Flexible Spending Accounts Provide an Easy Way to Save Money and Pay for Health Care Expenses

One unfortunate result of rising costs associated with health care and health insurance is that employers are now looking for ways to trim employee health benefits. This usually includes increasing co-pays, out-pocket-costs, and deductibles. The good news is that employers are also conscious of the burdens such benefit cutbacks could potentially have and are thus introducing new services to offset the increased costs shouldered by their employees.

Flexible spending account plans are just one such product intended to minimize the strain employees face while their employers transition to a different, more affordable health benefit program for the company. These plans are meant to act as sort of a personal insurance paid for by the employee with the benefit coming in the form of a tax break.

Moreover, in contrast to a health savings account, a flexible spending account is a program through which employees set aside money which they predict will be spent in the upcoming coverage year. Under a flexible spending account plan some predetermined amount of money is automatically deducted from an employee’s pay check and deposited in an account. These funds are then to be spent on a qualifying expense in that same plan year.

More specifically, flexible spending account plans are aimed at partially covering the gap in out of pocket expenses created by higher co-pays and deductibles. The kinds of expenses which may be covered under a flexible spending account plan are limited to health care costs and costs associated with caring for a dependent. Although employees must still assume the responsibility for these increased expenses, under the plan it would be possible for plan members to use pre-tax dollars for some expenses. Generally speaking, the savings when participating in a flexible spending account will be anywhere from about 20-35%.

Joining Your Employer’s FSA

With a flexible spending account employees are given the opportunity each year to opt-in to the plan. Each employee carefully determines how much of his or her salary will be directed to the plan at the beginning of the coverage year. it is It is especially important to estimate your costs wisely because an FSA is a use it or lose it plan and money leftover in the account after the plan year ends will be forfeited.

The funds to be dedicated to the plan are called “benefit elections.” For medical care and dependent fare flexible spending accounts, the coverage period is 12 months, although there may be a brief extension in some plans. Sometimes employers will begin plan benefits at an irregular time of year for the first coverage period with the intent that the first year will be a “short plan year,” and that the next plan year will begin on the normal starting date. In such cases the period of coverage must be the entire short plan year. If employee voluntarily terminates employment during a coverage period they may either forfeit all available funds or discontinue making contributions or they may continue making contributions through the end of the plan year through COBRA. The deadline for qualifying expenses to be used before forfeiture is typically either December 15 or March 15. Employees should seek information from their employers or plan providers to be sure about the correct date. Also, only services which have been performed after the start of the coverage period are reimbursable. Hence, bills or records from before the coverage period are not eligible for reimbursement.

Deductible Expenses

Many, but not all medical expenses are potentially reimbursable from a flexible spending account plan. The expenses which may be excluded from gross pre-tax income according to tax code Section 213 may be reimbursable; however, any expenses reimbursable through any other health care plan of which the employee is a participant may not be reimbursed through a flexible spending account.

Typical reimbursable health care expenses:

• Ambulance services
• Coinsurance
• Contact lenses
• Dentures
• Eye exams
• First aid supplies
• Lab tests
• Physical therapy
• Mental health expenses
• Smoking cessation
• Substance addiction treatment
• X-rays

Health care expenses generally ineligible for reimbursement:

• Cosmetic surgery for appearance only
• Dental bleaching
• Ear piercing
• Health club memberships
• Life, LTC, or disability insurance premiums
• Marriage counseling
• Massage therapy
• Tattoo removal
• Weight loss treatments (unless specifically prescribed by a doctor)

For more information about expenses which may be reimbursed under a flexible spending account plan, see “Medical and Dental Expenses” which is also known as IRS Publication 502. The document provides an exhaustive list of eligible services and expenses. Expenses which are typically not reimbursable under most plans are generally cosmetic or services and products not usually considered to be health care related.

Despite the fact that the decision to participate in a flexible spending account plan is made annually, in certain circumstances it is possible for plan sponsors to permit employees to alter benefit election requirements. For example, an employee who either marries or divorces during the coverage period may be permitted to alter the amount of his or her salary that must be contributed to the flexible spending account. Other conditions under which the terms of a plan may be changed include a change in the number of dependents and a significant change of residence or work location.

Changes for 2011

Starting January 1, 2011, you will need to be careful when planning your FSA deduction amount because there are changes in what can be reimbursed when it comes to over the counter drugs. In most cases, regular OTC drugs will not longer be eligible, but there are exceptions on insulin for diabetics and if your doctor prescribes a specific OTC drug. So, keep that in mind when making your elections for the 2011 plan year.

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.

Flexible Spending Accounts: Is a FSA Right for You?

What is a Health Savings Account?

Health savings accounts (HSAs) allow individuals to save money for health care expenses on a tax-deferred and tax-free basis. This law was signed into law on December 8, 2003 and became effective on January 1, 2004. The tax deferred money can be invested into mutual funds, stocks, cash or bonds and can earn interest. The money can only be used for medical expenses otherwise taxes and a possible penalty may apply. Individuals with high deductible health insurance plans are eligible to open a health savings account. High deductible insurance typically require $1,000 or more in out of pocket expenses before it can qualify as such.

In 2003, health savings accounts were introduced as a part of a “consumer directed health care” initiative. The government encouraged these programs as a means to control health care costs. Health care companies and the government assumed that physicians would have an incentive to lower their health care costs if the physicians had to compete for a patient’s business. Consumers would also demand better care if they were spending their own money as opposed to a company’s or insurance company’s money. How well this has worked is obviously up for debate.

Individuals who are generally healthy will typically benefit from investing in a health savings account as it’s an effective way to pay for routine doctor visits, prescriptions, and procedures. However, individuals who may need immediate health care should assess whether or not they can afford their deductible and weigh the options. If you have a possible need for an expensive procedure in the next few years it may be far cheaper to pay the high deductible instead of putting money aside in savings that may not cover everything and have little time to reap the tax benefits.

How Does a Health Savings Account Work?

Funds deposited into a health savings account will continue to accumulate tax-deferred from year to year if they are not spent. A lot of people mistakenly assume these accounts are “use it or lose it” but that actually applies to Flexible Spending Accounts, or FSAs. The funds accumulated in the account are the individual’s and are not owned by your insurance provider. The funds may generally be withdrawn at any time, but in order to withdraw the funds without paying taxes on the gains or be assessed a 10% penalty they must be used for a qualified medical expense. Qualified medical expenses include:

• Insurance Deductibles
• Co-Payments
• Dental
• Vision
• Chiropractic Care
• Eyeglasses
• Hearing Aids
• Some Cover Mammograms
• Prostate Exams
• Colon Cancer Screenings
• Pap Tests
• Well Baby Care
• Annual Physicals
• Medical Transportation Expenses
• Non-prescription Medications, until 2011

However, beginning in 2011 over the counter medical expenses will not be covered. If the individuals need to withdraw the money for non-medical expenses, then those funds will incur penalties. You should refer to the guidelines to determine the exact penalties associated with non-medical expense withdrawal.

Each year consumers may contribute up to a maximum amount to the health savings account. Depending upon the person’s familial status, the amount varies. The maximum amounts are listed below:

• Individual with Self Coverage (2010): $3,050
• Individual with Family Coverage (2010): $6,150
• Catch Up Contributions for Age 50+ (2010): $1,000

Other than the maximum contribution, individuals can contribute as little as desired. You  also can decide which company will manage the account and subsequently choose what type of investments to make with the money in the account.

According to America’s Health Insurance Plans (AHIP), as of January 2009, nearly 8 million people were covered by the health savings account. Most were covered under a group plan which comprised 6.2 million of the people enrolled. Nearly, 1.8 million people are covered by individual policies. That number has increased since 2008 when only 6.1 million were covered under this type of program.

Statistics show that on average most people withdraw half of what they put into their HSA each year. For instance, if the average annual deposit was $2,100, then the average withdrawal was approximately $1,000. Individuals can withdraw from the account in a variety of ways. Some health savings account providers allow the contributor to have a debit card to withdraw funds. Other health savings accounts provide checks for contributors to withdraw funds. And some will allow you to make payments on your own and submit for a reimbursement.

The process will depend upon the provider you select which means it’s important to choose the right provider for your needs. The checks or debits can be made payable to anyone. However, those checks may incur a 10 percent penalty along with income taxes if it’s determined the payment was not for a qualified medical expense. Therefore, make certain to plan accordingly to avoid penalties and taxes. If the person is over the age of 65 or disabled at the time of withdrawal, then the 10 percent penalty may be waived.

Who Can Establish a Health Savings Account?

To qualify for a health savings account individuals must be under the age of 65 and possess a high deductible health insurance plan. If there is a spouse covered on the insurance, both must fall under the high deductible. Furthermore, each individual can only be covered by the high deductible health insurance without having a secondary provider. However, the covered  can possess vision, dental, disability, and long term care insurance in addition to the high deductible health insurance plan which are not typically covered under regular health insurance plans.

According to one study, 46 percent of the health savings account holders were from a lower to middle income community with a median income between $25,000 and $50,000. Thirty-four percent of the individuals lived in middle income neighborhoods between $50,000 and $75,000. Twelve percent lived in an upper income neighborhood with a median income of $75,000 to $100,000. Three percent and five percent represent the lowest income neighborhoods and highest income neighborhoods, respectively. The low income neighborhoods represent median incomes below $25,000, and high income neighborhoods represent people with median incomes above $100,000.

Where Can You Set up a Health Savings Account?

Some employers offer health savings accounts to their employees so that is a good place to start. Employers may allow employees to contribute to a health savings account before their income is taxed as it comes right out of your paycheck. Some employers may even match what the employee contributes or fund the entire health savings account for the employee. Since each plan offered at the employer level is different you will want to check with your own employer to get the details.

For those who sign up for an independent health savings account through an insurer or bank, then the contributions made annually may be filed as a deductible expense on your taxes. Many of the insurers that offer health savings accounts are available on eHealthInsurance. Other options may be available by contacting the National Association of Health Underwriters. Some examples of health insurance companies that offer health savings account are listed below:

• Aetna
• Coventry
• United Healthcare
• AARP
• Anthem Blue Cross Blue Shield
• Cigna
• Kaiser Permanente
• PreferredOne
• Providence Health Care
• Rocky Mountain Health Plans

As of 2006, over 600 banks were also offering health savings accounts to individuals and to companies. Even more banks are offering this feature today, so another safe bet may be to check with your own local bank and see if they have an HSA plan available.

Summary

Some people  are obviously hesitant about this particular savings plan compared to traditional health insurance. However, this plan gives you much more control over your money. With an HAS you have the ability to take some money out of your insurer’s hands and control how much you set aside, where you save that money and what kind of interest it receives, and then choose how to spend it. All while receiving tax benefits for doing so.

At the same time, these plans aren’t for everyone. Your specific health coverage, deductible amount, and health care needs will ultimately dictate which plan is right for you. You’ll have to take a look at all of the variables in your situation and determine if an HAS is able to save you money or not.

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.

Health Savings Account (HSA) Basics

Life insurance tends to get a bad reputation even though most people have a legitimate need for coverage. The main problem is that there are many different types of life insurance and almost all policies are sold by someone working on commission. This scenario is perfect for abuse when you have people pushing a product to make some money and ends up caring more about the commission than finding the right amount of coverage with the right type of policy. Because of this you’ll often hear stories about how someone got sucked into a massive whole life policy at a young age, or signed up for million dollar term life when they don’t even make $50,000 a year and don’t have any kids.

These stories may be fairly common, but it doesn’t mean life insurance is a bad product or that you should shy away from determining how much life insurance you need. If you understand the different types of coverage and calculate how much you really need you’ll be able to get the protection you desire without feeling ripped off for buying too much or getting into the wrong policy.

Do You Even Need Life Insurance?

Before going on to find out how much life insurance you need you must first determine if you even need it. If you ask someone who sells insurance for a living they will tell you everyone needs life insurance regardless of what their situation is in life. This just isn’t true. There are plenty of people and situations where life insurance simply doesn’t make sense. So, how do you know if you’re someone who needs life insurance or not? Here are a few general rules to follow:

You probably need life insurance if:

• You are married.
• You have children.
• You have a desire to leave a beneficiary something upon your death.

You probably don’t need life insurance if:

• You are single.
• You are older and your children are no longer dependent.
• You are married but only your spouse earns an income.

Now keep in mind that these are generalities and not black and white questions. There are situations where there may be a combination of factors going on that warrant coverage even if the general consensus says otherwise. To put it simply, ask yourself this: If I were to die, would that place a financial burden on someone else? If you answered yes to that question that’s a pretty good indication that you need some sort of life insurance.

The Different Types of Life Insurance

Once you’ve determined that you could use some life insurance you’ll then want to consider the different types of life insurance options. To keep things simple, life insurance is generally broken down into two forms: term and cash value. Term life is just what you’d suspect. It’s an insurance policy that is only effective for a specific term and when that term is up the coverage ends. Policies that have a cash value come in a few different forms, but their goal is the same. They provide a death benefit just like term life but they don’t expire after a certain number of years (as long as you stay current on premiums) and a portion of your policy premiums build up cash value over time.

To get a better understanding of the different types of policies let’s look at some of the details of each:

Term Life -  This is the cheapest way to obtain life insurance. You select the length of coverage, typically 5, 10, 20, or 30 years, and make premium payments as long as the term is in effect. The premiums typically remain the same for the life of the term and when the term is up you stop making payments and the death benefit goes away. Term life is cheap because the policy only lasts a set number of years and doesn’t have any sort of cash value or investment option. Term policies are best for those who need coverage for just part of their life such as while they are married and in their prime earning years or while there’s a dependent child in the house.

Whole Life - Unlike term life insurance whole life is meant to provide a death benefit for someone’s entire life as long as the premiums are paid. Because these policies are effective in most cases until someone dies the premiums are much higher since the insurance company will almost certainly have to pay out a death benefit at some point. Whole life also has a cash component that will take part of each premium payment and set it aside in a separate account earning a set interest rate. Because of the significantly higher premiums and low rates of return on the cash portion whole life is almost never recommended for young people simply looking to protect their family. Like term life, generally the premiums remain the same for the life of the contract.

Universal Life – Similar to whole life in terms of having a cash component and still unlike term life, universal policies provide a little more flexibility over whole life. With universal life you can usually increase or decrease the death benefit at some point in the future and you may have a few different investment options for the cash value component of the policy.

Variable Universal Life – Here’s where things get a bit complicated. Similar to the other cash value policies you pay a higher premium than term life and some of that goes into an separate investment account. But instead of generally earning a regular interest rate you have the ability to invest that money into a all sorts of things such as mutual funds, putting your money at risk. These investments also increase the total fees paid which hurt your returns but help pad the insurance salesman’s wallet. These are the policies that have really given insurance a bad name in recent years and since very few people have a situation in where this type of policy can help you should probably think twice if someone mentions a VUL to you.

Calculating How Much Life Insurance You Need

So, you’ve determined that you do need life insurance and have identified the type of policy that’s right for you, but how do you come up with the magic number for how much coverage to have? It’s not as hard as it sounds so let’s walk through the process.

First, take stock of any life insurance policies you already have. Maybe your parents took out a small whole life policy on you when you were just a child or maybe you already have some coverage through your employer. While you’ll want to take any existing policies into account, don’t hold them with as much weight because like with your employer’s insurance it may disappear if you change jobs, or the little policy your parents took out on you might be too expensive to keep paying premiums on for the provided death benefit so you may opt to cancel or cash it out.

Next, look at your other assets that would be given to your beneficiaries upon your death. If you have a 401(k), IRAs, property, or other assets that have your spouse or kids listed as beneficiaries they will receive the bulk of those proceeds upon your death just like they would from an insurance policy so these funds may offset some of the coverage you think you need and can help you keep premiums down.

Using Income Rules of Thumb

Now it’s time to look at how long you need coverage. We’re going to assume you’re looking at term life which is the most common so you probably want to have coverage while you have dependent children, so you’re usually looking at a 20-30 year term. For sake of calculations we’ll go with 20 years. If you need coverage for 20 years you’ll want to start with the worst-case scenario if you were to die in that first year. How much money would your spouse and/or dependents be missing out on if that were to happen? If you make $50,000/year the easiest way to figure that would be to take $50,000 x 20 years, or $1,000,000. That means if you were to die within the first year of the policy your beneficiaries would receive enough money to directly replace your lost income for the next 20 years.

That’s a good rule of thumb, but it’s not always as simple as that. For example, your income probably wouldn’t remain static for the next 20 years and you’d probably receive pay increases over time. On top of that you want to factor in inflation. Remember, $50,000 in year 1 is going to be worth a lot more than $50,000 in year 20. So, maybe you take your replacement income and come up with an average inflated number to use for your calculation. If you make $50,000 today and expect your pay to increase with inflation you might expect your income to be upwards of $90,000 by then. Without getting too complicated you could then use these two numbers and split the difference for an average income over that time and maybe use $75,000. So with $75,000 x 20 you get $1.5 million.

Remember what we talked about above with looking at existing policies and assets? Well, if you have say a $50,000 policy through your employer and $200,000 tucked away in retirement accounts and other assets you could reduce your life insurance death benefit accordingly and save on premiums. So instead of $1.5 million you may only want to get $1.25 million in coverage. There is no right or wrong way to figure this in, but keep that in mind so you can balance your true death benefit needs and keep premiums as low as possible.

Using a Bare Bones Approach

The income rule of thumb above is great for maximizing your death benefit to ensure your beneficiaries don’t miss a beat, but covering two people to match their income for the length of the term may put the insurance premiums out of reach for many. That’s ok. What a lot of people do instead is take a look at their financial situation and determine what the bare minimum of coverage should be so that if something were to happen your spouse or children aren’t faced with a financial hardship. For most families this means keeping up with the mortgage and car payments, paying off other debts, and putting some food on the table.

So, that means you can determine how much coverage you need so that you can alleviate those concerns for your loved ones. Assuming the worst-case again where you die in the first year of the policy you should add up all of your current debts. Say you owe $150,000 on your current mortgage, owe $15,000 on a few cars, and have $5,000 in credit card debt. If you were to die your spouse and children would be left to live on just one income and still need to keep up with all of the above debt payments. But you can add up those debs to get a bare bones number: $150,000 + $15,000 + $5,000 = $170,000. To be safe, you may want to tack on another $10,000 that would be used to cover funeral expenses. So, here we’re at a $180,000 death benefit.

To understand how this may be all you need, consider what happens if you were to die in the first year. That $180,000 would be enough to pay off the house, the cars, wipe out the credit card debt, and pay your final expenses. With all of those things eliminated your spouse doesn’t have a mortgage, car payments, credit card bills, or any of that to worry about. As long as they are working there’s a good chance their single income will be more than enough to live off of.

Making Sure You Can Afford Life Insurance

You’ve seen the two extremes in the examples above. You can go all out and give your beneficiaries complete replacement income or you can get just enough coverage to eliminate your existing debt so they don’t have to worry about trying to make the payments when you’re gone. It goes to show you that there’s no right or wrong answer when it comes to determining how much life insurance you need. Your priorities, financial situation, and use of the death benefit will determine how much you should have. For some it might be a lot, but others may only need a little. So, don’t get caught up on numbers people throw out there as must-haves when it comes to insurance. It’s up to you to decide that.

But whatever you decide it’s important to make sure it fits within your budget. If your premiums cut into how much you’re able to put into an emergency fund, save for retirement, or pay down your debt, you’re buying too much insurance. Those items should take priority and insurance should be something that you can comfortably add on to your monthly expenses without negatively impacting the other areas of your budget.

To give you an idea, term insurance is much more affordable than you may think. For example, my wife and were shopping for policies and for non-smoking 30 year olds we were looking at $500,000 20-year term life policies around $240/year or $20/month. 20 bucks a month, that’s it! When you look at how much you might spend on things like cell phones, internet access, your daily Starbucks and so on, it really puts things into perspective. It really wouldn’t cost much to make sure our family is taken care of if something happened one of us.

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 Much Life Insurance Do You Need?

If you have a car, then you need auto insurance. There’s a good chance you’ll never need to file a claim, but car insurance is one of those things that you’re thankful you have if you do. Depending on many factors such as how many vehicles you have, your driving record, and age, auto insurance can run into the thousands of dollars per year. Because of this high cost you can probably see what it’s important to find a policy with low premiums. Even though the cost of the policy is important, it is also important to make sure you’re adequately covered. If not, just one minor claim could cost you far more than the money you thought you were saving.

Shop Around

The insurance industry is very competitive, and there are seemingly countless companies to choose from. So, with so many options available the best thing you can do is to shop around. You’ll be surprised how the exact same level of coverage can vary between companies. So don’t just pick one or two popular names, get quotes, and stop there. You should probably check with 3-5 insurers so you have a good idea of what’s out there for you.

With a lot of companies offering online services, it is easier than ever to get quotes, but don’t stop there. You’ve seen the commercials for companies that boast about the savings, but don’t ignore your local insurance companies. Usually a quick phone call is all it takes to obtain a quote from them and believe it or not, they may even be cheaper than one of the companies you see on TV.

Ask About Discounts

Do you have a clean driving record? You may qualify for a discount. Are you a member of a professional organization or auto club? You may qualify for a discount. There are many ways that you can obtain a discount on your policy, so be sure that when you’re shopping around, you mention anything that might qualify. Even something as simple as letting your insurer know you have a car alarm or how many miles you usually drive can qualify you for a nice discount.

Also, don’t forget multiple policy discounts. If you own a home it might be worthwhile to check with that insurance company to see what kind of discount you could receive by purchasing your auto insurance through them. In many cases, this could mean a reduction of up to 20% on either your homeowners or auto insurance premium. When you’re talking 20% off something like a $1,000 annual premium that’s some real savings. Use this discount to weigh against the other quotes you get and see if it’s worth switching.

Drive a Less Expensive Car or Drop Some Coverage

The type of car you drive plays a big role in determining how much your premium will be. Just like insuring a larger and more expensive house will require a higher premium the same goes for vehicles. That luxury SUV is going to sometimes cost double that of a standard sedan. In addition, insurance companies keep tabs on what vehicles are more likely to be stolen. If you drive a car that is a target for thieves, expect to pay more for coverage. Here are a few things to think about before buying your next car.

If you are insuring an older vehicle it may be time to drop full coverage. For example, if you are driving an older car that is only worth a couple thousand dollars, it probably isn’t worth paying for comprehensive coverage. In many cases, after you factor in the premium and deductible after an accident, you have spent more than the car is worth. So, it might make sense to drop everything but liability coverage on an older vehicle. Keep in mind that this may not be possible if you still have an outstanding loan on the vehicle so if full coverage on a car that’s only worth $5,000 is killing you yet you still have a balance on the loan this may be a good incentive to get that loan paid off early so you can modify your policy.

Don’t Underinsure

If you are facing high premiums, don’t simply reduce coverage in order to save money. Remember, when you are driving, you are putting your life and the lives of others on the line. Reducing coverage will simply reduce the amount of liability and injury coverage. With the high cost of medical treatment, even a relatively minor injury to you or others could go beyond what a low coverage policy might cover. And don’t think it can’t happen to you. People will sue for anything in this country and it can takes years and a mountain of legal fees just to clean up a relatively small claim. That fender bender you got in could cost you tens or even hundreds of thousands. Suddenly, saving $50 on your insurance premium doesn’t sound like a good idea when you’re on the hook for $50,000 in uncovered medical bills and legal fees.

You want to be sure that you are insured enough to protect yourself and your assets in the case of a lawsuit. While most states have minimum coverage requirements, they are usually far lower than what you should be considering if you want to protect yourself. Your car can make you poor, but not having enough coverage can bankrupt you.

Buy Insurance from a Reputable Company

In the event of a claim, you want to be insured by a company that will pay out. If you try to save a few bucks by dealing with an insurance company that isn’t highly rated, you may find yourself having difficulty if you need file a claim. Many of these companies will also entice you with a low initial quote, but come renewal time, they will surprise you with a large increase. After an accident or damage to your car the last thing you want to be doing is spending months fighting with your insurer to get a legitimate claim paid.

Additional Reading: 8 Ways to Save on Auto Insurance

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 Find the Best Car Insurance Policy

Should Singles Even Consider Life Insurance?

Ask anyone if a single person without any dependents should get life insurance and you’ll almost certainly be told no. But like most financial decisions, it isn’t as black and white as that. Sure, if you’re just a single 30-something living alone without kids it would seem like buying term life insurance would be a huge waste. After all, who do you have that you can leave money to? You don’t have a spouse or children that depend on your income, so that isn’t an issue. This is all true, but there’s an interesting fact about life insurance that puts people who wait at a significant disadvantage.

It all has to do with the cost of premiums and insurability. In the insurance industry, the older and less healthy you are, the more you pay for insurance. When you think about it, this is common sense. Say a 20-year old wants to buy a 30-year term policy. The insurance company knows that the policy will expire when this person is just 50 years old. Statistics show that the chances of this person dying over the course of this term is quite low. Compare that to a 45-year old looking to buy the same 30-year policy. Now, the insured person will be 75 years old before the policy expires. This person has a much greater chance of dying during the length of the policy so the insurance company charges a significantly higher premium since they are assuming greater risk.

The same situation plays out in terms of your overall health. At 25 you might be in the best shape of your life and have no major medical conditions that have developed yet. So, an insurance company is likely to insure you since you don’t have any major health issues. Again, after another 10 or 20 years go by you may develop any number of health issues that could make you completely uninsurable. What if you waited a few years until you did get married or have kids only to find out that you now can’t give them the protection they need because you’ve developed a health condition that was completely out of your control?

Looking at the Numbers

So, what is the real difference in premium as a typical healthy person ages? I went ahead and ran some quotes for a number of insurers to see what we could come up with. For this I stuck with your standard 30-year level term $500,000 policy at the preferred non-smoking status. Here are the average numbers:

• 25 year old 30 year term – $525/year or $15,750 total
• 30 year old 30 year term – $550/year or $16,500 total
• 40 year old 30 year term – $810/year or $24,300 total
• 45 year old 30 year term – $1,420/year or $42,600 total

As you can see, there isn’t much difference between age 25 and 30. But look what happens when you let ten years slip by and want to buy the policy when you’re 40. The premium is 47% higher, costing you nearly $8,000 more over the term. Just five more years go by and you’ve nearly doubled that premium costing you more than $18,000 extra. It’s obvious to see how purchasing your term life insurance as soon as it’s appropriate to can save you thousands.

So, Should a Single Person Buy Life Insurance?

Does this mean a single 30-year old guy should rush out and buy life insurance? Not exactly. You really have to look at your situation and lifestyle to see if is something you may end up needing in the future. For example, if you enjoy single life and never want to settle down with a spouse or have a family, there’s probably no need to buy insurance. But if you’re 30 and in a relationship and hope to finally settle down with someone and have a family in a few years you may want to start looking at your options. As you can see, just waiting 5 years to purchase insurance can make a big difference in how much you ultimately pay, so even if you’re covered for a few years while you aren’t married or have children it could still save thousands of dollars. Or, let’s not forget the worst-case scenario, where some health issue may come up in those few years while you wait and suddenly you can’t get insurance at all, or need to pay a premium so high it isn’t even affordable.

Take a look at your situation and see if it makes sense. If you’re already in a serious relationship and marriage is on the horizon the sooner you pick up coverage, the less you’re going to pay. If you don’t have any prospects of getting married or starting a family, then sure, you may want to spend that money elsewhere. It really depends on you and there’s no right or wrong answer.

Don’t let life insurance get in the way of your other financial goals when single. If you’re burdened with debt, have student loans, or otherwise need all the cash flow available while you’re single, keep that in mind. It isn’t worth saving money on insurance if it’s going to make it take longer to pay off high-interest debt.

But What About Beneficiaries?

If you aren’t married and don’t have kids, what’s the point? Who would you leave the money to? The great thing about life insurance is that you can usually change the beneficiary at any time. So, if you aren’t married yet and still decide to get a policy you can initially put anyone you want down as a beneficiary. Maybe it’s a brother or sister, your parents, another relative, or maybe even your favorite charity. Yes, that’s right, you can list a charity as your life insurance beneficiary. Even if the worst is to happen and you were to die before you do get married or have children you can be sure that your money is going to someone or a cause that you believe in. Then, all you have to do is update your beneficiary once you do decide to get married or have kids. It’s that simple.

Weigh Your Options

It still isn’t going to make sense for everyone, but you should at least take into consideration the increase in premium and total cost of a policy if you wait even a few years. Some situations may warrant the purchase of a policy before conventional wisdom says to, and in many cases the savings won’t be worth it if you’re not in a position to take advantage of it. That being said, insurance is a key component of any financial plan so it requires some serious consideration. Keep in mind that the example we used here was just a simple $500,000 policy with someone in excellent health. Once you start talking about higher coverage limits and health issues the cost difference could be very substantial by waiting just a few years and the savings could literally be in the tens of thousands.

So, if you’re someone who is thinking about the future and has marriage and/or children in the near future, you may want to run some quotes and see what kind of savings could be had by buying a policy early. You may find there’s little or no savings at all, or you could be faced with a decision that could save you thousands of dollars. Either way, it’s always a good idea to take a proactive approach and think about these issues before they happen.

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.

Why You Might Not Want to Wait Until You’re Married With Children to Get Life Insurance

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