without insurance will pay the greater of $95 or 1% of income.
• Starting in 2016, the penalties rise drastically, to the greater of $695 or 2.5% of income. These penalties apply to EACH family member without coverage, including children, to a maximum of $2085 per family – this basically means that you will pay the penalty for the first three uncovered family members.

Health Insurance Mandate Exceptions

You will be exempt from the individual mandate if one of the following applies to you:

• Your income is below the poverty line.
• The cheapest insurance policy you can purchase (on the open market or through an employer) would cost more than 8% of your income. This means that an American making $30,000 would be exempt if their insurance plan was more than $2400 per year, or $200 per month.

Individual Mandate Impacts

First and foremost, the Obama healthcare mandate provision is obviously meant to increase insurance coverage across the country. But there is a larger financial impact too: The healthcare bill forbids insurers from denying coverage based on pre-existing coverage, meaning their costs will likely increase. The individual mandate attempts to balance out those costs by adding people to the covered pool –namely the young and healthy, who are more likely to forgo insurance currently. By doing this, insurers should be able to keep their premiums at or near current levels.

If you currently have insurance, the health care reform bill individual mandate provision does not affect you at all. But if you or a family member has chosen or been forced to go without insurance, you will now face a penalty for the right to continue that choice. If you have been unable to afford insurance, you may be eligible for assistance or be able to find an affordable plan through the new health insurance exchanges.

Stay tuned for a closer look in our entire health care series, including:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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Life insurance is an absolute must for anyone with dependents, as well as for anyone with large debts (such as a mortgage) that exceed personal assets. Life insurance provides your family with a means of paying off your debts and replacing your income, if only temporarily, in the event of your untimely death.

At some point, though, your family may end up in a situation where they don’t really need the money after death – maybe you’ve paid off all your debts and left healthy savings/retirement accounts for your heirs.

Alternatively, you might need the money while you’re still living to pay for long term care or other large, unexpected expenses. Or, you might just find that your current policy is not the best for you, so you want to get out before you sink anymore money into it. In some cases, using life insurance while you are still living is both possible AND the best financial choice for you and your family.

Surrender Your Life Insurance Policy

Perhaps the most straightforward way of tapping life insurance during life is by surrendering the policy. This simply means that you inform the insurer that you no longer wish to pay the premiums (if you are still paying) and/or that you wish to “cash out” of the policy now.

This option is available on life insurance with cash value – most permanent insurance policies – you will simply receive the cash value component of the policy. Be aware that the cash value will be far less than the face value of the policy (the amount your family would receive at death). In some cases, it will actually be less than the amount you paid in premiums, particularly if the policy is fairly new. You will owe taxes on the proceeds to the extent your receipts exceed the premiums you paid in. Surrendering your cash value life insurance policy is probably the best option if you want to get out of a policy you feel is no longer beneficial to your family – you can cut your losses and move on.

Life Insurance Settlement

If the surrender value of your policy is lower than you’d like, or surrendering is not an option (as in the case of term policies), you may instead consider a life insurance settlement. Life insurance settlements are essentially selling your policy to an investment company. The company will pay a certain amount to you while you are alive, continue paying premiums as long as they are owed, and then receive the face value when the insured dies. Once again, you will not receive anywhere near the face value of the policy, but you may end up receiving more than the surrender value that the policy. As with a surrender, you will owe taxes on the proceeds of the sale to the extent they exceed your premiums.

Life Insurance Viatical Settlements

Viatical settlements are similar to life settlements, but they are designed for a certain type of insured, and specifically defined and governed by the IRS. A life insurance viatical settlement happens when the insured is terminally ill (expected to die within 24 months) or chronically ill (unable to perform certain activities of daily living). Viatical settlement payments involving the terminally ill are not taxable. Payments for policies covering the chronically ill are not taxable as long as the proceeds are used for the care of the insured. Viatical settlements may be good if a terminally ill person is not leaving behind beneficiaries or debts and wants to use the money to either enjoy the last few months or life or pay for final expenses.

Things to Consider

First and foremost, you should not use your life insurance policy during life unless a) you absolutely have to or b) your family absolutely does not need the proceeds after death. It may be tempting to cash out to take nice vacation or pay off debts, but you could leave your family in a huge lurch later on. That being said, if you are facing large medical bills, long-term care expenses, or other unexpected situations, you may not have a choice. If you think life insurance settlement is for you, talk to an estate planning attorney and accountant before making a decision. Remember that you will have tax consequences that your family would otherwise avoid (life insurance proceeds at death are usually tax-free).

Finally, realize that for most people, cashing in a life insurance policy should be a last resort. If you are young and healthy, take plans to save and invest now, so that you don’t find yourself facing this decision later!

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Since we’re focused on personal finance, I looked through the bills for all the financial impacts for readers. In addition to the health care bill highlights we’ll take a look at the tax credits, tax increases, and fines.

Here is a summary of the health care reform bill, including the reconciliation bill:

Health Care Bill Summary

• $940 billion plan.
• Extends insurance coverage to 32 million uninsured people.
• Insurance companies cannot drop you when you get sick.
• No more lifetime limits.
• State health insurance exchanges for small businesses and individuals to purchase coverage.
• Insurers cannot deny coverage to people with pre-existing conditions.
• Children can stay on their parent’s health plan until age 26.

Tax Credits

• Tax credits for individuals and families with incomes up to 400 percent of poverty (which is just over $88,000 for a family of four).
• Tax credits up to 35% – 50% of costs for some small businesses.

Tax Increases

• Raise Medicare payroll tax to 2.35% from 1.45% for individuals earning more than $200,000 ($250,000 for married couples).
• Expand Medicare tax to include unearned income of 3.8% on investment income making more than $200,000 ($250,000 for families).
• Increase tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses to 20%.
• Raise 7.5% AGI floor on medical expenses deduction to 10%.
• Limit health flexible spending arrangements in cafeteria plans to $2,500.

Excise Taxes and Fines

• 10% excise tax on indoor tanning services.
• Excise tax or fine for individuals who do not obtain health insurance; $695 annual fine ($2,085 for families).
• Excise tax or fine for employers (with 50 or more workers) who do not provide health insurance to employees; fine of $2000 per worker each year if any worker receives federal subsidies to purchase health insurance.

Money for Seniors

In addition to the taxes and fines, the health care reform bill includes some financial benefits for seniors:

• $250 drug rebate for Medicare “doughnut hole” coverage gap.
• Free annual wellness visit and prevention plan including preventive services with little or no cost.

Cadillac Tax

Finally, there’s a new “Cadillac tax”, which is a 40% excise tax for high cost employer plans. High cost plans are defined as those that cost $10,200 for individuals and $27,500 for families. Levels for retirees and high risk professions are increased $1,650 ($3,450 for families).

Health Care Reform Finances

That’s a lot of money getting shifted around. As the bill is passed, and the amendments are straightened out, I’m sure there will be a lot of discussion on how this will change our personal finances.

We’ll each have more tax planning to do, to make sure that we’re optimizing what’s available to us and at what cost.

Sources: Tax Foundation, Reuters, CNN, and Kaiser Health News.

Check out our entire series covering the new health care reform laws:

• Part 1: Individual Mandate
• Part 2: $250 Medicare Donut Hole Checks
• Part 3: Health Insurance for Young Adults
• Part 4: 1099 Changes in Health Care Bill
• Part 5: Flexible Spending Account Changes
• Part 6: Health Savings Account Changes
• Part 7: Student Loan Forgiveness Program

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HSA basics

• Definition: An HSA is a special type of savings account – a tax-advantaged way to pay for qualified medical expenses incurred while covered by an HDHP. HSAs can be held in simple interest-bearing savings accounts. Some plans will also allow you to invest in higher-earning instruments, allowing your contributions to grow significantly when invested properly.
• Eligibility: To be eligible to open and contribute to an HSA, you must be over 18 and covered by an HDHP that conforms to IRS standards. You may not have any other kind of medical insurance plan in addition to the HDHP, including Medicare. Finally, you cannot be claimed as a dependent on someone else’s tax return. Employers that offer an HDHP usually offer and manage an HSA as well. If you have individual health insurance you can sign up for an HSA through your insurance company or many banks/credit unions.
• Contributions: If you are an individual covered by an HDHP, you can contribute $3,050 in 2010 ($254/month). Covered families (including participant plus spouse, children, or both) can contribute $6,150. Your employer may contribute, but total contributions cannot exceed the above limits. Individuals can also contribute an additional $1,000 per year if they are 55 or over. These amounts are reduced if you do not remain covered by the plan for the entire year. You cannot contribute once you stop being covered by an HDHP due to retirement, employer changes, or plan changes, but the accumulated contributions and earnings are yours to keep.
• Withdrawals: Withdrawals for qualified medical expenses are tax-free. Many HSAs will provide you with a debit card so that you can pay expenses directly. Others will require you to file paperwork for reimbursement. Withdrawals for non-medical expenses will be taxed as ordinary income. A 10% penalty will also apply unless you are over 65 or disabled.
• Qualified Expenses: All normal medical expenses, including anything that your HDHP deductible would apply to, such as prescriptions, are qualified expenses. You can also pay for dental or vision expenses as well as long term care insurance premiums or expenses. Finally, Medicare premiums and COBRA premiums are qualified expenses, as are other health insurance premiums if you are unemployed. Cosmetic surgery cannot be paid for out of an HSA.

How can an HSA work for you?

An HSA is tax-advantaged in three ways:

1. It provides an up-front tax deduction, reducing your taxable income by the amount of your contribution.
2. It allows for contributions to grow with no taxes on earnings.
3. You can make tax-free withdrawals for qualified medical expenses. The withdrawals can be made at any time, even if you are not covered by an HDHP at the time of the expense!

Choosing an HDHP will always save you money in premiums when compared to traditional medical plans. The only downside is meeting your higher deductible. An HSA helps you save to meet that deductible and spread medical expenses evenly throughout the year so that they do not have to impact your everyday budget. In addition, your employer may contribute to your HSA, thus paying a portion of your annual deductible. Employer contributions and tax savings are in addition to other savings you may realize by selecting an HDHP. If your employer does not offer an HDHP option, consider getting quotes on private health insurance- even without an employer subsidy, the HDHP/HSA combined savings might be enough to make it worth it!

Because there are no income limits for HSA eligibility, HSAs are a great way to plan for increased medical expenses in retirement. If you have an HDHP/HSA for multiple years, and choose to pay for medical expenses out-of-pocket instead of an HSA, you can even treat your HSA as a “super Roth” and make tax-free withdrawals later instead of in the year they are incurred – this strategy allows the money to grow tax-free as long as possible!

To open an HSA, select it during open enrollment with your employer or check with your private health insurance company, bank, or credit union. Be aware that non-employer sponsored HSAs may incur management fees. While those fees can be frustrating, they are almost certainly outweighted by the savings!

Final thoughts

If you have the option of choosing an HDHP at work, spend some time running the numbers to see how much the combination of an HDHP and HSA can save you. JP Morgan Chase provides three easy-to-use calculators, including a tax savings calculator. If you are already covered by an HDHP, there is no reason NOT to open and contribute to an HSA. HSA money never expires – the account and any incurred tax benefits are yours to keep throughout your life. Combined with HDHPs, they can save you thousands of dollars over the course of your lifetime.

For more on HSAs, check out this handy guide from The Department of the Treasury.

Update: Health Savings Account Changes are on the way. Check out the new rules and regulations.

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What is a High Deductible Health Plan?

A high deductible health plan is a health insurance plan with lower premiums and a higher deductible than traditional plans. The IRS sets the minimum deductibles for plans to be considered HDHPs. For 2010, HDHP policies for individuals must have a deductible of at least $1,200. Policies for couples, individuals with children, or families must have deductibles of at least $2,400.

The IRS also limits the maximum amount that an HDHP can require you to spend out-of-pocket. In 2010 the maximum amount is $5,950 for individuals and $11,900 for all others.

An HDHP is usually offered in concert with a Health Savings Account, or HSA. I’ll talk more about these tomorrow, but the bottom line is that they allow you to save for and pay for health expenses tax-free.

How can an HDHP work for you?

High deductible health plans often cover 100% of preventative care such as annual physicals and screenings such as mammograms or prostate tests – that means you have no out of pocket costs. Your deductible will only apply to things like hospital/ER visits, prescriptions, and other physician visits. Even some percentage of these expenses may be covered by your insurer.

This means that if you stay relatively healthy over the course of the year, you could have little or no out-of-pocket expenses. Even if you have a few doctor visits and/or regular prescriptions, you could come out on top. As I said above, the HDHP limits your total out-of-pocket expenses, so the most you will pay in one year is your annual premiums plus that out-of-pocket limit. If your employer contributes to an HSA on your behalf, you will reap even more benefits from this plan!

HDHP Example

My HDHP at work this year will cost $50 less per month than a traditional in-network plan. That’s $600 per year! In addition, my employer will contribute $750 over the course of the year to my HSA. The $600 is mine to do whatever I want with. The $750 can go towards meeting my deductible.

All preventative care is 100% covered, so as long as my prescriptions, hospital visits, and other doctor visits cost less than $750, I make money by choosing an HDHP. My expenses can add up to $1350 ($750 from my HSA + $600 premium savings) and I’ll still break even with a traditional plan. Once my expenses hit the max out-of-pocket limit, all future expenses will be covered at 100% – compared to a traditional plan where I will have co-pays throughout the year, regardless of how much I spend out of pocket.

When should you avoid HDHPs?

A high deductible health plan is not right for everyone. The number one reason to avoid choosing an HDHP is if meeting the deductible places a huge burden on you. This may be the case if you do not benefit from HSA employer contributions. Depending on the terms of your HDHP and the other insurance options you might have, you also might want to avoid choosing an HDHP if:

• You have a chronic illness that requires frequent doctor visits and/or multiple prescriptions.
• You are older/in poor health.
• You are pregnant or plan to become pregnant during the insurance term.

In the above situations frequent medical care means you will almost certainly need to spend your whole deductible, possibly negating any premium savings.

Making the Choice

Before you decide on an HDHP or more traditional health plan, pull out a piece of paper and a calculator and follow these steps:

1. Write down all the medical expenses you expect to have over the course of the next year, including prescriptions. You can use this year’s expenses to estimate.
2. Calculate how much each event/expense would cost you under both a traditional plan and an HDHP, taking into account any co-pays, deductibles, and out-of-pocket limits. If the HDHP costs are less than the traditional plan costs, an HDHP is definitely for you. If not, continue to step 3.
3. If the HDHP costs are more than the traditional plan costs, subtract the traditional plan costs from the HDHP costs. This is the increased out-of-pocket cost with an HDHP.
4. Subtract HDHP premiums from traditional plan premiums. This is your savings from choosing an HDHP.
5. If your number from Step 3 is greater than the number from step 2, your savings outweigh additional expenses and you should choose an HDHP – this will be the case for most people who have limited health issues and use insurance sparingly. If not, stick to a traditional plan.

If an HDHP makes sense for you, it can be a great way to save money without compromising your health care! That’s money in your pocket that can be used for savings, dept payment, investing, or just a little breathing room in your budget.

Check back tomorrow for a more-detailed explanation of Health Savings Accounts. Employer and/or personal contributions can add even more savings when combined with an HDHP!

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If you find yourself in the same situation, it’s important that you take advantage of it. Barring a major life event like a marriage, birth, or death, this will be the only chance you have to elect 2010 benefits for your family.

Depending on your employer and benefit providers, your 2009 benefits may carry over if you skip open enrollment, but also could expire and leave you without benefits in 2010. Remember that different options are appropriate for different situations – that’s why you have choices!

Benefit Options

Your company may provide you with any or all of the following options: medical insurance, flexible spending accounts for dependent care, health care, or commuter spending, a health savings account, long- or short-term disability insurance, life insurance, dental or vision insurance, and more.

You also may have the option of a “cafeteria plan” where your employer gives you a certain amount of money to use to pick from various benefit options. If you haven’t used them in the past, watch for these options in 2010:

• High Deductible Health Plans provide cheaper premiums in exchange for a higher deductible – you are responsible for a certain dollar amount of medical costs before insurance kicks in. The deductible may not apply for certain expenses — annual physicals or other “wellness” visits and routine screenings are often covered at 100%
• Health Savings Accounts (HSAs) allow you to save tax-free (up to certain limits) for qualified health care expenses. HSAs are only allowed for employees with high deductible health plans. They allow you to save for your portion of medical payments. As an added incentive, your employer may contribute part or all of your deductible to an HSA for you. Contributions roll over from year to year, and can be accessed for medical expenses at any time or after 59 ½ for any reason. Other withdrawals before 59 ½ will result in taxation plus a penalty.
• Flexible Spending Accounts (FSAs) allow you to save tax-free (up to certain limits) for dependent care expenses (such as child or elderly care), commuter spending (parking or public transportation), and medical expenses under any type of medical plan besides a high deductible plan. Funds in these accounts expire at the end of each year or a few months after, so be sure to only contribute the amount you will actually use! That said, these accounts are a great way to save on taxes.
• Disability Insurance replaces a certain percentage of your income if a disability prevents you from working. Disability is more likely than untimely death, but more people carry life insurance than disability insurance. If your employer offers short or long term policies and your family is dependent on your income, consider electing this benefit in 2010.

5 Steps to Picking Benefits

The five steps below will guide you through the open enrollment process and help you choose cost-effective benefits for you and your family.

1. Consider your benefit needs: Your biggest benefit election will focus around medical insurance. What are the major medical needs of your family in 2010? Are you anticipating any major surgeries, a pregnancy, or new prescriptions? Has your family grown, or has a child graduated from college and dropped off of your insurance? For benefits besides medical insurance, consider how your family needs differ from last year – a new child/stay-at-home parent might mean a greater need for disability or life insurance. A medical condition might necessitate greater savings in an HSA or FSA.  A teenage child in need of braces might steer you toward dental insurance even if you have not had it in the past.
2. Review current benefit selections: What benefits did you elect for 2009, and how have they worked for you? Are you going to end up losing money in an FSA, or struggling to spend it? Did you wish you had set aside more for commuter or dependent care expenses? Did your dental premiums exceed what dental care would have cost you?
3. Understand your options: If your employer sent an enrollment guide, read it cover to cover and then read it again. Understand every option completely – if you have questions, contact HR or the benefit provider. Pay special attention to benefits that would be a change for you, specifically those outlined above – just because you haven’t used them in the past doesn’t mean they don’t make sense for you. If you and a spouse both have benefit options, understand all of the choices through both employers – some might differ in coverage, cost, or both.
4. Break out the calculator: First, figure out what medical plan makes sense for you – calculate your estimated medical costs under multiple plans, including premiums, co-payments, prescription costs, and payments to meet your deductible. A higher premium might make sense if it staves off out-of-pocket expenses later. If your out-of-pocket expenses are generally low, a high-deductible plan probably makes sense. Next, decide how much to contribute to your HSA and/or any FSAs. Remember to figure in any tax breaks when calculating how those may affect you. If you are also considering benefits from your spouse’s employer, run through the same scenario. Where possible, pick and choose the benefits from each employer that provide the best coverage for the lowest cost. Next, add up the cost of all of your benefit elections and HSA/FSA contributions, and make sure you can still afford other expenses. If you have to, go back and reevaluate lower-cost options.  
5. Take action: Use your employer’s process to select your benefits for 2010. If any circumstances change during the open-enrollment period, you can usually make changes before open enrollment ends.

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Since I used to work in the insurance industry, I actually didn’t shop our rates very often. Because of the state filings, I knew that we had some of the best coverage and premiums around.

Everything changed when we decided to enter the landlord business. We needed to secure insurance for our rentals and our current company wasn’t competitive in that area, so it was time to shop.

Getting Quotes

I’m a fan of getting quotes from multiple carriers all at once. Before we got quotes, I checked our credit scores since most of the carriers in our area use credit scoring to determine insurance rates.

We got quotes from 3 of the top competitors in our area, and began the comparisons.

Comparing Coverages

It’s actually really hard to do an apples to apples comparison. Lots of insurance companies have special programs and extra coverages that others don’t. In addition, because of multiple policy discounts, it’s important to shop all your policies at once.

For example, our old homeowners policy had land coverage, which is why the digging was covered when the water pipe burst under our front lawn. However, that same claim also requires us to use a $6,000 deductible with Allstate.

Allstate doesn’t cover land, nor do they cover earthquakes in our area. So, a direct comparison of premium isn’t the best way to compare. I called my current insurer to get a comparable quote without the land and extra coverages we have, without earthquake coverage, and with the higher deductible.

Allstate Pros

Landlord Policies. When I mentioned the landlord policy, it’s where Allstate wins hands down. Allstate has the ability for our personal umbrella coverage to provide excess liability on our landlord’s policies. It enables us to buy a lower liability policy on the rental but still get the coverage we want through our umbrella policy, something many of the other companies, including our current insured, don’t offer. This will save us multiple times, every time we buy another rental property.

Low moving violation charges. Scott has a speeding ticket, and of course, now so will I. However, it only added $9 to our six month premium, which is a substantial difference from the 20% increase (about $50) we saw with our current insurer.

Shop ahead discount. Allstate has an interesting discount, one for purchasing your coverage a week before you need it. Since we still have coverage with our old insurer, it was a no brainer. It was a discount that I haven’t seen before.

Low premiums. Allstate had the lowest quote of the companies we shopped. For those wanting to save money, obviously, this is a big plus.

Allstate Cons

High Deductible. I had a hard time agreeing to a $6,000 deductible. I’m always in favor of carrying high deductibles, but when I think of high, I usually think of $1,000 or $2,500. I’ll probably lower it once the 3 years have passed from our digging claim.

Limited coverages. As I mentioned, getting rid of land coverage and earthquake coverage was a hard decision for me. Normally, I would never insure land, but since we actually needed that coverage last year, I was glad we had it.

In addition, I’ve always carried earthquake insurance, even in Wisconsin, because of the New Madrid Fault line. Think I’m crazy? Maybe, but the New Madrid Earthquake of 1812 paints a very interesting picture. In addition, because my background is in risk management, I’ve read way too many journals about Midwestern earthquake projections.

New Premiums

Our new premiums will be $1945 per year (for 2 cars, a house, and an umbrella). Comparable premiums at our old company were $2140. So it’s a “savings” of $195. Add in the $500 savings on the landlord policy and we came out ahead.

But, we had to be comfortable without coverage on earthquake, land, and having a $6,000 deductible instead of $1,000. We used to pay an additional $540 per year for those coverages, so instead I’ll put that money, plus the $195 in savings into a savings account earmarked for a loss.

We ended up moving our umbrella, homeowners, and auto policies to Allstate. We didn’t move the motorcycle, since we insure that separately, and the quote from Allstate didn’t come close.

Have you shopped your insurance policies lately?

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1. Asset allocation rebalancing. Have you rebalanced your portfolio lately? With the decline in the market lately you could be overweighted in bonds. With stock prices down, you will be forced to sell your bonds high and buy your stocks low, just like you are supposed to!

2. Adequate insurance coverage. Do you have enough insurance? (Health, Disability, Life, Car Homeowners, Umbrella, and Flood).

3. Long term goals. Have you set long term goals and put a plan together to achieve those goals? No time like the present to work on them!

4. Set aside money for the holidays. Now is a great time to start saving for the holidays. By December you’ll have money ready to go. If you are a bargain shopper, make your lists now and keep your eye out for sales.

5. Use your vacation time. Make sure that you are using vacation. Sometimes people get so wrapped up in work, they don’t take time off. Instead of being forced to use it all at the end of the year, spend some now while the weather is nice. (As I write this… I’m enjoying my 2+ week vacation!)

6. Read your social security statement. Depending on when your birthday is, you may or may not have received your statement this year. When you get it, did you review all the numbers?

7. Tax withholding. Are you making the amount of income you estimated when you set your withholding level? Now is a great time to make an adjustment using the IRS withholding calculator.

8. 2008 reduced capital gains tax. If you are planning on taking advantage of the 0% capital gains taxes in 2008, have you sold your stock yet?

9. Update your beneficiaries. Don’t get caught with an old beneficiary on your account. Make sure your retirement accounts and life insurance policies are up to date.

10. Backup your files. Have you made a backup of your important files?

Do you have additional tasks you’d like to add to the list? Feel free to add them in the comments.

This article is included in: Carnival of Personal Finance #161: The “Feeling Renewed” Edition

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My 3 month old Sprint Palm Centro Broke

I’m not exactly sure how it happened. It just kept trying to hot sync (a feature I don’t use) and then finally shut down for good. It may have had something to do with my 8 month old slobbering all over it… but I’m not really sure.

Warranty

Since the phone is under warranty you can have Palm replace it for free. However, when I called, after over an hour, I determined it would take longer than a month; I wasn’t sure if it would actually be replaced or not.

I decided to go to our local Sprint repair shop. They replaced it with a refurbished phone for $55. It took 3 business days. You can usually save money with refurbished electronics.

Insurance Plan

Of course, the upsell for the insurance plan was strong.

Here’s the math, $7 month on 2 lines would be $168 per year. So I could replace our phones 3 times during the year and come out ahead. I’m not seeing where the value is.

I explained my profession to him and reminded the salesman that insurance was for catastrophic losses only. He told me that “someone going without their cell phone for a couple days is catastrophic.” Wow!

I said thanks but I’ll take my chances. I see that I can buy a used one on eBay or craigslist for around $100 if the refurbished ones aren’t available after my one year warranty.

Lessons Learned

I will do a better job taking care of my phone. I’ve always had the cheap free phones until now. I’ll get a case and I will treat it more like our camera (which I am very careful with). Ironically, I have a blackberry too, with a hard case and I have never had a problem with it!

Do you take the cell phone insurance?

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Photography: ozzzie

When we recently found out the insurance premium for my husband’s motorcycle was increasing by almost 400% we took action.

He got quotes from four different insurance companies and also did some digging in forums he reads to see which companies typically had competitive motorcycle rates.

Rates

Old premium: $169
Renewal premium: $789
367% increase

Quote Company 1: $456
Quote Company 2: $441
Quote Company 3: $359
Quote Company 4: $280

Other Policies

In addition, because the cycle premium was so much lower I prepared a document that listed our coverages and limits for our other cars, homeowners and umbrella policies.

We confirmed that the other four policies are still the cheapest for the coverage we need at our current company so we will only be moving the motorcycle.

Results

Estimated yearly savings: $509

In addition to the cheaper premium, the new policy provides better coverage than the old policy.

Action Plan

It’s important every once in awhile to shop around and make sure that you are still getting the level of customer service you expect and competitive rates.

Have you shopped your insurance policies lately?

Article featured in: The Festival of Frugality.

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Infants

Financial Strategies for Infants and Young Children @ My Dollar Plan

An informative list of all the financial topics to explore with a new baby in the house:

• Open a savings account and 529 plans.
• Get a piggy bank and organize savings bonds.
• Tax savings including the child tax credit, dependent care flexible spending, child tax rates and adjusting your W-4.
• Wills, trusts, beneficiaries and life insurance.
• Updating your budget.

Preschoolers

Teaching Preschoolers About Money @ Paid Twice

Jaimie is working on teaching her 3 year old 3 financial concepts:

• The concept of what money is, as far as values of coins and bills.
• Money can be exchanged for things we want.
• Money is also a way to earn time.

Jaimie sums it up: “Basically, I want my children to understand at a young age that money is something we need to take care of and use wisely, and that it isn’t the best idea to spend everything as soon as we get it.”

Children

Personal Finance for Children and Pre-Teens @ Being Frugal

Lynnae wants to make sure her children are financially prepared to survive in the real world. She has implemented the following plan:

• At age 6-9 the kids receive an allowance of 50 cents for each year of age, which is not tied to chores.  The children are required to tithe 10% of their allowance. They split the remainder in thirds: long term savings (for college or a car), short term savings (for a toy they might want), and spending money.
• At age 10-12 the kids are moved from an allowance to a monthly salary, loosely tied to chores. The kids are responsible for budgeting.

Lynnae states, “As a mom, I’m sure the mistakes will be hard for me to watch, but I’d rather have her make mistakes now when I can guide her, than later when the stakes are higher.”

Teenagers

Money Advice to My Teenage Son @ Debt Free Revolution

Ana advised her teenager to not finance a vehicle, and work hard for college scholarships, grants, and work-study programs. She reminds him to pay cash for college tuition and textbooks and stay far away from the credit card tables at school. In addition:

• Start saving for an emergency fund.
• Start saving for retirement as soon as you have some extra money.

Ana states, “Every parent wants his or her child to have a better life and be more successful, and I am no different.  I won’t be able to “bless” my son with actual money.  But I do hope I can lift the money ‘curse’ by teaching him a better way than what I learned at his age!”

Teach your teen the basics of money management @ Gather Little By Little

Glblguy has a new teenager in the house. Here’s what they did to get prepared:

• Set up a checking and savings account
• Help them set-up a budget
• Help find them a job
• Determine who’s paying for what?

Glblguy leaves us with these thoughts: “Teen years are also a critical time for instilling good financial habits. If you instill good habits in them now, they will continue these habits into their adult lives. Don’t miss this critically important time. Teach them what you know, discuss the mistakes you’ve made and the negative impact they’ve had on your life so they can learn.”

College Kids

College Money Matters @ Mrs. Micah

Mrs. Micah just finished college where scholarships covered 75% of her expenses. She shares the best financial moves to make while you are there:

• Don’t Stop Looking for Scholarships once in college.
• The Meal Plan and convenience store are a Rip-Off
• Pay Back Your Student Loan Leftovers
• Get an On-Campus Job
• Find Ways to Save Money on Clothes
• Some places, you might…but other times you really don’t need a car.
• Take a Personal Finance Class

Finally, Mrs. Micah reminds us not to get too stressed about money, if possible. ”College is a place where we learn, and learning from our mistakes is a big part of that. Relax, find ways to make frugality fun (or rather just do fun free stuff, don’t even think of it as frugal), hang out with your friends, and learn.”

The Twenties

Financial Advice for Your Twenties @ Remodeling This Life 

By 20 Emily owned property. By 28, she bought and sold 3 properties and had 2 kids, while living in 3 different states. Here’s what she wished she had known sooner or learned in her twenties:

• Stay out of credit card debt.
• This is the best age to be frugal.
• Understand and love compounding.
• Start an IRA if you haven’t yet and contribute the maximum annually.
• Learn to budget.
• Love living below your means.
• Borrow only for the absolute necessities.
• When you start investing in stocks and bonds use no-load index mutual funds.
• Do not be looking to jump in and out of investments!

Emily reminds us, “Above all else though, don’t forget to have fun. You’re only young once!”

Money Tips for the Twenty Something Crowd @ Cash Money Life

Patrick says the twenties are for learning how to make a budget, spend less than you earn, create good spending habits, and invest. Here’s his list of hot-topics for the twenties:

• Get out of debt
• Build an emergency fund
• Invest in yourself and your career
• Invest for your retirement
• Prepare for life changes
• Take calculated risks
• Live your life and enjoy it

Patrick says, “Life is not measured in dollar$ and ¢ents. Your 20’s is perhaps the most exciting decade in terms of pure excitement and change. Most people in the young 20’s have fewer obligations preventing them from going out and doing something spontaneous. Use this time to your advantage. Have fun. Live your life. Find yourself. Now is the best time to do it.”

The Thirties

The Chaotic Thirties@ Moolanomy

Pinyo navigates through a busy decade “where many of us buy our first home, get married, have our first child (or second, or third…), start savings for kids’ education, try to build retirement savings for ourselves, worry about our parents who are nearing or already in their retirement, and work hard to advance our careers.” He expands on the following topics:

• First Home
• Marriage
• Children and Family
• Saving Money for Retirement
• Saving Money for College
• Parents
• Career

Pinyo closes, “I hope you can see why the thirties is so chaotic, yet one of the most rewarding and important decade.”

Personal Finance Advice for Your 30′s @ My Two Dollars

David cuts right to the chase. “If you are already married and you don’t have children yet, the one huge piece of advice I can give you is to save your money. And save a lot of it.” He also adds some other tips and questions for the thirties:

• I would also make sure you get all that credit card debt paid off.
• Are you still carrying around student loan debt?
• Have you started saving for retirement?
• How are you for health insurance and life insurance?

He leaves us with the following thoughts: ”Your thirties are a great time – you have the ability to still do anything you want in life, you are young enough for any kind of adventure, you still have your full mobility, and you can still figure out how to play a video game.”

The Forties

40s: The Forty Year Olds’ Wakeup Call @ Credit Withdrawal

Randall reminds us that once ”the 40th birthday has come and gone, and you’re closer to retirement than ever. If you’re anything like the majority of Americans, you’ve been putting off serious retirement saving until ‘later’.” He categories the next steps accordingly: 

• For The Tortoises (Early Savers)
• For the Hares (Late Savers): Trim Expenses
• Plan for Life Expenses: College Expenses, Disposition of Property, Retired Life, and Leaving it Behind

And finally he states, “Plan for the future, but don’t forget to live life in the process.”

The Fifties

You’re in Your 50s – Wake Up and Start Saving @ Millionaire Money Habits

Ryan paints the following scenario, “You’re in your 50’s and all of your friends are starting to talk about their plans to take an early retirement and moving to the beach house in Florida they always dreamed about. You do the math and choke when you realize that if you want to retire at 65, you will need $1 million to produce a $40,000 income for the 25 years.” He goes over what you can do in your fifties if you realize you are short on money:

• People 50 and over have the option to contribute more money to their retirement plans.
• Delay retirement and work as long as you can. After that, you can still work part-time to supplement your income to reduce the amount of money you need to withdraw from your retirement accounts.
• Go heavy on a diversified stock portfolio.
• Consider downsizing and reducing your expenses.

He leaves us with his signature Millionaire Money Habit: “Funding your retirement for 25 or more years can be very costly and requires a sound plan. While $1 million will produce $40,000 in annual income for 25 years, that’s in today’s dollars. A 35-year-old today would need $3.25 million for the same relative income when inflation is taken into consideration. If you want to enjoy a comfortable retirement, don’t put retirement planning off another day.”

Retirement Objectives in your 50′s @ Credit Withdrawal

We returned to Randall for some additional thoughts about the fifties:

• If you’re turning 50 this year, that also means that Social Security will probably be around for you, in some form or another.
• It’s also time to simplify life even further.
• It’s ok to objectively think about where you might want to live.
• If you have some kids that don’t show any indications of leaving the nest anytime soon, it’s time “to start kicking a little butt.”

He reminds us: “There’s no time like the present to find new and interesting things to see and do. Do something you NEVER THOUGHT YOU’D DO. Go someplace you NEVER THOUGHT YOU’D GO TO. This is the time to explore those new vistas and activities you’ve always read about.”

The Sixties

In your 60’s? Use your financial freedom wisely @ Rocket Finance

Rocket wants us to take a closer look at our lifestyle in our sixties:

• Don’t just retire because you can, retire because you want to.
• Retirement is an opportunity to serve – family, humanity, God, and more.
• Happy retirees still have goals in life. What are yours?
• Frugal retirees have the opportunity to be philanthropic with their time.
• Look for opportunities to give advice (especially financial) to loved ones in your life.
• Remember your church in your estate plan.

He reminds us to: “Write down your thoughts about life – keep a journal.”

Easing into the Golden Years- the 60’s and Beyond @ Chance Favors

Ciaran says it’s time to “give yourself the gift of a full financial checkup. You need to take stock of what you have, prioritize what’s important and take the necessary measures to achieve those goals.” In addition he created a to do list for sexagenarians:

• Go and have a formal financial plan done, if you haven’t done so already!
• Determine your net worth
• Review your existing investment allocation
• Create a record keeping system
• Make sure you have prepared a will and updated your beneficiaries
• Analyze your cash flow
• Consider authorizing a power of attorney or creating a living will
• Review your Medicare coverage and consider the potential benefits of a Medigap policy
• Consider purchasing Long Term Care insurance
• Look to reduce your estate shrinkage

He concludes with: “After you’ve done all that, it’s time to sit back, relax and enjoy your golden years with nary a care in the world…”

Retirement

4% Withdrawal Rule for Retirement @ Quest For Four Pillars

Four Pillars answers the following retirement question: “How much can I withdraw without running out of money?” Simple – use the 4% rule. He adds some additional clarification:

• The 4% rule is really a guideline rather than a hard and fast rule.
• If your equities perform better than expected then you can spend a bit more than the 4% rule amount.
• If you encounter a bear market and the value of your portfolio drops then you should be prepared to cut back on the withdrawals.

He also included bonus material in a previous article: Why Retirees Need Equity In Their Portfolios.

Retirement in the UK@ Plonkee

Plonkee covers the state pension plan including 2 sets of rules depending on whether or not you retire before 2010. Plonkee goes on to cover:

• How to make up a shortfall
• NI credits and using a partner’s record
• Minimum income guarantee
• Final salary pensions (employer based)
• Buying an annuity
• Income drawdown

Plonkee explains in detail the UK retirement system. It’s an interesting read even if you aren’t from the UK to see how it’s done there!

Whew! We did it. Thanks to all the personal finance writers who participated. The final result is a great guide for everyone to use at any stage of life.

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Special Needs Trust

Special needs trusts, or supplemental needs trusts, provide the means to care for a disabled child (or adult) after the parents or guardians have passed away. It holds money that would typically be provided to children through an inheritance or through a lawsuit settlement. It also shelters money so the disabled individual cannot be taken advantage of financially.

Why It Is Important

To be eligible for SSI, an individual must have limited resources (including cash, savings, stocks, land, vehicles and life insurance policies), which is defined as $2,000 for an individual or $3,000 for a couple. A house and one vehicle are excluded, as are special needs trusts.

Many parents would agree that you currently give your disabled child a better quality of life than $2,000 could provide. You don’t want their quality of living to decline after you are gone. However, leaving an inheritance directly would jeopardize the SSI and Medicaid benefits. Without these government programs, the individual would be worse off financially even after receiving the inheritance.

A special needs trust is created to keep the disabled individual eligible for government assistance and provide a quality of life consistent with what they received when their caregiver was alive.

Our experience

Here’s some of the things I learned when we had the trust made.

• The trust cannot be created by the individual, so we created it for him.
• We worked with a lawyer to create the document. We were not willing to take a risk disqualifying him from SSI or Medicaid, so a do-it-yourself document from the internet was out of the question.
• There was another option about pooled trusts, but the remaining money would be distributed to a non-profit organization or the State. We did not look into this option, as we wanted the proceeds to be passed onto another family member when he dies.
• The trust names the current and future trustees and beneficiaries. The future beneficiaries do not need to be disabled. The trust dissolves upon his death and pays the proceeds to the beneficiaries directly (or creates additional trusts for the children under 25).
• The trusts are designed to provide money that focuses on quality of life above and beyond basic needs. The money can be used for special outings, vacations, and special interests such as a music class. It cannot be used for food, clothing and shelter.

Creating the trust was actually a simple process. We met a couple times with the lawyer to discuss options and learn about it. The hardest part was selecting the trustees and beneficiaries. Taking the first step to set up a meeting was half the battle.

Other considerations

• In addition, you need to notify and work with other family members who might have wills. Name the trust as a beneficiary and not the individual.
• The trust needs an EIN to file tax returns.
• For the applicable law, see Social Security Act: Section 1917(d)(4)(A).

The Simple Dollar recently had an article Setting My Own Personal Finance Goals where a reader asked about a special-needs trust. Our experience should help that reader get started. 

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Myth: You will need it to pay for burial expenses.

Burial expenses are a one time cost. While the cost is high, it is still less than a year of our child care expenses, and significantly less than what we will spend over a lifetime raising our children.

Myth: It’s cheaper to buy now than later.

Buying something that I don’t need when it is cheaper does not make it a good deal. It’s the same as buying olives on sale. I still won’t eat them.

Myth: It’s a good way to save for children.

If they mean disciplined, maybe. But I assume that good means getting a reasonable return on the investment. While whole life policies do include a cash value portion, it would be much better to discipline yourself and invest the money elsewhere, in a high yield savings account for example.

Myth: In case they become uninsurable later.

Isn’t this a double negative? Insuring against becoming uninsurable. This argument probably holds the most weight, but again, unless they are contributing to our family dollars, there is no income to replace currently. When they do get a job and need to be able to replace their lost income, there are still other avenues available such as group coverage through an employer. For adults, see How Much Life Insurance Do You Need? 

Final words
Of course there are always exceptions to the rule. For example, if your family does not have an emergency fund, and a burial would put you into debt, it may be worth considering. However, for the majority of families I find it as an unnecessary expense. Taking the money spent and investing it in their education is a better route to go.

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