Financial Peace University – Week 7
April 8, 2011 1 Comment
As you all know, I’m going through Financial Peace University (FPU) with my BF (Mr. Hive). If you’re new to the story you can read about Week 6 (and previous weeks) by clicking that lovely link. =)
Week 7 of FPU is about insurance.
One of the most interesting things that Dave talked about was making sure that the discount you get with a higher premium is worth the risk that you’re taking on. In fact, this is essentially the theme of the entire insurance lesson: save money by taking on more upfront risk but make sure that you get insurance so you don’t have to handle the back end risk.
For example: When it comes to health insurance, your rates are SUBSTANTIALLY cheaper if you have a much higher deductible.
Two plans that most people have to choose from for health insurance is a PPO or a HSA. I really like this table that compares the PPO vs HSA plan from the same company.
The main differences exist in the deductible, the monthly premium, and the percentages that you would pay after the deductible is met.
For the PPO (we’ll just assume in network doctors) you’ll have a $2,000 deductible and after that the insurance company would pay 80% of your medical bills.
For the HSA you’ll have a $2,800 deductible and after that the insurance would pay 100% of your medical bills.
The monthly price? For the PPO it is around $665/month. For the HSA it is $360/month.
So essentially, you save $305/month to take on an extra $800 of risk. If you divide the total increased risk you’re taking by the amount you’re saving per month ($800/$305 = 2.6) you would be assuming that for 2.6 months you would not need to go to the doctor.
For someone who is generally healthy this is a good risk to take. It is highly likely that a reasonably healthy person would be able to save that $800 over the course of 2.6 months of not having to go to the doctor (rather than paying for the more expensive health care plan).
Taking the difference that you save by increasing your up-front risk you’ll save $305/month – which equates to $3,660/year in savings. Put that in a good interest location and you’ll easily be able to cover your deductible.
Obviously this applies mainly to people who have to buy their own health insurance. For me, at my work, I can choose between the two and they cost me the same amount. Actually, the difference to my work (since we have a group plan) is $118 (HSA cheaper than PPO). So what my work does is they essentially give me back the difference between the two plans in a savings account that earns interest. I chose the HSA plan because I would get back $1,416/year into a savings account to use for medical expenses. This helps pay for my deductible and essentially makes my deductible THE SAME out of pocket for me as the PPO and if I’m particularly healthy I have extra money that doesn’t expire and earns interest.
This is obviously assuming that you’re following the Dave Ramsey plan and moving yourself swiftly towards being debt free and having 3-6 months of living expenses saved up. It is easy to pay a $2,800 deductible when you have an emergency fund of 6 months of expenses ready to use.
Other types of insurance that Dave recommends:
- Auto insurance (collision and liability, even on an old car)
- Home owners or renter’s insurance (with high deductibles to save you money)
- Life insurance (term ONLY)
- Disability insurance (because 1 in 3 of us will be disabled at some point in our lives)
- Long term care insurance (only once you reach 60)
Dave goes in to a loooooong rant about whole life insurance vs term life insurance. And quite honestly, I didn’t know there were people who bought whole life. Maybe that is because I’ve been lucky my entire life to get term life insurance provided free at all my jobs. But it makes sense not to spend $50-100/month of a whole-life policy of $12,000 vs $10/year on a $400,000 term life policy.
Dave brings up the VERY excellent argument that at some point, if we’re following the plan he’s laid out – then in 20-30 years – we’ll become “self insured”.
That is, the point of having life insurance is to help replace us monetarily when we die. To make things easier on the people we leave behind. If we’re following Dave Ramsey’s baby steps then when we die we’ll be leaving behind a mortgage that’s paid off, hundreds of thousands of dollars in investments, and won’t need the life insurance because our own assets are enough to support the people we’ve left behind. Why do you need a $400,000 life insurance policy when you’re worth more than that?
(Of course he then notes that his wife still makes him have a life insurance policy on himself anyway, which I find humorous. In the end, sometimes emotional security outweighs logic and that is why we have to have that significant other in our life to tell us what they need.)
Thoughts on Week 7: The thing that bothered me the most was Dave talking about how cancer health insurance policies are stupid. And if you have good health insurance and good disability insurance I guess that makes sense. I guess I don’t like it because I have a cancer policy on myself. It is through Aflac and essentially if I’m diagnosed with cancer I get a payout, and when I get a screening for cancer I also get a payout. I pay $28/month pretax for this.
My reasoning is explained in the link above, but I’ll summarize here.
Essentially for me this is a risk vs cost analysis. Just like Dave encourages us to make. I’ll pay $28 per month ($336/yr) plus I get $50 each real for getting a pap smear (down to $286/yr).
The average payout for a person who is diagnosed with cancer is $36,000. That means I have to stay cancer free for $36,000/$286 = 126 years to lose out on this insurance.
Considering my mom (at age 42), my grandfather (at 51) and my brother (at 22) have all passed away from cancer I’m hedging my bets on the side of cancer.
I’m going with the old adage: Hope for the best, prepare for the worst.
Dave Ramsey might not like, but to Dave Ramsey be damned!
One thing that is an absolute tear-breaker is the end story of a 28-yr old that came to Dave. He had some sort of cancer and was thanking Dave for helping him get financially stable. Essentially, because he had listened to Dave’s advice he didn’t have to worry about money while he was battling with cancer. He had the right life insurance, the right investments, the right medical insurance, a great emergency fund, the debt gone, the savings accounts in place. So when he passed away (which he did) his wife and children didn’t have to deal with financial loss on top of the emotional loss.
What a good place to be.