Here is the long-awaited continuation of the Financial Peace University overview series. As I was reviewing the course, the last half of the sessions were jam packed with useful information so I will be breaking them down into several posts.

This lessons will cover FPU lesson #6 entitled “Understanding Insurance.” Since insurance can be so convoluted and confusing it’s important to know what to look for. There are some highly actionable nuggets of information here so be prepared to pull out your insurance policies and see how you match up.

The types of insurance Dave covers are:

• Home owners/renters
• Auto
• Health
• Disability
• Long-term care
• Life

Auto and homeowners insurance

Saving money on car and homeowners insurance

Here are the main ways Dave Ramsey recommends saving money:

• Increase your deductible
  It seems to be pretty common knowledge that one of the best ways to decrease your insurance premiums is to raise your deductable. You really should only consider doing this if you have an emergency fund. Your emergency fund should allow you to pay the increased deductible.

  To determine how much to raise your deductible do a simple break even analysis. Take the amount the deductible will change and divide it by the amount that the premium decreases (you will need to call the insurance company to find this out). For example, if by increasing the deductible from $500 to $1,000 (a change of $500) your monthly premium goes down $25, divide $500 (the change in the deductible) by $25/mo (the change in the premium). This shows how many months it would take for you to compensate for the increase in deductible using the savings from the premium. Here is the calculation for this example (note: if you pay a quarterly or yearly premium, the result will be the number of quarters or years).

  $500/$25 = 20 months (1 yr, 8 mo.)

  In this example if you go for 20 months without an incident that would put you above you’re deductible and you would save money. You have to feel this out and determine what you’re comfortable with. In this example, there’s a pretty good chance you won’t have a major accident every 20 months so you’re probably better off raising your deductible.

• If you have an older car and have money to replace your car in case of an accident (emergency fund), you may want to drop collision coverage

Auto Liability Insurance

Ramsey recommends having 500,000 in liability insurance. When reading your insurance policy (e.g. 100,000/300,000) the first number is your liability coverage. LOOK UP OUR POLICY

Only use “Replacement cost” homeowners insurance

I thought this was one of the most useful tips and one which we don’t currently follow (I better find another insurance provider). Replacement cost insurance pays you what it would cost to replace your lost or damaged property rather than just paying you what it cost you to buy them originally. There’s a huge difference, particularly when it comes to your house. If you paid $100,000 for a home and it has appreciated to $200,000 and it burns down, the insurance company will only pay you $100,000 if you don’t have replacement cost insurance. Replacement cost would pay you the full $200,000. I can’t say from personal experience, but from what I hear, replacement cost is harder to find. Insurance companies these days don’t want to offer it because they have to pay out more.

If you have over 200k in assets, get an umbrella policy

Ramsy recommends an umbrella policy if you have over $200K in assets. An umbrella policy is essentially another level of liability insurance within your auto and homeowners coverage. Umbrella policies cover accidents that happen on your property (e.g. if someone slips on driveway) and can protect you against someone going after your assets. I personally don’t carry any right now but am probably at a point I should start considering it.

Health Insurance

How to save money on health insurance

Ramsey had three main recommendations for saving money on health insurance.

• Raise your deductibles – Again, this seems like standard, solid advice if you have an adequate emergency fund to cover you.
• Increase your co-pay – I loved this piece of advice and wasn’t previously aware you could raise your co-pay. In fact, reviewing this series reminds me that I need to do this. I imagine you would still want to do some sort of break even analysis similar to the one above for raising auto insurance deductibles. If your premiums don’t go down very much as a result of increasing your co-pay, you may not want to do it. I imagine if you have several kids and make frequent trips to the doctor, this also may not be such a great deal.
• Increase your “stop-loss” – This was also a tip I wasn’t aware of. The stop-loss is the total amount you can pay out-of-pocket before the insurance covers everything else. It “stops” your total “loss.” For example, if your stop-loss is $3,000 you would only have to pay that amount out-of-pocket (including deductibles, co-pays, etc). Once you’ve paid $3,000 out-of-pocket, the insurance company would cover everything else. Ramsey didn’t give any specific recommendations for how much to increase a stop-loss. I’ll have to research this a little more and post more details. If anybody has recommendations, please leave them in the comments.

MSA – Medical Savings Account (now called a Health Savings Account or HSA)

The next generation MSA is called an HSA (Health Savings Account). Emily and I are currently looking into starting one and are very excited about it. Here’s why. An HSA essentially allows you to save funds to pay your deductible amount tax-free. The money your save in an HSA is contributed pre-tax and grows tax free. You’re not even taxed when you use it. The reason this is so great is that it allows you to increase your deductible significantly which lowers your premium significantly. You can take the amount you’re saving on lower premiums and start putting it into the HSA.

This is honestly a topic I currently don’t know much about but as I learn more I will certainly pass the information along. In the meantime for more information on HSAs, check out the Wikipedia entry on HSAs

Disability insurance

Disability insurance replaces a percentage of your income (typically 50-75%, averaging 60%) in the event you become disabled and are unable to do your job. Disability insurance is one of the most under-insured areas. According to Ramsey If you’re 32 years old you’re twelve times more likely to become disabled by 65 than to die. Dave recommends “own occ” disability which stands for “Own Occupation.” “Own occ” means that you’re covered if you become disabled and are no longer able to do your job vs. covering only specific injuries. For example, if you’re a computer programmer and lose use of a hand, you are unable to complete you’re current job. Disability insurance would then kick in and cover you for the pre-defined time period. By the time coverage ends you’d have to have recovered from the injury or find employment that doesn’t require both hands.

Dave recommends getting long-term disability which should cover you for roughly 5 years. Dave also recommends a long “elimination period” because it’s cheaper. The elimination period is the time period it takes for the disability insurance to kick in from the date of proof of your disability. You should be able to cover your expenses in the meantime with your emergency fund. The elimination period is like a deductible in ways because the longer (higher) it is, the lower your premiums.

Emily and I didn’t have a disability policy until recently when my employer started offering a group plan. It was so darn expensive getting it independantly. Typically group disability policies are a great deal at about 1/4 the cost of individual policies. If your employer offers group disability GET IT. There’s really no need to shop around because the group policy will always be way cheaper.

Long term care insurance

Long term care insurance is typcially for elderly individuals and covers the expenses of nursing homes and other forms of long-term care. Ramsey recommends having a long term care policy if you’re 60 years or older and don’t have over $1 million in retirement investments.

He also mentions that care for parents is one of the largest expenses for adults. Statistically 60% of people over 65 eventually have some form of long term care – 20% will need 5 years or more of long-term care. Dave recommends addressing this issue with your parents to make sure they have a policy. I think it’s great advise but may be an awkward conversation to have. Emily and I have only brought up the topic casually one time with one of our parents. I need to get the guts up to really address the issue with them as both my parents are approaching 65.

Life insurance

There are two basic types of life insurance: term and cash-value (including whole life, universal life and variable universal life). Ramsey compares term life to renting and cash life to buying. In other words, with term you pay for coverage but no cash value is accumulated. With cash-value the money you pay (or a portion of it) goes into an account that accumulates and that you can use later according to very specific rules.

Get term life insurance and invest the difference

The standard advice about life insurance from most financial planners is to get term life insurance and invest the difference. While cash-value sounds more attractive, it’s much more expensive. And while cash-value policies can act like a savings account of sorts with money accumulating accumulating in them, you earn a very small return on those funds and are extremely restricted as to how and when you can use them. By getting term life insurance and investing the difference between what you would pay for cash-value, you end up paying less for the coverage you need while having full control over the money you’re investing from the savings.

Life insurance isn’t always necessary

One of the more interesting points Dave brings up is that, contrary to common perceptions, life insurance isn’t always a necessity. The idea of life insurance is to cover your funeral expenses and replace the “economic value” of the deceased person for those left behind. If you have savings adequate to meet those objectives, you don’t need life insurance. For familys that have a solid saving and investing plan, the need for life insurance decreases over time as their savings grows.

Don’t overlook life insurance for a stay-at-home spouse and children

Because the idea of life insurance is to replace the economic value of the deceased, stay-at-home spouses should be covered. Even if a stay-at-home mom doesn’t provide any income, she certainly provides economic value. To replace what she does would have a real cost in the form of day care, nannys, and even the cost of meal preparation and cleaning.

For children, you mainly need to cover the funeral expenses.

How much life insurance should I get?

Standard advice for the amount of coverage to buy is ten times your income. If you make $50,000 then you should get a $500,000 policy. Of course, you’ll have to make an estimation for family members that don’t produce an income.

What to avoid

Dave mentions a few more tips.

• Don’t get policies that cover college for kids.
• Smokers typcially pay double or more for life insurance.
• Avoid “credit” life and disability insurance that pays off the loan if you die. It’s 90-200x more expensive.
• Don’t buy credit card protection.
• Don’t buy cancer insurance. Your major medical should cover cancer.
• Don’t buy accidental death insurance.
• Don’t buy prepaid burial policies.
• Don’t do mortgage life insurance (decreasing term).
• Don’t get duplicate policies from more than one company. This causes disputes as to which company is responsible and may prevent you from getting your benefits at all.

Conclusion

This post is filled with actionable advice. Take some time today to check your policies and see if there are any ways to save money or optimize your coverage. Reviewing this lesson has caused me to identify several changes that I need to make.

Stay tuned for more FPU overviews.

Having a hobby can be good for you. Bill Malone (MSW) explains that hobbies can help battle stress and depression, have been shown to prevent or reduce memory loss, and can even help with arthritis. If you don’t already have a hobby you enjoy, here are some tips in finding one:

1. Choose Social or Solitary. Do you spend your days dealing with people, in a crowded work environment, or do you just find that you want some time by yourself? Choose a hobby that is solitary–woodworking, photography, fixing cars, or gardening. On the other hand, if you are stuck in a cubicle on a computer all day, or long for adult conversation after taking care of children, you will probably want a hobby that gives you a chance to be with other people–playing games or cards, a dinner group or a book club. Even if you have a solitary hobby, it’s easy to find a way to make it social. Perhaps you enjoy painting–you can take a class. Or you can volunteer to teach others.

2. Choose an interest. It makes sense to choose a hobby that you are naturally interested in or have a passion for. You may also consider trying something that others are interested in. I found that when I quit my job to stay home with our son, my hobbies didn’t match my new social circle. Not many of my friends who are stay-at-home moms enjoy managing web sites or building databases. I’ve tried my hand at new hobbies to create common ground–some are not for me (scrapbooking). But others I’ve really come to enjoy (gardening).

3. Don’t just spend money, make money. Almost all hobbies will cost money. Memberships, materials, equipment, classes, lessons–it can be expensive. The best way to defray hobby expenses is to find a way to turn your hobby into a money-maker. Sell your fresh fruits and veggies at a farmer’s market, teach your skill (art, music, etc.), post photos on www.istockphoto.com, or become expert enough to be a judge and get paid to give your opinion! With a little creativity, most hobbies can bring in a little money.
Right now, I have a bunch of hobbies that I switch between. I run a book club, enjoy square-foot gardening, am part of a dinner group, sew, and sell MaryKay. My book club and dinner group cost me money, but I’m saving on fresh produce by having a garden, I sell tote bags that I sew, and I make a little money as I deliver little pink packages.

What is your hobby, and have you found a way to make money with it?

Resources:

In our house: FIFTY DOLLARS!

Sam and I agreed that we should quit drinking Diet Coke. I always limited myself to only one per day, usually about 12 ounces. For me, Diet Coke helps me through that 2 o’clock slump–the same time Adam is getting up from his nap and is ready to go. Also, it’s a social thing–it’s the drink of choice at my in-laws, and after years of drinking it at family gatherings, I was hooked.

Sam, on the other hand, had at least a 44 ounce drink per day, sometimes two, and maybe a can or two.  For him, it’s a habit of refreshment; you get in the car on a hot sunny day, crank up the air conditioning, and stop for a Diet Coke. So he might drink one if he goes out to lunch and he almost always gets one on the drive home.

We’ve both tried to quit in the past, but with little success. Finally we have found something that works–MONEY! We made an agreement that whoever drinks a soda first owes the other person fifty dollars. And we’ve been soda-free for three weeks!

Ironically, neither of us are willing to pay the other $50, yet this is probably the amount we were spending each month on Diet Coke. A fountain drink at the gas station costs about a dollar. Sam had at least 20-25 a month, plus 10 or so for me. Then we’d buy a couple of 12- or 24-packs to have at home. I’ve found more savings: getting a giant popcorn at the movies is not nearly as good with water, and a nice greasy cheeseburger and fries does not satisfy without an ice-cold Diet Coke. I’ve found myself eating out less, and cutting back on a lot of foods that I associate with soda–most of them unhealthy and expensive.

I did a little research, and it turns out that Diet Coke is pretty bad for you. People quickly develop a tolerance for caffeine, and experience withdrawal symptoms such as headache and nausea when they stop consuming it. I can personally verify this–I had a headache for five days! High levels of caffeine has been linked to problems getting pregnant, miscarriage, and low birth weight babies. Caffeine and the high levels of phosphates in soda drinks seem to pull calcium out of bones and into the blood stream, increasing the risk of osteoporosis (Source: Nutrition and Well Being A-Z: Caffeine). The acids can also effect digestion–increasing stomach acid and causing indigestion.

All these reasons should be enough to deter me,  but in the end I quit because I don’t want to pay the fifty dollars!

Michelle Singletary offers an idea and a challenge in her washingtonpost.com article The Color of Money. The idea is that when we make environmentally friendly choices, we not only save the planet, we can save money too. The challenge is to submit your earth-friendly penny pinching ideas to colorofmoney@washpost.com by August 20th for a chance to win up to $100.

My number one planet- and money-saving practice is using www.freecycle.org. In fact, I am such a fan that I volunteer as a local moderator. This is how it works–go to the website and join the group nearest you. What you are joining is a Yahoo group (a separate web site is in the works right now!). Then, you clean out your basement/garage/closet and offer your items to others for free. A bunch of people will reply, and you pick the big winner (or winners). After you’ve become a contributor, you can ask for things (a WANTED post), and watch for others to post items that you can use. Just today I picked up a children’s kitchen playset–for FREE!

Although it is fantastic to get something for free, even better is when you can give things away. My favorite feature is the curbside pickup–by this I mean somebody else comes to my house and takes the junk I was going to get rid of anyway. I don’t even have to make the effort (or pay the gas) to drive to the local thrift store. I have given away kitchen utensils and gadgets, chairs, couches, lamps, decorations, curtains, clothing, shoes, tackle boxes, two tons of gravel, a broken lawn mower. . . the list goes on. It’s a great place to get rid of moving boxes, used carpet, extra building materials, large furniture, etc.

Freecycle (TM) is organized locally, so that the benefit of reducing landfill waste is not outweighed by the pollution of driving to get something. When choosing a recipient, I always pick someone who lives closeby, and who has offered several items in the last few months. It’s my way of rewarding those who contribute to the community.

I’d love to hear your favorite enviro-penny-pinching ideas!

I quit my job when we adopted our son Adam three years ago, and I swear my brain went to mush. After recovering from two months of sleep deprivation, it was clear to me that motherhood used different “brain muscles” than I was accustomed to: I track and multitask in a way I never thought possible. But my linear, analytical thinking skills are rarely challenged in the same way, and I missed it. So, I decided to start a book club.

Now, many of us have probably been in silly book clubs before–with little emphasis on books, it’s mostly a club for socializing. And then one annoying member (usually self-invited) manages to make the dynamics unpleasant so that the people you do enjoy seeing and talking to stop coming. There are some resources that tell you the basics of how to start a book club. In addition to these, I have found there are several ingredients to a happy, healthy, successful book club:

1. Leadership. Somebody needs to be in charge–this is particularly true if the book club is only women. The leader will run the meeting (although not necessarily the discussion), call or email members to remind them of meetings or changes, and provide all the books (see #5 below). This should be someone who is kind, but bold. This person should not be afraid to make an executive decision, while still balancing the needs and opinions of the other members. If one member starts sabotaging the experience for everyone else, it is the leader’s job to confront them, and if necessary, ask them to leave the group. This doesn’t have to be as mean or scary as it sounds: “Listen, you tend to do ___________ and it’s not really working in this group. We’d love to have you attend, but if this doesn’t change then maybe this isn’t the best group for you.”

2. Membership. In my experience, a book group won’t be successful if there are too many or too few members. Six to eight is ideal. You need enough that if one or two, even three members can’t attend, you still have enough people for a discussion. You need a small enough group so that when everyone does come, there is still a chance for each member to participate. I am opposed to “open” membership, mostly because by choosing members carefully you will avoid a world of problems later. If you must include anyone who wants to attend (it’s a neighborhood/church/group based club), you will need really strong leadership. Another disadvantage to open membership is that, unless you live in a diverse city, you are likely to have a very homogeneous group–I love having members of various ages, backgrounds, family status (single, married, married with children), etc. The common ground each member shares is the literature and a love of reading.

3. Identity and Purpose. Establish the goals and purpose of your book group from the beginning. What types of books do you want to read? Classics, poetry, science fiction?  Do you gather mostly for social reasons or do you really want to challenge each other and have focused discussions? This also helps limit your membership. Not everybody wants to join my book group because we read classics and discuss them at length. We talk about character development, symbols, and what the book says about mankind. It works great for us, but I know it’s not for everybody.

4. Democracy. Another pet peeve of mine when it comes to book clubs is what I call literary dictatorship: when the entire group is subject to read what one person thinks is a good book. Don’t get me wrong–I often take recommendations of friends and family for my personal reading enjoyment. But the fact that one person liked a book does not mean it’s good book club material. Instead, make/find a list that matches your purpose. Also, this list can be edited by length (it’s hard to get through 1200 pages in a month) or content. I have compiled a huge list of over 500 books that we choose from. Each person prints out the list and identifies three to five books or authors they would like to read. Then, we all get together, discuss it, and vote on our favorites. Each person also gets several “veto votes” so that we never read a book someone hates or will not read. Usually we agree on a small list (up to 10 books) and then everyone ranks them. The books with the highest combined rankings are chosen. By choosing books together, more people are likely to actually read the book and come prepared to discuss it.

5. Time and Location. Although some people enjoy a travelling book club, I prefer to have it at the same place and time every month. That way, if someone misses a meeting, they won’t miss again because they weren’t sure where and when to go. I chose a day and time before we began, so it was another factor that thinned our membership. If you choose to have refreshments, you can still rotate who brings them.

6. Money. I charge everyone $5.00 per month, and I purchase all the books and distribute them the month before. For example, if we are reading The Grapes of Wrath and will discuss it in August, I hand out copies of the book in July. I am consistently able to purchase books at Half.com or Amazon.com for $5 each, including shipping. Usually when one book costs a little more, another will cost less. Overall, it averages out. Then the members get to keep the books, and build a nice reading library. You can collect money each week with cash, or request PayPal funds. At first I thought charging money would be a problem, but nobody minds. On the other hand, they LOVE not having to find a copy of the book every month.

When I told a friend I was writing this post she said “But what do book clubs have to do with personal finance?” The answer is simple–wherever we spend our money, that is where we also invest our time and energy. I could probably find a way to run my book club for free, but when people get something for free, they don’t value it as much. Because they pay for it, my members are more likely to come, to read, and that leads to a very successful book club.

The same is true in personal finance–do you want to know what you truly value? Take a look at your spending. That’s probably also where your spend your time and attention. One of the goals we have is to spend consciously; we talk about what we value, and then plan to spend based on our values. It is a natural result that we are more invested in those areas.

Happy reading everyone!