Showing posts with label Insurance. Show all posts
Showing posts with label Insurance. Show all posts

Saturday, March 25, 2017

Why I'm switching to an HSA account

Do you know what's the biggest expense that you will incur in your lifetime?

Nope. It's not your home.

I remember my hands were shaking when I handed my agent a $43,000 cashier's check as down payment for our house, 13 years ago. But like I said, it's not the house. Not even close.

Our modest house being built in 2004, isn't she pretty?

Your house may very well be your single biggest purchase, but it's not the biggest expense that you will INCUR IN YOUR LIFETIME.

Guess again...

Nope. It's not cable (geez.. Are you really spending that much on entertainment?).


Here's a clue:





You guessed it right this time. It's TAXES!

Of course, this largely depends upon your tax rate. With a progressive tax system, the higher your income, the higher taxes are imposed. Here's a link to 2017 tax brackets courtesy of Bankrate.

Assuming you're in the 25% tax bracket, like my wife and I filing jointly do, you might be looking at paying a million-dollar tax bill over the course of your lifetime. And this doesn't include sales and property taxes.

Now, how about the second biggest expense ???

Stop bringing up the house again.

Try again...



Nope. It's not your car, unless you're driving a really fancy one like this Lamborghini.

Student loans? Nope, unless you're a broke doctor or a lawyer.


Here's another clue:






You are absolutely correct. It's HEALTHCARE!

According to a 2010 Prudential study, a typical 65yo married couple free of chronic disease, can expect to spend $197,000 on remaining lifetime health care costs-- excluding nursing home care and there is 5% probability that these costs will exceed $311,000.

Note that these numbers don't include expenses that you have already incurred on healthcare before age 65!

So it's TAXES and HEALTHCARE-- two of the biggest expenditures that we will incur in our lifetime.

Wouldn't it be great to be able to save money on both?


Health Savings Account (HSA) to the rescue

A health savings account is a tax-advantaged plan that is available to people with a high-deductible health insurance. The idea is that when people use their own savings for healthcare, they are likely to shop around for the best deal, which helps control health care costs.

Although HSAs have been around for more than 13 years, it was only a couple of years ago when it was actually offered by my company's healthcare plan. Even then, I didn't pay much attention to it because I'm already maxing out my ROTH IRA in addition to my company-sponsored retirement plan.

This year, I decided to switch. This is because my employer appears to be in the process of getting-rid of the 401(K) company match. I figured that since I am likely to spend a ton of money on healthcare when I get old anyway, why not max-out my HSA contributions first?

By maximizing the tax savings, I will, in effect, free up more resources for other expenditures like home renovations, vacations, and other fun stuff in retirement.

Note that this plan is not for everyone. It is particularly beneficial for people who are savers and are in excellent health condition like me.



Together, all the way. (image courtesy of Cigna)



Awesome Tax Advantages

With an HSA, you can contribute pre-tax money, just like a 401(K) or Canadian RRSP up to a pre-defined contribution limit. In 2017, the annual HSA contribution limit for individuals is $3,400 and $6,750 for families.

You can then use the money saved in your HSA self-directed investment account to buy individual stocks, mutual funds or ETFs (much to your heart's content) and your earnings will be TAX-FREE as long as you use them for qualified expenses.

There is also no Required Minimum Distribution-- You are not forced to take money out of them, which can potentially bump you up to a higher tax bracket.

In other words, an HSA account combines the TAX-DEFERRED feature of a 401(K) or RRSP, and the TAX-FREE and No RMD aspects of a ROTH-IRA, provided that you use them for qualified medical expenses, which you will surely incur anyway!

Eligible medical expenses may include things like contact lenses, dental treatments, insurance premiums, long-term care, and laboratory fees.

I don't believe that Obamacare is that broken to be repealed. But it's a shame that President Trump wasn't able to negotiate a deal with democrats last week to pass the American Health Care Act into fruition. The proposed bill would have expanded the HSA by increasing the contribution limits and lowering the percentage of the tax on distributions that are not used for qualified expenses.

Here's how I plan to use it

A little known feature is that you're allowed to pull out and reimburse yourself for past eligible expenses AT ANY TIME--- as long as you keep the receipts.

For example, instead of withdrawing money from the HSA account to cover things like routine dental treatments or medical check-ups, I can pay for these out-of-pocket. In this way, the money invested in the account can continue to grow and compound-- tax-free.

Later down the road, say in 20 years, I can reimburse myself for these expenses and use the money for paying non-eligible expenses that would have been taxable otherwise. That $1,000 that you didn't take out, 20 years ago, would have grown to maybe $10,000, depending on how it is invested.

By doing this, you'll have more money to spend for major expenses such as long-term care or heaven forbid, open-heart surgery.


May you stay healthy.





Sunday, November 27, 2016

Drive carefully. Don't skimp on insurance.

Inspecting a rented Lamborghini in Nevada

One of the aspects of wealth building is being able to protect what you have accumulated. Even if you are extremely frugal with no debt, wealth that you have worked so hard for your entire life can be lost in various ways, among them:
  1. a natural disaster
  2. a medical emergency
  3. an ugly divorce
  4. a court judgement arising from a lawsuit.
I've recently almost had to deal with the last one when the greedy 20-year-old waitress, whom I got involved in a 3-car-accident with, tried to sue me, and the person driving behind me, by half a million dollars for non-existent injuries that she sustained. Fortunately, I was adequately insured. The case was eventually settled, I paid nothing out of pocket, except half of my $1,000 deductible.

Here's how the story went...

SANDWICHED BY TWO CARS

It was a clear and sunny morning, in the spring of 2013, I was driving along the highway towards work at probably around 55 to 65 miles per hour when the car in front of me suddenly stopped. It was so abrupt that even though I was comfortably 6 to 8 car lengths away when I first hit the brakes, I still couldn't avoid the accident (and I did try to hit the brakes hard!). Seconds later, I was rear-ended by the car behind me.


NOBODY GOT HURT

Fortunately, none of us got hurt. Everyone got out of their respective cars unscathed. The other 2 drivers, both in their early 20s, even shook their hands. It turns out that they happen to know each other as they worked in the same restaurant a few years back.

It's so obvious that none of us got hurt that nobody even bothered to call an ambulance.
Should one of us got hurt it would have been me. My car was sandwiched between bigger and heavier cars, and I'm the oldest driver, the one having the brittlest bones among the three.

Don't get me wrong. I know that whiplash injuries are real and that they can sometimes manifest days or even weeks after the accident. But I do know that I didn't hit the car in front of me that hard. It had no visible damage whatsoever, as far as my bare eyes can tell.

THE POLICE REPORT

The traffic policeman came, quickly investigated, and wrote the police report. The driver behind me and I were given traffic citations for driving faster than conditions warrant, presumably because we were the ones who hit the cars in front of us.

I probably hit the car in front of me at 10 miles per hour. The car, a relatively new sport utility vehicle (SUV), did not sustain any visible damage, it seemed to me. The police report states that it has minor paint scratches. This is not surprising because I was driving a small subcompact car, a Prius C hybrid (I blogged about my Prius), which I bought just the year before this accident.

When the traffic citation came over the mail, I decided to just pay the $130 fine and not contest the ticket. I figured it's not worth the trouble and it would have been difficult to prove otherwise. Anywhere you go, you are presumed guilty if you happen to rear-end the car in front of you. Besides, the report states that everyone is fine and there were no injuries.

THE DAMAGE REPORT

My car wasn't as lucky. It absorbed all the energy from the impact (modern cars are designed this way). It had sustained $13,000 worth of damages, at least according to the collision shop responsible for the repairs, brought forth by the front and rear impacts. Part of the reason why it sustained that amount of damage is because of the bumper incompatibility between my car and the SUV- mine is much lower height in comparison. Amazingly, I managed to drive the Prius back home, after the accident, without being towed after the rear left wheel had been replaced with a donut.

Since my car was less than a year old, it was never declared as totaled; it's much cheaper for my insurance company to shoulder the repairs than to pay for the replacement cost. With the Prius C having been in the market for barely a year, the bright side is that car parts will be replaced with original equipment manufacturer (OEM) parts.

Since I've chosen to have a high deductible in my policy, I had to pay my insurance $1,000 before they can do the repairs. I was reimbursed $500 because the other driver who rear-ended my car was also at fault. Of course, this is peanuts compared to paying for the repairs yourself.

THE COMPLAINT

A full two years later, the driver of the SUV filed for a civil case against me and the other driver seeking compensation. The complaint alleges the following, among others:

"As a factual cause of the two collisions, Ms. XXX sustained the following injuries, some of all which may be permanent in nature and may have aggravated pre-existing conditions: trauma throughout her body; headache; contusion and strain and sprain of her left ankle; strain and sprain of the pelvis;  bilateral shoulder strain and sprain; cervical, thoracic and lumbar strain and sprain; rib contusions; cervicobrachial syndrome; cephalgia; kyphosis; lumbago; and myofascitis."

I wasn't surprised of the lawsuit because I was warned by my insurance carrier months before. But the above made me laugh. Her ambulance-chasing lawyer probably tried very hard to put as much medical lingo in there to make her 'injuries' appear very serious.

I wasn't at all worried. Why should I?  My policy provides coverage in the amount of $250,000 per person and $500,000 per occurrence for bodily injury. The chances of me paying out of pocket is very low:
  • The case would have to go to trial
  • The jury would have to decide in her favor
  • The judgement would have to exceed my coverage limit of $250K
Having a peace of mind is exactly the reason why we buy insurance.


THE DEPOSITION

Months later, I received a letter from the lawyer assigned by my insurance carrier to defend me. In addition to setting the time and date for the deposition, he gave me pointers on how to conduct myself during the course of the event.

In its simplest form, a deposition is the oral testimony taken under oath prior to trial when most objections available at trial do not apply. You're suppose to tell the truth, speak slowly and clearly, answer the questions directly, and stick to the facts and testify only to what which you personally know to be true. Most importantly, you should never lose your temper.

I was advised to be in the venue 30 minutes ahead of time, so he can prepare me for my deposition. I felt I didn't need preparation because all I need is to sit there and tell everyone exactly what happened. So the only other preparation I really had prior to this meet was watching Justin Beiber's deposition in YouTube.

I went to the event in a suit and tie and shook hands with the stenographer and the other drivers' lawyers. Once seated, her lawyer immediately asked questions, one after another, hoping that I make a mistake. Among the questions asked:

Q. Did you apologize to her for hitting her?
A. I don't -- No.
Q. Have you ever apologized to her for hitting her?
A. No.

Saying 'Yes' would have been tantamount to an admission of guilt. I would never apologize to her. Normally I would, but this is an exception. She's maliciously suing me for financial gain. Besides, she's the one who stopped abruptly. Under no circumstances was I tailgating her before the accident happened.

My deposition probably took an hour. To be honest, I enjoyed the experience mostly because all I had to do is to tell the truth. When it was her turn to give her testimony, I left following the advice of my lawyer.

Hers probably took the rest of the day. Her transcript was four times as long as mine as she was bombarded with questions about the extent of her injuries. It was full of lies she made Richard Nixon an amateur in comparison. I guess that's needed if you're wishing for a huge settlement from the jury.


THE SETTLEMENT

One afternoon, a year later. I received a phone call from my lawyer informing me that the case won't go to trial. They have decided to settle the case with the complainant by paying her the sum of $75,000 ($20,000 to be paid on behalf of the other driver involved). He thanked me for my cooperation then hanged up the phone.

There was a sense of relief that it's finally over. However, part of me wanted to proceed with the trial because this is a clear case of soft insurance fraud and I was more than eager to testify against her. It is insurance fraud that makes our premiums go higher. It is the paying public that eventually suffers.

A great majority of this type of cases don't go to trial. Insurance companies are smart enough to know that trials are typically more expensive because juries are extremely unpredictable. You just can't predict how outrageous the awards complainants get should they win. $75K is a chump change for these big insurance companies. Her lawyer knows this.

I hope she puts the money to good use (a significant portion will probably go to her lawyer's bank account). Paying all her debts is a good starting point. It seems she spends more on things that she cannot afford. A 20-something working 2 jobs probably won't be able to afford a brand new SUV.

LESSONS LEARNED

There are many lessons that can be learned from the accident.

Drive carefully. Never get into an accident.

Drive defensively and never tailgate. Maintain a safe following distance. Avoid distracted driving. If you've been driving distracted, lawyers can easily collect data from your cellphone provider and use that against you in court. Being sued is a long and time consuming process, much more if you go to trial.

I'm the safest driver in the world but still got into an accident. So the next lesson is ...


Make sure you have sufficient insurance coverage

Don't skimp on your insurance coverage. Most states in the U.S. will require you to carry the minimum amount of typically 25/50/15, signifying the maximum amounts of $25,000 for bodily injury per person, $50,000 for bodily injury per accident, and $15,000 for property damage per accident.

Mine was 250/500/250 because I had substantial net worth to protect. If I opted for the minimum, I would have been held liable to pay $50,000 out of pocket to cover the difference. Lowering your liability limits is one of the worst decisions that you can ever make with auto insurance.

Consider having an umbrella policy if you have a relatively high net worth. An umbrella policy is relatively cheap because it steps in to protect you only if your liability is over and above the limits of your auto policy.