With unemployment still at historic highs in many areas, a common concern is what to do about health insurance. A friend of mine was recently notified that he was going to be laid off, and so we talked about some of the options out there, and I told him I’d do some research about it since I had recently looked into an individual health plan.

About COBRA, Stimulus Bill Subsidy
COBRA gives people who lose their jobs the right to continue coverage under their group health plan. The catch is that workers must pay the entire premium themselves (plus a 2% administrative fee), which can be a lot higher than just the partial payment the employee usually pays. According to this WSJ article, the average cost of COBRA coverage for a family is $13,000 a year. In my friend’s case, he was surprised to see his corporate employer paid nearly $600 a month for his health insurance.

Keeping insurance continuity is important beyond immediate health concerns, because if you don’t have health insurance for more than 63 days, then even group health insurance plans can reject you later due to any pre-existing conditions. That can be a total disaster.

However, in February 2009 the “Stimulus bill” included a provision that would cover 65% of the COBRA premium for up to 9 months for people who qualify. You must have been involuntarily terminated between 9/1/08 and 12/31/09, and also not exceed an adjusted gross income over $125,000 for individuals ($250,000 for married couples filing jointly). According to this IRS page, there is no paperwork or extra tax return details to deal will; you just pay the 35% to your employer and let them handle it. In my friend’s case, this would lower his required payment about $210 a month for the next 9 months. That’s quite a discount!

Individual Health Plans
Still, if you are relatively young and in good health, you should be able to get a much cheaper health plan from many insurers. Group health insurance by definition has to cover everyone in the company, and may cover a lot more than you’d be willing to pay for yourself. However, you’ll have to familiarize yourself with some of the terminology. Here’s another quote from the WSJ article:

“My beef with Cobra is that it is the same gold-plated plan that my employer offered, when I would settle for copper or tin,” he says. Instead, he bought a catastrophic health plan, which covers only major hospitalizations, for $100 a month.

One of biggest comparison sites for individual plans is eHealthInsurance.com, which has a separate section on short-term health insurance plans. From their site:

Short-term health insurance plans provide you with coverage for a limited period of time, and may be an ideal solution for those between jobs or those waiting for other health insurance to start. Typically, short-term plans offer coverage up to six months, although some plans may offer coverage up to 12 months.

Indeed, I found basic 6-month plans starting at $50 a month, though they come with some hefty deductibles. As quote above, the idea here is just cover catastrophic events.

If you see the tab labeled “Help Me Choose”, I found the questionnaire there really helpful in narrowing down the choices. I figured I would want a temporary plan that would basically cover everything over, say $1,000-$2,000, but everything below that I would pay for, including doctor’s visits. The recommended plan ended up being a regular individual plan (not short term) that only cost $120 per month.

The annual deductible was $1,800, but I with 0% co-insurance (nothing above the deductible) as opposed to the 20-40% co-insurance on other plans. So the most I’d be out-of-pocket would be $1,800 a year. If there was no 65% subsidy, this $120/month insurance would beat out the $600/month COBRA option easily. Even now, it’s close. I could even add on a health savings account (HSA) and put more money away tax-deferred.

(The above is just an example. Your actual comparison results are dependent on age, sex, and location.)

Do you know if your auto insurance company will cover you in an accident in a rental car? According to a survey by Progressive Insurance, only 25% bother to ask. We are looking into booking a rental car for a week, so I called State Farm to double-check what the current rules are. A week of loss-damage waiver (LDW) would cost well over $100, so it was definitely worth a phone call.

Below is what I got from my agent, but I’m sure that auto insurance laws vary by state, so don’t assume the following extends to you. Call yourself! If you’re really serious, you’ll get them to show you where all this is written out in your insurance policy. I know I kept mine somewhere.

Liability Coverage. Your existing limits extends to the rental car.

Comprehensive Coverage. This extends to the rental car. Your same deductible applies.

Collision Coverage. This extends to the rental car. Your same deductible applies.

Other Possible Charges
This could be good news for some, but perhaps not quite so good if you have high deductibles. In addition, she did point out that there are certain things that State Farm will not cover from the rental car companies.

• Claims Processing Fees or “Administrative” Charges – If you get in an accident, it sounds like they can charge you a fee just to deal with it. Blech.
• Loss-of-Use Charges – The rental car company will claim that for every day the car was being fixed, they could have rented it out. They don’t even have to prove that they were out of cars at the time.

Secondary Rental Car Insurance
This is where the secondary rental car insurance from credit cards can come in handy. Details can still vary depending on the specific card, so look for specific wording in the paperwork that they mail you with the tiny print on amazingly thin paper. Here’s some sample info from Visa:

Visa Auto Rental CDW reimburses you for the deductible portion of your personal automobile insurance, valid administrative and loss-of-use charges imposed by the rental car company, as well as reasonable towing charges resulting from covered damage or theft of the rental vehicle while it is your responsibility.

This seems to plug in the remaining holes in coverage, besides the vague usage of the word “valid”.

Unlimited Non-Owned Car Coverage (UNOC)
Another option is to purchase an additional rider on your auto insurance, which State Farm calls UNOC. She quoted me about $30 per 6-month period. However, you can simply add it on and take it off for something as short as a month, which on a pro-rated basis would cost only $5.

Part of estimating your needs in retirement and also in buying life insurance is to know your likely life expectancy. Although kind of morbid, one calculator to help you do this is The Longevity Game by Northwestern Mutual. You just answer a few questions about your lifestyle and family history, and it gives you a number based on their actuarial tables. Fun animations too!

It turns out my median life expectancy is 85, while my wife’s is 95. Not sure how she plans on enjoying a decade without me, but I have been working out more this week as a result. 🙂 This site was found inside one of the 18 books I am trying to read simultaneously, Worry-Free Investing. The books uses it to show that for couples, there is a very good chance at least one of you will reach 95 or 100. So if you want to retire early, you basically need a portfolio that you can live off the income essentially forever while also having the principal keep up with inflation.

This is not how I like to get reminded of things, but sometimes that’s just how it goes. I hope all those out there affected by the floods are at least safe. A few months ago I wrote about buying flood insurance even if you are not required to by your mortgage lender. This means you are outside the 100-year floodplain, but could still be in the 500 year floodplain (1 in 500 chance each year, or 0.2%). Check if you are in a flood plain here. We got quotes, but never actually got around to buying a policy due to a combination of cost concerns and simply forgetting about it.

1 in 500? Why bother? Well, reports say that one third of Iowa is currently underwater. From one local newspaper:

“We’ve been taking a lot of calls, but most people don’t have flood insurance,” said State Farm Insurance Agent Doug Valentine. “This flood has blown through the 500-year flood plain and most only have to have insurance if they are in the 100-year flood plain because the banks require it.”

Valentine said many homeowners will soon face a difficult decision on what they will do given many will still have mortgage payments to be made and no insurance to cover rebuilding. “They may have to plow it down and will have $200,000 in payments on a $100,000 house,” he said.

This got me thinking – how likely do you think it is that your house will burn down, which is a major reason for homeowner’s insurance? Perhaps a 0.2% chance each year of severe flooding is worth insuring against. Insurance is all about paying to transfer the risk for events that can crush you. On that note, I also will need to check if our policy cover sewer backup, which has also caused a lot of damage in the Midwest.

There are a bunch of different ways to determine how much life insurance you need, from a simple “ten times your salary” to complex Monte Carlo simulations. Somewhere in between is the “capital needs analysis”, which is often used by insurance brokers and financial planners. This is what most online life insurance calculators use (examples here, here, and here), although I like the idea of doing it by hand to play with the numbers. I have a brochure from my State Farm agent with some stats, and also found another good example in this worksheet.

What is your goal?
Here’s the fun part. You get to imagine you’re dead. Will the remaining partner stay at home with the kids? Work and pay for daycare? Some people basically want to replace everything – their future income and also leave an inheritance or other lump-sum. Others want to make sure their dependents would be able to live as close to the “same life” as possible. This means staying in the same house, working (or not working) at the same jobs, driving the same cars, the same lifestyle. Then there is the “adapted life” approach, where maybe they would downsize somewhat, but have all the critical areas covered.

How much monthly income will your survivors need?
It’s usually easier to think of this monthly, and then multiply by 12. Include housing, transportation, education, childcare, insurance, entertainment, and perhaps also regular retirement savings. The average cost of daycare for a 4-year-old is around $8,000 per year. Now subtract any sources of income. The survivor’s salary, existing passive or investment income, rental income, Social Security benefits, etc.

Then, you have to decide what amount of money can create this income. Lots of guessing on your rate of return and length of withdrawal period is involved here. If you are young, you could buy an immediate annuity which will pay out about 4% inflation-adjusted a year (a certain % will be taxable). This is the same as multiplying by 25. So to create an annual income of $40,000 per year, you’d need a lump sum $1,000,000. As you get older, the payoff gets better. A more conventional approach seems to multiply by about 15.

Add in lump sum expenses
You’ll probably want to take care of debts like student loans, credit cards, funeral costs, and medical bills. A recent survey put the average funeral cost at over $6,000. If you haven’t already accounted for it above in housing, you may want to pay off the mortgage on your home or set aside money for retirement. Finally, you may want to consider the education costs of your children. The average cost for tuition + room/board for an in-state college is now nearly $14,000 per year.

Add these two big numbers up, and you have you future capital needs. You can then subtract out the insurance you have through work if you like. Finally, you should subtract your current assets, taking into account their liquidation restrictions. The difference provides an estimate of how much life insurance to shop for.

This all sounds simple, but in going through it myself there are so many variables. For starters, most couples will probably have different insurance needs for each person. Do I really want to pay off the entire house, or just allot for the mortgage payment? How many kids am I supposed to plan for? I end up with a number anywhere between $500,000 to more than $1M depending on different assumptions. (I’m open to advice here.) The good thing is that I am hoping that each $500k of coverage will only be about $30/month. I also may end up buying multiple life insurance policies as life goes on and stack them on top of each other.

Inflation?
If you buy a 30-year term policy with $500,000 of coverage now, at 3% annual inflation that you benefit will only be worth half as much after 23 years. But I don’t really worry about that, because for every year that I keep living, I should be saving enough that I don’t need as much coverage. And after the end of my term, we should have enough assets so as to not need any life insurance at all.