So we’ve all heard about the huge health insurance debate that has raged in this country for many years now. Parties on either side of the aisle have presented their case in hopes to sway the voters over to their point of view. While these are important issues, it is way beyond the scope of this article. In this article, I’ll go over the very basics of insurance, it’s principles and terminology. That way, when you hear news reports and such, you’ll be better informed.

The concept of insurance is as old as the hills. What is likely the most famous company that has been around for hundreds of years is Lloyds of London. Back when the British Empire was sending out ships in search of new trading partners, they would insure them through Lloyds. If the ships came back with new riches, Lloyds would get a cut of the profits. If they disappeared, Lloyds would cover the loss.

Today, insurance is based on the same principle. It is a protection against potential losses due to unforeseen events. The math is based on an idea called the “Law of Large Numbers.” This means that when there are thousands of people paying a little bit of money each, if one of them has a terrible accident, the insurance company will be able to pay out enough to cover their costs, while still being able to stay in business.

In order to create a new policy, the insurance company has to evaluate the potential risks involved. If the risks are low enough, and they think they can afford to pay out in case of an accident or event, then they will initiate coverage. If, on the other hand, the risk is deemed to be too great, like car insurance for somebody who has been in twenty accidents, they will not be able to offer coverage.

To stay in business, the insurance company has to make sure that any risk of any event happening is smaller than the total amount of people participating in the plan. If the risks start to get too large, then the company will have to do one of two things.

The first thing is that everybody has to pay much higher insurance rates, so the company can stay in business. If the insurance company goes out of business, then nobody will receive any benefits in case there is an accident. The other thing is that some people who are deemed higher risk will have to either pay much more for their insurance than everybody else, or be denied coverage altogether.

Basically, the less likely something is to happen, the less you will have to pay to insure against it. As the chances increase of something happening, so will your insurance costs.

To many young people retirement seems a long way off with plenty of time to start thinking about planning later. But if you’ve ever heard the expression, said with regret, “If I knew then what I know now…” think about it seriously and consider what the consequences could be of leaving retirement planning too late. Start saving now and avoid regret and a poor lifestyle later.

Let’s take a look at an example of the early saver versus the late saver. The use of the magic of compound interest will astound you…Albert Einstein called compound interest the “eighth wonder of the world”.

Jacqui and Carrie are old school friends. After attending university together they decide to travel overseas. Carrie spends the next 11 years working and living overseas but after a year away Jacqui returns. Jacqui starts a new job and saves hard for her new home. At the same time she is putting money aside for long-term goals. It’s only $100 a month as she puts everything else into her home account. She receives an average of 7% p.a. on her money over the lifetime of the investment. After 10 years Jacqui stops her investment but leaves it to gain interest.

In the meanwhile Carrie returns and starts her saving plan of $100 a month. She saves regularly for the next 30 years earning the same rate of return as her friend Jacqui. This is what each of their savings looks like:

• Jacqui in year one has $1,242 and by year ten has accumulated $17,160 before she stops investing any further. Carrie has no investment by year ten.
• Jacqui has invested no more money but by year 40 has accumulated $130,626 while Carrie has only achieved $117,320 in year 40 (having started investing ten years after her friend). A difference of $13,306.
• Jacqui has only paid in $12,000 over 10 years but Carrie had to invest $36,000 to achieve her total sum invested and she has saved for 30 years!

You’ll notice that Jacqui has invested less over the period but has ended up with more at the end of the term — interesting don’t you think? Imagine what would have happened if Jacqui restarted her investment. Compound interest certainly is a wonder!

This simple example clearly shows that planning for retirement should start early. It becomes harder the longer you leave it. Take advantage of your 401k plan through your employer if in the USA, start a KiwiSaver scheme in New Zealand. Wherever you live, plan for retirement and start saving now!

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Let’s face it, no one wants to owe money to the government but it can happen to any one of us at any time. Owing more taxes than you expect can occur in any number of ways such as excessive capital gains through stock sales, not paying enough taxes throughout the year, not filing tax returns at all or simply exaggerating your deductibles. Tax debt problems can happen but there are ways to reduce your tax liability without losing everything you own.

Personally, I innocently double-dipped on some taxes for a relocation payment I received. I thought taxes were already taken out of the check so I included the amount ($5,000) as taxes paid on my tax return. Unfortunately, I was wrong. Not only did I owe the 5k in taxes but also the amount I received as a refund because I added it to my return. Luckily for me, this was not a massive error in judgement but it could have been much worse. The best thing I did was to accept my mistake and take care of the problem.

Don’t ignore the problem - The worst thing you can do is pretend this is not happening to you and hope it all goes away. If you ignore the problem, it will, in fact, get much worse. Even before the IRS contacts you about a problem, they have already added penalties and interest to the amount you own.

For every week and month that goes by without a resolution, the penalties and interest will increase and the IRS may even impose liens on your property. Do the right thing and contact the IRS to understand the situation before it’s too late.

Assess your situation - Once you have spoken with the IRS and confirmed that you do indeed owe back taxes, you’ll have to decide whether you can manage to pay the debt with seeking outside assistance.

In order to reduce or eliminate fees that continue to accrue while the debt is owed, you’ll need to pay the amount in full. If you can only manage a payment plan, interest and penalties will continue to be added to the total, making your debt even larger. Depending on the amount you owe, it may be wise to seek professional assistance and have them work with the IRS for you.

Get professional help - If you are unable to pay your tax debt, professional tax debt experts can help you with your IRS problems. They can negotiate with the IRS on your behalf as well as agree on a settlement with an affordable payment plan. The benefit of this is that no more penalties or interest will be added while you are paying off the debt.

Professional tax debt experts can help you resolve and possibly reduce the amount you owe. You’ll be able to enjoy your life once more, no longer wondering if you’ll be able to pay off your debt or if your property will be seized by the IRS.

One of the worst things in life is getting into a financial mess, so it is better if financial planning is given its due importance and also is on time, which means very early in life. Usually there is a tendency to spend much more than what is being earned. Needs never end; and every individual want more and more of everything! The best thing is to set aside a budget and spend only when it is very necessary, and not just because your neighbor or friend is enjoying a particular luxury item. It is usually at the end of the month that people start experiencing the financial crunch.

Financial crunches will keep cropping up all the time, but it is for you to decide whether it is really necessary to incur certain expenses or not. Many a times, people spend on things, even if they are not required, and in the bargain tend to hoard. It is best to make purchases only when they are actually required. Emergencies could crop up anytime hence it is very necessary to set aside money for such emergencies. If this is not done, then amounts in the fixed deposits, provident fund, children education funds are utilized, which again affects investments made for the future.

These days credit cards, ATM cards, debit cards, and a variety of other funding cards are available which allow you to instantly withdraw money and utilize it whenever liquid cash is not at hand. Some people use these facilities excessively, which is not at all a good habit, because repayments only eat into the balance in your bank account, reducing it slowly and gradually. It is advisable to curtail use of such cards and purchase wisely. It is because of the new ‘mall’ culture, that people end up spending more than what is actually necessary.

Your financial decisions can be given a direction with the help of financial planning. Investing in mutual funds, recurring deposits, fixed deposits, postal deposits or even investing a significant amount in some good shares in the stock market can help generate additional income and thus ensure your future financial stability, which is very vital. A lot of books as well as tips keep coming up in magazines and newspapers which you could refer to and make best use of. If at all really necessary you could always consider professional guidance to plan your financial situation.

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Thinking about your own death, especially while in the prime of life, may seem morbid, but it is actually the perfect time to put your affairs in order. One way to ensure your wishes today are carried out tomorrow is with a funeral insurance policy. The subject may seem intimidating but it’s preferable to the possibility of leaving your family members alone and vulnerable should you die without making plans. Review these questions and answers for a good idea of how to start:

• Why is funeral insurance important?
• Your loss will change your family’s financial situation; funeral insurance, which is also called burial insurance or death insurance, will help get them through the urgency of a funeral without undue financial burden.

• Do healthy people really need death insurance?
• Healthy Australians die unexpectedly every day. A sudden and unexpected death is shocking enough, without the added expense an unplanned funeral will generate.

• What’s the value of a death insurance policy?
• Plans vary, with benefits peaking at $15,000. When death is accidental, the benefit amount paid to beneficiaries triples.

• Does inflation affect coverage?
• Yes, and you’ll be notified each year at policy renewal time. Expect an increase of 5% each year but you may choose to decline the increase in writing if you’d rather not opt in to it.

• Who’s eligible?
• Every Australian between 18 and 79 years of age is eligible, regardless of health status. No one is denied and no pre-enrollment medical examinations are required.

• Any exceptions?
• The only exception is when death happens during the first year the plan is in effect. During this first year, death cover applies to accidents only. After that, death from any cause is covered.

• What happens if a policyholder goes overseas?
• Overseas travellers need not fear gaps in coverage. Every policyholder is covered 24/7, no matter where in the world death occurs.

• What about family cover?
• Your family can be covered, too, if that’s what you choose. Death insurance is available to the individual; the individual and a partner; and the individual, partner, and every child in the family until he or she reaches the age of 21.

• Will rates to go up over time?
• Premium rates are adjusted every year to reflect the age of the oldest family member covered. Premiums must be paid until this policyholder turns 90 but, after that, no more premiums are required no matter how long the policyholder lives.

• Will coverage ever expire?
• No, coverage will not expire or be dropped as long as premiums are paid. Renewal is guaranteed every year.

• Who gets the benefits when the policyholder dies?
• Every policyholder can nominate as many as five beneficiaries per policy. If no beneficiaries are named, benefits will be distributed in accordance with the Life Insurance Act of 1995.

Making your own final plans means that loved ones are well protected from financial loss that can be as painful as a broken heart.