Dave Says - March 16, 2009

Heading for an emergency!

Dear Dave,
My husband has Hepatitis C, and at this point his only option is a liver transplant within the next two years. We make about $70,000 a year, but we also have $25,000 in debt. He's still able to work right now, and we have health insurance, but how should we begin preparing for the operation and medical bills?
Nikki

Dear Nikki,
God bless you guys. This is going to be really tough. You're going to face a lengthy loss of income, and sky-high medical bills even if everything goes well. I'm really sorry you have to go through this. Life can be hard enough without major health issues knocking you over.

The good news is that there's something you can do about all this, and it all starts with saving. First, set aside an emergency fund of three to six months of expenses as quickly as you can. In your case, I'd recommend leaning toward the six month side, because you'll be facing a real emergency pretty soon. Second, you guys need to have no life for the next year or two, and get very serious about paying off as much debt as possible after you get your emergency fund in place. I'm talking about following a very strict budget, and living on rice and beans. Bottom line? The less debt you have, the better off you'll be.

Wouldn't you love to be debt-free and have six months of expenses in the bank before they perform this operation? You can do it, if it becomes important enough to make it priority one.
- Dave

Mortgage insurance is a rip off

Dear Dave,
My wife and I just had our first child. Not long before that we bought a house, and since then we've been getting calls and letters about buying mortgage protection insurance. They say it would pay off the mortgage if we die. Our mortgage is $114,000, and we're both 26-years old. Is this a good idea?
Robert

Dear Robert,
No, it's not a good idea. Mortgage insurance is a rip-off, and here's why. This stuff is nothing more than a life insurance policy with the word "mortgage" stuck on the front. They make it sound like a high-end, specialized product, and they jack the price way up! Sometimes you can get guaranteed issue if you become very sick and can't get insurance anywhere else, but other than that it's just a racket.

At your age, if you're healthy, you could easily get $250,000 on a 20-year level term life insurance policy for $12 to $15 a month. Then, if something happened to you, your wife could pay off the house with the insurance money, and still have some left over.

I always recommend a good, level term life insurance policy - not just to cover your mortgage - but for eight to 10 times your annual income. You've got a responsibility to take care of your family now, and in the event that something unexpected happens, and you're no longer around!
- Dave

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