Insurance Dealing with Personal Finance Management

The subject of personal finance covers a diverse array of topics including: savings, debt, budgeting, expenses, and retirement (Vohwinkle, 2007); however, insurance is one facet that often gets less attention than its brethren, yet it is no less important. Insurance is an important component to help ensure a solid financial foundation. As such, this paper will discuss the various types of insurance that are related to personal finance management.

These include: health insurance options, life insurance, property insurance, and lesser known insurance programs such as travel, credit, and casualty insurance options. By acquiring proper insurance, one can better secure their financial future.

Types of Insurance Dealing with Personal Finance Management

Introduction:

Health Insurance:

Health insurance is one of the most common types of insurance people think of when the discussion of personal insurance is brought up. A simplified definition of health insurance includes the insurer paying the medical costs of the insured, should the insured become sick or injured. The insurer may be either a non-profit or private organization (“Health insurance,” 2007).

Disability insurance is one such form of health insurance that can significantly affect a person’s personal financial stability.

Disability insurance ensures the insured will maintain an income should a disability occur that prevents them from working. The disability may occur from illness or injury, and insurance coverage may be purchased to cover a temporary period or for a lifetime.

As best-selling author, Stephen Pollan, notes, protecting one’s income stream is at least as important as insuring one’s life. This is especially true due to the fact that there is a high probability that disability will come before death.

This is different from the limited coverage provided by most employers.

Premiums vary depending on how long the insured agrees to wait before applying for benefits. Typical waiting periods are 30, 60, 90, or 120 days, and income is usually limited to a maximum of 60% of salary (“Make the most,” 2007). However, this income is non-taxable since the taxes were paid up front.

This is in contrast to disability insurance that is paid by an employer, which is taxable.

A personal disability policy should cover the insured’s own occupation, should they not be able to perform their chosen profession any longer. As Pollan demonstrates, “If a dentist becomes disabled, he shouldn’t have to go to a restaurant and become a waiter” (cited in Berry, 2007).

Flexible spending accounts are a critical tool in the real of health insurance options, by allowing individuals to get a huge discount on all of their out-of-pocket health-related expenses. Everything from co-payments to eyeglasses to aspirin to birth control can be paid for via a flexible spending account, all with tax-free dollars, which can add up to hundreds of dollars a year in savings.

As an example, the average contribution amount to a flexible spending account was $1,261, which would lead to a net tax savings of $504, assuming income tax, Social Security and other deductions equaling 40% and a depletion of the account on items the person would have purchased anyway.

Employees elect to have a certain amount of money put into the account per year, this is then deducted from the employee’s paycheck at a prorated amount. When an approved medical item is paid for, it is drawn down from these pretax contributions. At the end of the year, whatever contributions have not been used are forfeited. According to Karp (2007) flexible spending accounts have been around since the 1970s, yet they are seldom used. Eighty-one percent of large employers offer flexible spending accounts to their employees, yet only one-fifth of eligible employees take advantage of this benefit.

Recent loosening of Internal Revenue Service restrictions on what can be purchased with this tax-free money coupled with automatic reimbursements and FSA debit cards has made flexible spending accounts even easier for individuals to use.

Different from flexible spending accounts, health savings accounts are specifically designed to help individuals fill a coverage gap. Health savings accounts work like IRAs for an individual’s health expenses.

They offer a unique triple tax break that can be very advantageous.

First, an individual’s current income taxes are reduced as pre-tax dollars are set aside. Second, the money deposited in a health savings account grows tax-free.

Lastly, withdrawals from a health saving account are tax-free when used for qualified medical expenses.

Health savings accounts offer flexibility not offered by flexible spending accounts. Contributions can be used to pay for current out-of-pocket medical expenses, or the money can be saved to build a nest egg to be used later in life, such as during retirement. However, to take part in a health savings account, the individual must have a high deductible health plan (Anderson, 2007).

In contrast to a health savings plan is a medical savings plan.

Medical savings accounts offer the same triple tax benefit, however they are specifically designed for self-employed individuals.

Like health savings accounts, medical savings accounts must be coupled with high deductible health care plans. Specifically medical savings account funds are to be used to pay for deductible expenses, whether it be for accident, disability, dental, vision, or long-term care plans (“Medical savings,” 2007).

Long-term care insurance is a branch of health insurance designed to cover a specific facet of health care, long-term care.

Long-term insurance goes far beyond nursing home care and refers to help for individuals with basic activities of daily living. This care may be provided in a nursing home, or it may occur in a middle-ground facility such as assisted-living facilities, or even at home.

Long-term insurance provides income to cover these associated costs, while protecting the assets of individuals.

A skilled nursing home can cost approximately $73,000 per year. Standard health insurance policies and Medicare do not pay for long-term expenses (“Are you interested,” 2007). When income and savings fail, the individual will have to turn to Medicaid for their health care. Instead, long-term care will cover these costs (“What is long-term,” 2007).

Life Insurance:

Although health insurance is an important component of personal finance management, life insurance is equally important, not just for the insured, but for their beneficiaries as well.

In general, life insurance protects those who depend on an individual’s paycheck. In the event of death, life insurance provides beneficiaries with money to replace the lost income and also can provide an emergency fund to cover funeral, medical and legal costs (“What is life insurance,” 2007).

With interest income taxed at the highest rate, life insurance can also be an effective tax shelter. Cahill (2000) recommends that once all debt is paid down that a life insurance policy as a tax-sheltered investment is the next logical step.

A universal policy tied to an outside indicator, such as the S&P 500 index, can offer the benefit of not only providing cash to pay tax liabilities at death, such as those acquired by private corporation shares, real estate, mutual funds, etc., and create a tax-free estate.

Term and permanent life insurance are two primary categories of life insurance available. As the name implies, term life insurance is for a specific time frame. In order to collect benefits from this policy, the insured must die within a set amount of time.

In contrast, permanent life insurance does not have a time limit attached to it. As long as the policy is in effect, a permanent policy will pay benefits upon death regardless of when the insured dies.

An additional benefit offered by a permanent life insurance policy vs. A term policy is that if the policy is canceled after several years, the insured can get some of his premiums back in the form of a cash value payment. “Permanent insurance rates tend to be steady for the life of the policy. With annual term insurance, rates climb as the insured gets older” (Mitchell, 2007). However, the disadvantage to a permanent policy is the fact that it is much more expensive than a term policy.

Property Insurance:

Property insurance is another important component of personal finance management. Of the various types of property insurance, auto insurance is one of the most popular. Auto insurance provides the insured protection for their cars, trucks or other vehicles in the case of loss.

It’s primary protection is against loss due to traffic accident (“Vehicle insurance,” 2007); however, it also protects the insured against loss due to other circumstances including: theft, fire, or vandalism. In addition, liability insurance covers damage done to other’s property, should the insured become legally liable for the damages.

Boiler insurance was originally created to cover loss due to insureds owning a pressure boiler. However, today, boiler insurance is often more aptly renamed equipment insurance.

Equipment insurance will provide coverage for mechanical breakdowns of equipment, including the cost of repairing or replacing the equipment. The equipment can include: air conditioners, hot water heaters, electrical and mechanical boxes, boilers, and even sometimes computers and telephone systems. Common types of damage to equipment include: short circuits, air conditioning failure, and boiler or hot water heater cracking, burning or bulging. Coverage includes repair and replacement costs, as well as costs to expedite repairs as well as damage to other property caused by the equipment breakdown (Ollis, 1997).

Title insurance protects an individual’s investment before they make a property purchase.

With real estate traditionally being an individual’s most valuable asset, title insurance is one of the most important forms of insurance for personal finance management. Simply put, title insurance guarantees that a title for a piece of property has no other parties who have rights or claims to it, or if there are parties, these will be identified to the buyer, so that they can make their purchase decision accordingly.

Title insurance is a one-time premium for the purchase of the property.

Should a claim be made against the title, the title insurers will pay to defend the title in court, and will bear the cost of settling to maintain the insured’s possession of the property (“What is title,” 2006).

Homeowners insurance occurs after the purchase of the property. “Homeowners insurance provides financial protection against disasters. A standard policy insures the home itself and the things you keep in it” (“What is homeowners,” n.d.).

This type of policy provides protection against damage to the insured’s personal property as well as liability or legal responsibility for injury or property damaged caused by the insured or their family members, including damage done by family pets. Although most disaster damage is covered, there are exceptions. Floods, earthquakes, and damage due to poor maintenance are typically not covered. Although maintenance related problems are the responsibility of the homeowner, additional flood or earthquake policies are available as two separate policies.

As mentioned, flood and earthquake insurance must be purchased as separate insurance policies.

Flood insurance is a specially created policy to cover damage caused by flooding. Federally-backed mortgages for properties located in a high-risk zone are required to care flood insurance. A standard flood policy covers a variety of areas of loss. These include: structural damage, mechanical equipment such as furnace, water heater, and air conditioner, flood debris clean up, and flooring surfaces, such as carpeting and tile. A flood insurance policy can also be purchased that will cover the contents of the home, such as: furniture, jewelry, clothing, collectibles, artwork, etc. (“What is flood,” 2007).

Earthquake insurance is also a separate policy to be purchased in addition to standard homeowners insurance.

Unlike most homeowner or tenant policies, earthquake insurance primarily covers major losses. It normally is sold with deductibles equaling 10 to 25% of the structure’s policy limit. Recently, the industry trend has been to raise deductibles”(“Facts about earthquake,” 2004). Separate premiums are charged for: total amount of loss for contents, total amount of loss for structure, and total amount of loss for unattached structures.

A third addition to a standard homeowners policy is fire insurance. Fire insurance covers far more than simply damage by fire to a home. It covers: collapse, explosion, hail, lightning, smoke, vandalism, weight of ice or snow, and windstorm (“Fire insurance,” 2007) damage to a property, further protecting an individual’s greatest asset.

Travel insurance is becoming increasingly popular and provides many benefits that are often covered by other forms of insurance an individual may already have in place.

Travel insurance can include trip cancellation, trip interruption, accidental death or dismemberment, medical and dental care, transportation to medical facilities, loss of luggage or personal possessions, and protection against the bankruptcy or default of your cruise line or tour operator” (Coffey, 2007). However, as Coffey notes, many homeowners policies provide coverage for theft and other losses away from home. Medical and auto insurance may be valid even if the individual travels outside of the country. and, airlines must reimburse an individual should their bags be lost. Certain credit cards also offer travel insurance benefits. American Express’ Platinum Card has not only an accidental death and dismemberment coverage benefit, but also provides insurance for rental car loss or damage.

Credit insurance is an optional insurance that is often offered when an individual applies for a personal or mortgage loan. This type of policy protects the insured in case they are unable to make payments. There are four primary categories of credit insurance. These include credit life insurance, which pays off all or some of an individual’s loan, in the case of death. Credit disability insurance makes payments on the loan if the individual becomes to ill or injured to work. Involuntary unemployment insurance, which makes the individual’s loan payments if they lose their job due to no fault of their own. and, credit property insurance, which protects the personal property of an individual that secures the loan in the case of theft or accident or natural disaster (“Credit insurance,” n.d.).

Personal liability insurance goes beyond the personal liability coverage afforded by standard homeowners or automobile insurance policies.

The umbrella like coverage of personal liability offers a higher level of protection. According to Davis (2007), “Additional costs will vary with insurance companies, but usually average from $200 to $300 a year for additional protection of 1 million dollars. This coverage may insure automobiles, boats, homeowners, and renters insurance. Most insurance companies require basic insurance of $100,000.”

Terrorism insurance is the newest form of insurance, and is the result of the September 11th terrorist attacks on the United States. It is an insurance policy designed to provide coverage to individuals who have suffered damages due to a terrorist attack. However, homeowners and auto insurance policies offer the same protection without the red tape. Although terrorism is not specifically referenced in homeowners policies, these policies due provide coverage in the case of explosion, fire and smoke, the likely causes of damage due to a terrorist attack. Automobile insurance too will cover a car that has been damaged or destroyed, if the insured has purchased comprehensive coverage. Even life insurance offers terrorism benefits, as these policies do not exclude acts of terrorism. In addition to other policies providing similar benefits, terrorism insurance has a second downfall in the need for a terrorist attack to be deemed a certified act by the Secretary of the Treasury, before claims will be paid (“Terrorism and insurance,” 2004).

All of the above policies can be deemed casualty insurance. Casualty insurance polices are written to provide coverage in case of an unforeseen accident. Casualty insurance policies can also cover damages due to crime and plate glass breakage (“Casualty insurance,” 2007).

Conclusion:

In the end, there is an insurance policy available to cover almost every facet of an individual’s life. From health insurance policies that will protect the individual if they are sick or injured and allow for unique ways to save money to pay for medical expenses, to life insurance policies that can offer the double benefit of providing a tax shelter for an individual’s estate, to personal property insurance that can cover an individual’s home, automobile, mechanical equipment and even the title of their property before they make the purpose a variety of insurance policies exist. Despite the vast array of policy types, insurance all has one thing in common, the desire to protect the insured and their assets from the unknown and the unexpected.

Without appropriate insurance coverage assets that may have taken a lifetime to build can be gone in a heartbeat. Only through effective use of insurance can an individual not only secure their personal financial future, but also assist in securing the financial future of future generations to come.

References

Anderson, T. (Fall 2007). Healthy savings for now and later. Kiplinger’s Personal Finance Retirement Planning Guide. Retrieved September 27, 2007, from ProQuest database.

Are you interested in long-term insurance? (28 July 2007). Knight Ridder Tribune Business News. Retrieved September 27, 2007, from ProQuest database.

Berry, W. (16 September 2007). Your money. Newsday. Retrieved September 27, 2007, from ProQuest database.

Cahill, C. (November 2000). Universal life insurance as a tax shelter: consider universal life if you’re debt free and have maximized your RRSP. Money Digest. Retrieved September 27, 2006, from FindArticles.com database.

Casualty insurance. (27 September 2007). Retrieved September 27, 2007, at http://en.wikipedia.org/wiki/Casualty_insurance.

Coffey, L. (23 September 2007). Know your way around travel insurance. St. Petersburg Times. Retrieved September 27, 2007, from ProQuest database.

Credit insurance. (No date). Retrieved September 27, 2007, at http://www.ftc.gov/bcp/conline/pubs/alerts/credinsalrt.shtm.

Davis, G. (2007). Personal liability insurance important considerations. Retrieved September 27, 2007, at http://ezinearticles.com/?Personal-Liability-Insurance-Important-Considerations&id=126082.

Facts about earthquake insurance. (November 2004). Retrieved September 27, 2007, at http://www.insurance.wa.gov/factsheets/factsheet_detail.asp?FctShtRcdNum=20.

Fire insurance. (2007). Retrieved September 27, 2007, at http://www.metlife2000.org/Applications/Corporate/WPS/CDA/PageGenerator/0,4773,P511,00.html.

Health insurance. (27 September 2007). Retrieved September 27, 2007, at http://en.wikipedia.org/wiki/Health_insurance.

Karp, G. (18 August 2007). Flexible spending accounts. Chicago Tribune. Retrieved September 27, 2007, from ProQuest database.

Make the most of your employer’s offerings. (16 September 2007). Pittsburgh Post-Gazette. Retrieved September 27, 2007, from ProQuest database.

Medical savings account. (19 June 2007). Retrieved September 27, 2007, at http://en.wikipedia.org/wiki/Medical_savings_account.

Mitchell, E. (19 January 2007). Term life insurance now less expensive. Oakland Tribune. Retrieved September 27, 2007, from ProQuest database.

Ollis, R. (28 April, 1997). Boiler insurance includes range of business equipment. Springfield Business Journal, 17(43). Retrieved September 27, 2007, from ProQuest database.

Terrorism and insurance. (2004). Retrieved September 27, 2007, at http://www.iii.org/media/hottopics/insurance/sept11/tria/.

Vehicle insurance. (21 September 2007). Retrieved September 27, 2007, at http://en.wikipedia.org/wiki/Auto_insurance.

Vohwinkle, J. (2007). Personal finance 101. Retrieved September 27, 2007, at http://financialplan.about.com/od/personalfinance/a/pfinance101.htm.

What is flood insurance? (2007). Retrieved September 27, 2007, at http://www.floodsmart.gov/floodsmart/pages/whatfloodins.jsp.

What is homeowners insurance? (No date).

Retrieved September 27, 2007, at http://www.iii.org/individuals/homei/hbasics/whatis/.

What is life insurance and do I need it? (2007). Retrieved September 27, 2007, at http://www.fool.com/insurancecenter/life/life01.htm.

What is long-term care and do I need insurance for it? (2007). Retrieved September 27, 2007, at http://www.fool.com/insurancecenter/longterm/longterm01.htm.

What is title insurance? (2006). Retrieved September 27, 2007, from https://www.ctic.com/whatistitle.asp.

Types of Insurance Dealing with Personal Finance Management

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