Affordable health insurance for the self-employed and early retirees?

I intend to retire early, and thus one of the challenges my family will face is what to do about health insurance until we’re 65 and can enroll in medicare. We have one kid already, and thus will need care for ourselves as well as children. We’ll have too much money to qualify for a subsidized Affordable Care Act (ACA aka Obamacare) insurance plan, and as of 2020 catastrophic health insurance is at least $1,000 per month for a family, and offers crappy coverage and high deductibles on top of the tens of thousands in premiums we’d pay.

On the plus side, we have been saving a good chunk in an HSA, which I recommend everyone take advantage of while working, so we can at least use that for out-of-pocket expenses.

One of us could work at least part-time to get subsidized insurance benefits. Another intriguing option is Direct Primary Care, where you pay a monthly fee (say, $100 or so) per month for primary care doctor’s visits and basic services (which might cost extra). DPC avoids insurance altogether, making both your life and your doctor’s easier.

While a DCP would cover the basics like labs, check ups, vaccinations, and maybe even bone-setting, what about surgery or other low-probability but extremely expensive hazards? To handle that, take a look at ‘health sharing’, an insurance-like membership plan to will reimburse you for health expenses after a (large-ish) deductible. Think of it as simpler, cheaper catastrophic health insurance, which you get a discount on if you also belong to a DPC.

Until I do more of my own homework, I’ll let my favorite financial blogger Mr. Money Mustache explain the DPC + Health Sharing concept, complete with links to find providers of both that you can check out for your own needs.

Recommendations

Mr. Money Mustache recommends Sedera for health sharing. For Direct Primary Care, try this map to find a provider near you.

You can compare the pricing & services providing by this combo of plans to traditional private health insurance by getting a quote at ehealthinsurance.com, and also search healthcare.gov for the health insurance exchange options.

Intro to Insurance – What you need to insure (and what insurance to avoid)

Insurance.  The idea sounds pretty reasonable: you pay a smallish payment (called a ‘premium’) on a regular basis (usually monthly), and in exchange, when something bad happens to you or your property, the insurance company covers the damage up to an amount specified in your insurance agreement.

While the idea may sound simple, there are some very important things to understand in order to think about insurance correctly.

It’s a bad bet, but you still have to buy it

Insurance is what is called a ‘negative expectation’ bet.  The insurance company is out to make money.  As a result, they are going to make sure that, on average, they make more money in ‘premiums’ paid to them (from you) than in ‘claims’ paid out (to you.)  Sometimes they’re wrong, sometimes they’re right, but most of the time they’re right.

If getting insurance is a losing bet, then why should people do it?  For only ONE reason: to reduce risk.

Insurance companies, and their commission-seeking agents, will try to sell you unnecessary and expensive policies and options (called ‘riders’) for all sorts of reasonsUse this guide to make sure you only buy the necessary policies that serve the interests of yourself and family.

Risk

Human beings are generally risk-averse when it comes to money.  That means that they’d rather get constant income (think treasury bonds), than income that varies (think stocks.)   As a result, people are willing to give up some money in order to reduce their risks (loss of life, home, car, physical ability to work, etc.)

BUT, because insurance is a losing proposition, you only want to pay for just enough insurance to cover you against big losses.  Any loss that you can cover yourself (usually up to a few thousand dollars), should be covered by you.  This is one reason why it is important to build up and maintain a healthy emergency fund (of at least a few thousand dollars) in something stable like a high-interest savings account or bond fund.

From these principles, we can create a few general insurance-buying rules.

Rule #1 – Only insure what would be financially very painful to replace on your own

If your $3,000-valued used car gets totaled in an accident that’s your fault, it’ll hurt a bit to replace it on your own.  However, if you have some emergency savings, replacing it shouldn’t wipe you out financially.  As a result, you should probably avoid paying for collision auto insurance on a car of that little value.  (On the other hand, if you just bought a new Mercedes with them frog eyes, you’d better insure it.)

Similarly, if you have a $1,000 deductible (the amount you have to pay per accident before the insurance company will kick in anything) on your homeowner’s policy, and your roof caves in, paying that $1,000 shouldn’t cause you to fall on hard times.  Depending on your available savings, income, and comfort with risk, the amount you can pay to replace something without too much pain will vary.

That said, most people should be comfortable with ‘self-insuring’ for losses in the range of $1,000 to $10,000.  Anything over $10,000 should probably be insured (unless you’re really wealthy), and anything under $1,000 should definitely be self-insured by keeping an emergency stash.

One exception to this rule is if somebody else (your employer, the government) is subsidizing the cost of your insurance by paying a substantial part of your premiums.  This often changes the math in favor of you getting more insurance coverage than you would if you had to pay for it on your own.

Rule #2 – Keep your deductibles high and your premiums low

Related to rule #1, rule #2 tells us to increase your deductibles to the maximum level that you’re comfortable with.  Raising deductibles is the surest way to reduce your premiums.  For auto and home policies, $1,000 is a good level to set deductibles to.

Health insurance is a little trickier.  If you’re relatively healthy, or if you can’t afford more comprehensive coverage,  and you have to insure yourself without an employer’s help*, you may want to look at high-deductible ‘catastrophic’ insurance.  Be sure to look at both the deductible AND the annual out-of-pocket maximum.  Combine these two to get a true picture of the most you’ll potentially have to pay in one year.  You can get a feel for what policies are out there at ehealthinsurance.com.

* Even if your employer DOES pay part or all of your health insurance premiums, if you’re young &/or healthy, you should take a good look at any high-deductible health-care plans that your employer offers, especially if the plan is HSA-eligible.  Such employer plans often have extra benefits like employer contributions to an HSA on your behalf, or zero premiums that you have to pay.

Rule #3 –  Err on the high side for coverage limits

While you want to be aggressive by keeping deductibles to the highest level you can afford if and when disaster strikes, you want to play it safe when it comes to protecting yourself from a large loss by having high coverage limits.

The logic behind this is simple: insurance is to protect you from BIG losses.  It’s okay to risk a (relatively) small loss of a few thousand dollars in exchange for lower premiums, but it’s NOT okay to potentially wipe out your finances with low coverage limits.

Here are a few ‘standard’ recommended limits to keep yourself safe (tailor these to your own risk profile and net worth.  The more you have to lose, the more you need to protect.)

Car insurance: Liability limits of “100/300/100” are pretty standard, and correspond $100,000 per person for bodily injury (as in paying for the health costs of someone you injure), $300,000 per accident for bodily injury (total injury costs for all the people you injure), and $100,000 per accident for property damage (paying for that other car/fence/house that you ran into.)

Health insurance: If you’re pretty healthy, or can’t afford more comprehensive insurance, have a deductible of at least $1,000 – $2,000, with an annual out-of-pocket maximum of no more than $5,000 or $10,000 per person or family, respectively, or less paying if that amount in the event of a health catastrophe terrifies you.

(Keep in mind that even if you do have to pay, say, $300 out of pocket for some annual trip to the doctor, the amount you save in premiums with a high-deductible plan that doesn’t cover such a visit, versus a more comprehensive (=higher premium) plan that would,  might still make the high-deductible plan a smarter choice.)

Your lifetime maximum benefit should be at least $1 million**.

(** You may not have to worry about lifetime & annual maximums: As part of the Patient Protection and Affordable Care Act, aka ‘Obamacare’, lifetime maximums should be unlimited for all health plans at time of this writing (March 2012), however, your annual coverage maximum may NOT be unlimited until at least 2014.  If this part of Obamacare is repealed in the future, as some politicians & voters would like, then you should adhere to the guidance written above this note.)

Life insurance: I have a whole post on life insurance here, but I’ll give you the quick summary:

Buy a 20 – 30 year TERM life insurance policy with guaranteed level-premiums with a death benefit around 5 – 10 times your family’s expenses (say, $500 K – $1 million for a middle class family of 3 or 4.)  Try  Quotacy to get a quote online. Quickquote is also good, but I like the speed and interface and lack of entering an email address at Quotacy.

IMPORTANT: You should almost NEVER buy any kind of ‘cash value’ life insurance which goes by seemingly benign names like ‘whole’ or ‘universal’ life.  These are fee-laden policies that should only be considered by the rich who need more ways to avoid paying taxes on their investments.

Long-term disability insurance:  Your employer should offer some form of long-term disability insurance.  If not, you should probably buy some on your own, as you have about a 2:1 greater chance of being disabled by the age of 60 than dying, and you’ll need income if you’re hurt so badly that you can’t work.  I recommend getting coverage for at least 40%, and preferably at least 60%, of your income.

You can reduce your premiums by lengthening the period of time after you’re disabled but before benefits kick in.  This is called the ‘elimination period’ and should be at least 90 days, and perhaps more (180 days to a whole year, if you have enough savings to make it until then without income).

Home insurance:  Buy ‘Guaranteed Replacement Cost Coverage’ (GRCC), which guarantees to pay whatever it would cost to replace your home at today’s prices, regardless of the stated ‘dwelling limit coverage’ in your policy.

If you can’t get/afford GRCC, buy ‘Extended Replacement Cost Coverage’, which typically will replace up to 120 – 150% of the ‘dwelling coverage limit’ specified in your policy.  This helps to protect you if your ‘dwelling coverage limit’ (the amount that your home is insured for) ends up being lower than your home’s new construction value.

Avoid ‘Replacement Cost Coverage’ (pays up to 100% of the ‘dwelling coverage limit’ to replace your home) and ‘Actual Cash Value’ (which pays only the depreciated value of your home’s construction, which is always less than the replacement cost) policies.

Rule #4 – Don’t buy insurance you don’t need

There are tons of silly insurance policies sold that no one should ever buy. I’ll just mention a few here:

1) Pet insurance: fido’s vet bills should be small enough for you to cover yourself in the event of an emergency.

2) Rental car insurance: use your credit card to book a rental car & you should (check your credit card’s policy) be covered already for collision, AND your regular auto policy should cover you for liability, so tell that pushy Hertz salesperson to take a hike when they try to push any kind of rental car insurance on you.

3) Life insurance for children: unless your child is supporting dependents with their income (maybe you have a young Hollywood star that’s supporting you?), there’s no reason to buy life insurance that covers them.

4) Cash value life insurance: I’ve mentioned this once already under the life insurance rules of thumb section, but it bears repeating: all except the wealthy who need more ways to save on taxes should AVOID cash value life insurance, such as ‘whole’ or ‘universal’, like the plague!

5) Insurance targeted at specific, ‘scary’ risks like so-called ‘dread disease’ policies: The policies you have should already be broad enough to cover most risks (or possibly include ‘riders’ to cover some non-standard risks, for example, earthquake protection for your home).  Don’t let fear-mongering insurers push duplicative & expensive policies for specific risks.

Rule #5 – Keep insurance and investments SEPARATE

This rule boils down to avoiding high-cost, heavily-pushed combined insurance-investment products like cash value life insurance (called ‘whole’, ‘universal’, ‘variable’) and annuities (especially variable ones; fixed ones with good rates may sometimes be appropriate, but I prefer investing in fixed income vehicles like bond funds, instead of locking my money up in an annuity.)

Whenever an insurance agent or commission-driven financial ‘advisor’ starts talking about insurance with ‘investment’ components, run the other way.  These products are typically high-fee, low-flexibility money traps that generate high commissions for the people that sell them (because they’re very profitable for insurance companies.  And guess what?  Those profits come out of your pockets.)

Conclusions

Insurance is a useful risk-reducing tool that should ONLY be used to insure against large losses (never against relatively small ones that you can cover using your income and/or emergency savings.)

So, raise those deductibles and cut your premiums, but make sure you err on the high side of benefit amounts & maximum coverage limits, as well as the length of time that a policy will cover you & your family (in the case of life or disability insurance.)

Stay safe and protect your family & money!

P.S.  If you’re shopping for insurance, or just trying to understand your policy, this link from Investopedia provides some explanation of the various aspects of different types of insurance.

Smoking is bad for your wealth: Quit today!

Today, everyone can repeat the Surgeon General’s warning that smoking is terrible for your health.  Given the high costs in terms of everyday spending, insurance rates, quality of life, and other effects, smoking is also extremely harmful to your wealth.

Direct costs of smoking – the high price of cigarettes

According to a 2002 study, the average smoker smokes 13 cigarettes per day.  If we assume that a pack is 20 cigarettes, and the average pack costs $5, that’s $3.25 per day (= 13/20 * $5) or $1,187 per year.  Obviously, the more you smoke, the more it’s costing you.  With the federal tax per pack having been raised to over $1 combined with many state taxes at $2 (including Washington’s), the cost of cigarettes seems to only be going up ($6.33 per pack in Washington state as of this writing.)

For reference, a person in the 15% tax bracket could quit smoking their 13 cigarettes per day and contribute nearly $1,400 per year (pre-tax) to a 401k.  If this person quit smoking at age 30 and retired at age 65, their 35 years’ worth of cigarette savings would’ve grown to $206,000 (in real dollars) given historical stock market returns of 7%.

Indirect monetary costs of smoking – insurance, job prospects, resale values

In an article on the high costs of smoking, MSN Money “pulled some online quotes on 20-year term life insurance (a $500,000 policy) for a healthy 44-year-old male … The lowest quote for a nonsmoker was $1,140 in premiums per year; for someone smoking a pack a day, the lowest price more than doubled to $2,571 per year.

[…] According to eHealthInsurance.com, the monthly premium for a policy from Regence Blue Shield with a $1,500 deductible for a 44-year-old male nonsmoker is $552 more a year [for smokers].

A few state governments also charge their employees extra for health insurance if they smoke, and others are gradually joining the trend.”

Additionally, home owner’s typically receive a 10% discount for being non-smokers, tacking on about $85 per year for smokers, given average home insurance premiums of $850.

“Numerous studies find that smokers earn anywhere from 4% to 11% less than nonsmokers. It’s not just a loss of productivity* to smoke breaks and poorer health that takes a financial toll, researchers theorize; smokers are perceived to be less attractive and successful as well.”

Add on higher dry cleaning bills, lower resale values of homes and cars (or money shelled out to clean them), and perhaps the occasional teeth whitening service, and you’re looking at a few to several thousand a year to smoke.

[* – I should note that in fairness to smokers, I’ve read assertions that other than early death, there are no appreciable losses in job productivity attributed to smokers.  However, if employers believe there are anyway, smokers will still receive lower salaries, everything else being equal.]

Indirect non-monetary costs of smoking

Besides bad breath, yellow teeth and smelly personal effects, smoking seriously reduces one’s quality (and length) of life.  The average smoker dies 7-8 years sooner than a non-smoker.  In addition, they are way more likely to live an unhealthy (and therefore uncomfortable) old age, suffering higher incidences of various cancers, heart diseases and strokes:

“The number of people under the age of 70 who die from smoking-related diseases exceeds the total figure for deaths caused by breast cancer, AIDS, traffic accidents and drug addiction.”

There are other side effects as well due to reduced blood flow: “For men in their 30s and 40s, smoking increases the risk of erectile dysfunction (ED) by about 50 per cent.”  For both men and women, smokers’ skin develops more wrinkles and looks paler.

The sooner you quit, the better

The benefits of quitting become immediately apparent (including more cash in your pocket):

From Wikipedia: “The immediate effects of smoking cessation include:

  • Within 20 minutes blood pressure returns to its normal level
  • After 8 hours oxygen levels return to normal
  • After 24 hours carbon monoxide levels in the lungs return to those of a non-smoker and the mucus begins to clear
  • After 48 hours nicotine leaves the body and taste buds are improved
  • After 72 hours breathing becomes easier
  • After 2–12 weeks, circulation improves

Longer-term effects include:

  • After 5 years, the risk of heart attack falls to about half that of a smoker
  • After 10 years, the risk of lung cancer is almost the same as a non-smoker.”

While quitting is difficult due to the addictiveness of nicotine, there are several methods that greatly increase your chances of succeeding.  Try to surround yourself with those who have quit smoking, or are non-smokers:  “A study found … that smoking cessation by any given individual reduced the chances of others around them lighting up by the following amounts: a spouse by 67%, a sibling by 25%, a friend by 36%, and a coworker by 34%.”  So if your significant other, friends or coworkers smoke, try to get them to quit too.  You’ll both help each other succeed.

The best approach using pharmacological aids seems to be use of “[t]he Nicotine Patch plus [as needed] use of gum or spray” which “increased quit rates to 36.5%, the largest quit rate reported.”  In addition, joining a social ‘support’ group seems to help.  “Programs involving 8 or more treatment sessions can double success rates.”  Use support lines like 1-800-QUIT-NOW (1-800-784-8669), to talk to an expert and increase your likelihood of success even further (live IM chat is available too.)

Despite all these methods, it often takes people more than one attempt to quit, so keep at it if it doesn’t work out the first time.  Set a date to quit, then use the above resources to stick to it.  You can get started by tossing your cigarettes & buying some nicotine patches and gum.  Then, check out this free quitting guide at smokefree.gov.

Good luck, your bank account and body will thank you!

Useless types of insurance to avoid like the plague

Here’s is a good link from Bankrate.com on 14 types of useless insurance to avoid.  It’s good information and ties in with the article I wrote recently on auto insurance (and how a saved a bunch of money on my car insurance by switching to GEICO…)

The main moral of the story linked below is that for any event related to your death, you should just buy adequate life insurance (likely term life, which I recommend.)  For property, often your car insurance, homeowner’s/rental insurance, or sometimes your credit card will cover you.  Often your employer has some types of insurance (life, disability) built into your compensation package gratis; check this out as well.

As a follow-up, here’s a brief introduction to life insurance on ‘Get Rich Slowly’.  Again, for 95% of people, I recommend using Term Life if you have dependents (and NO life insurance if you DON’T have dependents.)