What is AD&D Insurance?

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Dear Alicia,I have the ability to buy AD&D Life Insurance at work. The coverage would cost me less and I would get a higher death benefit than the Term policy I currently have. Should I buy it? I don't understand the difference?

- Insurance Irene 

Dear Irene,

In general, life insurance is purchased to give those who are dependent on your income a lump sum of cash upon your death so they can sustain their current lifestyle. An AD&D policy stands for accidental death and dismemberment and is a type of life insurance. AD&D has some specific requirements for when it will and will not pay death benefits to the named beneficiaries. This restriction in payments is why we most often recommend Term over AD&D.

What is covered

AD&D policies pay out only if you are killed or injured in an accident. Accidents that result in death or injury, such as, a car or plane crash would qualify, but accidents from high-adrenaline sports, skydiving or car racing, would not. Also, if the accident was caused by the insured because they were under the influence of drugs or alcohol, it would also not be covered. Lastly, if the insured does not pass away as a direct result from the accident, but instead dies from another disease or complication after the accident, the policy would also not pay. To qualify for a payout for injury, you must lose a body part or the ability to hear, see or speak. Injuries generally pay out only part of the full death benefit.

Therefore, to get paid out under AD&D life insurance, you must pass away or lose a body part or function from a pure accident which is unforeseen, unintentional and immediate.

Term vs. AD&D

Term insurance will pay out for almost any type of death claim as long as you are covered with an active policy at the time of death. The primary exclusion for Term insurance is usually a suicide clause that lasts, most often, for the first two years of the policy.

AD&D does not cover the top two causes of death which Term does. Heart disease and cancer amount to 44.9% of deaths (from the CDC's 2015-2016: NCHS, National Vital Statistics System, Mortality Report*). Death's caused by accident (unintentional injuries), from the same report, only accounted for 5.9% of deaths. So, statistically qualifying for an AD&D payout is much less likely than regular Term insurance.

Why we don't recommend AD&D

Overall, AD&D insurance is not recommended because of the limited scope for claims. AD&D is less risky to the insurance agencies because there is a lower probability they will have to pay the beneficiaries. This is why they can offer reasonable prices and higher coverage. Just remember, you always get what you pay for.

If you are going to buy life insurance, we recommend you purchase Term. If AD&D is the only coverage you can afford, or it is free, then something is better than nothing. But almost always, Term insurance will leave you and your dependents with no gaps in coverage. Paying a little extra money for a lot more coverage is worth it.

Each policy is different, talk to an independent licensed life insurance broker to understand what is and is not covered under your own policies. Talk to a professional before making any changes to your insurance coverages

For more information on types of life insurance, read Linda's article on "Term vs. Whole" Life Insurance

Sources:*CDC Reporthttps://www.nerdwallet.com/blog/insurance/life-insurance-accidental-death/

We're "Official." Now What?

Dear Alicia,

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We're getting married soon and are wondering if there are any particular financial steps we should take once we're "official?"

-Ned and Nancy the Newlyweds

Congrats Ned and Nancy! Getting married is an exciting and hectic time. Here are the financial steps you should be taking once you are "official."

Goals

Start by discussing your financial goals now and in the future. Do you want to buy a home, start planning for a baby, or create an emergency fund? Write down your joint and individual goals and when you would like to achieve them. Make sure to decide which goals will be jointly or individually funded.

Credit Check-Up

Review your credit scores together (free from most credit cards) and pull your full reports at annualcreditreport.com. If one of your goals requires you to apply for a loan, it is good to know in advance if either of you needs to work on increasing your credit score.

Balance Sheet

Decide if you will combine or not combine your money. There are many things to consolidate like; checking and savings accounts, credit cards, and investment accounts (ex. brokerage or trust accounts). Start by creating a simple balance sheet, one page showing all assets and liabilities you own. This is a great way to see what each of you has and to review how your situation looks as a whole.

Expense Management

Managing the household bills usually falls on one individual. Regardless, it is essential to make sure someone takes on the specific responsibility of paying joint bills on time. Creating a joint cash flow, showing all income coming in and expenses going out, will help both spouses to visualize how much each of you spends and saves. You will also want to decide what types of expenses you will discuss together before purchasing. Couples often set a dollar limit, like $500, for a large purchase that should be discussed.

Investment Strategy

Also to be considered is whether you will have a joint investment strategy and joint savings strategy or if you are going to save and invest for your own separate goals. Do you both have the same risk tolerance when it comes to stocks? Review your current investment accounts, the holdings (funds invested in), and overall asset allocation (% stock and bonds) to see if you are currently invested similarly.

Taxes

Review your taxes currently and decide how best to manage them after marriage. You may need to change your tax withholdings to "married status" on your W4 at work. Also, determine whether you will file your taxes Married Filing Jointly or Married Filing Separate. You will also need to agree on if you want to prepare your taxes on your own or find a tax preparer.

Insurance

Once married, your spouse most often becomes dependent on a second income to support the lifestyle you build together. Do you know how much life insurance you currently have? Discuss and decide if it is enough. Also, look into who has a better health care plan at work. Most often you can combine your health coverage into one family plan. You may also want to consolidate your Auto, Home/Renters, Umbrella and Earthquake Insurance under one carrier to save with bundled prices. Make sure each spouse is named on all policies as a covered individual. It is also wise to consider insuring your engagement/wedding rings on a separate rider. Your home or renters insurance may have provisions for covering jewelry, but if you have expensive rings, it can be a good idea to get more coverage in case they are lost or stolen.

Estate Planning

Most often Newlyweds don't have estate plans already created. So now is a good time to get them done, especially if you own a house or have kids. Discuss who you want to have your belongings and money if something were to happen to one or both of you. Remember that assets acquired before marriage are separate property, but if commingled with joint funds, it becomes marital property (each state's laws are different, this is related to CA). You will also want to change the beneficiaries of all your retirement accounts and life insurance to your spouse. Lastly, update the titling of your non-retirement assets to both of your names "Joint with Rights of Survivorship" or in the name of your Trust, if created. An estate planning attorney can help you decide the best titling for your assets as well as create your estate plan. Always review these issues with a licensed estate planning attorney, in your state, before taking action.

Once you become "Official," you are now a joint financial team. Set up regularly-scheduled meetings to review your finances and any financial issues you may be having. Commit to communicating actively and openly about any money issues. If you ever get stuck or are too overwhelmed, always get help from a fee-only and fiduciary CERTIFIED FINANCIAL PLANNER™ for any tasks that seem beyond your grasp.

Planning Within Reach serves Newlyweds and helps their clients with financial planning and tax preparation. If you are interested in how we help our clients, see our Newlywed Plan Packageand our Tax Preparation Service.

Ask Linda: Which type of life insurance should we buy?

Dear Linda,My husband and I need life insurance. Should we purchase a Term Life or Whole Life policy to protect our young children? Please explain the difference.

Underinsured Uma

Dear Uma,

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The purpose of life insurance is to protect those who are dependent on your income in the event of your death. A dependent can be a spouse or a young child, but it can also be a sibling or a parent whom you help financially. While there are exceptions, we typically recommend Term Life over Whole Life for the following reasons:

Whole Life is much more expensive.

Both Whole and Term Life premiums are fixed, but Whole Life premiums can be up to 10X more expensive. Given this price difference, many people simply can't afford the amount of coverage they need if they purchase a Whole Life policy.

Life is unpredictable and you need flexibility.

Even if you can afford the higher premium associated with Whole Life today, there is no guarantee you can afford it in the future. Affordability is one reason why a quarter of whole life policies are terminated within the first 3 years and nearly half within the first 10 years. Think about how different your cash flow was 3 years ago. If money gets tight for whatever reason - a job change, a new baby, or a new car payment - you can stop contributing to your Roth IRA, 529 or 401k, but you can't stop paying your insurance premiums without the risk of losing coverage.

The Whole Life investment component, or cash value, tends to be oversold.

Both Whole and Term Life have an insurance component (death benefit), but only Whole Life has an investment component (cash value). Whole Life is a poor investment if you end up canceling the policy in the first few years - the cash value will be eaten up by surrender charges and you shelled out higher premiums than if you purchased Term. You have to hold onto a Whole Life policy for about 16 years to at least break-even.If you die, the cash value goes to the insurance company, not your beneficiaries, unless you take action such as purchase an increased death benefit. And if you borrow from the cash value, the loan amount plus interest is deducted from your death benefit.

Term Life allows you to secure protection for the period you need it.

For example, you can choose 10, 20 or 30 years, which allows you to tailor the coverage to precisely the years you need it. For many, that is until they are retired, the mortgage is paid off, or the children are launched. You can also ladder policies - purchase multiple policies for different terms - since the amount of coverage you need will likely vary over time. Alternatively, Whole Life covers you until you stop paying premiums or reach a certain age, such as 100. Do your dependents really need coverage when you are in your later years? Many find that if they want to leave an inheritance, home sale proceeds and untapped investment accounts are sufficient.

There are situations where a Whole Life policy may make sense, such as if you have an estate tax issue or a special needs child, but the situations are limited. In our practice, Term Life is the best solution for most people because it allows you to obtain the life insurance you need, when you need it, and at a lower price.

“Ask Linda” is a monthly personal finance column where the founder of Planning Within Reach, LLC, Linda Rogers, picks one question from her readers and publishes a detailed answer. If you would like to ask Linda a question, email linda@planningwithinreach. Due to the volume of questions received, she may not be able to answer every question in a timely manner. For advice on your personal situation, schedule an initial call to learn about our services.

A Newlywed's Guide to Updating Insurance

A lot of things change when you get married, including your insurance options.

Making sure your insurance is adequate once you are married is an important step to take. You have the option of buying new, combining, and/or discontinuing policies you will no longer need. Here are the insurance coverages we recommend you review or consider purchasing once married.

Life Insurance

After you say "I Do", you might need to increase your life insurance coverage. The bills you would leave your spouse with include, debt payments, and the cost of funeral/final expenses if you were to pass away. Make sure you have enough insurance coverage to at least pay these minimum costs. You might also consider additional coverage if your spouse will need extra money to manage the lifestyle you have now built together, or to allow them to take time off from work after this traumatic event. Compare the cost of insurance with your employer versus getting a term life insurance policy through a broker.

Disability Insurance

If you were to become disabled from a change in health or an accident, would you be able to survive off a single income? The answer for our clients, who mostly live in expensive cities, is definitely not. Disability insurance typically covers 50-70% of your monthly salary. It is a necessary insurance to have when you start building a lifestyle off of two incomes. Look into your employer's disability coverage and purchase increases up to the limit if it makes sense and is affordable. Start your evaluation with the spouse who makes the most money as this would hurt the greatest if they are unable to work.

Health Insurance

Once married, you can apply for joint coverage as a family under one of your health insurance plans. Compare the costs of a family plan with both of your employers versus insurance as an individual. Other things to consider are; who has the better coverage, do you both like your doctors/plans, and which employer covers more insurance costs. Weigh your options and decide on the best deal.

Auto Insurance

The coverage for you autos will likely remain the same but you do want to make sure your spouse is added as a second driver of your vehicle if you will be sharing cars. While you are logged in or talking with your broker, this is a good time to confirm that you and your spouse have adequate liability and property damage coverage.

Homeowners or Renters Insurance

If you are just moving into one of your residences or getting a new place together, cancel the policy associated with the old residence. Make sure your new policy has enough "contents replacement" coverage for both of your personal belongings and has both your names listed as policy owners/insured.

Umbrella Insurance

Umbrella insurance is used as an additional liability protection on top of the liability coverages in your property and casualty insurance (ex. home and auto). This coverage is often used in a personal liability event like a lawsuit. It includes coverages for things like libel, slander, vandalism, and invasion of privacy. If your net worth together is more than the liability limit on your home/auto insurance ($300K-$500K, most often) it can be a good idea to get umbrella coverage to protect your additional assets.

Combining Policies Under One Provider

Lastly, combining your insurance coverage under one roof is usually the best way to keep your costs low, as most providers offer bundling discounts. It will also make sure you don't have gaps in coverage and that your limits on insurance all match. If you and your spouse have separate insurance companies, discuss which company you like best and get a quote.

Advice for All Stages

Recent Graduates / Early Career
Typically in your 20's

Cash Flow: 

  • Allocate at least 20% of your gross income to long-term savings and / or paying off debt.  Now is the time to get money invested so it can compound.
  • Start identifying spending habits and patterns by creating a budget or trying out the WholeWallet30.

Tax Planning: 

  • For many during this stage, it makes sense to save to a Roth versus pre-tax retirement vehicle since starting salaries tend to be lower than in mid / late career.  

Investments: 

  • Invest in extra schooling now if you think you will need it.  Life has a way of getting more complicated, making it harder to go back to school down the road.
  • Educate yourself on how to invest.  Read financial blogs and whitepapers or hire a fee-only financial planning professional to make sure you get started on the right path.  

Insurance: 

  • Make sure you obtain renter's insurance if you are renting an apartment.  
  • Obtain disability insurance.

Estate Planning:

  • Create at least an advanced health care directive, power of attorney financial and will.  You may not even have to visit an attorney if your situation is simple enough.
Early - Mid Career
Typically in your 30-40's

Cash Flow: 

  • You may feel overwhelmed during this time, whether it is from having young children or working long hours as you move up the corporate ladder.  Start outsourcing.  For example, pay a house cleaner or someone to help with the garden, even if you won't do this forever.  You need to survive this "crunch time" without sacrificing personal relationships and your work performance.
  • Resist trying to live a lifestyle you cannot afford.  Many people work for decades before being able to take annual trips to Europe or eat at expensive restaurants.  Bgrateful for what you have accomplished so far, and focus on living within your means.

Tax Planning: 

  • Make sure you are taking advantage of your employee benefits (many of which have tax benefits). 
  • If you are self-employed, look at your tax-deferred benefits with a fee-only financial planner or your tax professional.  

Investments: 

  • Stay on top of your portfolio.  Re-allocate at least annually and make sure you are investing new savings (versus forgetting about it and leaving it in cash).  

Insurance:

  • Revisit life insurance.  You likely need more coverage now than when you were in your 20's, especially if you have someone who is dependent on your income.

Estate Planning:

  • It is likely a good time to meet with an attorney now and update your estate planning documents. Together, you can decide if it makes sense to create a living Trust.
Mid / Late Career
Typically in your 40-50's

Cash Flow: 

  • Continue to track household expenses.  
  • Calculate if you are on track for retirement.  If not, adjust your savings strategy now before it is too late to change course and you end up working longer than desired.

Tax Planning: 

  • You may find it makes more sense to save to pre-tax retirement accounts versus Roth accounts now as your income rises.  Do an analysis on your current and projected retirement tax bracket.

Insurance: 

  • See if it makes sense to get long-term care insurance at this time or if you want to plan on self-insuring.
  • Revisit liability insurance.  You have likely done a good job of accumulating assets - now make sure they are protected.

 Estate Planning: 

  • If you find yourself getting married, divorced, or re-married, engage an attorney to be clear on separate versus community property.  
  • Have your estate planning documents reviewed every 5 years to account for changes to the tax code
  • Check your beneficiaries and the titling of your accounts to make sure they are in line with your intent.

Family Finances: 

  • Teach money skills to children, nieces and nephews.  Involve them in the financial decisions you are making, such as whether to refinance a loan, or have them attend a meeting with your financial advisor.  
Retirement / Financially Independent
Typically in your 60's+

Cash Flow:  

  • As you move into retirement, conduct an analysis to determine when you should begin taking social security benefits.
  • Develop a portfolio distribution strategy.

Tax Planning:  

  • See if it makes sense to do Roth conversions between the period you retire and the year you receive social security income.

Investments:

  • Outsource financial planning and investment management now if you haven't already.  The risk for dementia increases as you age.  You want to have a plan in place before this happens.
  • Explore the opportunities afforded to seniors in your area for free or inexpensive learning. For example, in the San Diego area, there is Osher Institute and Oasis.

Insurance: 

  • Create your aging plan.  Decide if you want to age in place or make some modifications to your home to make it more livable.

Estate Planning:

  • Communicate your wishes to your family in the event something happens to you.
  • Notify family where they can find your estate planning documents, safe deposit box key, or anything else that is pertinent.
  • Don't forget about your "digital" estate plan. Make sure usernames and passwords are safely stored and available for family members that may need them.

Health Savings Accounts (HSA's) are an underappreciated vehicle

A health savings account (HSA) allows you to use tax-free money to pay for qualified medical expenses. The money you use to fund the account is not subject to federal income tax or state income tax in most states (California being one exception), and employer contributions are not taxable to the employee. Unlike a flex savings account (FSA), the money contributed to an HSA can be rolled over from year to year. There is no "use it or lose it" feature. In order to contribute to an HSA, you are required to be enrolled in a high deductible health plan (HDHP). You cannot contribute to an HSA if you are on Medicare Part A, but if you had an existing HSA account, you can use the funds to pay for qualified medical expenses while you are on Medicare. Considering Medicare doesn't pay for all medical expenses in retirement, and that this money is tax-free, there is a planning opportunity to over-fund an HSA with the understanding that you are letting the funds grow to be used tax-free in retirement.

For 2018, the max that can be contributed to an HSA is $3,450 for one person or $6,900 for a family.

Open Enrollment Season

October & November are open enrollment months for health benefits.  If you are employed at a company with benefits, this is the time to make any needed changes.  Typically, you cannot change your benefits during other months of the year unless you have a qualifying event such as a new baby or a change in marital status.  Review your most recent financial plan and see if there are any recommendations regarding your benefits.  You may need to obtain additional life insurance or start utilizing a flex spending account (FSA). If you have coverage or are looking for coverage through Covered California, this page has everything you need with regards to open enrollment (start date is November 1 for 2016).   Open enrollment for Medicare starts on October 15 for 2016 (here is more information).  Enrollment for Medi-Cal is year-round.

Living to 100

At a national financial planning conference this year, I heard a speaker who is a Medical Doctor turned Financial Planner. She has all new clients go to Livingto100.com and complete the online questionnaire with her. The questionnaire gauges probable life expectancy and enables the planner to estimate a possible end date (end of life) for the client's financial plan. This is helpful not only for the retirement plan, but also to help clients understand the factors that insurance companies look at when calculating insurance premiums. For example, did you know premiums are much cheaper for people with BMI's (body mass index) lower than 28? Living to 100 asks for an email address at the end of the 15 minute questionnaire. I answered the questions and it came up with an estimated life expectancy of age 97. It also gives you feedback. For example, I was told if I cut my caffeine consumption I could add a 1/2 year to my life. That is not really enough to motivate me to change but you may find something that compels you to adjust current habits.

What do you think? Is this too personal? Or is there a benefit to adding something like this to the financial planning process? Share your thoughts with me by emailing linda@planningwithinreach.com.

Why I Decided to Purchase Earthquake Insurance 

The first earthquake I felt in San Diego was on Easter Sunday 2010.  While it lasted for just over a minute and didn't cause any major damage in our immediate area, it certainly made me uneasy.  It made me aware of how vulnerable we are to the forces of mother nature in our new home. Four years, 2 kids and a dog later, I am reviewing my insurance policies to make sure they are up to date, as I do ever year.   Earthquake damage, like flood damage, is not covered through most homeowner's insurance policies.  The cost depends on where you live, the type of house you have and the coverage amounts that you select.

We purchased a California Earthquake Authority (CEA) policy through USAA where we also have our Homeowner's Insurance.  It costs us a couple hundred dollars per year with a 15% deductible.  The deductible is the amount you need to pay out of pocket before getting the money to rebuild.  For example, if you are covered for a $400,000 house, you have to pay $60,000 ($400,000 x 15%) out of pocket before the dwelling coverage kicks in.

Since other insurance policies such as home and auto have options for much smaller deductibles (ex. $500 or $1,000), this high deductible may be what makes earthquake insurance unpalatable to some.  I think it is yet another good reason to have an emergency cash cushion on hand at all times.  The reality is that if we didn't have earthquake insurance, and we experienced earthquake damage, we couldn't afford to rebuild our house without jeopardizing our retirement and children's education.  While our house isn't sitting on a fault line as far as we know, we do have faults within close proximity.  According to the CEA website, new faults are discovered all the time and no part of California is immune.

In addition to the coverage to rebuild, we are covered for $25,000 (not subject to the 15% deductible) for living expenses while we are displaced and rebuilding.  This is essential now that we have children.  If school is in session, we can't head back to the east coast to live with family.  We can't crash with friends since most of them have at least two kids now and wouldn't have the space to put us up.

I have heard people say they would just walk away from their house if "the big one" came.  Even if we were willing to walk away from the equity in our house, which we are not, we couldn't walk away from the mortgage.  If we did, it would hurt our credit score and make it hard for us to get another loan in the future.

To get an idea of what earthquake insurance would cost you, check out the CEA website's premium calculator.  I also highly recommend reviewing their FAQ page and your own policy disclosures and information to make sure you fully understand it.

Evaluating if Pet Insurance is Right for Your Family

Most of us think of our pets as part of our family. As such, we care for them when they are sick or injured as we would any family member. While we know that the human members of the family should have medical insurance, we may not think about it for our pets. That begs the question, should you obtain insurance for them? Well, it depends. Insurance is just one way to manage risk. Here are some tips for evaluating the decision. Determine if you can self-insure. We decided to self-insure our dog when we found him 4 ½ years ago. Instead of paying $50 / month ($600 / year) for a comprehensive insurance policy, we put that amount into a separate pet account each month. The money in the account is used only for pet expenses. His bills have averaged $400 / year so I now have a cushion in the account. If something were to happen to him, I still have this savings that I can use towards another pet or unrelated expenses.

Decide if you would be prepared for larger costs. The automatic savings plan works for a fairly healthy pet without major expenses. If our dog had a serious illness or injury, our pet account funds wouldn’t have been sufficient. That is where the emergency fund comes in. An emergency fund is a pot of liquid assets or cash that is set aside for emergencies. These can include a disability or job loss. You could choose to also make this fund available for unexpected pet costs while you are getting started with your pet account. If you don’t have an emergency fund, insurance may be a better option for you while you create one.

Determine what your limits are. If you are willing to pull from savings for unexpected pet expenses, decide what your limit would be. You don’t want to be faced with an emotional decision with an already sick or injured pet. Would you do anything to save your pet even if it meant putting them through a painful, risky treatment that cost $10,000? You may not want to deplete your savings leaving you vulnerable to falling into debt.

Review insurance policy specifications and cost. As with all types of insurance, there are multiple tiers and limits on benefits. If you decide to obtain insurance, review the list of items covered, deductibles, copays, premiums and benefit maximums.

As more and more procedures and medications become available for pets, questions regarding pet insurance will likely increase. Self-insurance has worked for me. What has worked for you? Email me with your experiences: linda@planningwithinreach.com.