Insurance 101 - What do I really need?

In a fit of rage, I leaped towards my cousin swinging. A second later, I was on my back with a pool of blood forming around my head. I was 10 years old and I would learn two very valuable lessons that day. One, never try to resolve conflict with violence and two, never be without health insurance.

For my family that just immigrated from Korea two years prior, having health insurance was just not one of our priorities. I thankfully came out of the emergency room with only 5 minor stitches, but my parents would end up paying close to thirty thousand dollars for that one incident.

In this post I want to share with you 5 must have insurance products to protect you and your family.

 
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1) Health Insurance

Everyone needs health insurance. The American Journal of Public Health found that the number one reason families file for bankruptcy was due to medical issues; a staggering 66.5 percent. Unaffordable mortgages or foreclosure came at far second with 45.0 percent. Hundreds of thousands of families are turning to bankruptcy because they can’t afford to pay their medical bills.

 
 

The most common way to get healthcare coverage is through your job. Although most of you’ll need to pay a portion of the annual cost, the amount is much less than what you would have to pay if you were to purchase insurance on your own. If you happen to be under 26 years old, you could be covered by your parent’s plan until you can find a coverage on your own.

The bottom line is prioritize healthcare insurance! If you or your family member becomes very sick and you don’t have adequate coverage, you may be forced to file bankruptcy in order to pay the medical bills.

2) Auto Insurance

In California where I live, if a motorist can't provide proper proof of insurance during a routine traffic check, the driver may face charges including the suspension or loss of their drivers license.

Even a seemingly minor car accident can leave an uninsured driver in significant debt when a car insurance policy could have helped. The uninsured driver may be accountable for thousands in repair bills, expenses, medical bills, and liability costs. Even worse the driver found responsible for an accident may be sued for their assets if they don't have adequate coverage.

3) Disability Insurance

Do you know what you would do if you had a serious accident that affected your ability to work and bring in an income? You would be unable to produce an income and yet still need to be cared for. You might be thinking, what are the chances of me being disabled? I am healthy! According to the Council for Disability Awareness, higher than many of us think.

“Just over 1 in 4 of today’s 20 year-olds will become disabled before they retire. Ironically accidents are NOT usually the culprit - back injuries, cancer, heart disease and other illnesses cause the majority of long-term absences.”

You can’t afford to not have this type of insurance and you can usually get it the cheapest through your workplace. If you don’t work for a company that offers disability insurance, consider buying an individual disability policy. Ideally you want coverage that pays 60% to 70% of your income following an accident.

4) Home / Renters Insurance

You should never own or rent property without having yourself covered in the case of a fire, flood, burglary or some other disaster. Renter’s insurance is relatively cheap to get, so make sure to have some!

Most homeowners insurance covers the cost of rebuilding or repairing your home as well as the contents of your home. It can also protect you if you are held responsible for injuring people or damaging someone else’s property. Make sure you have adequate coverage to protect the roof over your head.

5) Life Insurance

If you haven’t been approached regarding purchasing life insurance, count yourself lucky. It is one of the most aggressively sold financial products in the market. You might have heard of terms such as variable or whole life insurance. My advice. If someone tries to sell you any of these products, run away!

The purpose of life insurance is very simple. If you or your spouse were to pass away, it protects your family members who rely on you and your spouse’s income. My recommendation is to purchase simple term life insurance policy 8-10 times your annual income. The term life insurance protects you for a fixed period of time. If you die during the term, the insurance company pays out a specified amount to your beneficiaries.

The premium on these types of insurance are relatively low and fixed. For example, I currently hold a 20 year term policy for $1,000,000 that costs me $31.65 a month. I want to protect my wife and children until the kids are old enough to be on their own.

Do you have adequate insurance coverage? Do you see any insurance gaps?

Want Financial Stability? Start Sleeping Better

Key factors to financial stability are simple - make smart life decisions and sustain them for the long run. Few examples are as follows:

  • Investing - Find low cost index funds such as the Vanguard Total Stock Market Index Fund (VTSAX), automate your investment and invest for 20+ years.

  • Transportation - Never lease a car. Buy affordable and reliable car with cash and drive it for 10+ years.

However, despite how simple these principles are, we oftentimes find it very challenging to make smart life decisions and even more, sustain them year after year. We receive a hot new stock tip from a co-worker and feel we need to jump on it due to fear of missing out. We see an ad for a luxury car and before we know it, we are on the Kelley Blue Book to see how much my old beater would sell for.

We can’t completely eliminate dumb decisions from our lives, but I have noticed a trend in my own life. I tend to make irrational and regretful choices when I’m emotionally and physically drained. And as I’m getting closer to 40 (just turned 38!), it’s becoming even more apparent that I need to better manage my energy level as my responsibilities as the sandwich generation grow (e.g. demanding career, growing kids, aging parents, increasing financial responsibility etc.).

In this post, I want to share with you the starting point for better managing our energy level, better sleep!, and six tips that will allow us to most effectively rest our body and mind.

 
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Sleep is one of the most underappreciated activities. It is oftentimes the first item to be sacrificed when other priorities pop up and many of us don’t give it too much thought. However, study after study have shown a direct correlation between sleep and mental performance. Lack of adequate sleep leads to slower reaction time, lower concentration and reduced analytical reasoning to name a few.

We’ve all been there. You slept late watching Netflix latest release. You woke up early because you have to be at work by a certain time. However, your brain was only halfway present. You couldn’t concentrate effectively and you were constantly distracted. You came home feeling drained and unsatisfied.

But in contrast, you’ve also experienced the opposite. You slept early and woke up refreshed! Throughout the day, you felt like Bradley Cooper from the movie Limitless. You were able to concentrate intensely. You walked by a box of donuts with no problem - you have intense willpower to resist! You came home feeling accomplished and proud of yourself.

Now how can you repeat this day over and over? Here are six tips to better sleep:

1) Set a Sleep Schedule

Set a routine sleep schedule (e.g. 10am - 6pm) and stick to it both weekdays and weekends. Our body craves routine. Resist the temptation to stay up late on weekends because you don’t have work the next day. Once your body gets used to a sleep routine, you will fall asleep quicker and wake up more refreshed.

2) Make Your Bed & Room Super Comfortable

Treat your bed with the utmost respect. Check your mattress firmness, sheet thickness and even the pillow comfort. Set your room temperature to ideal 70 degrees. You want it all to be most comfortable as possible. Do you enjoy laying in your bed? Do you look forward to crawling into your sheets? Is the pillow thickness ideal for your sleep position?

3) Watch What You Eat or Drink

No big meals at night after 8pm. Your body will struggle with digestion and you’ll find it hard to fall asleep. Also avoid alcohol before bed and limit caffeine after 4pm. “Alcohol may seem to be helping you to sleep, as it helps induce sleep, but overall it is more disruptive to sleep, particularly in the second half of the night,” says researcher Irshaad Ebrahim, Medical Director at The London Sleep Centre. Caffeine on the other hand can disrupt your sleep up to six hours after consuming. So if you want to be in bed by 10pm, coffee after 4pm is not a good idea.

4) Empty Your Mind

Keep a pen and notepad next to your bed and get in a habit of clearing your mind before bed either through journaling or just listing out what’s in your mind. By writing down your thoughts and concerns, you are giving it a place outside of your head.

5) Eliminate Light & Noise

Completely darken your bedroom by turning off all lights before you get into bed. You also want to eliminate all noise if possible. I prefer to use an eye mask and an ear plug to make sure I can control for all light and noise. If you go this route, make sure you use high quality products and not the free eye masks they give you on international plane rides. They are much more comfortable to wear and completely block out all light.

6) Power Down

Lastly, get an alarm clock! Since the invention of the iPhone, we’ve taken it as a matter of fact that phones are our alarm clock. However, how many of us have stayed up longer than we wanted scrolling through Facebook feeds or just reading our emails in bed? The temptation is too strong and the light from any of these devices also have a way of over stimulating our brains. If possible, have your phone across the room or even better yet, in a different room and get an analog alarm clock!

Do you find it challenging to get adequate sleep? Are there any tips from above that resonate with you?

Remember the 20% and 28% Rule When Buying a Home

Purchasing a home is not easy. Not only is it one of the most expensive purchases we will make in our lives, there are so many numbers to consider:

What is a good down payment?

How do I know if the monthly payment makes sense for our family?

In this post, I want to share with you two essential rules you want to consider when buying a home

 
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1) Down Payment - At Least 20% of Purchase Price:

The first rule of home buying is to only buy a home when you can afford a 20% down payment.

Many lenders will give you a mortgage even if you put less than 20% down. However, don’t think that they are being generous. Lenders are in the business of lending money so if they can lend you more money while mitigating their risk, they will eagerly do so. What’s worse is that they pass on all the risk to the borrower in the form of Private Mortgage Insurance, aka PMI.

Borrowers who can’t put down 20% are required to carry PMI on top of their mortgage. PMI typically cost between 0.5% to 1.0% of the entire loan amount. This means on a $300,000 mortgage if the PMI fee was 1.0%, borrower would be paying $3,000 annually or $250 monthly on top of his or her regular mortgage! Why!? By putting down 20% down payment, you can avoid this pesky PMI expense.

Some lenders might forgo the PMI fee even if you can’t put down a 20%. Why are they being so kind you might ask? Not so! Lenders want home buyers to borrow more money and they will do everything to make this possible. Stay strong and keep to the principle of putting down at least 20%. This rule will also make sure that you don’t buy more than you can afford. The 2008 housing crisis was a direct result of homebuyers buying more than they can afford by putting less than 20% down. Many mistakenly thought that just because the banks were willingly lending them the money, they could afford the payment.

2) Mortgage Payment - At Most, 28% of Gross Income:

The second rule of home buying is to ensure that the mortgage payment (including property taxes and insurance) is no more than 28% of your gross income.

28% is a general ‘mortgage rule of thumb’ used by lenders to assess borrowers ability to take on the mortgage. Lenders typically want no more than 28% of your gross income to go towards your housing expenses including mortgage payment, property taxes and insurance. If the debt-to-income ratio exceeds the 28% limit, borrower may not get the loan or need to pay a higher interest rate.

An example of this 28% rule looks as follows:

  • $500,000 home purchase

  • $100,000 down payment (20% down)

  • $400,000 30 year mortgage with 5.0% interest rate

  • $2,147 / month mortgage payment

  • $500 / month property tax ($6,000 a year)

  • $100 / month insurance ($1,200a year)

  • Your monthly mortgage plus property tax plus insurance would be $2,747 ($2,147 + $500 + $100)

  • Using the 28% rule, you would need to make around $9,800 a month ($2,747 = 28% of $9,800), or $117,600 annually to feel comfortable purchasing a home under the 28% rule

My recommendation is that 28% should be your upper most limit and you should aim to bring this number down as much as you can. Housing is most households biggest expense and is also the least flexible. You can quickly lower your monthly food or entertainment expense if need be. However, once you are locked into a 15 or 30 year mortgage payment it's not easy to get out of this obligation. Staying within the 28% rule will help you avoid the trap of buying a home more than you can afford.

Are you thinking about purchasing a home? Or did you recently become a homeowner? What do you think about these rules?