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Health Savings Account Plan Comparison Question & Answers

2013 August 29
by Sarah Fields

Laura asks…

Is it recommended to buy whole life insurance for a child?

A friend of mine recommended buying whole life insurance for my child. He said it was better than investing elsewhere. For example, you can get a 1 million dollar insurance which will be paid up by the time he is 18 at an annual rate of about 4500$. And this money grows to over 5 million when is 65 and is tax free. Withdrawal can be done at any time. What’s the catch?
Thanks everyone for the response. I see that the recommendations lean towards not buying it. Strangely enough, I was told that it is very common among families that have lived in this country for over a couple of generations and it’s the immigrants who don’t understand the benefits of this insurance.

Sarah Fields answers:

Most families rarely buy life insurance on their children. If they do buy life insurance on the child. It is usually because of the environment surrounding them or some sort of medical condition that the child has. For example, if you live in a high crime neighborhood, then there’s a high risk of someone getting killed. If your child has asthma or whatever disease, then there’s a high risk that the child can die if the child doesn’t take his/her medicine. Families who buy life insurance on their child only buy $10,000 worth of coverage. In some states, they only allow a maximum of $20,000 coverage on a child.

Anyway, your friend is not a very good friend if he is selling you a whole life policy. Whole life policies are the most expensive life insurance product out there. Whole life insurance contains two elements: the insurance element and the savings element called cash value. Your cash value grow tax-deferred and you are guaranteed to have this much premiums at a certain age. When your child reach 18, he can use it to pay for college. When he reach age 30, he can use it to buy a home and so on. I bet this is how your friend sold it to you. But here’s the catch of whole life insurance.

While your cash value does grow tax-deferred, in the first two years of the policy, no cash value is accumulated. After that, it only grows about 4%. It is true that you can use the cash value at anytime, but you have to borrow it with a loan interest of 5-8% The cash value will never be worth more than the coverage amount until you hit age 100. My parents own whole life and been paying 25 years on it. They bought it age 30 and they were 55 years old when I took a look at their policy. For $30,000 coverage on both of them at age 55, only $10,000 was sitting in the cash value in each policy.

Your life insurance is never paid up unless you choose a payment plan where you pay only a certain amount of years into the policy such as 20-Pay Whole life. The shorter the payment period, the more premiums you need to pay. Most people choose to pay continuously for life because the premiums are lower.

So, if you are looking to buy life insurance on you and/or your child, choose term insurance. You probably have a homeowner insurance, health insurance, and auto insurance right? Does any of these insurance have a savings plan in it? Then why does only life insurance have it? It’s because it generates big profits for the insurance company. Term insurance is just strictly insurance, therefore it is cheaper than whole life insurance. Since it’s so inexpensive, you have more flexibility to invest the difference. To see the comparison cost between whole life and term insurance, go here: http://obe231.blogspot.com/2006/11/comparing-whole-life-with-term.html

What should you invest in? Have you heard about Roth IRAs? Roth IRAs grow tax-deferred and withdrawals after age 59 1/2 are tax-free. That means you don’t have to pay any taxes on your Roth IRA. Most IRAs are funded by mutual funds. Mutual funds is an investment company that invests your money in company stocks. Stocks represent ownership of a company. Mutual funds invests between 25 to over 100 companies, therefore there is a low risk that the mutual fund will lose lots of money if one company goes bankrupt. Mutual funds are also professional managed. That means you don’t have to worry about when you should buy or sell stocks or how to manage your mutual fund. For more info about Roth IRAs, go here: http://obe231.blogspot.com/2006/12/individual-retirement-account.html

As for your child, if you want the child to go to college, setup a 529 plan. 529 Plans are state plans where your investments grow tax-deferred. Unlike custodial accounts where you give up your control when your child reaches age 18 or 21, you have complete control over the assets for life. That makes sure your child uses the money for college. For more info about 529 plans, go here: http://obe231.blogspot.com/2006/12/529-plan.html

Jenny asks…

I have a 7 month boy a 21/2 year old and a 7 what is a good health insurance?

Im paying 134.54 a week rihgt now for a family of 5

Sarah Fields answers:

Child only policies through the Blue Cross Blue Shield in your state is an excellent value.
It may be best to insure your wife and the three children on their own policy with Blue Cross, and you stay on your employer’s plan, (assuming you pay little or nothing for you alone.)
$540 a month isn’t bad to begin with, but if the family is healthy I’d suggest a high deductible plan, (lower premium.) In Arizona, a $2500 deductible would be around $300 a month for your wife and children, $270 for child-only. The upside to being insured with a Blue Cross plan is the likelihood that immunizations, office visits, medication, and annual physicals are covered without having to meet the deductible first. Immunizations may possibly be free, no co-pay. I say possibly because each Blue Cross is separately owned and operated, most being non-profit.
Arizona premiums are on the high side, your rates will most likely be lower than what I’ve mentioned for comparison sake.
Lastly, I would strongly suggest an HSA, (health savings account,) qualified plan. They are a smart bet, and you may read about them on the Blue Cross website in your state.

Ken asks…

How do HSA medical plans work?

Sarah Fields answers:

HAS’s are a great supplemental tool that can be used to enhance certain health insurance programs. Some of the advantages to an HSA are the fact that the balance and any subsequent earnings on the account are tax deferred and if you use any of that money for medical expenses it is tax-free. This allows for you to obtain a High Deductable Health Plan, or an HDHP, as you will be able to use your HSA to help pay your deductable. What this will accomplish is a lower monthly premium for you to pay. You can also continue to accumulate the money from year to year in your HSA and if you are retired it can actually be used to supplement your income after all medical expenses are paid.

In order for HSAs to work properly they must be paired with HSA-compatible health care plans. Virtually all of the insurance providers that there are will offer HSA-compatible plans. This is good news for you and means that you can take the cost savings offered by the HDHP in comparison to the traditional medical insurance policy and deposit the funds into an HSA. If you do not have an HSA you can open one at most banks or credit unions.

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