3 Affordable Financial Safeguards to Protect Your Health and Income

Hello my friends and thanks for downloading another weekly episode of the money girl podcast. My name is Lora Adams I’m a personal finance author speaker and consumer advocate who’s been writing and hosting this show since 2008. If you’re interested in my most recent publication it’s called debt free blueprint how to get out of debt and build a financial life you love it’s available as a paperback or ebook and if you’re used to listening to me you might want to pick up the audiobook. The audiobook version of debt-free blueprint is available at audible.com. If you are ready for more knowledge, resources and motivation to manage your money the best way possible and create a richer life, you are in the right place.

I love getting your questions and comments so today I’m going to respond to an email from Jennifer and a voicemail from Megan that are both about creating affordable financial safeguards. Here’s Jennifer’s question. She says how can I prepare our family for the high cost of health insurance when my husband leaves his job at the end of the year to become a full-time independent contractor.

And here’s the voicemail from Megan

Hi Laura, my name is Megan. First off I want to thank you so much for the work you do in the podcast I’ve been a longtime listener and it is helped me get out of debt and establish accounts and have it for my finance that has helped me feel in control less stress and even excited about my future so thank you so much. My question for you is what is the best way to shop for and purchase disability and insurance. I’ve heard you talk about this topic before and would like more information on how to get it my jobs are all pretty physical and then concerned that if I get injured I don’t have enough insurance to cover my everyday expenses. Thank you so much Laura for the work you do again and I look forward to hearing from you regarding this topic.

Thank you so much for these crucial questions Jennifer and Megan. If you or the breadwinner in your family lose your job or your business income or you get sick all of a sudden what would you do? For many people these scenarios are their worst nightmares because they don’t have financial protections inplace. Statistics about getting ill or suffering a serious injury during your career are pretty sobering. According to the Council for disability awareness, more than one in four of today’s 20 year olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age and what’s pretty shocking is that when a disability occurs, the average time spent away from work it’s almost 2 years so you know that’s a lot of time not to be earning any money. Yet most people do not have a back-up plan for how they would pay everyday bills like your housing, utilities, your food. Many Americans don’t even have health insurance to pay a portion of their medical bills so while you might think that protecting your health and your income is a luxury, I’m here to tell you that it is not. These safeguards should be pillars of your financial plan so in this podcast you’re going to learn three financial protections that can be surprisingly affordable for both employees and entrepreneurs.

Okay let’s get into the financial protections.

The first one is savings. If you follow this podcast for any length of time you know that you’ve heard me talk about building a cash reserve which is also known as an emergency fund. Having savings is one of the best ways to protect yourself from an unexpected expense or a sudden drop in earnings. The trick is to save diligently when times are good, if you get a raise at work or you have a profitable year in your business. I know it can be awfully tempting just to spend that excess money but before you buy a luxury item or you booked a vacation make sure you’ve got plenty in the bank. I know saving isn’t as much fun but the best way to make sure that you’re ready when bad luck strikes is to prepare for it today so think about your emergency savings as like a special bucket of money that should be kept completely safe. Put it in an FDIC insured savings account you can open one at the same place that you have your checking account or you can use a different institution. I would encourage you to consider some high-yield savings that pay a little bit more interest than a typical account but whatever you do, don’t make the mistake of investing your emergency money. This is something a lot of people ask me about. I know it seems like you should want that money to grow but remember the purpose of your emergency fund is not to make money and you know what it’s not even to keep up with inflation. The purpose is to save you from a financial hardship. If you invested that money the value could drop significantly like the moment that you desperately need it so don’t make that mistake. What you want to do is build up your savings to a minimum of three months worth of your living expenses. For example, if you spend $3,000 a month on your rent your utilities food transportation debt and any other expenses that you truly can’t live without you would want to have at least three times that amount or $9,000 in your cash reserve but depending on your family and your work situation you might need less or you might need more so if you have not even started thinking about this concept of having an emergency fund and you haven’t started saving don’t get upset about it. A lot of people really feel like they’re behind the 8-ball and you know they just kind of feel very negative about saving this money. Don’t get upset, don’t make it into a big thing, just get started make a goal to accumulate a small amount maybe for you that’s $100 maybe you can get up to 500 maybe $1,000 build it up as quickly as you can yes this might require some sacrifices to reduce your spending or maybe even earn a little bit more money when possible. A tip that always helps me is putting my savings goals on autopilot what I mean by that is setting up happening in the background of your life and you really don’t have to you know remember it you don’t have to try so hard that’s a smart way to stay on track and never get tempted to spend the money so maybe you’ve got an employer that can put some amount of your paycheck into a separate savings account or if you’re self-employed you can set up a recurring transfer from your checking into your savings account on a regular basis. It may take a little while to juggle your expenses but eventually you won’t even miss the money. Once you’ve got it going and it’s a regular habit once you have a safety net of savings in place you’ll have an amazing sense of security and peace of mind that no matter what happens with your health or your income, you have options.

All right so that is the first pillar of your protection is to have some savings.

The second financial protection that you need is health insurance. So while having emergency savings is critical, it probably would not be enough to pay for ongoing medical care if you had a severe illness or a severe injury. I mean think about it even a quick trip to the emergency room could set you back thousands of dollars. That’s why health insurance exists starting in 2019, the quote shared responsibility payment which is the fee for not having health insurance it no longer applies. Here’s the deal technically it is still illegal not to have health insurance but the federal government will not penalize you for it starting with the 2019 plan year however I will say that some states have their own insurance mandate which does require you to have a qualifying health plan or to pay a fee with your state taxes so don’t forget about the state side of this you might want to do a little research to figure out if health insurance is required where you live now. If your employer offers coverage through a group health plan that’s definitely the most affordable option but what if you’re like Jennifer’s husband who’s about to become self-employed. Jennifer, there’s no denying that individual health coverage is more expensive than a group plan. In a previous podcast, it’s episode 596 called how to manage health benefits when you leave a job, I cover your rights and options for most out of your health benefits from an old job one of them is using COBRA continuation coverage. Cobra is a law that gives you the option to continue your employer sponsored health insurance even after you’re no longer employed so instead of having your plan cancel the month you leave a job you can use Cobra to continue getting the exact same benefits and choices that you had before you left your company. Cobra protects everyone affected by the loss of group health insurance including the former employee, his or her spouse, former spouses and dependent children when certain events occur. In most cases you can use Cobra to continue your group health coverage for up to 18 months and it also applies to any dental and vision insurance that you may have had through your employer. As I previously mentioned it must be identical to the coverage you were offered at your company before you left. You or your family are entitled to have the same coverage limits co-payments and deductibles after you leave an employer. You should receive information about your rights to apply for Cobra you have to notify your Human Resources department within 30 days after a qualifying event such as a termination or a cut in work hours that’s when you have to let them know that you want COBRA continuation.

Jennifer, I recommend shopping and comparing the cost of Cobra to a private policy. Typically your Cobra cost will be higher compared to what you previously paid as an employee because your employer is no longer subsidizing it. Depending on your household income and the number of people in your family, you may qualify for assistance that would reduce your monthly premiums for a private policy that could make the cost of a marketplace plan less expensive than Cobra but if you’ve got high income and you don’t qualify for any reduced premiums Cobra may cost about the same or even give you better benefits for the price. There are several ways that you can shop for coverage. One is going to healthcare.gov, that’s the federal health care marketplace. There are also lots of insurance aggregator sites such as bankrate.com and a through an insurance broker or you can go to your state’s online health care marketplace there are 13 states with their own health exchanges they are: California Colorado Connecticut DC Idaho Maryland Massachusetts Minnesota Nevada New York Rhode Island Vermont and Washington

So all of those states have their own online health insurance website but you can also get there from healthcare.gov if you just want to go there first. You can get through to your state’s site from that site the best type of coverage for you and your family depends on what you can afford whether you need frequent visits to a specialist and if the doctor’s you prefer are covered. I’m going to cover some common types of health plans that may be available for you and the benefits they provide but first I want to take a short break to thank the sponsors who really make money girl possible and keep it going for listeners.

All right back to health insurance let’s talk about some of the different types of plans that may be available. The first is an HMO that stands for health maintenance organization and an HMO is simply a network of doctors providers and hospitals that you can choose from for healthcare. What happens is you have to select a primary care physician that is like your kind of central contact. They have to refer you to a specialist when needed such as a dermatologist or an allergist. Now if you get treatment outside of an HMO Network it may not be covered so this is like the downside of an HMO. You know there are exceptions, maybe being transferred to an out-of-network hospital in an emergency. With an HMO you pay monthly premiums and the benefits begin once you meet an annual deductible. You’re responsible for coinsurance which is a percentage of healthcare costs and you also have fixed co-pays for visits to a doctor’s office and prescription drugs because an HMO gives you less freedom of choice than other plans. They typically cost less, that’s the upside so it is a good option when you want to maintain low health care costs and you’re in relatively good health.

All right another plan that you’ve probably seen is a PPO that stands for preferred provider organization a PPO is similar to an HMO in that you choose healthcare providers from a recommended network however you’re allowed to get care outside your network and you don’t have to select a primary care physician or even get a referral to see a specialist. So you have a lot more freedom while a PPO gives you more flexibility. It is typically a more expensive plan compared to other options. If you go out of a PPO Network you usually get less coverage and therefore have higher out-of-pocket costs like an HMO you also pay monthly premiums a deductible co-pays and insurance a PPO is typically a good option when you can afford higher premiums and healthcare costs and it also gives you the most flexibility if you travel frequently or you just prefer to see out-of-network doctor so think about that you know where will you be when you need medical attention.

All right the next type is called a catastrophic health plan. We don’t hear a lot about these but a catastrophic plan is designed to provide benefits only when you suffer a major medical event such as a car accident, a heart attack or cancer. It protects your finances if you’re diagnosed with a serious illness or you need emergency treatment. These plans give limited coverage and they do come with a high deductible and in some cases they may only be offered to those under age 30. They may require policyholders to use in-network providers and they may not cover prescription drugs so these are gonna offer you the least benefits compared to other plans and they should definitely only be used as a last resort when you need the lowest premium possible.

And the last plan will review is called an hdhp that’s high deductible health plan. These can really be any plan, It could be an HMO or a PPO but it comes with a higher than normal deductible and lower monthly premiums plus many high deductible plans qualify you to use an HSA or health savings account. You’ve probably heard me talk about these in previous shows. With an HSA, you make pre-tax contributions to a special savings account up to an annual limit and then you can spend that money on a variety of qualified health care like medical expenses, dental, hearing, vision, a lot of different things and it gives you several tax advantages. The contributions you make to an HSA are never taxed as long as you spend them on qualified expenses. Also you can invest the funds that you contribute and that interest or investment earnings is never ever taxed and then when you take withdrawals to pay for your qualified medical expenses. Again they’re never taxed as long as you’re spending them on qualified healthcare expenses. I also really love HSAs because the balance is just roll from year to year you don’t have a spending deadline. You don’t have to empty it every year like you do with other types of medical spending plans. The only downside to an HSA is that if you’re under age 65 and you spend it on non qualified expenses you will be subject to income tax plus an additional 20% penalty on the withdrawn amounts. However if you still have money in the account after age 65 you can actually use it for non-medical expenses without penalty so it kind of works more like a retirement account after age 65. You would have to pay income taxes on those withdrawals but no penalties would apply. Having a high deductible health plan can be a really good option if you want lower premiums and you’re in relatively good health. So you’re not likely to bump up against that deductible every year and if you’re likely to take advantage of an HSA I would say that if you’re managing a chronic illness or you take expensive prescription drugs you probably need a more comprehensive plan than a high deductible health plan you’ll probably want a PPO but if you’re on a budget and you’re in relatively good health you may come out ahead choosing an HMO or a high deductible health plan but what’s important to remember is that even when you have health insurance you still have out-of-pocket expenses. You still have to pay a deductible co-payments coinsurance. You know a health plan rarely covers 100% of your medical costs. It’s a fantastic safety net that helps limit your total potential medical debt but it doesn’t mean that you’re not going to have any out-of-pocket medical expenses and it seems like every year the maximum out-of-pocket limit goes up. For 2020 a high deductible health plan can require you to pay a maximum of sixty nine hundred dollars out-of-pocket as an individual or twice that much $13,800 as a family every calendar year. So these annual limits don’t even apply to services that you might receive outside of your plans network of doctors so having savings in the bank or having money in an HSA is how you’re going to pay medical bills until you meet your annual deductible or pay bills that your insurance doesn’t cover.

All right the third financial protection that we’ll talk about is disability insurance. Once you’ve got savings in the bank and you’ve got health insurance there is still a significant risk you face that is not being able to earn an income while you recover from an accident or illness. Health insurance only pays a portion of your medical bills, not your everyday living expenses and Megan is very wise to be thinking about the fact that she is vulnerable. If she gets injured but the reality is that you don’t need a quote physical job like Megan’s to be a risk. Anyone could be injured in a car accident or come down with a serious illness that leaves you unable to work. You may have the option to enroll in a short or long term disability policy through work. It’s typically more affordable than a private policy and it definitely comes with less underwriting requirements when you get it at work such as not having to undergo a physical exam but what you get at work may not be enough. Your income and your family situation so I would encourage you to really take a look at what you’ve got no matter if you’re underinsured at work or you’re self-employed. You can purchase a disability policy on your own and the cost depends on various factors such as the amount of replacement income that you get it. It could be 50% 60% 70%, it depends on the waiting period for when your benefits would begin after a disability, depends on your age and your health status but I would say if you’re in relatively good health and you’re young a good disability policy might cost in the range of $25 maybe up to $50 per month. There are several ways that you can shop for disability coverage. There are lots of insurance companies that you can go to directly such as MetLife State Farm and Northwestern Mutual, there are also lots of insurance aggregator sites such as policy genius.com and bankrate.com. You can also go through and insurance broker and many people will say; well Lara what about the disability that you get from the government. Well if you think that you don’t need private disability insurance because you know you’re just gonna get something from the government make sure you understand what the government is providing. Yes, it’s true that if you qualify for Social Security disability insurance, it’s called SSDI, you can receive it until you reach retirement age and then your benefit would switch over to Social Security retirement benefits however there are very strict requirements to qualify for SSDI according to the Social Security Administration. To qualify, you must be unable to work because you have a medical condition that is expected to last at least one year or result in death. You cannot have a partial disability or a short term disability and you’ve got to meet the Social Security Administration’s definition of a disability. I’ll put a link to the listing of impairments that can qualify for disability according to the Social Security Administration and that’ll be in the notes for this show which is in the money girls section at quick-and-dirty tips.com. The types of health and disability insurance policies that are best for you depend on a variety of factors. It depends on your finances your health care needs in your family situation. I would encourage you to compare several options and always speak with a licensed insurance professional when you need help.

Thanks again to Jennifer and Megan for inspiring this show. If you have a money question or an idea for a future show topic I would love to hear it. We’ve got a voicemail line if you want to call in just like megan did call three zero two three six four zero three zero eight. Money girl is produced by the audio wizard Steve Ricky Berg with editorial support from Karen Hertzberg if you’ve been enjoying the podcast your ratings and reviews on Apple podcasts mean the world to us it’s an easy free way to give back and show your support you might also like the backlist episodes and show notes that are always available at quick and dirty tips com that’s all for now I’ll talk to you next week have a wonderful Thanksgiving if you’re celebrating in the United States until then here’s to living a richer life.