Why your life insurance is key to financial planning for your special-needs child
You've been searching for the perfect house for months. Finally, you find the one. After your offer is accepted and a small mountain of paperwork is signed, it's yours. What are you going to do next?
If you're smart, before you pack a single box, you will make sure your home insurance has you covered for whatever life might have in store. While your mortgage lender likely requires you to carry some level of home insurance, don't assume that amount will protect you from financial disaster.
Donald Griffin, vice president of personal lines for the Property Casualty Insurers Association of America (PCIAA), offers these tips.
Tip No. 1: Insure for your home's replacement cost
Here's one of the most common mistakes homeowners make: Confusing a house's market value with its replacement cost. Your home insurance coverage should cover the cost of rebuilding your house if it is destroyed. "The best indication [for coverage] is the cost to build a new home," Griffin advises. "With an existing home, look at the replacement cost rather than the market value." This is often less than what you paid for your home; if you're insuring your house for its market value, you may be overinsuring it.
On the other hand, if you bought a foreclosed home, the price you paid may not accurately reflect construction costs to rebuild it.
To determine the replacement cost, most home insurance companies use software that allows them to enter your home's features and calculate the cost of replacement. In addition, most policies include coverage for up to 125 percent of the replacement cost.
While it may be tempting to use this buffer as a reason to purchase less coverage, the reduced cost may not be worth the risk you take in having inadequate coverage. Griffin says it can be less expensive to rebuild a home than to do extensive remodeling, and many home insurance claims are for only partial damage to a home.
Tip No. 2: Don't skimp on liability insurance
There's the old joke that trial lawyers have never seen a lawsuit they didn't like. That may be an overstatement, but the threat of legal action is a real concern for everyone - especially if you have assets like a house, savings and investments. If you're sued for an incident covered under your home insurance (like a slip-and-fall injury on your front steps), liability insurance covers not only the settlement but also your legal fees (up to your liability limit).
According to Griffin, many liability insurance policies will cover you even if an incident happens away from your home. He also recommends buying an excess liability or an umbrella policy that offers coverage of $1 million beyond what is already included in your home insurance and car insurance policies. These policies are relatively inexpensive, often costing $200 to $300 per year.
"You don't want to lose your home because you failed to buy an insurance policy," says Griffin.
Tip No. 3: Protect your personal property
Be sure to review the coverage amount for your personal property. Most policies include coverage equal to 50 to 75 percent of the replacement value of your house.
In addition, you may need a separate endorsement, or rider, for some valuables. For example, coin collections, stamp collections, jewelry, furs, fine art, cameras and other expensive belongings may be subject to limited coverage under the personal property provisions of your plan. When requesting a home insurance quote, ask whether these items need to be listed under a separate endorsement to ensure they are properly covered.
Tip No. 4: Don't overlook coverage for additional living expenses
If your house is destroyed or otherwise unlivable while repairs are being made, you'll be glad you can tap into your "additional living expenses" (ALE) coverage. This type of coverage won't pay your mortgage, but it will cover the cost of an apartment or hotel. If you are displaced from your house, you can make a claim for this coverage by submitting paperwork documenting your living expenses.
The ALE standard for most homeowner insurance policies is a benefit worth 20 percent of your home's replacement value. When you get a home insurance quote, find out if the policy specifies any limitations or exclusions on ALE.
Tip No. 5: Examine what's not covered
Finally, read the exclusions section of your home insurance policy. Understanding what's not going to be covered is just as important as knowing what is - before you ever have to make a claim.
In the end, Griffin reminds new homeowners that it is important to choose a financially stable insurance company. Financial strength ratings are available from A.M. Best, for example.
"Remember," he says, "you are buying a promise from that insurance company that they will be around when you need to make a claim."
And what about customer satisfaction? J.D. Power and Associates releases annual customer satisfaction rankings of home insurance companies. And state insurance departments generally post their annual "consumer complaint" reports on their Web sites.
Getting sick can be a real pain in the neck, but at least Uncle Sam gives Americans a little bit of relief in the form of federal income-tax deductions for medical expenses.
"Medical bills can be a huge expense, so the Internal Revenue Service gives people a break so they can recoup some of that money," says Lisa Greene-Lewis, a certified public accountant with TurboTax.
Some 10.2 million U.S. households collectively deducted $85.3 billion of medical expenses on their 2012 federal tax returns, according to the latest available Internal Revenue Service statistics. Many Americans can make similar write-offs from their state income taxes as well.
But who can deduct what is pretty complicated, and experts say few taxpayers really understand the rules.
"I think the biggest misconception is that people think that all medical expenses are deductible from dollar one. But for my clients, I'd say that well under 10 percent actually qualify to deduct anything," says Rob Seltzer, a Los Angeles certified public accountant and chairman of the California Society of CPAs' Financial Literary Committee.
Here's a look at the basics of deducting medical expenses from your federal income taxes. Consult your tax adviser for specifics regarding your personal situation.
Who qualifies for medical-expense deductions?
The Internal Revenue Code includes two big rules that can severely limit who truly qualifies for relief from medical expenses:
You must generally itemize deductions on Form 1040 Schedule A rather than take the "standard deduction" if you want a break on medical expenses. If what you plan to deduct for everything (from medical bills to mortgage interest) adds up to less than the standard deduction ($6,400 for singles and $12,600 for married joint filers for tax year 2015), there's no point in itemizing.
Most taxpayers can only deduct allowable medical expenses that exceed 10 percent of "adjusted gross income" (AGI). That's the amount you earn in a given year from wages, investments and other sources minus what you paid for alimony, student-loan interest and a few other things. So, if a married couple has $100,000 AGI and $10,500 of qualified medical expenses, they can deduct only $500 -- $10,500 minus $10,000 (10 percent of their $100,000 AGI). Seniors age 65 or older can deduct any medical expenses above 7.5 percent of AGI.
Seltzer says the only taxpayers who pass both tests are typically those with unusually high medical expenses relative to income. That's often just the elderly, the unemployed, low-income people or those with big medical bills due to serious illness, in-vitro fertilization or a child's birth.
Are health insurance premiums deductible?
Yes, in certain circumstances, you can deduct your health insurance premiums as part of your overall medical expenses.
But you can deduct only premiums that you pay with after-tax money from your own pocket. For example:
If your health insurance premiums are paid entirely by your employer or the government, you cannot deduct the cost.
If you have health insurance through your employer and your share of the premium is deducted from your paycheck pre-tax, you cannot deduct the cost because the premiums were tax-free already. If you don’t know whether you pay pre-tax or after-tax, ask your human resources department.
If you buy health insurance through the state- or federally run health insurance marketplaces, you can deduct only the portion of the premium you pay out of your own pocket. You cannot deduct the amount of any subsidy.
If you buy an individual or family health insurance plan, either on the open market or through a marketplace, and you pay all of the cost out of pocket, then the whole amount is deductible.
Your total medical expenses, including premiums, must surpass 10 percent of your adjusted gross income to be deductible.
What else is deductible?
Assuming you pass the above tests, the IRS lets you write off pretty much every out-of-pocket medical expense that's ordered by a doctor or other health care professional. (See IRS Publication 502 for a list.)
Common items you can deduct from taxes include medical appointments, tests, prescription drugs and durable items like wheelchairs and prescription glasses. In fact, you can even write off unusual expenses as long as they're medically necessary. For instance, one of Seltzer's clients deducted a home lap pool because a serious injury meant the man could only swim for exercise, but couldn't risk colliding with others in a public pool.
You can also deduct transportation expenses for going to the doctor -- parking, tolls, mileage, cab or bus fares -- and even air fare and certain lodging costs for out-of-town treatments.
But remember, you can only write off out-of-pocket expenses -- copays, deductibles, etc. -- not bills that your insurance covers.
What's not deductible?
There's a wide list of things you can't deduct, from medical marijuana to over-the-counter vitamins and drugs (except insulin). Hair transplants and cosmetic surgery are also out, unless procedures correct underlying medical problems (like breast-reconstruction surgery following mastectomies).
As noted above, you also can't deduct expenses that your insurance covers, nor things you paid for with money from a flexible spending account or health savings account. If you get insurance through work, you typically can't write off your share of the premiums because your employer won't normally withhold taxes on the money in the first place.
Writing off health insurance for the self-employed
One big exception to the above rules involves health insurance premiums paid by self-employed people. You can write those off as adjustments to income even if you don't itemize your deductions. The adjustment to income cannot exceed what you earned, though.
Self-employed people can deduct health insurance premiums directly on Form 1040 (Line 29 on returns for the 2014 tax year). You deduct all other qualified medical expenses on Schedule A, Line 1.
How to maximize your health care deductions
You obviously can't control when you get sick, but TurboTax's Greene-Lewis says Americans who are close to meeting the annual AGI threshold should "bunch up" procedures to maximize any deductibility.
For instance, if one family member has a major illness in a given year and rings up big hospital bills, everyone else in the family should get any needed dental work, prescription eyeglasses, etc., during the same year in order to boost the available tax break.
"You should look at anything you were putting off and bump it up [to the current tax year] if that's going to put you over the AGI threshold," she says.
You don't need to attach receipts to your 1040, but it's a good idea to keep them for three years after filing your return just in case the IRS audits you.
If you're looking for life insurance, aside from considering how much you need, you'll find the need to understand and possibly choose between the two basic types: term life insurance and cash value life insurance.
The main difference between the two is that term life insurance covers you relatively inexpensively for a set period, whereas cash value life insurance covers you at a much higher cost for the remainder of your life. Cash value life insurance costs considerably more than term life insurance, depending on age and health, but adds a cash value component of debatable merit.
How do term and cash value life insurance work?
Term life insurance generally offers the most amount of coverage for the least amount of money, and is the appropriate choice for most people. The most common reason to buy life insurance is to replace a person's income in case of early death, and term life insurance is the cheapest and best way to do that. Term life insurance is also an especially good choice for people and families who are just starting out, because it's relatively cheap and provides a lot of protection when replacing income is most important.
Cash value life insurance, also called permanent or whole life insurance, offers protection for your entire life (as long as you pay your premiums) and more flexibility than term life insurance. However, it usually comes at a much higher price. For example, the premium for a cash value policy can easily be 10 or more times higher than a term policy with the same level of coverage. The feature that makes permanent life insurance different is its ability to gain cash value. A portion of the money you pay into your premium goes into a cash value portion that grows over time, and becomes available for your use after a certain period.
How does cash value work?
The portion of your payment that goes toward the policy's cash value is very large in the beginning, but decreases slowly as time goes on. That's because permanent life insurance payments are made up of two parts: the regular insurance premium, which is comparable to the premium amount for the same coverage in a term life policy, and the cash value, or "overpayment" amount. The overpayment money is invested by the insurance company and later used to pay for the higher costs of insurance as you get older. In this way, the company is able to keep your premiums the same instead of increasing them over time. At a certain time, this cash value amount becomes available for your use.
The cash value component of a policy can work differently and be used for different things depending on the type of permanent life insurance you choose. There are four main variations: whole (or ordinary) life, universal (or adjustable) life, variable life, and variable universal life.
Whole life insurance is a predictable policy that provides a guaranteed benefit, a guaranteed earnings rate on your cash value, and a level premium. You may also earn dividends based on how well the company performs. Whole life is the most basic kind of permanent life insurance.
Universal life insurance is a flexible option that lets you vary your premium payments. After the first premium, you can usually make payments at any time. If you have extra money, you can pay more. If you can't afford to make a payment, you can skip it or pay less. The cash value portion usually operates in a similar manner as with whole life insurance. A problem with universal life is that if you don't make enough payments, or the company does not perform as expected, your policy could lapse. Newer types of universal life policies include guarantees that this will not happen, so be sure that you explore this option. Universal life can be one of the cheapest forms of permanent life insurance.
Variable life insurance allows you to invest your policy premiums. The problem with this is that if the investments perform poorly, the death benefit and cash value will decrease. On the other hand, if the investments perform well, the death benefit and cash value can greatly exceed those of a normal policy. Variable life is one of the most risky forms of permanent insurance, although its rewards can be great as well.
Variable universal life insurance, as its name implies, is a combination of variable and universal life insurance. It allows you to vary your payments, invest your policy premiums, and vary your coverage amount. Variable universal life insurance is the most flexible type of permanent life insurance, and can be either risky or predictable, depending on how you use it.
It's easier than ever before to compare car insurance quotes and find a better deal. You can do it using Insurance.com's quote comparison tool below or over the phone.
But switching car insurance companies the right way is every bit as important.
You don't want a gap between your policies that can come back to haunt you. You don't want your old insurance company to cancel your policy for nonpayment and report you to the state. And you want a refund of any premiums that may be due.
- When to switch car insurance
- Be sure to get new car insurance first
- You don't have to wait until renewal
- Watch for cancellation fees
- How to cancel your old auto insurance
- Confirm cancellation and get a refund
While New York City has long had a reputation for good real estate investment, several other cities are also now following close behind.
London, Singapore and Hong Kong are becoming hot spots for real estate investment.
Around the world, there has been an emphasis on luxury real estate, which is seen as a sound investment. Prices on luxury apartments in these cities have gone up astronomically, making competition fierce.
Image via Flickr/Aurelien Guichard
Credit reports play a major role in interest rates on car loans, eligibility for credit cards and even job applications, so it's important to keep them clean.
If your credit report is a mess, start by reviewing your borrowing history. Get a credit report for free from AnnualCreditReport.com.
“You’d be surprised what things you might find on a credit report, intentionally or unintentionally,” says Syd Ally, the chief credit officer for lender DRB.
Image via Flickr/Kate Ter Haar
Many real estate agents and investors have college degrees, but they are not specifically real estate-focused. The reason being that a college degree is not necessary for a real estate career.
For investment, the best teacher is real life. You won't get the same experience learning in a classroom as you would on the job.
College can give students a false sense of confidence. They may believe the classes they are taking are preparing them for the job, but a hiring manager may disagree.
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Credit card fraud is more common than ever, and the holiday season is a particularly vulnerable time.
To reduce your chances of becoming a credit fraud victim, you should first choose your credit card company carefully. Look for zero liability protection and sign up for alerts.
One of the best ways to avoid fraud is with a strong password. Make sure it is long, with letters, numbers and symbols, and isn't something obvious like your birthday or children's names.
Image via Flickr/Ben and Kas Askins
Hilton Hotels recently confirmed that they experienced a series of credit card security breaches last year and earlier this spring.
These breaches occurred at several hotel restaurants, gift shops and other stores.
The hotel group launched an official investigation of these security breaches in September after financial institutions discovered credit information stolen from Hilton properties.
Image via Flickr/Prayitno
Chinese money is becoming a major force in real estate around the world, despite the country's current situation.
China has recently experienced a currency devaluation and a stock market crash. This has left many looking to invest in places other than their own country.
In the U.S., Chinese buyers began buying luxury condos in Manhattan and mansions in Silicon Valley, but they are now moving inward from the coasts.
Image via Flickr/Michael Coghlan