The Brooklyn FI Guide to Insurance
Insurance – it’s one of those things that we feel like we should all have but it’s something we generally don’t know much about.
In a very basic sense, insurance is risk management. By joining a ‘pool’ of others, you are transferring the risk to the insurance company and, in turn, paying a monthly or annual premium (which is usually lower than the larger the pool of insured).
Insurance is complicated and frankly a little bit boring. But we don’t want to minimize its importance.
Below you will find a quick overview of the various types of insurance, but know you should always reach out to your insurance provider to get more specific details/coverage needs/price quotes. Or! Ask your BKFI financial planner.
Health Insurance
What is it?
Health insurance covers you in the event you need any type of medical help. When choosing a plan, you will notice there is a range of prices and coverage offered. Typically, the less expensive plans require a higher deductible (out-of-pocket expense paid until you meet this pre-determined amount). Whereas the more expensive plans may have little to no deductible for ordinary medical needs. However, both will have pre-determined copays (amount, or percentage, you will have to pay out-of-pocket for each specific service vs what the insurance company pays).
How do you get it?
Typically, you are offered group health insurance through your job, which is the cheapest option out there. If you have been terminated from your job, you now are eligible for COBRA (don’t worry about what this acronym stands for). COBRA extends the health benefits you received from your prior employer for 18 months for employee + dependents (for different situations the length of coverage may be longer). You must elect COBRA coverage within 60 days of the qualifying event and then you have 45 days to pay the premium for the time prior to making the election. So, if you elect COBRA coverage a month after leaving, you still must pay for that month, even if you did not use it. You will have to contact the insurance company to determine what the new cost of coverage will be, but at a maximum, it cannot be more than 102% of normal group rates. COBRA can typically be quite expensive, especially since employer subsidies are gone when you no longer are employed.
If you’re a freelancer, consultant, or independent contractor (or have been terminated and want another option rather than COBRA) you will want to shop for health insurance via the Health Insurance Marketplace. For the Marketplace, you’ll go through an application and will need an estimate of your current year net self-employment income. The open enrollment period is normally from early-November to mid-December, with coverage starting the beginning of the next year. However, special enrollment periods are available if you have a qualifying event. You can find the State Marketplace sites for NY and CA here: New York - California
Insurance add-ons:
FSA (Flexible Spending Account) – this is a ‘use it or lose it’ medical-related savings account (not for self-employed). Usually funded by your own pre-tax salary reductions but can include employer contributions as well. The money in this account must be used for qualified medical expenses and the current limit you can contribute to a Health FSA is $2,750.
One little-known fact about the FSA is that when you leave your current employer you can actually use the entire amount that had been earmarked for that year. So, for example, say that you had started an FSA on January 1st with your current employer and aimed to contribute $2,400 in the year. Come April 1st, you decided to leave your current employer – well, at this point you have contributed $600 ($2,400/12 * 3 months of contributions). You might think this means you can only be reimbursed for $600 of medical expenses prior to your April 1st departure – wrong! You can actually spend, and be reimbursed, for all $2,400 as long as they are qualified medical expenses and occurred prior to your termination.
HSA (Health Savings Account) – this is another medical-related savings account that does not fall under the ‘use it or lose it’ category and is made up of pre-tax contributions. HSA accounts are available through group work plans or for self-employed individuals. In order to be eligible for an HSA, you must be enrolled in a high-deductible health plan – meaning your minimum out-of-pocket amounts are $1,400/$2,800 and maximum out-of-pocket of $7,000/$14,000, for single and family, respectively. Maximum contributions for the current year are $3,600 for single and $7,200 for family coverage. If you leave your current employer, you can keep the HSA where it is, transfer it to your new employer plan, or transfer it to a different custodian.
Taxes:
Currently, if you have qualified, unreimbursed medical expenses that exceed 7.5% of you AGI (Adjusted Gross Income) you can claim these on a Schedule A. However, your total itemized deductions will have to exceed the standard deduction in order to actually reap the benefit for these expenses.
If you’re self-employed, you can deduct 100% of health insurance costs from your gross income on your Federal return. When calculating your self-employment tax, you can also deduct 100% of your health insurance premiums.
HSAs are the ONLY triple tax benefit account, meaning pre-tax money goes in, it grows tax-deferred, and money spent on eligible medical expenses are withdrawn tax-free.
Also, keep in mind that most health insurance premiums paid out of your paycheck are also pre-tax deductions.
Disability Insurance:
What is it?
This type of insurance kicks in for a period of time (after you have met the elimination period as predetermined by the provider: elimination period for short-term is usually 14 days and long-term can be 60, 90, 180, or 360 days). Disability insurance offers periodic payments for a person who is unable to work as a result of accidental injury or sickness. Short-term coverage usually lasts for up to two years and is limited to about 60% of weekly wages. Whereas long-term coverage usually starts up after the two-year short-term period and generally lasts until you reach age 65 and is limited to about 75-80% of monthly gross wages (however, it is more common to see payments closer to 50-60%).
So why do you need it? Well, it is much more likely that you will become disabled during the period of time you are working than to die.
How do you get it?
Most employers either offer this coverage as part of their benefits package or provide you with the option to purchase short and/or long-term group disability insurance for a fairly reasonable price. For self-employed individuals, you’ll want to look into organizations you can join to take advantage of their group disability offerings. For example, the Freelancers Union offers members to purchase long-term disability coverage at a reasonable price.
Taxes:
Whether or not these benefits are included in your taxable income at the end of the year depends on if it was employer-paid or personally paid; the former will be included in taxable wages, whereas the latter are excluded. If it is a mixture of the two, there is a pro-rata share of premiums and that calculation will determine what amount for you to include in your taxable income.
Life Insurance:
What is it?
Well, if you read that last paragraph you’re probably wondering why you even need this if the probability of occurrence is much lower? Yeah, that’s true – but I didn’t say there was NO chance of death and the name of the game is risk protection… Not a fun topic, I get it. What is even less fun is leaving your spouse/children behind and having their lives overcome with grief and burdened with financial loss. This insurance is not for you – it’s for your family. So, to answer the question, life insurance provides a benefit to whomever you elect as your beneficiary in the unfortunate event of your death.
How do you get it?
Again, typically employers provide a minimum benefit at no cost (150% of your salary with a cap of $250k, for example – it really depends on the employer) and the option to purchase additional group life insurance through their plan, which is generally more affordable than going through a traditional insurance provider. If your employer does not offer life insurance or you want to shop around or you are self-employed, you can reach out to your current insurance provider or look into other low-cost providers such as LLIS or Policygenius.
What amount should you be covered for?
This really depends on a couple of factors … Does someone depend on your income to help pay the bills/lifestyle expenses? Do you also have children and want to make sure their care + costs of college would be covered if you were to die? Are you single but want to make sure your family members have enough money to take care of your basic end-of-life expenses? Do you have a best friend that you’d love to know received a little nest egg? Regardless, a general rule of thumb is to hold a policy that is at least 10x your salary, but really should be enough to cover all expenses that your salary would have covered (mortgage, children’s care, etc.) + any additional items that your spouse may no longer be able to afford (for example, college).
Other things to note:
I’m not going to get into the very nitty-gritty details of all the different types of life insurance and the pros/cons of each. I will just say, here at BKFI we recommend term policies (usually 30 years) to cover you for a specified amount of time in which your spouse/dependent(s)/family would be detrimentally financially impacted by your death. So, most commonly, the period of time your children are young and your spouse would need the extra money to help provide for them, making up for the loss of your income, and still be able to afford college expenses.
We have a whole guide to Life Insurance you can find here.
Home Insurance:
What is it?
Generally, homeowners’ insurance comes in a package that includes fire, theft, and personal liability. Depending on where you live and the risks associated with that area (flood, hurricane, tornado, fire, etc.), what type of dwelling you have, or what other valuable items are located inside your home, you may want to look into additional riders/coverage to protect against that specific loss or damage.
What coverage is needed?
The typical coverage for your dwelling is at least 80% of the replacement cost. However, with risk management in mind, you should really cover 100% of the replacement cost to make sure you are fully protected in the event of total loss.
Automobile Insurance:
What is it?
Okay, I think ya’ll know what this is, but, just in case, here is a very brief description: when you are legally liable to pay for property damage or bodily injuries, auto insurance covers this loss… up to a certain point. There are three common types of coverage 1) collision – which (yep, you guessed it) provides when there are losses that resulted from collision, 2) comprehensive – which provides for loss other than collision; like if your vehicle was stolen or damage was caused by a non-collision related incident (i.e. hitting a deer) and 3) liability – which protects you if you cause personal or property damage to others. There is also uninsured motorist, which provides you with the amount that could have been collected from a driver at fault who did not have insurance (trust me, you might not think about this, but these types of accidents DO happen, and you will be happy you received something when the person who injured you or your property has no insurance and nothing to their name).
Things to note:
There are a lot of factors that go into the costs of auto insurance, including: location, sex, age, marital status, use of car, completing drivers’ education, number/type of cars, credit score, driving record, being a ‘good student’, etc. You might have heard that being a young male results in more expensive coverage – yeah that’s true and there isn’t anything you can do about that… thank all those other young fellas that are driving up the accident rates and making the premiums more expensive.
An add-on that you may want to consider would be an allowance for a rental car to keep you on the road during the time your car is in the repair shop. Another thing you may want to consider as a car owner is AAA, if your current auto policy doesn’t have a roadside assistance benefit included. It typically starts around $50/year and is always good to have if you travel frequently.
Umbrella Insurance:
This sounds cute, right? I mean, what it does is cute too! Previously we discussed homeowners and automobile insurance, but what happens when your liability coverage offered from those policies does not add up to your total net worth? Meaning – your coverage falls short from protecting your assets that are beyond that liability amount. This is where umbrella insurance comes into play. An umbrella policy will be added on top of either your current auto or homeowners. So, let’s say that your auto liability is up to $300k (per accident) and you cause $900k in injuries that you’re liable for – where does the extra $600k come from? Well, if you don’t have umbrella coverage, you will quickly be liquidating your assets to pay this out (ouch!). If you do have umbrella for, let’s say, $1mm – your insurance will be paying out the difference. Sounds good right?
I won’t get into all the calculations, but a conservative approach is to take the value of your total net worth and round up to the nearest million. Adding this to your auto or homeowner’s policy is fairly cheap and a no-brainer if you have a high net worth.
Renter’s Insurance:
What is it?
Again, probably self-explainable, but here is a quick rundown: this type of insurance provides you protection in the event of theft or damage of clothes, furniture, other personal property – as well as personal liability damage and emergency medical expenses. You can also add additional coverage to pay for temporary relocation expenses.
Another pretty affordable insurance – starting around $9 to $10/mo, depending on your coverage. You can reach out to your current insurance provider or get a quote from Lemonade.