This document provides an overview of insurance concepts. It begins with legal disclaimers noting the author is not a certified financial advisor and discusses various types of insurance including health, auto, home, life, disability, and long-term care. It emphasizes the importance of having adequate insurance coverage, especially life insurance, before health issues arise. The document also touches on factors that impact insurance costs and strategies for building a diversified portfolio. Overall, the key messages are to protect yourself from risks through insurance and start planning for your financial goals and retirement as early as possible.

1. Insurance 101
Eric Krock

2. Legal Disclaimer
Eric Krock does not have any financial expertise, certifications, or
qualifications. He does not guarantee the accuracy, currency, or
completeness of this presentation or make any warranty, express
or implied, or assume any legal liability or responsibility for the
accuracy, completeness, or usefulness of any information or its
suitability for any purpose whatsoever. This presentation is
provided as-is for informational purposes only, is general in nature,
is not intended to be a substitute for qualified financial, tax, or legal
advice. Use is at your own risk. In no event shall Eric Krock be
liable for any direct, indirect, special, punitive, incidental or
consequential damage or any other damages whatsoever arising
out of or in connection with the use or misuse of this presentation.
For investment and retirement advice that's right for you, see a
certified financial planner! For tax advice that’s right for you, see an
accountant! For legal advice that’s right for you, see an attorney!

3. Disclaimers
• I’m not a certified anything.
• All investments have risks.
• Past performance does not guarantee
future results.
• No investment strategy is optimal in all
situations.
• I am not responsible for your choices or
their consequences. You are.

4. Disclaimers
• I’m not an accountant and can’t give you
tax advice. Get an accountant for tax
advice that’s right for you.
• I’m not a financial or retirement advisor.
• This is for informational purposes only.

5. What are your financial goals?
• Tithe?
• Pay down existing debt?
• Have children & put through college?
• Build up liquid assets? (cash, stocks)
• Cushion against job loss?
• Cushion against disability/early death?
• Buy a home?
• Save for retirement?

6. The Problem: Uncertainty
• You could develop a short- or long-term health
problem (stroke, cancer …) that interrupts or
reduces earning power

7. Real Problem: We Can’t Predict the
Future
• Can’t predict your personal future (heart
attack? stroke? cancer? Alzheimer’s?)
• Can’t predict the global future (debt
crisis? inflation? low growth? bird flu
epidemic?)
• But you can try to prepare so you’re
better able to handle various possible
scenarios
• Learn to invest and manage risk

8. Things We CAN Guarantee
• Social Security and Medicare are
running out of money. Current tax rates
can’t pay for projected benefits.
• Therefore they HAVE TO change.
• Taxes will go up and/or retirement age
will increase and/or benefits will be cut.
• So don’t rely on them for your own
future.

9. Things We CAN Guarantee
• Social Security alone provides for a low
standard of living in retirement and no
cushion for emergencies.
• Lesson: Don’t rely on Social Security
alone for your retirement.

10. Likely Things
• Health care costs will continue to rise as
new, more-expensive treatments are
invented.
• Medicare benefits for the elderly will be
reduced (e.g. later eligibility age, higher
copays and premiums, etc.)
• Lesson: Don’t rely on Medicare alone to
pay for retirement health expenses.

11. Tax Rules of Thumb
• Never risk the wrath of the IRS.
• Legally deferring taxes is good. (IRA,
401(k), ETF instead of mutual fund)
• Legally deferring taxes until after your
death (when they may pass on tax-free
to heirs in your estate) is better.
• Legally avoiding taxes completely is
best. (permanent life insurance & Roth
IRA/401(k) compounding gains)

12. Insurance
• Health
• Auto (required if you drive)
• Homeowner/Renter (fire, theft)
– Separate: Flood insurance (if in zone)
– Separate: Earthquake insurance
• Umbrella policy (wise to have)
• Life
• Disability
• Long-Term Care

13. Health Insurance
• Fact: anyone can be diagnosed at any
time with breast, brain, or prostate
cancer, or have a car accident or stroke
• Make sure you’re covered
• Health problems are a common cause of
bankruptcy
• Fancy car + no health insurance = stupid

14. Umbrella Insurance Policy
• Goes “on top of” basic automobile and
homeowner’s insurance policies
• Covers you up to a high amount (e.g.
$2M)
• Doesn’t cost much
• Protects your assets if you are at fault in
a bad auto accident (for example)

15. Why Life Insurance?
• Anyone can be killed in a car accident or
have a fatal heart attack or stroke
without warning at any time.
• If that happens, who will take care of
your spouse and children?
• If you don’t have spouse & children
today, you may someday!

16. Life Insurance Basics
• Life insurance pays out tax-free to the
beneficiaries.
• Life insurance pays out immediately and
avoids probate of estate, so heirs don’t
have to wait 12+ months to get money.
• Age and many health conditions will
make it expensive or unavailable, so sign
up now while you’re young & healthy!

17. Factors That Can Increase Cost of
Life Insurance Policy
• Age (older  more expensive)
• Personal health history (e.g. past cancer)
• Current health status: overweight,
diabetes
• Family health history (e.g. cancer)

18. Term Life Insurance (Simplified)
• Fixed payment each year
• Pays fixed amount if you die
• No value when policy expires
• Benefits: cheapest form of life insurance
• Use: cover your family while children are
minors or in college
• Drawback: not an investment; no value
when policy ends

19. Permanent Life Insurance, a.k.a.
“Whole Life” (Simplified)
• Fixed (much higher) payment each year
• Insurer buys term policy to cover their
risk & invests the rest for you in
“relatively safe” investments
• Pays fixed amount if you die
• Cash value compounds over time,
ultimately exceeds face value

20. Permanent Life Insurance Benefits
• Policy never expires if pay premiums.
• When you die, it pays out, so it provides
insurance against death.
• It’s an investment whose dividends
compound tax-free, so it reduces taxes.
(like a second 401(k))
• It’s invested in bonds, etc., so it
diversifies your investments.
• Can borrow cash value, so it’s savings.

21. Permanent Life Insurance Drawback
• Much more expensive than term.

22. Two Life Insurance Strategies
1. Get low-cost term policy and invest the
rest of your money in the stock market
for its higher returns.
2. Get higher-cost permanent policy as
tax-sheltered investment and for
diversification out of equities.

23. “Term to Perm” Option Life Insurance
• Northwestern Mutual offers permanent
life insurance that starts off as term (so
cheaper) but that you can convert to
permanent each year a little at a time on
a schedule of your choosing.
• Lets you lock in life insurance coverage
now (in case you get sick) but keep costs
low now.
• Lets you convert to permanent over time.

24. How Much Life Insurance Do You
Need?
• Best case answer: as much as they’ll let
you buy! (multiple of your income)
• Realistic answer: as much as you can
afford
• Eric’s guess: 13x annual income?
• Example: $100k annual income, $1.3M
coverage, invest & withdraw 4% annually
 $52k annual income

25. Eric’s Rules on Health, Life, and
Disability Insurance
• Buy them before you need them,
because you can’t buy them after you
need them!
• Buy them now before you get even older
and sicker than you are already and they
get more expensive!!!
• Buy them now in case income drops
since income limits size of policy.

26. Insure Both Spouses!!!
• A so-called “non-working” spouse
provides enormous financial benefit to
family: child care, shopping, meal
preparation, transportation, etc.
• Replacing those benefits if non-working
spouse dies is expensive! (e.g. child care
alone)

27. Disability Income Insurance
• You’re about 3x more likely to become
disabled than to die early.
• Only eligible for Social Security after 40
quarters of pay-in.
• 75% of Social Security disability claims
rejected.
• Even if accepted, it’s not a lot.
• Action Item: verify your eligibility for
Social Security disability & retirement

28. Factors That Can Increase Cost of
Disability Insurance Policy
• Everything on life insurance list, plus
others, e.g. history of back pain

29. Supplemental Life & Disability
Insurance Through Your Employer
• Check if you’re eligible for extra life and/
or disability insurance (e.g. Aflac)
• Often a great deal: group policy  very
good rates
• Coverage usually limited, e.g. life
insurance up to 2x salary, so not enough
alone
• You lose it if you change jobs

30. Long-Term Care Insurance
• Covers in-home and/or in-patient nursing
home care
• e.g. $200/day benefit after you’ve paid
for 180 days of paid care services
yourself
• Expensive
• Insurers have underestimated claims
• Rates going up (by 40% in some cases)
• I have it, but not a slam dunk

31. Annuities (Simplified)
• You pay an up-front fee and they
guarantee a certain payout per year
(hopefully indexed for inflation!) until you
(and perhaps your spouse) die
• Combining life insurance with an annuity
can be used to hedge risk. If you die
early, life insurance pays out and covers
family. If you live longer than expected,
annuity pays extra years of money.

32. A Diversified Portfolio
• Own home as real estate investment & for tax
benefits
• Traditional & Roth IRA
• ETFs for tax-exposed investing
• Stocks diversified by geography, asset class
• Money in the bank for short-term needs
• Permanent life insurance to cover risk of death,
diversify into bonds, tax benefit
• Disability and (maybe) long-term care insurance
for risk coverage

33. Don’t Be Overwhelmed
• You can’t transform your financial
situation overnight
• You can’t completely guard against all
risks
• But you can make your situation a little
better each month and year
• Ten years later, you’ll be much better off
• Start changing things for the better now!

34. Action Items
• Check your 401(k) & IRA investments
• Pay down credit card debt
• Optimize your investment allocation
• Get life insurance (term to perm?)
• Consider disability & long-term care
insurance

35. For Further Reading
• The Black Swan by Nicholas Nassim
Taleb
• 100 Questions Every First-Time Home
Buyer Should Ask
• Boundaries by Cloud & Townsend
• Subscribe to Wall Street Journal,
Fortune, and Forbes

36. For more information:
http://www.vanguard.com/
http://www.nmfn.com/
Company names used for identifying
purposes only. Neither Vanguard nor
Northwestern Mutual nor Aflac nor any
other company has seen or endorsed this
presentation.