I cannot count the number of times in the last 25 years when I have been called to “clean-up the mess” that was created by an incompetent insurance agent or someone attempting to build their insurance portfolio without doing the required study.
It happens when good people look at insurance as just another expense that their parents say they must have in order to be a “responsible adult.”
Below are 5 of the most common mistakes that I have seen in the past 25 years.
1) FOCUS ON PRICE ALONE
Often, younger folk, have been told by their elders that they must have a certain type of insurance or be labeled a free-loader. In the past few years, we have heard this mantra by several politicians.
Section 5000A of “Obamacare” mandates that all Americans must purchase a government approved “Essential Benefits” plan by January 1, 2014 or pay an additional tax to the IRS.
The problem with mandates is that many Americans do not like being told what to do. When we are, we buy the least expensive thing that is available. That is not always the wisest move.
A couple of years ago one of my clients insisted on a Health Savings Account (HSA) compatible plan. Their reasoning was that it was the least expensive. They elected a plan with a $5000 deductible.
A few months later, their daughter injured her arm and needed surgery. Before the hospital would authorize the procedure, it required my client to pay the full $5000 deductible or make payment arrangements.
In the end, the “least expensive” health insurance plan ended up costing my client an extra $5000. Sadly, it all could have been avoided if they had only considered the benefits that they were buying rather than just the money that they were spending.
The second common mistake people make is to over-insure themselves. I see this most often with Life insurance. I have a client that insists on paying for $1,500.000 of Life insurance but has no Long Term Care insurance.
When he was actively working, he was earning enough money to justify that high level of Life insurance. Since then, he has been able to retire early. He no longer has dependent children in his house and has no need to replace an income.
In my opinion, he only needs enough Life insurance to guarantee that if something happens to him, his wife will have enough money to maintain her current standard of living.
Since the house is paid for and there is not mortgage payment that has to be paid, she does not need $1,500,000.
I would rather see him use some of the money that he is paying for Life insurance on Long Term Care insurance.
Another common mistake that people make is not to buy enough insurance. Once again, this is often caused when people focus entirely on price.
Contrary to what a politician, political pundit or insurance agent may say, there are no insurance policies that will cover you for every risk.
Major Medical (health insurance) will only pay for some of the bills that are medically necessary. There are other potential risks that you face if you get sick other than just doctor and hospital bills.
If you get sick and are not able to earn a paycheck, how will your mortgage, utilities and grocery bills be paid? That is what Disability Income insurance is for.
If you have a stroke, heart attack or cancer and require someone to sit with you while your spouse is at work, Major Medical insurance will normally not pay for you to hire an aide. For that you need Critical Illness or Long Term Care insurance.
If you have a family and are concerned that they have enough money to pay off the mortgage and get a college education if you die, $100,000 of life insurance is not enough in most cases. You need to do some math and calculate the true costs of 5 years of college plus your mortgage plus final expenses.
Often insurance agents will try to persuade you to buy either Whole Life or Universal Life insurance with “Something is better than nothing.” That philosophy may be true. There is a legitimate place for both Whole and Universal Life insurance. However, it is often not necessary to sacrifice your family’s financial future. In many cases, you can buy enough Term Life insurance to meet all of your family’s needs for the price you would pay for a Whole or Universal Life insurance policy that will force your family to choose between paying off the mortgage or a full ride in college for your child.
A common mistake that people make is to assume that all insurance plans are the same. That is not the case.
This is the source of most of my customer service problems. Most “health insurance” plans today have providers who are both “in-network” and “out-of-network.”
The doctors and hospitals that are “in-network” have agreed to a contractual price that they will charge patients in order for the insurance company to recommend them. They remain free to charge an unlimited amount to people who do not have health insurance. However, they are limited on the amount that they can charge people who have “health insurance.”
Doctors and hospitals who are “out-of-network” do not have any such limitations. They are free to charge whatever they want to any and all patients, regardless of whether or not they have insurance.
The only way to prevent getting exorbitant medical bills is to know what medical providers you can use to get the contracted rate and what ones to avoid. In order to do that, you will need to read your policy to know how it works.
Recently, I got a frantic call from one of my clients. Her son had suffered an injury to his hand. She took him to the closest Emergency Room for treatment right after the accident. Since it was emergency care, his bills were paid at the 80% “in-network” rate.
The problem was that she elected to have his required surgery done at the same hospital. Since that hospital was “out-of-network.” She experienced two challenges.
- The hospital was not contractually limited on the amount it could charge. Therefore, the charge was significantly higher than it would have been with an “in-network” hospital.
- The plan she had has a 20% penalty for using an “out-of-network” hospital for non-emergency surgery. Her insurance only paid 60% of her medical bills.
The ironic thing is that there was an “in-network” hospital less than a mile further from her in the opposite direction. Her problem could have been avoided if she had only taken the time to review her health insurance during the 72 hours after her son’s accident.
COMPARE WITH OTHERS
You are unique. You have unique needs. Possibly the worst thing that you can do is to get the same type of insurance your parents or friend without carefully looking at it’s benefits.
I am opposed to the “One-Size-Fits-All” approach to health insurance that is so popular in America today. When Obamacare goes into full force, in January 2014, your options will be limited. You will be required to purchase one of four government approved “Essential Benefit” plans.
In some states, people’s options are already highly limited. However, in the majority of states, you are still free to customize your health insurance plan to cover what you need.
The problem that I have with the “Essential Benefits” plans in Obamacare is that it requires people to pay for health insurance for something that there is no possible way they will ever need that type of care.
I have several questions for which the politicians have been unable to satisfactorily answer. The only answer I get is, “Because we said so.”
- Why should a post-menopausal female be required to pay for maternity benefits?
- Why should a non-smoker be required to pay for smoking cessation programs?
- Why should a law-abiding citizen be required to pay for addiction recovery programs for people who abuse illegal drugs?
If you are going to try to build your own insurance portfolio without the help of an insurance professional, I encourage you to get and read a copy of the study below. It is my hope that the information in it will help you avoid making mistakes in your insurance portfolio that can cost you hundreds of dollars.