Safety Net

Emergency fund. One rule of thumb suggests you should keep six months of living expenses in conservative investments, in case you lose your job, need to make major home repairs or have to handle other unexpected expenses. You might hold a smaller sum if you have a secure job, your spouse also works or you have easy access to borrowed money.

Credit lines. To help pay for financial emergencies, you might set up credit lines. Often the best option is a home-equity line of credit. With a credit line, you don’t incur any interest expense until you borrow money, though you may have to pay a modest annual account fee.

Risk pooling. When you purchase an insurance policy, you are effectively joining with other policyholders to pool risk. Those who suffer misfortune collect from the pool of money that all policyholders have contributed to.

Self-insure. As you accumulate more wealth, you might drop some of your insurance policies or reduce the amount of coverage. Instead, you would “self-insure.” For instance, those with seven-figure portfolios might eschew long-term-care insurance and instead plan on paying nursing home costs with their savings.

Property casualty vs. life companies. Property-casualty insurers provide protection for property through auto, homeowner’s, renter’s and similar policies. They also offer umbrella liability insurance. Life insurers, which focus on disability, life and long-term-care coverage, provide protection against the various misfortunes that can afflict individuals. Some insurers protect both property and individuals.

Premium. The amount you have to pay each month or each year for an insurance policy.

Deductible. If you have a claim on an auto, homeowner’s or health insurance policy, your out-of-pocket cost is represented by the deductible, with the insurance company paying the rest. The higher the deductible, the lower your premium will be.

Elimination period. If you have a claim on a disability or long-term-care policy, the elimination period represents the amount of time you will have to shoulder costs before the insurer starts paying. The longer the elimination period, the lower your premium will be.

Co-payments and coinsurance. This is the sum you are expected to pay for each doctor’s visit with a health insurance policy or with Medicare. A co-payment is a fixed dollar amount. Coinsurance is figured as a percentage of the medical bill. The coinsurance will be based not on the actual bill, but on the bill that reflects the discount the insurer has negotiated with the medical provider.

Managed care. In an effort to hold down costs, many health care insurance policies no longer allow you to see any doctor you wish. Instead, they offer some form of managed care. For instance, you might only be covered if you use the insurer’s network of doctors. Alternatively, the policy might cover you if you visit an out-of-network doctor, but at a lower rate. You might also be required to get approval from the insurer before using some medical services.

Flexible spending accounts vs. health savings accounts. A flexible spending account (FSA) is funded with pretax dollars and used to pay medical expenses not covered by your employer’s health care plan. A health savings account (HSA) is also funded with pretax dollars. It’s used to pay for medical expenses not covered by a high-deductible insurance policy. Unlike an FSA, you aren’t expected to largely or entirely empty an HSA each year—and, indeed, the account can be left to grow and then used to pay for medical expenses years later or even used for other costs.

Medicare vs. Medicaid. Medicare is the government-run health insurance program for Americans age 65 and up. Medicaid is the health insurance program for those with low incomes and few assets. Medicaid is run by the states, but funded by both the federal and state governments.

Rehabilitative vs. custodial care. You might require nursing home care when rehabilitating after an illness or injury. Alternatively, you might be in a nursing home because you can no longer handle your own daily needs and need custodial care. Medicare covers rehabilitative care for those age 65 and up, while Medicaid may pay for custodial care if you have few assets and limited income.

Cash value vs. term insurance. Cash-value life insurance combines pure insurance with an investment account. As the investment account grows in value, you purchase less pure insurance each year. By contrast, a term policy is pure insurance, providing a death benefit if you die while the coverage is in force, but nothing more.

Asset protection. This refers to the strategy of trying to protect your wealth from creditors who have a claim on your assets, either because you lost a lawsuit or because you took on too much debt and ended up in financial trouble.

Liability coverage. If you cause an auto accident or someone gets hurt at your house, the liability coverage that’s part of your auto or homeowner’s policy can help cover the medical costs of injured individuals and pay to repair damaged property. It can also help with any resulting legal claims. For additional coverage, you might buy umbrella liability insurance.

Homestead exemption. If you lose a lawsuit or file for bankruptcy, your primary residence may be protected, depending on the state where you live. In some states, your entire home will be protected, while in other states the protected home value is capped at fairly modest levels.

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