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When we deploy our hard-earned dollars, we all have our financial reasons. But are we focusing on the right thing? Consider four examples:
Homes. When folks buy a home, they’ll often dwell on the potential price appreciation, the tax benefits and the advantages over renting. But I’d contend there are two reasons that are even more compelling: Buying a home locks in our housing costs and, with every monthly mortgage payment, forces us to save.
Health insurance. Yes, health coverage helps with medical bills. But forget the size of the copays and the deductibles. When I look at health insurance, I see two huge financial advantages: We benefit from the discounts that insurers negotiate with medical providers, and our annual cost is limited by the out-of-pocket maximum. Everything else, I’d argue, is secondary.
Auto insurance. We carry auto insurance so we’ll be covered if we crash the car, right? Sure, that’s one of its roles. But the repair cost of a bad crash pales next to the financial hit we’d face if we hurt or killed others in an auto accident. That’s why I see the primary role of auto insurance as providing liability protection, and why most folks should probably also add to that coverage with an umbrella-liability policy.
Portfolios. Many folks buy investments for their income—the dividends from stocks, and the interest from bonds and cash investments. There’s nothing wrong with that. Still, when we think about why we should buy the three key asset classes, I believe it’s better to think of them in terms of the role each plays in a portfolio.
Specifically, I’d view stocks as a portfolio’s engine of growth, bonds as the financial shock absorber and source of spending money in the event of a drawn-out bear market, and cash investments as the place to go for immediate portfolio withdrawals.
The points about health insurance and liability insurance are important. We need to be insured against the catastrophic. A few years ago this was discussed at length on HumbleDollar.
As for owning a house making housing costs predictable? Not so sure. New roof needed sooner than expected. Air conditioner dies. Sewer backs up. Bathtub pipe backs up and ceiling downstairs collapses with a big bolus of water. Homeowner’s insurance skyrockets. Roots from tree crumbles section of foundation.
But those events will also be reflected in rent plus you will be at the mercy of a landlord to fix them promptly and correctly.
We bought a condo to avoid some of that, but since we bought in 2018 the AC had to be replaced, a hot water heater went, water leak from neighbors above us required new bathroom ceiling not covered by insurance, property taxes have increased to $13,500 and HOA fees from $700 to $950.
There is no escape. On the other hand what we paid $580,000 for now easily sell for over $800,000.
The rent for anything close to what we own is $5,000 or more a month.
It’s a throw of the dice I guess.
Thanks, Jonathan, for a good post. I wanted to mention that having a paid off house means to us that our family would have a place to land if things got rough. As long as we pay the property taxes. I sleep well at night knowing this. Chris
Yep. Back when we owned a house, even though it wasn’t in a place we wanted to stay, we used to comment that if the proverbial poo hit the fan, at least we owned our house. Now that we’re nomadic we no longer have any fixed abode, never mind own it outright. Lately we’ve been thinking of purchasing one even if we don’t live in it all the time.
There may be a psychological edge to owning a house or condo.
For my spouse, it provided some certainty for her, an anchor point. I was okay with that and eventually we travelled and only lived in the condo about 1 month of the year. There were expenses including HOA fees and Real Estate Taxes. The utilities were slight. Our budget could handle it and I considered it to be the price for calmness.
If everything fell apart we could always live in that condo, and when Covid occurred we did live there for about 7 months one year. I preferred setting up “lily pads” in two other locations while travelling in-between. We also lived in those during and in the aftermath of covid.
We did sell the condo in 2022 but because of health issues we upgraded one of the lily pads to a house in a resort community. After a year of treatment, we resumed some travel in 2024 (6,000 miles) while I continued treatment. During that two year period the cancer center became the anchor [point]. We are planning a trek in June-July-August, pending the outcome of medical tests.
Good thoughts, Norman. Chris
Like the lily pad idea, mostly because we’re incapable of picking one place, or at least one that will allow us to stay a long time. How did you select yours?
Before becoming nomads, we travelled a lot and rarely saw our house the first year of retirement. My wife initially felt the same way as yours about the anchor, but got over it, and over the last couple of years has embraced not having a place. That is until our recent thoughts I mentioned.
Hope your travel plans materialize.
Ultimately, it is about designing and supporting one’s goals in life. My perspective on a home, and later a condo and several stationary RVs morphed over time into shelter. That was the reason to have them.
The Class B RV is our portable motel room and for travel.
I never thought of the house or condo as an investment, but after renting we decided that we wanted some control over our abode. We knew it might appreciate (all real estate is local) but we also knew maintenance costs would erode any appreciation. We spent some funds upgrading the condo, but lived in it for 22 years (the financial plan called for a minimum of 10). It served the purposes.
I agree completely about the role of insurance. We have Long Term Care insurance as a hedge. We bought it 11 years ago at a time the plan indicated that self-funding LTC could be dicey. The premiums are about 4% of our annual budget. Our experience with close relatives who have used assisted living indicates that a care giver even if one is in a facility might be desireable. G’s mother has one for about 5-6 hours a day and 6 days each week. This relieves much of the burden from family and we are convinced it has added to the quality of her life. We’ll have the financial resources to be able to do this for ourselves with the help of the LTC insurance.
My approach to our investing is more adventurous, but would be considered a moderate portfolio. I think that’s appropriate for our ages and the fact that we are retirees. Our portfolios are hybrids. Some ETFs and mutual funds, some sector funds, bonds, bond ETFs and cash. The portfolios are optimized to provide some stability and to appreciate at the rate of inflation or better. The role of stocks is to do the heavy lifting and the bonds are ballast. Cash as noted provides immediate access to funds if needed, but until recently was a drag. Bond funds can be disappointing and that occurred in 2022. In fact, a TIPs fund I purchases in 2020 is down 3.03% even after reinvesting dividends each quarter. An income fund is down 12.24%. These are 3.6% of my portfolio so the hit is slight. Disappointing, but that is the reason I minimize bond funds in the portfolio. Cash, which is reputedly trash did much better. Go figure!
I just paid the renewal premium for my umbrella policy this week. The current renewal premium was 32% higher than the last year policy premium. I wonder if others are also seeing such premium increases?
As part of the declarations my renewal notice states “You must maintain the required underlying insurance, at or above the limits shown below at all times for each liability exposure any insured person has.” I check my auto and homeowners policy to be sure those policies meet the minimum which they do. My auto, homeowners, and umbrella policies are all with the same agent and insurance company so my expectation is that my agent will advise us if we needed to change the policy coverage limits but I do check to be certain we are meeting the requirement.
Our HO and umbrella have 6 months to go, but our auto just suffered a pretty big increase. I’m getting quotes but haven’t found anything significantly better.
Ours also went up about 31% from last year. I think the increase from 2023 to 2024 was similar.
Our umbrella policy is due for renewal in a few months. Our current policy is inexpensive. If it goes up by 30+ percent I won’t be happy but the hit to the wallet will be minimal. I guess it’s just the price you pay to be able to sleep well at night knowing that your assets are protected should you really screw up bad.
I wondered what the umbrella insurers’ losses were last to justify the large increase.
I found this via an AI search, although it does not specifically cover last year’s losses:
Umbrella insurance policies experienced rising losses and increased rates last year due to factors like escalating liability risks, higher claims, and increased claim payouts. Specifically, Safeco Insurance reported that umbrella claims doubled and payouts increased by 67% from 2010 to 2020, with the average claim now around $500,000.
Car accidents, particularly property damage claims, and the rising cost of bodily injury claims contributed significantly to these losses.
The paragraph just above may be why the policy has the disclaimer William Perry refers to, although I’m pretty sure that the policies have always required a certain level of coverage for home and auto as the umbrella is the secondary insurer.
A little over 50 years ago i was an underwriter at Safeco…..The required minimum underlying auto bodily injury insurance liability was $100,000 per person and $300,000 per accident. Virtually no one wanted more than a $1M umbrella. Umbrella claims were very rare because the underlying limit was high enough to take care of most losses and so umbrella premiums were low. Since 1972 inflation has averaged 3.91% per year (1972X7). The insurance companies should have increased the minimum underlying required coverage to offset inflation. Since they have not done so, a portion of umbrella coverage has become primary coverage for those who want equivalent coverage today compared to 1972. If you purchase higher underlying limits, your umbrella premium will be lower. You could consider $500,000 Combined Single Limit, or 500/500 limits.
Many states today have case law or statues that require insurance companies to deal in good faith with their policy holders. These did not exist in 1972. After accidents with significant 3rd party injuries, the existence of an umbrella policy may produce settlement offers within the umbrella limits which can force the umbrella carrier to settle instead of going to court to contest a higher damage claim amount. If the company does not settle, it can become responsible for the amount in excess of its umbrella policy limits. So, fewer claims go to trial.
When there are serious injuries, one of
the first thing that a plaintiff’s lawyer will do is to try to determine the amount of liability insurance carried by the at-fault driver. When the limits are low, and the driver has no assets there isn’t much that the lawyer can do except to look at their client’s Uninsured Motorist coverage. But, when there is both primary coverage and an umbrella, they have more options!
Remember that the average percentage of drivers without insurance is around 14%.
I fully agree with everything except this statement: “We benefit from the discounts that insurers negotiate with medical providers.” While that is the conventional wisdom, my experience has been different over the last 28 years.
First example: When our oldest child was born in 1997, I was shocked that the bill of the nurse anesthetist — whose office address was on the same floor as the in-network hospital where our child was born — turned out to be out-of-network (this was a BCBS plan). Therefore, I had to pay the full bill myself — a complete rip off. When our second child was born almost 3 years later, I inquired about the self-pay price, and particularly whether anesthesia was included. The self-pay price did include the nurse anesthetist, but I was told the hospital could not put that in writing because their contract with the insurance company required them to offer their lowest rate on each procedure to the insurance company (“Favored Nation” clause). I ended up paying significantly less by being a “self pay” patient.
Second main example: Before going on Medicare this year, I spent 9 years on a healthcare sharing plan — which I have written about on HD previously. When a significant medical event occurred in 2019 that resulted in a low six-figure hospital bill, I learned that “self-pay” patients at nonprofit hospitals are entitled to very significant discounts, including families with incomes up to 5x the poverty level. As a family of 5, my recollection is that we could have AGI up to $330,000/year and remain eligible for discounts up to 85% of the bill. My healthcare sharing plan came through with flying colors in covering 100% of my bills with no deductible or unreimbursed expenses whatsoever.
After “not having insurance” for the last 9 years, and using sites like http://www.healthcarebluebook.com, http://www.fairhealthconsumer.org, and others, I believe that it is possible to beat the insurance companies at their game. But it does take some effort, though.
Finally, for anyone considering healthcare sharing plans, do your own due diligence. I asked for and received the audited financial statements of the plan I used (www.CHMinistries.org). These plans are not considered “creditable coverage” under the Affordable Care Act, but are also statutorily exempt from the federal individual mandate (and therefore any tax penalty). Monthly premiums are typically $100 for high deductible plans, to the low to mid $200’s for more comprehensive coverage. (This excludes mental health and other ACA-mandated benefits, however, so again, study these plans first before purchasing.). My personal immediate savings were $500 – $600/month, fairly common for most people. I started out ahead $6,000 – $7,200 per year using a sharing plan. It proved to be a terrific option for me.
For us, as a couple, my wife and I BOTH agree that our house was – and now condominium is – primarily shelter.
A place to live and, in the past, raise our family.
The changes we made/make are for our comfort or convenience, not because we expected a return on our “investment”.
ObvIously … other people have a a different view. One that is right for them.
Completely agree that the most important thing about health insurance is the annual out of pocket maximum. Health insurance to me, is much less about getting this much or that much covered for a procedure, and much more about avoiding financial disasters merely because I – or some other family member – have a serious illness.
And I’m a big fan of umbrella insurance for the same reason: To avoid – or at least largely mitigate – the chances of an event that can wipe out a lifetime of savings. I suspect many people who might benefit from umbrella insurance do not have it. I’m not rolling that dice.
The initial motivator for my last house purchase was the woman in the apartment above me. She bought a puppy, and much of the time it sounded like she was moving the furniture. Then I thought about the tax deduction. Ultimately, paying off the mortgage early gave me 22 years of rent-free accommodation.
Don’t get me started on the need for health insurance. Having grown up with the UK’s National Health Service, I have always regarded the US’s non-system with a mixture of horror and incredulity. (Even more than my somewhat similar reaction to the tax system.)
I always struggled with the forced savings argument for buying a house, because that’s obviously an inferior form of savings to cash/equity investing. You’re paying huge fees to save that money, like buying a mutual fund with a 6% annual maintenance fee. So I feel like that point is not applicable to those who are already good savers. Locking in costs is somewhat debatable too, given other factors like insurance and property taxes, but that’s a fairly solid argument usually. The tax advantage argument always cracks me up too, kind of like cash back on a credit card. You should buy a house as an investment in your lifestyle first and foremost, I believe.
This is why in our retirement asset planning real estate is not considered an asset. With taxes currently $20k and insurance $15k, plus heat this winter exceeded $800 in Jan and Feb, this is a considerable expense.
We have to pay to live somewhere.
As for investment quality? The stock market has appreciated far more than our house in the almost 30 years we’ve owned it. I don’t regret living here, and we’ve gotten great value for this as a place to live, but if numbers of dollars were the metric, the stock market wins.
Jonathan,
Your points are right on target as usual.
You write, “When I look at health insurance, I see two huge financial advantages: We benefit from the discounts that insurers negotiate with medical providers, and our annual cost is limited by the out-of-pocket maximum.”
This is a pet peeve I have about what medical providers charge. It seems the billed price is not attached to reality. That these practices and hospitals just throw outa number that is detached from the actual cost of the services provided as they know the insurance companies are just going to reimburse what they are going to reimburse. Who does this hurt the most? Those without insurance.
If the proposed house tax package is adopted as written the Congressional Budget Office predicts nearly 14 million people will loose their health insurance. These people will either go into medical debt, and/or insurance premiums paid by those with health insurance will skyrocket. There is no free ride. Someone has to pay the piper.
That’s true because both Medicaid and Medicare pay below market even practice sustainable fees and the private sector makes up the difference.
However, it is possible for people with any coverage to negotiate a fee closer to what is accepted from commercial insurance. Unfortunately, people tend not to speak up.
Regarding Umbrella policies, a client was at fault in an accident that resulted in the death of a motorcycle rider. He had no Umbrella, and the award exceeded his car insurance limit by $80K.. He had to dip into his IRA to satisfy the judgement. An umbrella policy would have covered it.
Regarding those who rent their living space. Many renters skip renters insurance either because they don’t know it exists or because their furniture and clothing doesn’t have much value. However, like a typical home owners policy, renters insurance protects far more than just your possessions. And it’s affordable; I once bought renters insurance, and the multi-policy discount was actually greater than the cost of the renters policy premium.
Thanks for the interesting perspective. When considering the value of home ownership, I also think understanding the concept of imputed rent – the hypothetical rent you would pay for an equivalent home – as useful. When we rent a home, the rental income is taxable to the landlord. When we own, we don’t pay rent, but we are getting the same housing service. I’ve read that there are countries where this imputed rent was taxable to the homeowner, and it has been considered in the US. Imputed rent is considered in GDP calculations, to make it equal to rented housing services. I’m sure the accountants in the HD community can do a much better job of explaining this quirky concept.
Right on as usual Jonathan, especially regarding insurance. People tend to miss the point when it comes to health insurance by dwelling on the premiums and not the protection provided.
Your search for simplicity is what attracted me to your writing. Several years ago, when I first read your approach to investing, I thought there must be more information on the way. It’s took a few re-reads and pondering to realize you had already given me what I needed, including more time and less headache from complicated plans.
Jonathan, thanks for the interesting perspective. I wholeheartedly agree with your approach of boiling things down to their most simple core. This tends to make decisions much easier.
I echo your response exactly, Greg.