It wasn’t long ago that employees were rewarded for their loyalty to a company with a pension. For you younger readers the word pension may seem like it’s from a foreign language. It’s true, and in recent years the classic pension plans have been dwindling. Pension plans had a very unique feature that most retirement plans today lack: income for life. That’s right, most pensions were set up to pay you each month for the rest of your life, regardless of how long you live.

That’s a great benefit, right? This feature is what made pensions so attractive. While the actual dollar amount might not be enough to enjoy a lifestyle of the rich and famous, the fact that you could depend on this check coming in the mail every single month for the rest of your life made up for that. For many retirees, after factoring in social security and pension payments there was little need for additional savings since these two gaurnteed monthly payments were sufficient for paying the bills. But with pensions going the way of the dinosaurs what options do younger generations have for creating income for life?

The Role of Annuities

You’re seeing more annuity advertisements these days targeting baby boomers. Insurance companies realize that especially in this economy many retiring baby boomers are wishing they had some form of guaranteed income if they don’t currently have a pension. While it’s true that annuities can in fact provide lifetime income it’s important to understand the different types of annuities, features, and drawbacks.

How Annuities Work

An annuity is a simple concept. Generally, you take a lump sum of money and deposit it into the annuity acount. Then, if you choose to annuitize it, you begin receiving a regular payment (monthly, quarterly, annually, etc) that continues for the rest of your life. As simple as that concept is to understand, these products are actually far more complex than this.

First, you have two different types of annuities: fixed and variable. A fixed annuity is pretty much just what it sounds like and it earns a fixed rate of interest. While the rate may be fixed, there are often situations where the rate can change. For instance, there may be a first year bonus rate that pays out higher interest, rates could change from year to year with a minimum or floor rate that it can’t go below, and so on. But what’s important to note is that this rate is really only important before you annuitize the money. That is, you can deposit the money into the annuity and it will sit there and earn tax-deferred interest at the specified rate. Once you annuitize it you lock in that guaranteed monthly/annual payment for life and the interest rate doesn’t matter. And typically, once you annuitize, there’s not backing out of that decision.

Next, you have the complicated variable annuity. Unlike a fixed annuity the variable annuity gives you different investment choices for your money prior to annuitizing. If you wanted, you could deposit money into the annuity and then invest it in any of the investment options available to you within the annuity. Think of it like a 401(k) plan where you have a handful of various mutual funds to choose from. The drawback here is that depending on how you invest your money you could experience a loss in value. This is why it’s called a variable annuity since the account value will vary depending on investment options and market conditions.

Fees and Riders

This is where annuities can end up hurting an investor. First, annuities aren’t free. You probably know by now that virtually any investment out there comes with some sort of fee. Some investments have low fees such as index funds and other funds may have front-end loads and high annual expenses of upwards of 2%. Annuities are no different. When it comes to fees the fixed annuity is the most transparent. You get a fixed rate of return on your money and that rate is already net of fees. The fees can easily be calculated with the documentation provided with the account.

When you start talking variable annuities there’s a potential to get raked over the coals with fees. First, you’re going to have the fee just for having the privelage of owning a variable annuity. This is the Mortality and Expense (M&E) fee that is charged annually. This fee pays for the insurance guarantee, commissions, selling, and administrative expenses of the contract. In general, these fees in a variable annuity will be charged as a percentage of the average value of the investment. The average M&E of a basic variable annuity contract is between 1-2%. On top of the M&E you also have your investment expenses. Since you’re typically investing in mutual funds you’ll also pay their annual expenses. These can often be between 1-2% as well. So, right out of the gate you could be paying upwards of 4% per year just for opening a variable  annuity!

We aren’t done with fees yet. Next, you have to worry about surrender fees. A surrender fee is a fee applied if you cash in before a set amount of time. In many cases the surrender period will be around seven years. What the annuity may do is charge you 1% for each year you take your money out early. So, if you withdraw the funds in the first year you’d be socked with a 7% penalty. Take it out after 6 years and still get hit with a 1% penalty. After holding the funds for 7 years you’d finally be free to take your money without paying a surrender fee. Surrender fees apply to both fixed and variable annuities.

You think we’re done with fees yet? Hardly. Now, we have to talk about riders. Riders are additional features that you can add to your annuity contract. Common riders can provide some additional guarantees. They might provide additional guaranteed income, protect against losses, increase payouts for inflation, or extend the death benefit. Obviously, these features cost extra. Riders often cost between 10 and 100 basis points (0.10% to 1.0%) per year. So, if you’re in a variable annuity already paying a 1.5% M&E, 1.5% fund expenses, and tack on riders that add 1% you’re paying 4% a year in fees.

Annuities Have Their Place

Annuities seem like a pretty bad deal after looking at all of the fees and restrictions discussed above, but they do have their place. For one, they really can provide guaranteed income for life. They are insurance contracts and once annuitiezed you’re going to get a payment for the rest of your life. For retirees who want this sort of safety they can be an attractive option.

But here’s the problem. Many so-called financial advisors and insurance agents sell annuities to people who still have many years before retirement. So, what happens is they convince someone to put their money into an annuity, either fixed or variable, and make a hard sell by promoting all of the guarantees. It’s one of the few instances in the world of finance where you can get away with offering a guarantee. So, they get someone who is say 50 years old to buy an annuity contract and then they spend the next 10 or 15 years paying these unnecessary fees before finally retiring.

There are very few reasons to invest in an annuity well before you’re thinking about annuitizing it. If it’s a fixed annuity, you’re playing the rate game. You might get a good rate right now, but how will that rate stack up in 5 years? And don’t forget, you have surrender charges to deal with that could prevent you from moving the money into something with a better rate. And if you’re looking at a variable annuity you’re subjecting yourself to high and unnecessary fees that can erode your earnings significantly in the years prior to annuitizing.

If you really do want a source of guaranteed income for life an annuity can do that, but you should consider an immediate annuity. This means you would only buy the annuity contract when you’re ready to start receiving those guaranteed payments immediately. This allows you to invest your money however you want in low-cost funds on your own and then when you need to begin receiving a fixed income from these investments you can immediately turn it into an annuity and make this happen. This way it doesn’t matter what the rate is on a fixed annuity or require you to negotiate high fees and poor investment options in a variable annuity.

Generating Your Own Income for Life

An annuity is just one way to generate income for life, but you can go about it on your own, too. As you approach retirement you’re probably starting to get a little more conservative with your investments. So, you’re investing more in things like bonds, CDs, and money market accounts. Essentially, after you’ve spent your working years accumulating that retirement nest egg you’re trying to preserve as much of that egg as possible while earning enough to at least keep pace with inflation.

Ideally, you will have created a portfolio large enough so that you can simply withdraw the interest generate each month, or at the very least, draw the interest and a small portion of your principal so that you won’t outlive your money. That is often easier said than done because it requires a few things to fall in place. First, you need to save enough during your working years to build up a portfolio large enough to sustain this withdrawal model. Second, you are at the mercy of the economy, interest rates, taxes, and investment performance. With so many unknowns it’s possible for even the best plan to be insufficient once retirement does arrive. But done right, you can create an investment portfolio that generates enough income that can provide you the money you need for the rest of your life.

That being said, annuities can still play an important role. Most of us, retirees included, will have some fixed expenses throughout our life. For some it’s a mortgage, and others it could be medical costs, groceries, or insurance premiums. Because there are some things that we’ll need to spend money on regardless one strategy is to use an annuity to take a portion of your nest egg and use that to generate some fixed income to cover the necessities while using the rest of your portfolio to tap into as needed to pay for the rest. This way you get some guarnteed income each month while still having control over the bulk of your money.

Start Planning For Income Now

Even if you have 30 years until retirement it’s a good idea to begin planning for how you’ll be generating income once you do retire. Sure, we have no idea what the future holds that far off, but begin thinking about your options and how important it is to have a guarnteed source of income. A lot of things will change, but if you’re aware of your options and know what to expect when it comes to generating income for life you can be better prepared to make the best decision with your money.

And finally, if you’re in you’re still a number of years away from retirement and are approached by someone trying to sell you an annuity just turn around. Tell them to give you a call when you’re 65 and actually getting ready to retire. Their sales pitch may sound great with all of the guarntees, but you know better. Annuitizing some of your money might make sense once you do retire, but until then, keep control of your investments and avoid making the insurance companies rich in the meantime.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Earn Income for the Rest of Your Life: The Good, Bad, and Ugly of Annuities

I occasionally receive questions from readers that ask about a number of financial issues, and a recent reader asked: “Is is smart to buy disability insurance?” Of course, without understanding someone’s complete financial situation it is impossible to give a straight “yes” or “no” answer, but I can provide some insight as to when it is a good idea to buy disability insurance.

Before jumping into the question, I just want to recap what disability insurance is if you aren’t familiar with it. Simply put, disability insurance is a policy you purchase that will supplement your income in the event of a disability that keeps you from working. This insurance is meant to allow you to maintain a stream of income to help you stay on top of your finances if you will be out of work for an extended period of time.

An Example of How Much it Can Benefit You

If you’re 35 years old, earning $50,000 per year, and become disabled for the rest of your life, you’ll be missing out on around $1.5 million in income between age 35 to 65. And this doesn’t even take into account raises, promotions, or benefits that you may have earned over this period. So, an average person could be putting a couple million dollars or more at risk by not carrying disability insurance. When you think of it that way it is kind of scary, isn’t it? You may have a $500,000 term life policy to insure against your death, but you may be neglecting even more by not protecting against a disability.

When Disability Insurance is a Good Idea

Do you earn income? If so, having disability insurance is probably a good thing to have. You’re far more likely to become disabled for six months or more during your working years than to die. In fact, even at age 30 you have a 1 in 5 chance of becoming disabled for a year or more. Even one year without income could be devastating to your finances. At best, you may have to deplete your emergency savings. At worst, you won’t have enough saved up to cover all of your expenses during this time and have to resort to taking on expensive debt. In some cases, a long-term disability can force people into bankruptcy.

When Disability Insurance Not Such a Good Idea

Even though you can clearly see the benefits of protecting your income against a disability, it isn’t for everyone. For example, if you’re married and both of you work, you could be in a situation where two incomes aren’t a necessity to pay the bills. You or your spouse may be working part-time just for extra money, or otherwise still be able to get by without both incomes. In a case like this, it might not make sense to pay disability insurance premiums for both of you, so money could be saved by only covering one of you.

One of the biggest hurdles is that disability insurance is another premium to pay, and if money is tight, this is almost always out of the question. If you can hardly keep up with your minimum payments and monthly bills, buying disability insurance may do more harm than good. Think of it this way: if you can hardly keep up now, with full income, even if you have disability insurance at best you’ll still be treading water, and more likely, only earn a portion of your income from a claim and end up heading for bankruptcy regardless.

It isn’t a fun topic to discuss, but it is real. Disability is the number one cause of home foreclosure and bankruptcy. You need to protect against it if you can, but if your finances are already in disarray, you need to get that house in order before you can take on another monthly payment to obtain insurance.

What About Social Security Disability?

Good luck. Social security benefits are hard to qualify for, and even if you do, the amount you receive is very low relative to what your pre-disability income was. I’ve written about how hard it is to qualify for, and receive Social Security disability benefits in the past. So, don’t count on it, and view any benefits you receive from Social Security as a bonus.

How to Obtain Disability Insurance

First, you should check with your employer. If you’re a full-time employee with benefits there is a good chance that you receive some sort of disability insurance. In some cases, your employer will pay for a short or long-term disability policy automatically, and in other cases you may have the option to purchase additional insurance through their group plan. Obtaining coverage through a group plan will almost always be cheaper than going out and buying coverage on your own, so check there first.

If your employer doesn’t offer coverage, then you’re going to be on your own to find a policy. Shopping for any insurance policy requires some homework since there are a lot of shady sales reps and companies that may appear to offer low-cost coverage. Many of the large insurers will offer disability, or work with a company that does. Check with your current insurance companies, whether it is homeowners, life, or otherwise and see what they provide.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Should You Buy Disability Insurance?

If there is one item in my budget I hate more than everything else it has to be auto insurance. If you think about it, you can go years or maybe even your entire life without ever having to make a claim so it feels like you’re throwing good money away. At the same time, this is really no different than every other type of insurance. You hate paying the premiums if you aren’t using it, but when something happens where you do need to rely on your insurance it can literally save your financial life.

So, since auto insurance is pretty important (and even required in most states) we have few options to escape the premiums. But, that doesn’t mean you should be paying more than you have to for coverage. Auto insurance is a competitive industry and there are dozens of companies looking for your business. If you shop smart and only get the coverage you need you can save big. Here are eight things that you can do to help keep your auto insurance costs to a minimum.

1. Comparison shop.

Not only do you have to rely on local insurance companies for coverage, but you can now browse the web for countless providers. In fact, many of the online companies may offer steep discounts compared to your local agents because they don’t have to staff as many local offices. So, take some time to shop around and get quotes from a variety of sources. It’s good to review your policy annually and see if there are better deals out there.

2. Drop collision and/or comprehensive coverage on older cars.

If you own a car that’s worth less than a few thousand dollars, you’ll probably pay more for the coverage than you would ever collect on a claim. Your bank can tell you how much your car is worth, or check out the Kelley Blue Book for an estimate. There is no need to shell out costly comprehensive coverage premiums to insure something that’s relatively worthless.

3. Ask for higher deductibles.

When you file a claim, the deductible is the amount of money you pay before your insurance company kicks in. Higher deductibles mean lower premiums. For example, increasing your deductible from $200 to $500 on collision coverage could reduce your cost by as much as 30%. That is a significant savings when you factor in the likelihood of actually filing a claim.

4. Ask About Multiple Policy Discounts.

If you own a home or have other property insured, be sure to check with them to see if there would be a discount by adding your vehicle. Most insurers offer substantial discounts that can range anywhere from 10-20% just for carrying multiple policies with them.

5. Drive an Inexpensive Vehicle

Generally speaking, the more valuable something is, the most expensive it will be to insure. Want to drive that shiny new luxury vehicle? That’s fine, but expect to pay a significantly higher premium than an older and less expensive model. There are plenty of benefits in buying a used car or something a little less fancy and lower insurance premiums are just one of them.

6. Location Matters

Did you know that living in a rural area instead of a city can make your auto insurance premium lower? That’s because insurers know that there is generally higher traffic, higher crime, and the greater chance of making a claim when living in a city.  Now, are you going to pick up and move to the country just to cut your auto insurance bill a little bit? Obviously not. But if you are thinking about moving anyway it could be worth getting some quotes to compare the cost difference.

7. Inquire About Low Mileage Discounts

If you don’t have a very long commute and put fewer miles on your car than the average person, you might be eligible for a low mileage discount. If you aren’t on the road very much the insurer knows that there’s less of a chance of having a claim, so you can often get a discount.

8. Don’t Ignore All of the Safety Features

There are discounts for virtually every safety feature that comes on your car. Anti-lock brakes, front airbags, rear airbags, automatic seat belts, and even security systems can all be used to keep your premium lower. Usually, when you enter your make and model or VIN with the insurance company they will already know what most of these features are that come with your vehicle, but sometimes they are not all included or you may have added aftermarket products. Make sure you’re getting credit for everything you’re entitled to.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

8 Ways to Save on Auto Insurance

While I’ve talked about the importance of having disability insurance in the past, a lot of questions still arise regarding Social Security disability benefits. Everyone seems to have a story, or know someone who’s receiving Social Security disability, so there is always some skepticism as to whether or not outside coverage is needed. Think of it this way–if it is easy to qualify for Social Security disability benefits, why are there so many  attorneys and law firms that specialize in Social Security disability claims and appeals?

Go ahead and do a quick web search for these types of attorneys. You’ll be amazed at what you find. Of course, many of these law offices look about as reputable as your local payday loan company, but it just goes to show you how people often try to claim Social Security disability and are subsequently denied, so they seek help from an attorney.

Eligibility

Disability coverage through Social Security is a legitimate benefit that you’re entitled to if you meet the criteria. The problem is that the criteria are very strict and it can be difficult to actually qualify for the benefit.

To be entitled to a disability benefit, a worker must:

• Be fully insured at the onset of disability.
• Have worked in Social Security-covered employment for at least five of the previous ten years (20 out of 40 quarters). This applies to disability that begins after age 31. If the disability begins before age 31, you must have worked under Social Security-covered employment for the greater of six quarters, or at least one-half of the quarters between age 21 and the age when disability began.
• Be under Social Security normal retirement age. After normal retirement age, disability benefits become retirement benefits.
• Have a physical or mental impairment that (1) disables the worker from the performance of any substantial work, and (2) is expected to either be terminal or last for at least 12 months.

The last piece is what’s most important. It states that you must be unable to perform ANY substantial work. This is where most people get snagged. It isn’t uncommon to become disabled in such a way that it prevents you from doing your exact line of work, but that isn’t enough. Did you work in construction and suffer a disability that has put you in a wheelchair? Sorry, there are still a lot of other types of jobs you can do, so chances are you’d be denied.

Benefits

A disabled worker who qualifies for Social Security disability benefits is entitled to the full benefit payable until the earliest of the following:

• The disability ends: benefits are terminated in the second month after the end of disability.
• The worker dies: benefits are terminated in the month prior to the worker’s death (e.g., worker dies in July; no June benefit is paid).
• The worker attains normal retirement age.

Spouse’s benefit. Disability benefits for spouses are calculated in the same way as retirement spousal benefits: 50% of the worker’s benefit, reduced if the spouse is under normal retirement age. Benefits are subject to a family maximum.

Child’s benefit. A child who is under age 18, or under 19 if still in high school, is eligible for a benefit amounting to 50% of the disabled worker’s benefit, again subject to the family maximum.

But how much money would you receive even if you do qualify? Well, the Social Security Administration has a few nice calculators that can help you see how pitiful the benefit would be if you were really unable to work. I went ahead and did the first option of using the quick calculator just to see what my benefits would be, and it wasn’t pretty. My disability benefit would be around 38% of my current salary. And this number is high, because my pay has only been at this relative level for just a few years. Prior to that it was significantly lower. So, in using the detailed estimator, I found out my benefit would be about 23% of my salary.

Ouch! Could you live on a third of your salary if you were to become disabled and unable to work? Probably not, especially if you now have higher health care costs that stem from the disability. The Social Security Disability program is a nice safety net of last resort, but count on it saving the day if something happens and you become disabled. You’ll first have to struggle with meeting the eligibility requirements and if you do qualify, then have to deal with a very small payment.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

How to Qualify for Social Security Disability Benefits – Eligibility Requirements

If you own a home, it’s almost certain that you have homeowners insurance. While insurance agents will help determine the kind of coverage you can buy, it is ultimately your responsibility to know what the policy covers. And remember, insurance agents are salesmen and typically work on commission. This isn’t a bad thing, but be aware of what type of coverage you actually need so that you can spot when you’re being sold something you don’t truly need. Each home and family will have different specific needs, so your policy should reflect that.

At the very least, you should take a few minutes to look at your current coverage. Do you remember the major flooding in the midwest last year? Thousands of homeowners thought they were well out of flooding areas, but the record rains proved otherwise. To make matters worse, flood insurance doesn’t typically come with your standard policy and has to be added on. So, thousands of people lost everything because they assumed they were not subject to a certain risk or assumed that something like flood damage would be covered. Don’t let something catch you off guard. Here are a few tips that are sure to help you better understand your policy and hopefully save you some money.

1. Review your policies annually. A walk-through of your coverage needs with your agent may identify other items to insure(i.e., jewelry, artwork, etc.), as well as ways to save on premiums such as bundling auto and home insurance coverage together with one provider or requesting higher deductibles to help contain your costs.

2. Identify risks you face that are not covered by your homeowners policy. Disasters such as floods and earthquakes need a separate policy or riders to protect your home if tragedy strikes. Risks can change, so don’t assume that what you had in the past is sufficient today.

3. Understand how much coverage you have. Many homeowners believe their insurance policy will replace their damaged or destroyed property regardless of the amount of damage incurred. Remember, it is generally not your home’s market value that is covered, but rather its replacement cost. Home additions and major kitchen or bath remodeling projects can add significant value to your home, which may not be fully covered by your current policy. It is important to that your coverage is sufficient. Take some time to speak to your agent about the differences between replacement cost coverage and actual cash value coverage.

4. Do your homework when shopping for insurance. Get quotes from different carriers. Since rates can vary, make sure you compare coverage on an apples-to-apples basis so you can spot when a lower price really just represents less coverage. Consider higher deductibles to help reduce your premiums or ask if discounts are available for installed safety and security devices such as smoke detectors and alarms.

5. Research carrier performance. Ask your friends and neighbors for references. Also, research the financial strength of carriers through independent third-party sources such as state insurance departments, A.M. Best, Standard & Poor’s, and customer satisfaction ratings at the J.D. Power Consumer Center. With a lot of uncertainty in the financial markets there may be some insurers who are in worse shape than others which can lead to a greater disparity in premiums.

Your home is likely one of your greatest assets, so it pays to make sure it’s properly protected. By keeping premiums down, you save money up-front, and when you make sure you have appropriate coverage, you save money in the end if you have to unfortunately file a claim. Don’t let anything catch you by surprise and take a few minutes to review your coverage today and look for money-saving opportunities.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

5 Tips to Help You Save Money and Protect Your Home With Homeowners Insurance

New COBRA Changes Reduce Premiums by 65%

The latest stimulus package, also referred to as the American Recovery and Reinvestment Act of 2009 has included a provision that will reduce the COBRA health coverage premiums by 65% for those who qualify. With job losses mounting and many individuals relying on health insurance through their employer, this is welcome relief.

If you aren’t familiar with the program, COBRA stands for the Consolidated Omnibus Budget Reconciliation Act. Created in 1986, COBRA provides certain former employees, retirees, spouses, former spouses, and dependent children the right to temporary continuation of health coverage at group rates.  This coverage, however, is only available when coverage is lost due to certain specific events.  Group health coverage for COBRA participants is usually more expensive than health coverage for active employees, since usually the employer pays a part of the premium for active employees while COBRA participants generally pay the entire premium themselves.  It is ordinarily less expensive, though, than individual health coverage.

In other words, if you were actively participating in your employer’s group health plan and were terminated, you would generally qualify for COBRA coverage. Once approved, you would then pay the entire premium to maintain the same health coverage that you had under your employer for up to 18 months. Unfortunately, if you’ve just lost your job and now have to pay even more for health insurance than you did before, it can become a difficult financial situation, thus the new premium reduction.

New COBRA Premium Reduction

The American Recovery and Reinvestment Act of 2009 provides for a 65% reduction in COBRA premiums for certain assistance eligible individuals for up to 9 months. An assistance eligible individual is a COBRA qualified beneficiary who meets all of the following requirements:

• Is eligible for COBRA continuation coverage at any time during the period beginning September 1, 2008 and ending December 31, 2009;
• Elects COBRA coverage (when first offered or during the additional election period), and
• Has a qualifying event for COBRA coverage that is the employee’s involuntary termination during the period beginning September 1, 2008 and ending December 31, 2009.

The bad news is that if you’re married and your spouse is eligible to enroll in a health plan through their employer, you would not qualify for the premium reduction. This is also the case if you are eligible for Medicare. The premium reduction applies to periods of coverage beginning on or after February 17, 2009.

There is also an income limitation in effect and if your MAGI for the tax year in which the premium assistance is received exceeds $145,000 (or $290,000 for joint filers), then the amount of the premium reduction during the tax year must be repaid. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers), the amount of the premium reduction that must be repaid is reduced proportionately.

For more information, be sure to check out the COBRA page at the U.S. Department of Labor.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

COBRA Changes – Premium Reduction Under the American Recovery and Reinvestment Act of 2009

If you’re covered by a health plan, you’ve probably encountered the words deductible, co-pay, and co-insurance a number of times when examining your bills, paying your doctor for a visit, or simply looking at the benefits package from your employer. These terms can be a bit confusing, and with all of the limits, maximums, and different coverage options, it is important to understand what they mean so you can obtain the best coverage for the right price.

When looking at your health insurance options, it’s important to go beyond the premium. The premium is the amount you pay each paycheck or month just to have the coverage. Obviously, you want the lowest premium you can get for the coverage you want, but you really need to look beyond that. Saving $20 a month on your insurance premium may end up costing you hundreds of dollars in co-pays or out-of-pocket expenses. So, let’s take a look at how you can make sense of all these terms.

Defining the Terms

Deductible

This is probably the most straightforward, and easiest ways to change the premium on your policy. The deductible is the amount that you need to pay for a claim before the insurance kicks in. If you have a $50 deductible and you are billed for $500 in services, you’d need to pay $50 out of pocket before the remainder is sent off to the insurance company.

Obviously, the higher the deductible you choose, the lower your premium will be since you’ll be covering more of the expenses out of pocket. So, you have to be careful. If you choose a high deductible in an effort to keep premium costs down, a period of poor health or unexpected medical treatments could add up quickly.

Don’t forget the maximums. Deductibles usually have an annual maximum, for both individuals and families. When comparing plans or options within your plan, determine how likely it would be that you’d reach those maximums, and if two plans have different maximums, think about which one provides the best cost-to-benefit ratio.

Co-pay and Co-insurance

The co-pay is probably another common term you’ve heard, and have probably paid a number of times without thinking much of it. Co-pay and co-insurance are basically the same thing, but cover different items. In either case, this is the amount of money you have to pay for a claim or service rendered. The difference is that a co-pay is typically a flat dollar amount for a specific item such as an office visit, exam, or prescription. Co-insurance is typically based on a percentage. This means that you’re responsible for a certain percentage of a claim, and the insurance provider is responsible for the rest.

Again, when comparing plans, the co-pay amount or co-insurance percentage can play a big role in how much your premium is. A plan with an 80/20 co-insurance (insurance company pays 80%, you pay 20%) will have a higher premium than a 50/50 plan, and so on.

Compare All the Numbers

So, when you’re exploring your health insurance options, it pays to look at more than the premium. While the premium directly affects your bottom line, saving a few dollars on the premium could cost you much more in the long run, and paying a higher premium for coverage you might not need may also cost an unnecessary bundle.

This is especially important if you have a certain condition that requires specific tests or drugs, or if you are planning on having a baby, as the amount of coverage provided for these items may require digging a little deeper than glancing at your premium. So, take the time to completely understand your health benefits, and you can be sure that you’re getting as much coverage as you need, and paying no more than you have to.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Comparing Deductible, Co-Pay, and Co-insurance When Looking at Your Health Insurance Benefit Options

What happens when you are sued for more than your basic homeowners or auto insurance policy covers and are found liable? Well, for most people, it would mean liquidating unprotected assets in order to satisfy the judgment. This may mean garnished wages, selling property, and possibly losing some of your investments. This is certainly a situation that could ruin your life, but there are ways to protect yourself.

What is an Umbrella Policy?

A personal umbrella policy is additional coverage that goes above and beyond what your homeowners and auto insurance policies cover. Think of it as a protective umbrella that will pick up the damages once you have exhausted your coverage of those policies.

Here’s How it Works

Let’s say that you’re having a 4th of July cookout with some neighbors, and one of your neighbors suffers a major injury while in your home. You don’t think much of it because you know that your homeowners policy covers liability up to $100,000. But to your surprise, the neighbor is suing for $1 million in damages. How on Earth will you ever be able to come up with $900,000?

If you don’t have an umbrella policy, you could find yourself in a very ugly situation. But let’s say you had the foresight to purchase a $1 million umbrella policy. Guess what, you’re in luck. Your homeowners policy would pick up the initial $100,000, and the remainder would fall under your umbrella. This could save you from losing almost everything you’ve worked your whole life for.

It is also important to realize that this type of policy works for auto accident claims as well. We all know how dangerous the roads are, and most people only have a few hundred thousand in liability coverage through their auto policy. Just a seemingly small accident can do a great deal of damage to the occupants of another vehicle that leads to a potential significant lawsuit. Are you willing to share the road with all those crazy sue-happy drivers with only $200,000 in liability protection?

How Much Does It Cost?

Most people just assume that since the coverage amounts are typically in the millions that it would simply be too expensive to purchase. This is generally not the case. In many instances you can obtain $1 million in coverage for just $200-$300 per year. Think about that–the annual cost of a million dollars of coverage is probably less than half of what you spend annually on your cable or cell phone bill. Sure, you may never need it, but if you ever do, you’ll wish you had it.

Where to Get It

You usually never have to go past your own current insurance provider. The first place to check is with your homeowners insurance provider and see what they offer. Even if you don’t own a home, or want to look for other options, I’d check with your auto insurance provider. I use Progressive for my auto insurance, and they also offer an umbrella policy. I don’t have one through them, but when I looked last year, it had an annual premium of $250 for $1 million in coverage. You can also look for coverage elsewhere, so there is nothing stopping you from shopping around. But keep in mind that having multiple policies with one carrier may provide additional discounts.

How Much Coverage?

This answer will be different for everyone, and due to variances in state laws regarding what assets may not be subject to seizure,  it is impossible to say that you should have a specific amount of coverage. This is where it pays to speak to an attorney. Even so, there is a general rule of thumb that suggests that you should have enough protection to equal your net worth, rounded to the next million. So, if your net worth is approximately $600,000, you should err on the side of caution and have a million in coverage. Granted, some assets may be protected in your situation or state, but given how inexpensive the premiums are relative to the coverage, it is better to be slightly over insured in this instance.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Protect Yourself from Catastrophic Loss With the Often Overlooked Umbrella Policy

Your home is likely your most valuable asset–make sure it is properly protected. While insurance agents will help determine the kind of coverage you can buy, it is ultimately your responsibility to know what the policy covers. And remember, insurance agents are salesmen and typically work on commission. This isn’t a bad thing, but be aware of what type of coverage you actually need so that you can spot it when you’re being sold something you don’t truly need.

This has been a topic of renewed discussion recently with all of the floods and severe weather in the midwest. Many people had assumed that they were in no danger of a flood, and now that their home is under water, they find their policy isn’t going to cover the damage.

1. Review your policies annually. A walk-through of your coverage needs with your agent may identify other coverages (i.e., jewelry, artwork, etc.) that you need, as well as ways to save on premiums such as bundling auto and home insurance coverage together with one provider or requesting higher deductibles to help contain your costs.

2. Identify risks you face that are not covered by your homeowners policy. Disasters such as floods and earthquakes need a separate policy or riders to protect your home if tragedy strikes.

3. Understand how much coverage you have. Many homeowners believe their insurance policy will replace their damaged or destroyed property regardless of the amount of damage incurred. Remember, it is generally not your home’s market value that is covered, but rather its replacement cost. Home additions and major kitchen or bath remodeling projects can add significant value to your home, which may not be covered by your current policy. It is important to that your coverage is sufficient, based on your home’s replacement cost.

4. Do your homework when shopping for insurance. Get quotes from different carriers. Since rates can vary, make sure you compare coverage on an apples-to-apples basis so you can spot when a lower price really just represents less coverage. Consider higher deductibles to help reduce your premiums or ask if discounts are available for installed safety and security devices such as smoke detectors and alarms.

5. Research carrier performance. Ask your friends and neighbors for references. Also research the financial strength of carriers through independent third-party sources such as state insurance departments, A.M. Best, Standard & Poor’s, and customer satisfaction ratings at the J.D. Power Consumer Center.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

5 Quick Homeowners Insurance Tips That Can Save You Money and Your Home

I occasionally receive questions from readers that ask about a number of financial issues, and a recent reader asked: “Is is smart to buy disability insurance?” Of course, without understanding someone’s complete financial situation, it is impossible to give a straight “yes” or “no” answer, I can provide some insight as to when it is smart to buy disability insurance.

Before jumping into the question, I just want to recap what disability insurance is if you aren’t familiar with it. Simply put, disability insurance is a policy you purchase that will supplement your income in the event of a disability that keeps you from working. This insurance is meant to allow you to keep a stream of income to help you stay on top of your finances if you will be out of work for an extended period of time.

An Example of How Much it Can Benefit You

If you’re 35 years old, earning $50,000 per year, and become disabled for the rest of your life, you’ll be missing out on around $1.5 million in income between age 35 to 65. And this doesn’t even take into account raises, promotions, or benefits that you may have earned over this period. So, an average person could be putting a couple million dollars or more at risk by not carrying disability insurance. When you think of it that way, it is kind of scary, isn’t it? You may have a $500,000 term life policy to insure against your death, but you may be neglecting even more by not protecting against a disability.

When Disability Insurance is a Good Idea

Do you earn income? If so, buying disability insurance is probably a smart thing to do. You’re far more likely to become disabled for six months or more during your working years than to die. In fact, even at age 30, you have a 1 in 5 chance of becoming disabled for a year or more. Even one year without income could be devastating to your finances. At best, you may have to deplete your emergency savings. At worst, you won’t have enough saved up to cover all of your expenses during this time and have to resort to taking on expensive debt. In some cases, a long-term disability can force people into bankruptcy.

When Disability Insurance Not Such a Good Idea

Even though you can clearly see the benefits of protecting your income against a disability, it isn’t for everyone. For example, if you’re married and both of you work, you could be in a situation where two incomes aren’t a necessity to pay the bills. You or your spouse may be working part-time just for extra money, or otherwise still be able to get by without both incomes. In a case like this, it might not make sense to pay disability insurance premiums on both parties, so money could be saved by only covering one of you.

One of the biggest hurdles is that disability insurance is another premium to pay, and if money is tight, this is almost always out of the question. If you can hardly keep up with your minimum payments and monthly bills, buying disability insurance may do more harm than good. Think of it this way: if you can hardly keep up now, with full income, even if you have disability insurance, at best you’ll still be treading water, and more likely, only earn a portion of your income from a claim, and end up heading for bankruptcy regardless.

It isn’t a fun topic to discuss, but it is real. Disability is the number one cause of home foreclosure and bankruptcy. You need to protect against it if you can, but if your finances are already in disarray, you need to get that house in order before you can take on another monthly payment to obtain insurance.

What About Social Security Disability?

Good luck. Social security benefits are hard to qualify for, and even if you do, the amount you receive is very low relative to what your pre-disability income was. I’ve written about how hard it is to qualify for, and receive Social Security disability benefits in the past. So, don’t count on it, and view any benefits you receive from Social Security as a bonus.

How to Obtain Disability Insurance

First, you should check with your employer. If you’re a full-time employee with benefits, there is a good chance that you receive some sort of disability insurance. In some cases, your employer will pay for a short or long-term disability policy automatically, and in other cases, you may have the option to purchase additional insurance through their group plan. Obtaining coverage through a group plan will almost always be cheaper than going out and buying coverage on your own, so check there first.

If your employer doesn’t offer coverage, then you’re going to be on your own to find a policy. Shopping for any insurance policy requires some homework since there are a lot of shady sales reps and companies that may appear to offer low-cost coverage. Many of the large insurers will offer disability, or work with a company that does. Check with your current insurance companies, whether it is homeowners, life, or otherwise and see what they provide.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

Is it Smart to Buy Disability Insurance?