Insurance – Primer

Fundamental Building block to having your Life in order:
For centuries the Insurance industry has grown up priding itself on making the products they sell the most difficult to understand of anything you will likely ever buy.
Below is a primer on how to look at your insurance situation and needs.  Jules will play an integral role in helping you go through this process so you fully understand what coverage you have and don’t have as it pertains to Property, casualty and liability.  We do not touch Health insurance.  See below for a primer on Health insurance.

If most of you are like me you do a fairly detailed evaluation of Medical Insurance when you join a new employer and all other types of insurance when you change brokers.  From then on you check back in fairly infrequently if at all.  You just pay the premium each year or 6 months as it’s billed.  I remember the feeling each time I received the premium notice wondering is this a fair price?  Did it increase from last year?  What am I really getting?  am I properly insured? Am I able to recall the details of each policy?  am I utilizing the insurance optimally?  I would then start to dig through the paper files and quickly sigh a big groan and give up due to more pressing issues needing my attention.  I would then just pay the premium and move on.

Lets start with Health care Insurance.  If you joined your current employer 5 or 10 years ago and if your insurer is Blue Shield of California (as mine is) they’ve probably changed plans on you at least 3 or 4 times.  They seem to be randomly experimenting with new plans each year and terminating old plans that don’t meet their profitability hurdles and introducing new plans that better meet their interests (not yours).  The general type plan (HMO v PPO) may still be the same but the details have changed considerably.  Are you in touch with these changes?  I doubt it.  I wasn’t.  In the 5 to 10 years since you joined your employer and last looked at the details of your plan, your family needs have likely changed considerably.  Heck you and each member of your family is 5 to 10 years older.  When you and your spouse are in your 20’s and 30’s you’re most likely active and healthy.  Not on many if any prescription drugs.  Not yet having knees scoped and rotator cuffs repaired.  The kids are young and only needing the odd antibiotic for ear infections and regular pediatrician visits.  Now that you’re in your 40’s and 50’s the knees are wearing out, the shoulders are freezing up, the kids are all in braces and there are lots of prescription drugs now being taken regularly by all members of the family.

The key question to ask first is whether or not your current plan really matches your current needs?  As one example, prescription drug costs are a big deal as you get into your 40’s and 50’s and the kids into their late teens and early 20’s.  If you’re like me 10 years ago I never even paid attention to the Prescription drug aspect of the plan I chose.  Now I scrutinize it carefully.  I make much more use of Generic drugs than in the past.  If there is a generic alternative it can save you 70%.  I now make full use of the Blue Shield Mail order pharmacy which saves you another 33% to 50% and after getting over the start-up hassles is much more convenient.  The retail cost of all the prescription drugs we use annually in our family is well over $12,000.  We’ve now got that cost to us down to around $2,500/year.  You will be surprised how quickly it adds up.

Another aspect of Health Care insurance is more philosophical.  Do you view it as protection only against major unexpected medical expenditures or do you view it as an overall protection against all types of medical expenses.  It’s kind of like the “sleep at night factor” v “I’m willing to pay a predictable $X amount of money each year to cover all medical costs”.  Where you fall in this spectrum will dictate what sort of plan best suits your needs.  If you just want to protect against the big expenses.  The big $100K emergency surgery then a plan with a high deductible but lower premiums would suit you better.  You won’t get reimbursed for the small stuff as you may not even hit your deductible level in an average year but you’re protected against the big one.  On the other hand if you view health care as your god given right and you expect insurance to cover essentially all of it then you will be looking at a differently structured plan and will certainly pay more for it.  Going this way you can rest assured that all your expenses will be covered by the plan and your cost will predominantly be the cost of the insurance.

This may be obvious to all of you but the list below details the really important aspects to pay attention to when selecting and using your health insurance:

  1. Annual deductible.  These can range from $0 to $5K or $10K per family.  This is the amount of medical expenses covered under the plan that you must pay out of your pocket (or a Health Savings Account pocket) before insurance kicks in and starts paying.  Even though you know you’re still short of your deductible make sure all medical expenses are still processed through your insurer so you get the proper credit towards the deductible.  May seem obvious but you would be shocked how many people overlook this aspect.  Particularly when you have teenagers handling their own medical affairs.
  2. % coverage or co-pays.  Once the deductible is reached your insurance will then cover a percentage of the cost of the medical service you receive or you will pay a fixed $ co-pay with each treatment or drug purchased.  These percentages and co-pay amounts vary by type of service or drug being purchased.  These will also vary by in network or out of network.  Brand or generic drug.  Type of medical treatment.  Etc.  Pay special attention to this area.  Can get very complicated.  In my opinion Insurance companies deliberately make it complicated to confuse the consumer.
  3. Limitations.  All policies have limitations as to what they will cover per year.  Read the fine print.  There are $ limitations, number of treatment limitations, etc.  When you unexpectedly hit these limitations as I did following shoulder surgery with the limitation of Physical Therapy sessions it can get very costly.  Cost me $2,500 out of my own pocket before I learned I had gone over the PT session limit.  With the lag in time it takes insurance companies to process claims and the fact the medical care service provider is not incentivized to notify you when you reach the limit, you can go well past the limit before you realize it.  You must know the limitations in the policy you choose.  Also keep track of when you have more to go towards the end of the year on a category limitation and if possible take advantage of the $$s left and take a treatment in the current year rather than postponing to the next year.  Having old tooth crowns replaced is a good example.
  4. Dental and Vision.  Don’t forget about these components.  Most Medical plans offer or include Dental and Vision.  If you have not reviewed the details of your current plan you might be surprised to find out the new coverages now included.  10 years ago it was unusual to find Orthodontist or contact lens being covered.  Now it’s pretty common to cover some ortho and some contact lens purchases.  Many vision plans will also cover Lasik up to tight limits.  I neglected to spot this change and went 3 years not claiming any of these benefits.  Cost to me was over $5,000.

Now lets turn our attention to the other types of insurance.  Home, Auto, Life, Umbrella Liability, specialty (i.e Earthquake).  I’m going to skip small business since I truly know nothing about it.  Personally I’ve now concluded it is both economical and obviously more convenient to bundle all these together with one carrier.  I use State Farm (despite  their insistence this Internet thing never really happened.  they are far and away the most backward company when it comes to using technology!).  I know people who use different carriers for different types of insurance and find it works out better but my analysis has consistently shown the bundled approach to be superior.

The same philosophical issue I talked about with regards Medical applies here.  Are you trying to protect against the BIG $$ unexpected expenses or are you trying to buy insurance against all insurable expenses.  I’m much more in the former category.  I carry large deductibles on both home owner and Auto and pay lower rates and rarely file any claims.  We view our cars as very utilitarian.  As long as the safety of the car or the operability of the car is not effected we don’t worry about it.  They’re not pretty but we don’t worry about it.  We also pretty much “use up” the cars we buy.  We’re definitely long term buy and hold Car buyers.  Same pretty much goes for homeowners insurance.  We only protect against the big expense item.  Fire burns down the house, major flooding damage or major theft.  The smaller stuff we essentially self insure through lower rates.  We have also chosen to self insure for life (death) insurance through savings.  What we would have paid in for life insurance payments we simply put away each year into savings.  I’m no expert on life insurance but it seems to me the days of using life insurance as an investment vehicle are long gone.  Umbrella liability insurance is in the category “sleep at night”.  It’s relatively inexpensive (obviously because it’s rarely needed) and in my opinion is worth having.  The range is from $500K to $25M on average.  If bundled with Car insurance it is very affordable.  It’s primary purpose is to cover liability resulting from auto accidents that exceed the auto insurance limitations for liability.  Also covers liability for accidents in your home and elsewhere but in my understanding the primary application is Auto.

The combination of the deductible and the max coverage limitations when taken together make up the bulk of what you will pay in premiums.  Applies to Home and Auto (along with boat, motorcycle, etc.) equally.  Think about your aggregate premiums over 10 years and weigh against what your insurance value is likely to be and decide what your comfortable losing.  Everyone sleeps at night better according to different rules.  You simply need to figure out where you fall on the spectrum of fully insured against everything v only insuring against the BIG one.  There’s some analysis needed to frame this but it really comes down to a risk comfort decision.  I would suggest reviewing your policies to remind yourself what’s in there annually and reviewing the premiums v alternatives every 2 or 3 years.  Keep your broker honest.  He feels you’re locked in as the switching cost to go to another broker/carrier is high.  Lots of paperwork and hassle to change.

Some small tips:  If you have teenage drivers in the house make sure you utilize the good student discount.  The bar is only a 3.0 GPA.  If they have an accident or get a ticket don’t file the claim for the accident and make sure they take the driving school (offered online now in CA.  Not sure where else it’s available) to have the ticket scrubbed off their record.  Kids getting in accidents or getting tickets really hurts!!  Pay particular attention to which driver you designate as the primary driver of each vehicle you have as this can have a significant impact on the overall premium.  If the child is away at college and not driving any of the cars much if at all be sure to change their status with your insurer as this will also bring down your rates. If  you’re looking into Earthquake insurance make sure you completely understand the policy you’re getting.    Note that if there’s an earthquake and a fire starts and burns down you house that’s one type of insurance needed.  If the earthquake causes a Tsunami and the flood wipes out your house that’s another type of insurance.  If the shaking from the Quake brings down your house that’s straight up Earthquake insurance.  Very complicated and worth understanding thoroughly if you live in earthquake country like we do here in the Bay Area.  If you are converting a house from your primary residence to a rental property as many of us have done who recently moved and could not sell our old house, be sure to note you will now need “renters” homeowners insurance which is a different policy from the one you had when you were occupying the house yourself.  It’s basically the same coverage as before but will cost you 25% more.  Why?  Because the insurance carriers can get away with it (in my opinion).  If you don’t make this change you might find you’re not insured should something happen while you’re renting the property.  (placeholder note here for a future blog on the advantages of converting your prior primary residence to a rental property for 3 years in these economic times)

One final category of insurance I’ll just mention here is Warranty and product recalls.  Do you know that the major insurance carriers that underwrite this category of insurance assume up to an 85% breakage.  That is to say they assume 85% of the potential claims against warranties are never filed.  A future blog will discuss this issue and what you can do about it.