Ep 11: How to think about Insurance to protect you and your family

Matt: [00:00:00] Welcome to real financial planning broadcast on WK XL available where ever you get your podcasts. I'm joined as always by rockstar personal financial advisor. Mike Morton, Mike.

Mike: [00:00:17] Hey Matt. It's always great to be here. Having a great conversation with you.

Matt: [00:00:20] It's always fun. Now. Look. It is fun. When we get together to chat about all these topics, I learned a ton and I hope our listeners do too.

Eventually you have to get around to a topic when you're talking about financial planning that people don't think of as super fun. And I'm not sure we're going to convince them today that this topic is super fun, but I'm convinced. That it's, super-duper important. If you're thinking about how to manage your personal assets, your personal finances, there's really no way to get around thinking about and being serious about insurance.

Mike: [00:00:58] Yeah, that's exactly right. In fact, with all of my clients, it's the base that we start with because you can't invest for the future and grow your personal assets and your wealth and your career without making sure that you're first protected from being wiped out from something unexpected. And that's exactly what.

Insurance is for is making sure that you're protected, making sure that you're safe and that then we can layer on top, growing your career and assets and things like that. Look,

Matt: [00:01:28] I'm not trying to psychoanalyze myself or any of our listeners. I suspect that the reason people tend to shy away from thinking about this topic is that.

It involves all the bad stuff that can happen to you, who wants to sit around and think about it but like you said, super duper important. So I think the deal with this episode today is let's just go through an overview. Let's give ourselves the what's the stuff you really need to know.

What's the stuff you really need to understand. Yeah. And to get a jumping off point. So at the end of this episode, okay. Everyone will know the critical basics when it comes to insurance.

Mike: [00:02:07] That's exactly right now with insurance. The important thing about this whole episode is to give you the basics to understand what to be looking for.

And what's really important. So hopefully in this 20, 22 minutes segment of this episode, we'll be able to highlight why it's important to have insurance and what to be on the lookout for the types of insurances. So in general, the insurance is what you're trying to do is protect against a very low likelihood event.

Like you said, Matt it's, they're terrible events. You don't want to think about them. Hopefully they're very little likelihood, big car accident or a big life insurance would be to cover your life for your, the rest of your family, those kinds of events. Hopefully they're not going to happen.

So they're very low likelihood. But they have a high cost associated with them. If you're in the middle of your career and you're in a major accident or something happens, then that is a huge financial hit for your family. And so those are the things that insurance is really built for low likelihood, probably not going to happen, but high cost associated with them.

And so those are the things that insurance is great for protecting.

Matt: [00:03:16] So what should people have on their radar screen? What's the starting menu when you think about types of insurance.

Mike: [00:03:23] So there's a lots and lots of types of insurance, and we're not going to touch on all of them, of course, in this episode, but the important ones are health insurance,

we all know. That long-term care insurance who might touch on that topic. There's auto and home, of course, that people have umbrella insurance life insurance. Disability insurance, business insurance. So the list goes on and on of things that you can protect and it's in every instance, you have to look at your own unique situation and decide.

So for instance, business insurance, you'd come across that if you have a small business or you own a business, then that becomes very important for you. But for a lot of people that are just working in a career for some other company, they wouldn't have business insurance. So it really depends on your situation.

So let's start

Matt: [00:04:05] with health insurance, both because it's a critical fact of life. And also because it's one of, you and I were talking about this a little bit before, and we noted that. There are some kinds of insurance that are like gravity. They're not just a good idea,

they're the law. And so you've got to get them. And health is one of them over the last 10 years. It is actually a requirement of law that you carry health insurance. Now there's no tax penalty that goes with that anymore, but you have to have health insurance. That's a good way to think about it. How

Mike: [00:04:33] should you start to think about health insurance?

So health insurance always start with making sure it's the right kind of insurance for your family. So looking at the coverages depending on your situation and see what you need. And it's a great one to start with Matt, because we can cover some of the terms that people will be familiar with health insurance, and they apply to other insurances as well.

So let's go over those. When you have health insurance, you're paying a monthly premium. To have that insurance. Now, your company might cover that whole premium or a part of that premium. So you might only pay part of it or none of it, but that's a monthly premium that is allows you to have health insurance.

And so that's just the insurance component. Then when you start using your health insurance, you go to the doctor or whatever, you might have a copay. Or you go pick up some prescriptions you might have to pay for that. You will pay money up to the deductible. So that's the first thing you'll notice in your health insurance.

Do you have a deductible? It could be a thousand dollars. It could be a few thousand dollars and you will have to pay that first before any insurance starts kicking in. So that's what the deductible means. You owe that money first before the insurance is going to start covering things. And it's usually a pretty low amount because again, the insurance, as we said before, is to cover.

, high cost financial burden. All right. And so we're trying to cover catastrophic problems. And so you're going to owe the first little bit on the deductible. From there, you also have co-insurances and copays. So once you've hit the deductible, then the insurance is going to start kicking in, but you still might own some more money up to your co-insurance, including copays.

And finally. There's out of pocket maximum, and this could be 5,000. It could be 10,000 and that is the most you will ever pay within that year cycle. So if you have, again, that catastrophic event, you will only owe up to the out-of-pocket maximum for your health insurance. And then the insurance company will cover everything beyond that.

Matt: [00:06:25] That's a really helpful concept at the end there that this idea of the out of pocket maximum, because that's a relatively recent development in health insurance that you have that kind of added protection. And at the same time, you don't have lifetime caps on how much coverage you can have, which used to be a feature of the health insurance market.

Previously. So it sounds like you have some really powerful tools here to limit your exposure to financial ruin. Should you or a family member get sick.

Mike: [00:06:59] Yeah, that's exactly right. And all of those four different things we discussed between premium deductible, co-insurances and copay and the out-of-pocket maximum, they're all levers that you can pull.

So different health insurance plans when you're comparing, the HMO's and the PPOs and all the other options that you might have from your workplace, you can decide all pay a higher premium. Okay. With a lower deductible or have lower deductibles with higher out-of-pocket, whatever makes sense for your family in terms of coverage, both from the doctor perspective and from these different levers you get to make that decision.

So it's pretty great.

Matt: [00:07:34] While we're talking about health. Maybe we can go to the next step along the continuum here and talk about a different kind of insurance long-term care insurance. Now. Most people have some experience with health insurance, many fewer people have experience with long-term care insurance.

So what's the deal

Mike: [00:07:54] with this long-term care. Insurance is a fairly recent product. And I do say if you have one from early on, 10 years ago or before. I would recommend really trying to keep that or compare it, but they're usually pretty good cause they weren't priced too well in the beginning.

And I know those premiums have been going up significantly, but the coverages are just amazing. And so they've been repriced recently to limit the amount of coverage because as we all know at the end of life, it can be significant costs between in-home care, nursing home care, things like that. It's a tricky field long-term care because there are a lot of products with a lot of different options and hybrid options and riders and all kinds of things.

So let me give you just one way of looking at it first. There's three general buckets of people. First is that you might not be able to afford long-term care. So if you just don't have the assets to afford the premiums or to buy the insurance and you can't really afford that yearly payment, then that's the bucket you fall in.

Okay. I just can't afford it. I'll have to spend what I have and hopefully, shoot for the best. The second is that you can self-insure. If you have enough assets that you'll be able to cover your own in-home care or your nursing care, you don't need . Long-term care either you have enough money that you'll be able to cover it.

So then you that's called self-insuring and then finally the middle is the tricky one. All right. You can afford the premiums. You don't want to be totally wiped out. You want to leave, money to your heirs. And so therefore you might want to look at one of these products and see what might be a good coverage for you.

Matt: [00:09:23] At what phase of life should you start to think about?

Long-term care insurance. This is again, it's one of these, I think for our listeners, I'm certainly speaking for myself. It's does this have to be on my to-do list now? So are there people who you don't really need to worry about it either because you're about to incur these costs or they're like super-duper far away.

Mike: [00:09:44] , that's a great question, Matt. Typically we say in the fifties. So once you're reaching about 50, between 50 and 60 is a great time to be looking at these products because there'll be low enough costs. You can start spending some money towards them. You might still be working. So therefore you can, you still got income.

And so you can start spending money towards these products. Some of them have A cap in terms of how much you pay. So you don't just keep paying forever. You can get like a 10 year products you pay for 10 years, and then you have a certain amount of coverage for later in life. So if you're earlier than fifties, I wouldn't really worry about it.

And if you're much older, then it's probably not worth looking at too. It's going to be way too expensive.

Matt: [00:10:20] And just in terms of parsing out, who should be thinking about what which is, I think one of the real values of this episode is like what needs to be on my to-do list and what. What does it you mentioned this term self-insure a moment ago.

What does that mean? Who does that

Mike: [00:10:36] really apply?

So self-insuring is a general term for any of these insurance products where it's a low likelihood event. It does have a high cost associated with it. But you figure that I've got enough money. I can cover it. So again, if we're talking long-term care, that could be, Hey, I've got hundreds of thousands.

I can earmark just in case. And if I don't use them great, my heirs can get that money. No problem. But if I do need it, I have enough that I can cover it. So I don't have to pay for insurance. . Another one that I often look at is for life insurance, you can self-insure for that as well. If you have enough, if you've got, one kid who's 10 years old, And so you've got another 10 or 20 years that you would like to make sure if you're not around that you need to cover for them in terms of their education and all of that daycare or, babysitting after school, whatever it is, you might have enough assets that you say, Oh, I don't need to buy life insurance.

I have enough that if I'm not around, it will cover them. So self-insuring just means you have enough assets to cover the worst case scenario.

Matt: [00:11:36] I'm glad you brought up life insurance, because I think that was our next stop on sort of the cycle of life continuum of, health long-term care.

And then if life insurance, and again, it's one of these topics that people don't like to dwell on because it involves, what happens when you die. But so let me just read back what you just said, because it was interesting in the vein of who should be thinking about life insurance.

Now, there are some people, high net worth individuals, people who have a lot of assets socked away where you could think to yourself, you know what, maybe this is not something that I really need, but it sounds like that's a relatively smaller slice of the pie that the need for life insurance would apply to a much broader swath of our listeners.

Is that right? What, when should you be thinking about life insurance and what you're

Mike: [00:12:27] thinking about? So life insurance, the way I usually couch it is that , if you're no longer around, do you have responsibilities, financial responsibilities that you need to take care of for the rest of your family? So that's the first way of looking at if you're single and young, , you might not have any financial, debts that you need to pay off if you're not around.

No big deal. You probably don't need life insurance. If you're in your sixties and your kids, or you got adult kids, and they're off doing things, you might not have any need for life insurance, because you don't have any financial burdens that . You want to make sure you have paid off and you might have enough assets by then.

Anyway. So it's usually this middle segment of like young families. Got some young kids haven't built up too many assets yet. If I'm not around, I need to cover those kids. Again, the home cost, I've got a large mortgage. We just bought our first home. I've got kids growing up. What we do is add up all of those debts, those liabilities that you want to make sure you're covered.

In other words, if you're maybe the in the family, you're both two working parents. And so you have income that you're expecting for the next 20 years to help cover the kids. And you've got a mortgage and you've got their education costs, add all those up. And figure out how much life insurance you want for that amount of time.

And I usually recommend term insurance, which means you're covered for 500,000 or a million dollars for 10 years or 20 years or 30 years. And then it runs out because again, once you get old enough, you probably don't need it anymore, but there are a number of different life insurance products, but that's the, really the way of looking at it.

Let's

Matt: [00:13:56] jump quickly from yourself to your stuff. George Carlin, the comedian used to do this bit about like your stuff. You've got stuff in life, and most of your stuff is a place where you keep more of your stuff. The two biggest categories of stuff that we have are: Auto and home. So dealers choice, Mike Morton, you go first.

Which one should we cover first, your car or your house?

Mike: [00:14:22] All right. I will go with the home first. We'll go with home insurance. All right. On the home insurance front, you definitely want to, have home insurance, probably you're going to be required, especially if you have a mortgage they're going to require you to it's the law.

Exactly. So you've got home insurance and what you want to do is really look at the coverage. All right. So the main one is the dwelling, and that'll be the big number of kind of at the top of your summary page, how much is covered? $400,000? $800,000? And this is to cover rebuilding your home. . So it's not going to really cover the land.

It's the rebuild your home that's the dwelling coverage. And then a lot of other coverages are based off of that, whether it's other structures on the property, et cetera. So just make sure that the dwelling coverage is enough to rebuild your home. That's really important, especially when you have additions.

So if you've done, solar it's been really popular the last five or 10 years. If you've invested a bunch in solar or other upgrades, check your dwelling and make sure that's still going to cover rebuilding the home in its current state. The other thing to look in there is the deductible.

We've already talked about what that is, but I recommend the deductible should be definitely a few thousand dollars maybe to two to $3,000. The reason is. You're not going to use your home insurance. If there's a $500, a thousand dollars little problem, you probably just covered that. It's really, if there's a big water leak that costs $20,000 or $30,000 that you'll use it.

And so having a higher deductible will save on premiums. So year in and year out, you won't be paying nearly as much money and again, you hope never to use it. And so that should save you money.

Matt: [00:15:54] That's a super helpful tip because my in-laws, for example, they had, they left a pot on the stove top a few years back.

And it started smoking and now you've got smoke damage. And so thinking about right-sizing that deductible against your premium, that it just so happened that they fell in exactly the circumstance, I think, happens to a lot of people and that you're talking about here, where they had right-sized their deductible against their premium.

So they hit that right point. They had about $20,000 bucks in damage. They were able to cover it with a minimal financial hit to them, which is really what insurance is all about.

Mike: [00:16:29] Yup. Yup. That's exactly right. So that's great. And then we'll go back to the auto. So you mentioned the auto insurance, so let's take a look at that as well.

And there are limits on your auto insurance and what you want to look at there is the per person and per occurrence. And so probably is going to be again right at the top of the summary page. And I recommend a hundred thousand. Dollars of limit per person, $500,000 per occurrence. And so if you have multiple people in the car, that's where the per occurrence is kicking in.

Now, a lot of people might have a lot less than that 20,000, and so 20,000 of coverage per person is just really not that much. If you're in a big accident, have a lot of medical expense. So that's why it's really worth having the higher limits there. And the deductibles, the premiums should not go up significantly.

With, increasing those limits. So I would definitely look at increasing those limits to the maximum you can and your premiums shouldn't go up that much. And the way to save on premiums there again is the deductible. We're only going to kick in the insurance once we really have a catastrophic problem, not for like little dings and stuff like that.

So I would look at having a deductible close to a thousand dollars. Lot of them typically are like $250. So go ahead and up that, and you can save on the yearly premiums.

Matt: [00:17:36] And if you got insurance for either your car or your house at a certain point, probably because it was required. How often should you take a look at what you've got and just double check that it's still the right level for you.

Mike: [00:17:51] It's funny. Every time I'm looking at clients insurances, I can always save money on their insurance every time you review it. Cause they're all kinds of riders and stuff on there. It's do you really need this? Sometimes you do. It's great. But just review it and say, Oh yes, I want that coverage.

It's cost me an extra $50 bucks a year or a hundred bucks a year, but that's the, I want to have that perfect. But a lot of them you're like, man, I'm not sure I really need that. And then also they just drift up over time. And so I always recommend every three to four years. Just look through , all your limits, make sure they're good.

And then shop around everyone I've ever talked to has saved hundreds of dollars a year when they've shopped around to try to find exactly the same coverage just from a new company or reopened with their same company.

Matt: [00:18:34] And you also mentioned liability limits a minute ago, is that, that you can increase those.

Mike: [00:18:40] Yeah. So the way to increase those, you can only go up to certain limits, especially around the auto, but you can increase it by having what's called umbrella insurance. And umbrella insurance sits on top of your home and your auto insurance and increases the liability coverage up to $1 million, $2 million, $5 million.

You can put on, a lot more on top of that. And I always recommend doing that once your assets and your net worth continues to grow, that you would want to have higher limits on those, because this is again, to really cover a lawsuit, like a major problem. You're in a big car accident with somebody and they say, Oh, you're a doctor or a lawyer, man, I'm coming after you.

And having an umbrella insurance will help really cover that liability. So if your net worth is now growing, with your home and your retirement accounts and everything else is growing to one to $3 million, Just go ahead and get umbrella insurance for that amount. It's very inexpensive, hundreds of dollars, maybe a thousand dollars a year depending go really high, but usually, a few hundred dollars a year and you get it through your home or your auto insurance company.

Perfect.

Matt: [00:19:42] All right. Lightning round time, you mentioned a ton of different types of insurance at the top of the show. You get to pick in our lightning round in about one minute. What have we not covered that people should have on their radar screen?

Mike: [00:19:56] One thing you definitely want to have on your radar screen is disability

coverage. Now a lot of people will have this through work short-term disability and long-term disability. And disability claims are actually 10 times what they are for life insurance claims. And so it's, this insurance is used quite often and that makes it expensive to get on your own. But what you want to do is just look at your work coverage and really think it through and decide if you want additional coverage or not beyond that.

And the last point is if you have a business, small business, you definitely need to look at business insurance.

Matt: [00:20:28] Yeah always a good idea. And it does fall into one of those categories where especially if you subcontract you're a business that works for other businesses. It may be required.

So really important thing to look into.

Mike: [00:20:39] Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at . Until next time thanks for tuning in