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Are You Underinsured?
Are You Underinsured?
For some, insurance is just one more item on their financial checklist. Whether you mortgage a home, buy a car or start a business, some type of insurance is usually required. But what if, despite paying all your premiums on time, your coverage comes up short when you encounter a loss?
There are at least three ways you might be underinsured:
- Not carrying insurance for new risks as your life circumstances change.
- Having a policy with coverage limits that are too low to cover a potential loss.
- Failing to notice policy exclusions that don’t protect all your assets.
To avoid finding yourself in one of these situations, it’s important to understand where your coverage may be insufficient — or lacking altogether.
The Home Valuation Problem
Prices, especially on homes, can rise and fall dramatically. In most cases, the insurer will pay for damage to your home up to the limit set in the policy. But what if that upper limit is no longer enough to replace your home when prices for materials and labor go up due to inflation or other causes?
Some policies include “extended” or “guaranteed” replacement coverage. It’s not uncommon to see materials and labor jump in price following a natural disaster that damages multiple homes. Extended coverage will increase the maximum amount the insurer will pay, adding a percentage — 20%, for example — to the stated policy limit. Guaranteed replacement is just that: You are guaranteed to get enough money to rebuild your home no matter what it costs. Naturally, both options will add to the cost of your premium.
The Value of Valuables
The valuation problem also applies to your possessions. For personal property coverage, you can choose between replacement cost and actual cash value. Replacement value means the insurer pays to replace your belongings with new comparable items up to your policy limits. If you lose your home in a fire and you had an older iMac sitting on your desk, you’ll get enough to purchase a new iMac. However, if you choose the actual cash value option, you’ll get the current cash value of that computer — as determined by the insurer — meaning purchase cost minus depreciation, which is going to be less than the cost of a new comparable model.
Change in Circumstances
If you previously had no one financially dependent on you and then get married or have a child, you may be underinsured as a family if you have no life insurance to replace your income should something happen to you. Your children or other family members may develop conditions or needs that your existing coverage is insufficient for. Or perhaps there are now grandchildren you want to include as beneficiaries. Think through all the people in your life who you might want to provide for in the event you’re no longer around.
Get Help from an Expert
As with all things related to insurance, seek out a knowledgeable agent or speak to a financial professional for advice to get the coverage you need at the best price and terms. Be sure to read part two of this discussion, where we’ll examine policy exclusions, protection against lawsuit risk and the importance of understanding your health insurance deductibles.
Saving for a big purchase can be a big challenge, whether it’s a brand-new car, a hot tub — or even a 1959 Gibson Les Paul. But you can tackle your elephant-sized purchase with a similar strategy: Just take it one step at a time. Here are a few big-ticket budgeting tips that you won’t need a memory like an elephant to remember to use.
1. Set a reasonable budget … then pad it. It’s always wise to allow extra room in your budget for contingencies. There can be unexpected surprises, especially with larger purchases. And unfortunately, things often have a way of costing more than you expected. Consider allowing a minimum 10% overrun on your big-ticket budget.
2. Find discounts and take advantage of them. If you’re traveling, for example, consider AAA or AARP discounts. Off-season travel can score you some savings, too. Many items and experiences cost more depending on when you buy or book them. Always look for coupons and other saving options when paying for routine purchases such as oil changes for your car, grocery shopping, dining out and ordering pizza.
3. Comparison shop. Scour the web and Google Shopping for other retailers who offer the product or service you’re interested in. If you’re looking for a car, for example, don’t assume that the price at your local dealer is “the” price. Edmunds.com, cars.com and other online resources can provide options in your area that you can filter based on your needs and preferences. And be sure to check national franchises that can ship inventory from across the country to find the best deal.
4. Ask a “friend.” Crowdsourcing consumer opinions has never been easier. Most products and services are reviewed, rated and compared — and the results can be easily searched for online. Search the comments for keywords like “discount,” “savings” or “cost less” to see how others saved on their purchases.
4. Set up a dedicated account. A great way to help organize your savings for a large purchase is to earmark the money intended for it by keeping the funds in a separate account. That way, you can more easily track your progress — and you won’t be tempted to spend the money on anything else.
5. Boost your savings with offsets. Take a look in your garage, the back of your closets and the attic. See if there are things of value that you no longer use or want. Sell them on eBay, Craigslist, OfferUp or at a yard sale. On the flip side, a penny saved is a penny earned. Can you decrease nonessential spending until you reach your savings goal?
6. Put time on your side. Start saving as early as possible. If you wait until the last minute, you may be faced with having to do some pretty extreme saving. The sooner you start, the less you’ll feel the impact on your day-to-day budget.
Seek out Advice — and Save
Family members, friends and co-workers might have their own experiences with the purchase you’re about to make and can share how they saved money on it. Ask for their advice — but also consider bringing in an expert by speaking with a financial professional who can help you make a realistic, feasible plan for your purchase.
Make Tax Efficiency a Part of Your Investment Strategy
Make Tax Efficiency a Part of Your Investment Strategy
When reviewing investment options, many people focus strictly on returns. But it’s critical to also consider tax efficiency as you build a portfolio.
There are two types of investment accounts: tax-advantaged and taxable. Tax-advantaged accounts are any investment or savings option that’s either tax-exempt, tax-deferred or offers some other kind of tax benefit. When you take advantage of tax-advantaged investing, you can reduce the impact when Uncle Sam comes calling on April 15th.
One of the most common and well-known tax-advantaged accounts is the 401(k). Many employers offer a 401(k) as part of their workplace benefits. There are two main types:
A traditional 401(k) grows tax-deferred. You contribute money from your paycheck before taxes are taken out, lowering your taxable income today. You save money on taxes now, but you pay taxes on your withdrawals later. If you think you’ll be in a lower bracket during retirement, this can be one way to realize tax savings over time.
A Roth 401(k) grows tax-free. You make your contributions with after-tax dollars. So, even though you pay taxes today, you don’t have to pay taxes when you withdraw during retirement. If you think your taxes will be higher in the future, this can be a good move, reducing your tax liability during retirement.
HSA (Health Savings Account) – The “Triple Tax Advantage”
If you have a high-deductible health plan and meet other requirements, you might be able to contribute to an HSA. With this type of account, you get what’s often called a triple tax advantage:
Contributions are made with pre-tax dollars, resulting in tax savings today.
Money in the HSA grows tax-deferred, allowing it to accumulate without the drawback of paying taxes as you accrue earnings from investments.
Withdrawals aren’t taxed if they’re used for qualified medical expenses.
Some retirees use an HSA in conjunction with other tax-advantaged investing accounts. For example, an HSA can pay for health costs during retirement, while money from the 401(k) is used toward everyday expenses.
529 Savings Plans
After you’ve shored up your own finances, you might want to use a tax-advantaged account to save for your kids’ education. Many states offer 529 savings plans that can help you do just that, whether you’re putting money away for college or even K-12 tuition. Both prepaid tuition and savings plans are available but investment options and fees may differ by state. Contributions are made with after-tax dollars, but money in the account grows tax-free if withdrawals are used for eligible education expenses.
Understand Your Options
Taxes can have a big impact on your financial picture and can sometimes be complicated to fully understand. Nonetheless, it’s important to consider tax-advantaged investing when establishing your personal financial plan. If you have questions, speak with your qualified financial professional about which tax-advantaged investment options might be best for you.
Enrolling in Your First 401(k)
Enrolling in Your First 401(k)
You’re probably aware of 401(k) plans — and may have even heard how they can give you a leg up on your retirement goals. If you have a 401(k) available to you through your job, however, you might still want to know more. Let’s look at some answers to frequently asked questions about your employer-sponsored retirement plan.
Q: Why is a 401(k) better than a savings account?
A: For the most part, a traditional savings account doesn’t offer tax advantages. A 401(k), though, allows you to put money aside for the future before you pay taxes on it. You also don’t have to pay taxes on investment earnings from the account as they come. Instead, you only pay taxes when you withdraw from your 401(k) during retirement. By then, you’ll hopefully be in a lower tax bracket.
Q: How can a 401(k) improve your retirement readiness?
A: Since your 401(k) is an investment account, you can take advantage of the considerable benefits of compounding returns, which can allow your money to grow at a faster pace than it would in a traditional savings account. This can help put you in an accelerated position to achieve your retirement dreams. Plus, having the money deducted from your paycheck automatically makes it easier to stay consistent with your investment goals over time — you can build wealth without having to think about it as much.
Q: What are the risks of participating?
A: Market volatility is always a possibility, so it’s important to understand your personal risk tolerance and create an investment plan that works for you. It’s also why it’s critical to review your retirement plan regularly and rebalance your asset allocation as needed.
Q: Are there other advantages?
A: Your employer might offer a match, providing you with a way to put even more money into your retirement account. Additionally, your employer might give you the option of a Roth 401(k), which can result in lower taxes during retirement. Carefully consider your tax situation and individual needs when deciding if a Roth 401(k) makes sense for you.
Q: What if I quit my job?
A: Money you put in, plus your investment earnings, stay with you no matter what. Money your company puts in becomes yours based on a vesting schedule. You can roll your 401(k) over to a new employer-sponsored retirement account or an IRA if you leave your job.
Q: How much do I need to contribute?
A: Work with your qualified financial professional to figure out how much you need to meet your specific retirement goals. You decide how much you put in from 1% of your salary up to the annual contribution limit. Some retirement plans also allow you to automatically increase your contributions each year, or you can bump up your deferral rate when you receive a promotion or bonus. Consider what you should set aside each paycheck to help you achieve your long-term goals.
Q: When is a good time to join?
A: Sign up for your 401(k) as soon as you can. Put time on your side when it comes to reaping the benefits of compounding returns. There can be significant opportunity costs by sitting on the sidelines too long, which can hamper your retirement readiness over the long term.
Q: How do I sign up?
A: Contact your company’s HR department for help opening your account and setting up payroll deductions. Enrolling isn’t hard at all — and it can be one of the most important items to check off on your to-do list in order to help ensure a more secure financial future. The specifics of 401(k) plans can vary from company to company, and there’s more to know than what we’ve covered here.
Contact your qualified financial professional if you have additional questions or to learn more.
10 Ways to Save Money on Health Care Costs
10 Ways to Save Money on Health Care Costs
We all know that health insurance can cost a lot. In 2022, the average American who received coverage through their employer paid more than $6,100 for a family plan — or about $500 per month. That’s nearly 10% of the typical household budget.
But there are also many expenses outside of premiums to contend with, including copays, deductibles, medications and medical devices. Here are 10 strategies to save on out-of-pocket medical costs.
1. Health Savings Account (HSA). HSAs are available to employees with a high-deductible health plan (HDHP). They let you set aside pre-tax dollars to cover certain qualified health care costs. In 2022, the minimum deductible for an HDHP was $1,400 for an individual and $2,800 for a family, and you could contribute up to $3,650 for individual coverage and up to $7,300 for family coverage. The money invested in an HSA is tax deductible, and it can grow and be withdrawn for qualified medical expenses tax free, giving it a triple tax advantage.
2. Flexible Spending Account (FSA). FSA funds can be used to pay for qualified medical expenses, such as health plan deductibles, copayments, prescriptions and medical devices. Your employer sets the limit on deposits, and this money isn’t taxed. You may be allowed to roll over up to $500 of whatever you don’t spend from one year into the next, or your employer may allow up to 2.5 additional months to use up those funds. See your human resources department for more information.
3. Pharmacy discount programs. Pharmacy discount programs offered by major chains as well as independent companies operate outside your insurance plan and can help save you money on prescriptions. Discounts may vary, so research a number of different programs.
4. Urgent care. Some facilities that look like urgent care clinics are actually associated with hospitals and bill at much higher “emergency room rates.” So it’s important to understand which type of facility you visit.
5. Generic medications. Once a drug manufacturer’s patent lapses, other companies can make it in a less expensive but chemically equivalent generic form. Ask your doctor how much a prescribed medicine will cost and if a generic would be appropriate.
6. Free health services. Many free preventive and wellness benefits, as well as maternity and newborn care, are provided under the Affordable Care Act (some restrictions may apply, contact your health plan provider for more information). Take advantage of those you qualify for.
7. Shop around. We routinely shop around for a new phone or TV, yet often fail to do so when it comes to our medications, provider services and medical procedures. Hospitals are now required to publish prices for many services, which makes comparison shopping easier. Shop the cost of nonemergency procedures to see where you can save, but also research your providers’ health and safety outcomes.
8. Time your procedures. Health plan deductibles renew yearly. Be mindful of the calendar and get nonemergency procedures scheduled before your deductible rolls over each year.
9. Hire a medical billing advocate. If you have a serious medical condition, consider hiring a medical billing advocate to review bills to look for errors that can cost you money. They can challenge any discrepancies and negotiate with health care providers on your behalf.
10. Protect your health. One of the best ways to save on health care is to do what you can to keep yourself healthy. Stay up to date on screenings and recommended vaccinations, don’t smoke or drink excessively, maintain a healthy weight, stay active and manage stress.
Medical bills can be overwhelming and threaten your financial wellness, but armed with information and smart strategies, you can fight back.