The 6 Different Types of Insurance Policies That Should Be A Part Of Your Financial Plan

Earlier this year, when the hubs and I reviewed our spending from last year and set up our 2016 budget, we talked about incorporating more (and better) insurance into our financial plan.

Now, 6 months later, we’re finally putting the final touches on all 6 different types of insurance policies that we determined were necessary to protect us from every sort of situation, and I’m really proud of it.

Why?

Because often people our age (mid-twenties) neglect insurance until they’re much older, or just neglect certain types of insurance, which causes those policies to be much more expensive when they do finally incorporate them into their budget and long-term financial plan.

All told, there are 6 different types of insurance policies you should have:

Health Insurance

Health insurance is, far and away, the most important type of insurance you should have.

Everyone will need medical care at some point, and since medical debt is the largest cause of bankruptcy in the United States, I cannot stress the importance of health insurance enough. Before the Affordable Care Act, health insurance was not mandated, but for most people was available through their job, and expected in the budget.

But now, with the Affordable Care Act, health insurance is mandatory, and you will receive a fine (gradually growing larger each year) if you do not have it.

The best place to find health insurance at an affordable rate, and with the best coverage, is usually through your employer. However, not every employer is required to provide health insurance, the plan doesn’t cover much, is very expensive, or you have a special circumstance, such as you’re self or unemployed.

If this is the case, try the Government Healthcare Marketplace, or eHealthInsurance.com to compare rates, coverages, and prices.

Key Questions to Ask:

What Is The Deductible? Is is per person, per family, per year?
Are there any copays?
What is your yearly maximum out of pocket?
When does the insurance cap out?

Auto Insurance

Also mandated in your state, auto insurance protects you and other driver’s from the huge financial costs of causing/being in an accident.

After all, even if you’re a perfect driver, acts of God like deer, hail, and storms happen. You can’t control everything, and auto insurance protects you from suffering financial ruin should something go horribly wrong.

Key Questions to Ask:

How much property damage will this cover?
What portion of medical bill will this cover?
What is the deductible?
Are there any perks like free glass, accident forgiveness, etc?
Does it meet the requirements for your state’s minimum coverage?

Homeowner’s Insurance

Your home is important to you, above and beyond your car, even.

It’s where your family lives, where you brought your children home to, and where you’ve made a lot of memories, so it makes sense that you would want to protect it in case of fire, storm, floods, or other disasters.

It is also probably the most valuable asset you own.

As a result, your homeowner’s insurance is incredibly important – and probably mandated by your mortgage company – and can be quite pricey. Shop around for homeowner’s insurance, and be sure to factor this cost into your budget every month.

Key Questions to Ask:

What is the deductible?
What is the total cost to rebuild?
Have you added flood coverage (if in a flood plain)?
Will your policy cover the cost of a hotel or rental while the house is being rebuilt?
What about all the belongings inside the home? Does this policy cover them as well?

Life Insurance

Life insurance is a budget line that everyone needs, but hopefully not for some time.

In a nutshell, it protects those that depend on from having to make large life changes if you should pass away. It protects them from things like having to assume your debts without a way to pay them off, requiring your spouse to get a job outside the home (if they stay home with children), or going from 2 incomes to one.

It also ensures things that have more than a financial connotation.

For example, if you were to pass away tomorrow, would you want your family to have to move out of your home? Would you want your children to have to switch care providers or schools? And how about activities? Would you want your family to have to break away from everything they’ve ever known?

Chances are, you would want your family’s life to stay relatively constant to make the time of mourning that much easier on them.

There are several different types of life insurance, the most common of which are Whole Life Insurance and Term Life Insurance, and you’ll need to decide which is right for your family.

Whole Life Insurance does not expire at a set age, and generally has a small rate of return, like an investment account. You can also “draw” on your whole life insurance policy if you need cash for a large or unexpected expense. As a result, Whole Life Insurance coverage is more expensive than it’s counterpart, Term Life Insurance.

Term Life Insurance costs less, but expires at a certain age, depending upon your policy. It was designed as an affordable alternative to Whole Life Insurance, since the insurer is betting that you won’t pass away at a young age, therefore it is less likely they will have to pay out before the policy expires. By contrast, the policy saves you money because you’re betting that you won’t have large debts, you’ll own your home, and that your children will be out of the house by the time you pass away.

Key Questions to Ask:

Who are my beneficiaries?
Have I set up my insurance to take care of my children if both my spouse and I pass away?
What is the death benefit? Will it cover my debts and my family’s needs comfortably?
Is there a cash benefit to the policy?

Disability Insurance

Now, before you go all “not another one!” on me, hear me out, because some of your disability insurance may already be taken care of.

Many employers provide some sort of disability insurance for you, and although coverage varies from employer to employer, the standard is 60% coverage at not cost to you. Alternatively, you may be required to pay for this coverage, or have no coverage at all, it just depends upon your employer.

But, in the case of 60% coverage, what this means is that if you were to have a long-term disability, 60% of your salary would be covered by that disability insurance.

That sure is a nice perk, but for most people 60% isn’t going to cut it to keep the bills paid and food on the table, which is why you should at least consider purchasing an additional 30% salary coverage, which would bump your salary replacement level up to 90% – a lot better than 60%.

The best and first place you should look for this coverage is through your employer. Often, it can be purchase at an additional, but minimal cost. If your employer doesn’t provide disability coverage, or you need more than you can get through them, check with your insurance agent for recommendations.

Think you won’t use Disability Insurance? Think again:

A pregnancy puts you on bed rest? Use your disability insurance.
An injury/surgery unrelated to work requires some recovery time? Use your disability insurance.
Come down with an illness that requires hospitalization? Use your disability insurance.

Key Questions to Ask:

How much of my salary will this coverage replace?
What is the annual (or monthly) premium?
Will taxes be taken out of the replaced salary?
How many weeks of coverage will this policy replace?

Long-Term Care Insurance

I know, getting old isn’t something you want to think about, and believe me, I’m with you.

I mean, I just turned 25 and it kind of hit me that the first half of my 20’s was over. It wasn’t the best birthday, to say the least.

But the bright side of realizing I’m getting older is that it made the hubs and I think about our insurance, specifically insurance that will cover the costs of a nursing home, whether we use it as we age, or because of a serious injury that leaves one of us needing intensive care in a nursing home.

If you purchase it while you’re young, Long-Term Care Insurance is insanely cheap. Yes, you’re paying for the cost over the course of many years, but with the rising costs of senior care and the likely hood that you will live longer than ever, this coverage is super important.

Key Questions to Ask:

What is the maximum payout for the policy?
Does the policy adjust for inflation?
Does it expire at a certain age?
How much will it pay out per day?
What is the qualification to start coverage?

One Last Option

While this last point isn’t one that I would recommend to everyone, but since this is a personal finance blog, it does have a place here.

Rather than opting to purchase 6 policies with different premiums and coverages, you also have the option to self-insure in a few instances.

Health Insurance and Auto Insurance are mandated by laws, so you will have to purchase those policies, but the others are somewhat negotiable.

Just be warned, the costs to self-insure can total in the millions, and a mistake could cost you and your family more than just money.

Homeowner’s Insurance

It’s very important to be protected in case of a tragedy, but if your mortgage is paid off, you’re not required to carry homeowner’s insurance. Cancelling the policy will certainly save you money, but where will that leave you if your home is destroyed?

Homeless, that’s where.

Rather keeping a policy, if you’ve saved above and beyond the requirements of retirement, you could self insurance. Basically this means that you have enough money in the bank to cover the cost of rebuilding, replacing everything inside, and paying for a place to live during the rebuild – that is not already slotted for a specific purpose such as retirement.

Life Insurance

Self-Insuring is also an option for life insurance, especially if you have very little debt, own your home, and have significant savings not required for retirement.

I don’t recommend this, not because of the massive amount of money you would have to save, but simply because landing on your perfect number to self-insure with is so hard.

You have to ask yourself questions like “What does it cost my family to live for 1 year, comfortably?” and “For how many years do I want them to live off the insurance money?”

It’s a very hard number to come by, so proceed with caution.

Disability & Long-Term Care Insurance

You can also skip the Disability and Long-Term Care Insurance if you’ve saved aggressively, and this number is even harder to come by than the Life Insurance amount.

Insurance isn’t the most fun item in your budget, that’s for sure.

But it’s absolutely necessary.

And, although you may never need it, planning your finances requires thinking through every possible contingency, even those that aren’t entirely pleasant.

June 18, 2017April 26, 2020

The Complete Guide To Paying Off Credit Card Debt With A Balance Transfer

Fighting fire with fire.

More than once, I’ve heard that phrase used to describe completing a balance transfer for the purpose of paying off credit card debt, and the people that said it were right.

Credit cards are a dangerous thing when used incorrectly. For most people, credit cards are easy to get, easy to use, and tough to pay off. The high interest rates (usually 15% – 23%) leaves you drowning in interest, barely touching the principal, paying thousands of dollars in interest each year.

But, if you’ve gotten yourself into some credit card debt, and are committed to paying it off, you have options. After all, paying off a credit card while still paying exorbitant interest rates is like trying to swim upstream, against the current. You can make progress, but it’s unbelievably hard.

Here are the most common ways to refinance credit card debt:

A personal loan
With home equity
A Balance Transfer

Today, we’re going to fight fire with fire and talk about balance transfers: who they’re right for, what you need to do it successfully, and what to watch out for. Done correctly, regardless of you feelings about credit cards, you can save yourself a lot of time and frustrating by paying off debt after a balance transfer, rather than going the more traditional routes of a home equity loan or a personal loan.

How Much Is Your Credit Card Debt Costing You?

Credit card debt carries some of the highest interest rates of any type of debt, and is the undisputed “worst” type of debt to have. The average American family has more than $15,000 in credit card debt, and at a low estimated interest rate of 15%, a minimum payment of $400 and paying $400 extra each month towards the debt, that family would pay $5,367 in interest over the 51 months it would take to pay it off!

In order to understand just how advantageous a balance transfer can be for you, you need to first understand just how much that debt will cost you in interest, and how long it will take to pay it off.

You might be surprised at just how much interest you’ll be paying on your credit cards alone + how long it will take you to get out from underneath that credit card debt!

What Is A Balance Transfer?

A balance transfer is when you take the balance from one credit card (usually bearing a high interest rate) and transfer it to a newly opened credit card in exchange for a 0% interest rate for 12-15 months. This cuts down on the interest payments by hundreds or even thousands of dollars, and give yourself a set time frame to pay off the debt within.

Why Is A Balance Transfer a Good Option?

Utilizing a balance transfer over a route with a traditional bank is advantageous for several reasons:

You don’t have to fill out tons of paperwork
Very little income information required
Instant, or very quick decision
Huge interest rate deduction

As long as you have good or excellent credit, you can apply for and be approved for a new credit card within a few minutes, all online, without ever having to set foot in a bank. Credit card companies are required to be VERY transparent about the terms of the credit card, not only the interest rate, but any an all fees, the balance transfer terms, as well as any associated fees.

You can also get an interest rate advantage by completing a balance transfer, with most balance transfer interest rates hovering around 3%. Some may be larger, and you can even find some that are 0%, but 3% is pretty common. Let’s use $15,000 of credit card debt as the example and assume that you’ll be approved for the balance transfer credit card with a credit limit large enough to accommodate the $15,000 of debt.

In this case, you would pay a $450 fee for transferring your balance, well below the $5,367 in interest you were looking at.

If you choose the correct card, you can pay as little as 0% interest for 15 month, putting your payment right at $1,030 a month.

This is larger than the $400 minimum payment + $400 extra you were paying each month, but chances are you can find an extra $230 each month to put towards the payment! If you can’t, you should seriously look for ways to cut your budget for a few months, or put a few hours each week into making extra money. The other alternative is to transfer your $15,000 balance, continue to p pay $800 a month towards it, and then transfer the remaining $3,450 to another balance transfer credit card for a few months to continue paying off the debt without racking up interest!

The ease of application, ease of use, and lower interest make transferring a balance to pay off a credit card faster a really good option if you have systems in place to keep from falling into credit card debt again (I’ll get into those in a minute).

The Best Balance Transfer Credit Cards

There are some truly great offers out there right now to help you pay off credit card debt – even though that’s not what they’re designed for. These 0% for 15 month offers are supposed to entice you to open up a card and rack up large amount of debt on it so that the credit card company can make a killing charging you hundreds in interest each month.

But you can outsmart the system using these great balance transfer credit cards:

Barclaycard Arrival World MasterCard: 0% APR for 12 months on each balance transfer made within 45 days of account opening

Chase Slate: 0% APR for 15 months on balance transfers made within 60 days of account opening. $0 annual fee.

Citi Simplicity: 0% APR for 21 months on balance transfers made within 60 days of account opening. $0 annual fee, but a 3% balance transfer fee applies

Discover It Card: 0% APR on balance transfers for 18 months, $0 annual fee, and 3% balance transfer fee.

June 18, 2017April 26, 2020

THE MIND TRICK I USED TO CURE MY CREDIT CARD DEBT

I used to think I’d be in credit card debt my entire life. I started young in my debt journey. I was 18 years old when my bank sent a pre-approved credit card in the post. The limit was $2500 – a heck of a lot more than I had ever had in my life. To a spendaholic 18-year-old with a new-found love for bars and nightclubs, it could only end badly. If you’ve ever been in credit card debt you know that it’s not really about the money. Credit cards allow you to inflate your lifestyle to a level you can’t sustain. I took full advantage of my card and purchased lots of vodka & diet cokes and taxis home. As you can imagine I quickly maxed it out.

My parents offered to bail me out, by allowing me early access to the funds they had saved for me since I was born. I paid that card off and tried to be better. But I’d learned nothing. I’d spent money I couldn’t see, and then eliminated my debt with money I didn’t have to work for. Not to mention being so wasteful with the money my parents had eked together while I grew up.

As my earnings increased and I moved to a new country, my bad habits crept back. It got to the stage where I had maxed out credit cards to the value of about $10,000 and no idea how I spent the money. Each weekend I’d go shopping and come home with a new handbag or a new pair of shoes. It never occurred to me to pay with my own cash. I always got out the plastic, swiped and was on my merry way with my new purchase.

After a few years of running up balances on multiple credit cards and transferring between cards in order to access more cash I finally came to my senses when I had to fill in a loan application to purchase an investment property. It had never really occurred to me that banks wouldn’t look favorably upon credit card debt. I figured since I could manage the monthly payment I was doing OK. The truth is my credit card debt was stopping me from making important moves towards my financial future – my credit cards were managing me.

I knew it was going to take something drastic to change my credit card habit.

I realise that for me (and a lot of people) using credit cards doesn’t feel like you are using real money. There’s only one thing that feels like real money: cash. The feel of notes and coins in your hand really brings to life the amount you’re spending. There’s a very good reason many personal finance gurus advocate using cash. So I had to find a way to translate in my mind that the cute little piece of plastic which let me buy cool things I couldn’t afford was actually a bunch of cash that I was literally burning each weekend.

The idea came to me when I was late in making my minimum monthly payment by internet banking and had to pay in cash at the branch. First I had to leave my office at lunchtime and head to the ATM of my bank to withdraw enough cash to make the payment. I then crossed the road to the bank that issued my credit card, took my place in the line and waited. I stood in line, clutching my minimum payment in notes, waiting for the bank teller to call. As I handed her the card and my cash I had a strong realisation that I was giving this woman (technically, the bank she worked for) money. For nothing. The penny dropped.

After that time I vowed to always make my credit card payment in cash. Every week on payday I would deposit whatever I could afford. Sometimes it was $20, $30, $150. It depended on my earnings. The amount wasn’t important. It was the repetitive act of paying my debt in cash. That constant reiteration finally started to make an impact, and within a few months I’d cut up my credit card. I still had a balance to pay so I’d bring the paper statement with me each week to make my payment. It took me a year, but I finally paid that card off and then applied the same principles to a personal loan I had. Within 4 years I was completely free of all consumer debt and cured of my addiction to spending on the plastic.

If you’re struggling with credit card debt, I urge you to hold that cash in your hand. Really feel it and think how lovely it is to physically hold the money you’ve earned. Then hand it over.

It stings, but you’ll feel it. Which is the main thing!

Note: It took a few years but I now use credit cards as a life tool. I appreciate some people need to cut up the plastic permanently to get their life back on track, but I couldn’t forgo all the rewards that credit card users benefit from. I needed to train myself to be a smart user of cards and I’ve finally got there. I’m constantly aware of my history, so I track each purchase then I’m not in for a shock when the statement arrives each month.

June 18, 2017April 26, 2020

Here’s What I Recommend for a First Credit Card

There are hundreds of credit card options out there, so how does someone pick their first credit card?

“What should I get for my first credit card?” is a question I’ve heard from many people. What I’ve learned over the past few years is that most people are not looking for a bunch of options. They just want to know which card I recommend – and why.

Most people realize that even if they don’t like their first credit card they can always sign up for another one. But they obviously prefer to sign up for a solid first credit card that they will continue to use for years to come.

I’ve actually been meaning to write this blog post for over a year now because my answer has remained consistent for a long time now.

The Best First Credit Card

The card I recommend for a first credit card is the Discover it® Card.

Coincidentally (or perhaps not), Discover was my first credit card. I opened my Discover card about a decade ago and have been using it ever since.

Here’s some reasons I think the Discover It credit card is the ideal first credit card:

1) No Annual Fee

When it comes to a first credit card, having no annual fee is the most important feature I look for. If a card has an annual fee, it’s not a good first credit card.

Your credit score is, in part, based on your credit history. If you open a card with no annual fee you can keep it open forever even if you decide to stop using it. If you open a card with an annual fee you will likely end up closing it, perhaps even within a year of opening it.

The Discover it® Card does not have an annual fee and this is by far the most important feature of the card.

2) Solid Rewards

While it’s true that there is no huge sign-up bonus for the Discover it card that will allow you to travel hack your way to Europe, it does have some solid rewards that I think you should take full advantage of.

These include:

1% Cash Back The Discover it® Card has always offered 1% cash back, regardless of where the purchase was made, what was purchased, etc. No matter what you will always get 1% cash back.

Dollar for Dollar Cash Back Rewards the First Year While the Discover it® Card does not offer the lucrative sign-up promos that some of the top travel rewards credit cards offer, they do offer a special incentive to those signing up for the first time.The incentive is this: for each dollar in cash back rewards you get throughout your first year, they will give you an additional dollar. So if you racked up $150 in cash back rewards, you’d get an additional $150. Essentially you get 2% cash back your first year.

5% Revolving Cash Back Each quarter of the year Discover offers new 5% cash back offerings. For example, you can earn 5% cash back bonus on up to $1,500 in purchases made at Home Improvement Stores & at Amazon.com July through September 2016. Last quarter it was a 5% cash back bonus on up to $1,500 in purchases at restaurants and movies.If you take advantage of these revolving 5% offerings you can rack up cash back bonuses quick.
Partner Gift Cards One of my favorite benefits of the Discover it® Card is the partner gift card program. My wife and I have used this for years and it’s always nice to get a “free” gift card.It’s a really simple program. If you use your cash back rewards to redeem a gift card, you will get the gift card at a discounted rate. For example my two personal favorite gift cards to get are $50 Starbucks and Chipotle gift cards. You can get either of these for just $45 of cash back rewards, another free $5 on top of the $45 you already accumulated through cash back rewards.There are currently 140 participating stores/brands and some have even better deals than what I described for Chipotle and Starbucks. For example, a $50 Gap gift card can be had for just $40 in cash back rewards. A $60 1-800 Flowers gift card can be had for just $40 in cash back rewards, and so on.

3) Good Dashboard & Customer Support

The design of the online dashboard and customer support are definitely less important features than having no annual fee and having a good rewards program, but I still think it’s worth noting.

The online dashboard that Discover has is my favorite of any credit card I’ve used – and I’ve signed up for a lot of credit cards the past few years. It’s clean, easy to navigate, and I’ve never had problems with it. Other dashboards can be clunky or overly simplistic to the point where it’s difficult to navigate.

I thankfully haven’t had to interact with customer support that often with Discover, but I did talk to them prior to going on a cruise so that they were aware of the countries I’d be visiting and potentially using my Discover card at. They were kind, courteous, and overall I just got the feeling that if anything went wrong with my Discover card they would quickly resolve the issue (with a smile on their face!).

Tips for People Getting their First Credit Card

While I could easily write a whole post (or series of posts) on tips for people getting their first credit card, I figured it would be worthwhile to briefly touch on the topic in this post.

Here’s 3 tips for people getting their first credit card:

Treat your credit card like cash The fact that you are getting your first credit card means that you haven’t gotten into credit card debt. You have an opportunity to never get into credit card debt, but it requires you to immediately get in the mindset of treating your card like cash.If you don’t have the money, don’t charge it, and make sure you pay off your credit card in full each month.

Only use 1/3 of your available credit at any one time Using only 1/3 of your available credit may not seem like common sense, but your credit score is impacted by how much credit you utilize. So if you were approved for $1,000 in credit you should keep the balance on your card below $333 at any one time.There is no penalty for making multiple payments towards your credit card throughout the month, so consider taking that approach if you are worried you will go above the 1/3 “utilization” threshold.

Request a credit increase after 6-12 months Along the same lines of only using 1/3 of your available credit, you will also want to consider requesting a credit increase after 6-12 months. If you have been consistently paying off your card you are likely in a good position to have your request approved.How do you request a credit increase? With Discover it’s an option within the online dashboard. If you aren’t approved, don’t sweat it. You can wait another six months and submit the request again.

To summarize, I recommend the Discover it® Card as a first credit card. It has no annual fee, solid rewards, and a good online dashboard and customer support.

June 18, 2017April 26, 2020

How to Close Credit Cards Without Damaging Your Credit Score

Paying on your credit card accounts and maintaining good credit often results in a credit limit increase and additional credit card offers. There is nothing wrong with having credit card accounts, as long as you use these accounts responsibly. What’s more, bad credit cards have helped many people re-establish their credit and build strong scores – but what if you’re ready to decrease your number of credit cards?

Closing credit card accounts that you no longer use may seem wise, especially if you’re looking to simplify your finances. However, there is a wrong and a right way to close down your accounts. Credit scores are based on numerous factors, including the length of your credit history. The longer you’ve had a credit card (or any type of credit) in your name, the higher your personal FICO credit score. {Also read Why Cancelling a Credit Card Hurts Your Personal Credit Rating}

Whether you have unsecured credit cards or bad credit cards, closing your accounts can possibly reduce your credit score. This is because canceling the account can reduce your overall credit history. The actual damage varies, but your score can drop 15 or 20 points after closing an older account. This single move can damage your prime rating and result in a higher interest rates on loans.

Cancel the Youngest Card to Reduce Credit Damage

Closing or canceling an older card will cause some credit damage, however, you can minimize the damage by keeping your oldest account open and closing your newer accounts. Closing the oldest account can greatly reduce your credit history, but if you were to keep this account open and cancel another account, the length of your credit history remains the same. Thus, helping keep your credit score intact. Read your statements or call your credit card company for information regarding the date that you opened your account.

Lowest Credit Limit

It also helps to close the account with the lowest credit limit. The wider the gap between your balance and your credit limit, the better. Accounts with low limits ($300 to $500) increase the risks of having a high utilization ratio, which can damage your credit score. However, if you have a credit card with a higher $1,000 credit limit and you maintain a balance of $200, your utilization ratio is less than 30 percent, which helps improve your score.

Close Accounts Slowly

Don’t close multiple accounts within the same day, week, or even month. Take your time. Close one account, wait six months, and then close another account. Canceling several accounts within a short period can cause a huge decrease in your credit score.