Insurance
Insurance is one of life’s obligations. None of us wants insurance, but we buy it because it’s necessary. And because of our reluctance to deal with insurance, we tend to buy it hurriedly, purchasing too little of some kinds and too much of others.
In this chapter, I’ll tell you the right kinds of insurance you need, how much of it to buy, what to do if your insurer goes bust (as many did during the economic meltdown), and how to identify financially strong insurers that will be around for the long haul. Plus, I’ll name a couple of my favorite companies for all your insurance needs.
AUTO INSURANCE
Go with a top-tier insurer like USAA or Amica Mutual
Cutesy TV ads do not a good insurer make. We buy insurance because if something goes wrong, we expect the insurer will be there to make it right—be it to repair our home or to fix our car or replace it if it gets stolen.
I particularly love insurance companies that put the focus on the customer, such as USAA and Amica Mutual. Both Amica and USAA are often rated as having just about the best customer service of any company in America by J. D. Power and Associates, Consumer Reports, and other sources. It’s as if these elite companies get up every morning and think, “How can we please our customers?”
However, USAA and Amica don’t earn trust with low premiums; they do it by really helping customers when they have claims.
USAA limits its insurance offerings to active military and all honorably discharged members regardless of when they served. I’ve been a member for more than thirty years now. During that time, my family had three claims (none of them major) and each time the service has been phenomenal. Visit USAA.com for more information.
If you’re not military, Amica is often acknowledged in the insurance industry as an equal to USAA. Amica is a mutual, which means you as a shareholder are an owner and Amica is run as a co-op. If it pays out less in claims than it takes in during a given year, it sends a refund check to customers. Visit Amica.com for more information.
Will you pay more with Amica or USAA? Sometimes yes, sometimes no. But you’ll be with a company that will stand by you when the chips are down.
If these two insurers don’t appeal to you, the key is to get several other quotes before making a decision. Sites like Insure.com, InsWeb.com, and NetQuote.com will give you quotes from multiple auto insurers. If you prefer the human touch, you can find an independent insurance agent in your area to do the same thing for you. In addition, Costco Wholesale members can buy group auto coverage at a very good rate, and it’s underwritten by Ameriprise Financial, Inc.
Auto insurance ads are not all they seem to be
GEICO, Progressive, and Allstate are just a few of the auto insurers with ads on TV promising they can save you hundreds over the competition. But how can they all be the cheapest?
There are actually huge differences among insurers based on an individual driver’s circumstances. Each insurer uses its own criteria to assess your level of risk and prices your policy accordingly. That’s how each insurer can claim to be the cheapest in its ads; they’re all assessing different motorists and presenting the results as typical.
Consumer Reports put Progressive’s claims to be the cheapest to the test. Flo the Progressive Girl’s “name your price” promise is really more of a “name your coverage” come-on. And it’s not necessarily the cheapest; in fact, Consumer Reports found Progressive could be twice as expensive for certain motorists. In one hypothetical situation the magazine detailed, Progressive wanted to charge $94 each month on a 2006 Toyota Camry that would have cost $49 for the same coverage with another major insurer.
I’m not saying this to bash Progressive. I’m just saying it to show that you’ve got to be diligent shopping over the phone and on the Web to find the best deals. Get out your current coverage statement and compare it apples to apples with other insurers’ offerings. I recommend shopping for insurance every three years or after an accident or a ticket.
The only time I would not recommend jumping ship for a lower premium is if you’re with either Amica Mutual or USAA. See my explanation above.
Develop an independent value for your vehicle
Any call that I take from a listener following an auto accident is what we refer to behind the scenes on the show as an “onion call.”
There are so many layers to these questions and they can go in any direction. Chief among them are concerns about whether the car should be totaled, how much you should be compensated for a totaled car, and whether or not the vehicle should be repaired.
Edmunds.com recently ran an article titled “Confessions of an Auto Claims Adjuster” that goes a long way in addressing one common complaint I hear from people after an accident: “I can’t get the adjuster to call me back!”
I have long said that adjusters purposely don’t call back because they’re trying to wear you down. But Edmunds says that’s not the case—rather, it’s all about adjusters being overworked. Adjusters are racing the clock and the phone every day. The caseloads are heavy and the rate of burnout is high in this industry.
Having said that, I still believe insurance adjusters will lowball you and hope you just take their offer. It’s up to you to independently verify that the money they’re offering for your car is a fair amount.
The database the industry uses has historically paid about 70 cents on the dollar. But you can visit Edmunds.com, KBB.com, and NADA.com to build an independent value for your vehicle.
Never be rude when you’re speaking to the adjuster and explaining your method of calculation. Some adjusters have a real attitude, but for the most part they’re just overwhelmed. Just clearly state why you claim your car is worth more than what the adjuster is saying.
Finally, Edmunds disagrees with my long-standing advice that it’s acceptable to go to a shop preferred by your insurer for repair so long as the repair is guaranteed for the life of the vehicle. Edmunds instead insists that you pick the repair shop, preferably one that specializes in your brand.
Skip the rental insurance when renting a car
Car rentals are the one segment of travel that went up in price during the recession, unlike hotels and airfares. When the car rental companies sensed the softening economy at the end of the last decade and the beginning of this one, they simply refused to buy new fleet cars. That drove down supply and drove up price, in addition to leaving customers stuck with older, run-down vehicles.
I recommend booking a rental at the time that you book your air travel. Then one week before your trip, check the rates again and see if you can grab a better deal at a lower price. Car rental fees are completely refundable, so you won’t lose anything if you cancel the original booking.
When you get to the rental counter, you’ll be hit with a sales pitch for insurance such as a collision damage waiver (CDW), also known by the codes LDW or PDW, and excess liability coverage.
There are two “Clark Smart” ways to get around signing up for this rip-off fee, which can cost you up to $20 a day.
First, your auto insurer might have a clause in your policy that covers you for temporary use of a rental car. It’s worth calling them before you take a trip to find out.
Second, certain VISA and American Express cards and MasterCards will provide secondary coverage when you rent a car. If you’re a frequent car renter, you might want to pay the $95 annual fee for a Diners Club card because they offer full primary coverage.
So I say waive the additional coverage the car rental company is trying to sell. The only exception to this rule would be when you rent a truck to move because neither your credit card nor your insurer is likely to cover that.
HEALTH AND RELATED INSURANCES
Drastically low premiums might indicate a bogus insurance pitch
There are a lot of pseudo–health insurance companies out there selling fake plans to employers and individuals. The Wall Street Journal reports that some 200,000 businesses have been taken in by these kinds of rip-offs.
Small businesses crushed by high premiums are very susceptible to the lure of cheaper health care. But when somebody gets sick, the insurance card comes back as a fake and all the bills go unpaid. This has been happening in state after state.
Insurance is regulated by the states, not the federal government, so the rip-off artists can just bounce around from state to state pulling their scams. What do you need to know to stay safe? First off, be wary if you get a pitch for a great deal with premiums that are drastically lower than what others in the marketplace are offering you.
But don’t let your skepticism stop there. Contact your state insurance department and ask if a prospective company is licensed to do business in your state. Make sure the name matches exactly because sometimes the rip-off artists will use a name that’s very similar to that of a legitimate business.
Seniors also have to be especially careful of fake prescription plans. Once again, call your state insurance department to verify if a health insurance salesperson represents a legitimately licensed company. Preventative steps are the best medicine for your wallet.
If you’re starting from scratch in shopping for health insurance, I recommend comparison shopping online for affordable coverage at a site like eHealthInsurance.com. In addition, you might want to check out Kaiser Permanente, one of the nation’s largest health maintenance organizations. Kaiser is available if you live in California, Colorado, Georgia, Hawaii, Maryland, Ohio, Oregon, Virginia, Washington D.C., or Washington State. Visit KaiserPermanente.org for more details. Finally, Costco Wholesale offers an affordable health insurance plan administered by Aetna for customers in Georgia, Illinois, Pennsylvania, and Texas.
Take advantage of PCIP
Having a preexisting condition used to make you a pariah to insurers. But as part of the health care reform law that President Obama supports, those with preexisting conditions would no longer be ignored.
In actuality, there are two programs at work here: States that chose to administer a risk pool themselves and states that opted out and asked the federal government to step in. The majority of the latter states are located throughout the Southeast and the mountain states.
Visit HealthCare.gov to see if the federal pool exists in your state. In order to qualify to buy coverage, you must have been uninsured for at least six months. Premiums will depend on your age and your state of residence. The minimum monthly premium will be $140, while the maximum premium caps out at $900. With the risk pool, you have a cap on what treatments will cost you. That will be roughly around $6,000 annually.
The Pre-Existing Condition Insurance Plan (PCIP) is really just a bridge program through 2014 until the new federal rules kick in and ban insurers from redlining based on preexisting conditions. It’s being funded with $5 billion. Now that may sound like a lot of money, but it’s supposed to last through 2014, and that’s very unlikely to happen.
Bump up your FSA during open enrollment
Each November, many employees choose their benefits during open enrollment at their workplace. Don’t forget about those flexible spending accounts (FSAs)! This is a way to take tax money back from Uncle Sam. It’s like getting an automatic raise.
Here’s how it works: You elect to have your employer automatically deduct money out of your gross pay. That money is essentially put into a savings account funded with pretax dollars. Then over the course of the following year, you can take those pretax dollars and use them for qualified medical expenses.
One caveat: You’ve got to use it or lose it. If there’s unused FSA money left over at the end of the year, you won’t get it back.
There are two major types of FSAs. The health care FSA can be used to take care of unreimbursed medical bills like deductibles, copays, medications, eyeglasses, dental care, etc. While there’s no government-imposed limit on how much you can contribute, most employers will limit your annual contributions to $5,000. However, beginning in 2013, the FSA cap will drop from $5,000 to $2,500, with annual inflation increases.
The second type of FSA is for dependent care. For example, you can use the money in this FSA to pay for day care or a legal nanny. The same $5,000 limit ($2,500 beginning in 2013 and going forward, with annual inflation increases) and forfeiture rules apply. Other qualifying uses of this money include paying for an elderly relative or other adult who needs special care.
In addition, new rules governing the amount of pretax money you can put into FSAs—not to mention health savings accounts or health reinbursement accounts—went into effect in 2011.
You’ll no longer be allowed to buy over-the-counter medications with your tax-free money. In addition, the use of your pretax money will be tightened steadily for unreimbursed purchases of prescription meds, with the only exceptions being medical equipment and supplies. That includes “over-the-counter medical supplies such as crutches, medical-testing kits and joint supports, and standard medicine cabinet stock, such as Band-Aids, contact lens solution and hearing-aid batteries,” according to financial writer Greg Karp.
My advice with FSAs is to choose wisely how much you put in; you don’t want to overestimate and wind up losing your money.
Buy disability insurance at 60 percent of current pay
Your odds of being disabled are far greater than your odds of dying during your working years. That makes disability insurance more important than life insurance.
I know that a lot of people find the idea of disability insurance to be distasteful, because no one likes to consider that they might become disabled. But this could happen to you, and you need to be prepared if it does. In fact, you can visit WhatsMyPDQ.org to assess your “personal disability quotient” (PDQ). This is a free service of the Council of Disability Awareness. Your PDQ will predict the likelihood of your needing to use disability insurance during your working lifetime.
When purchasing disability insurance, it’s best to get a disability policy that begins making payments three or six months after you are disabled and continues until age sixty-five. Buy coverage that’s equal to 60 percent of your current pay before taxes, because that will approximate what you’re taking home after taxes.
Be sure you get a policy that uses a more liberal definition of disability than the one used by the Social Security Administration. Social Security pays only about one-third of the claims it receives.
Finally, don’t make the mistake of buying disability insurance (or life insurance) through your employer. It might be more costly and it won’t follow you if you change jobs. Worse still, if you develop a health condition that makes you ineligible to buy disability and life insurance, you’ll have lost your chance to buy them when you were healthy.
Buy long-term care insurance in your late fifties and early sixties
I have long encouraged people in their late fifties and early sixties to consider buying long-term care (LTC) insurance, which pays for care in a nursing home, assisted living facility, or your own home. LTC policies are not for everyone. It depends on your age, health status, overall retirement objectives, income, and wealth.
There’s a misconception that Medicare will pay for this kind of care, but it won’t. Medicaid, meanwhile, requires you to impoverish yourself before the government will pick up the tab for a nursing home. But what happens when you get better and you suddenly find you’re broke? LTC insurance takes the worry out of the equation.
However, the industry has been littered with fly-by-night operations and other unstable players. One textbook example of the latter came in late 2008 amid the insurance industry meltdown. An insurer called Conseco worked out a deal with Pennsylvania to dump its LTC obligations and essentially turn people over as wards of the state. It was a troubling situation that scared a lot of people.
The solution is to buy LTC insurance only from a solid company, preferably one that has an A.M. Best rating of A++ or A+. A.M. Best is one of the most respected rating agencies for the world of insurance. Visit AMBest.com and sign up for free to view their ratings.
While it might cost you more now, decades down the road you’ll have a greater likelihood that A++ and A+ companies will be around to provide the benefits you paid for.
One final note: LTC insurance isn’t necessary if you’re so wealthy that money is no object to getting the best care, or if you’re so poor that being a ward of the state makes sense. That still leaves between 65 and 80 percent of Americans in the middle who could benefit from it.
Avoid single-issue insurance policies
Single-issue insurance policies are considered a rip-off by some consumer advocates. I also agree that you should avoid them. Examples of single-issue policies include mortgage life insurance, cancer insurance, and accident insurance.
In the case of cancer insurance, insurers use the power of the C-word to sell the policy. Years ago, people wouldn’t even utter the word “cancer.” They would just say that you had a malignant tumor, because a diagnosis was often considered fatal. But today, many people survive cancer. Insurers, however, have learned that they can still capitalize on people’s fear of the disease.
Accident policies are also a tremendous rip-off. The reality is that general insurance—of the life, disability, and/or health variety—represents a better choice.
Mortgage life insurance (aka “croak and choke” insurance), meanwhile, is garbage too. The premiums are about ten times what life insurance should cost. The worst part of it is that you’re insuring the mortgage company, not yourself; mortgage life insurance pays off the lender in the event of your death! But your survivors likely will have more pressing financial needs at that time. That’s why plain-vanilla term life insurance would be a much better choice than expensive mortgage life that doesn’t provide any benefit to your survivors.
HOME INSURANCE
Update your amount of homeowners coverage every few years
If you’ve been in a house for five years or longer, chances are you might be grossly under-insured for homeowners coverage. Discovering that fact after a catastrophic loss is not the answer.
I want you to read the coverage limits when your policy comes up for renewal every year. Let your insurer know if there is no way you could rebuild your house for the specified amount. Write down the name of the representative you speak to and the date/time of the call. That way if your insurer refuses to raise your limits and a catastrophic loss happens, you’ve already begun building a case against them.
My insurer would not raise my limits on my primary residence, so I triggered a clause in my contract and got a third-party appraiser to look at my home. The appraiser said my home had appreciated in value beyond my coverage. Only then did the insurer accept the appraisal and comply by raising my coverage—and even though the extra coverage raised my premiums, I was happy to pay.
The scary reality is that insurance companies are not required to rebuild your home in the event of catastrophic damage if you’re grossly underinsured. Say you purchased your home ten years ago for $100,000. Now your home might be worth $200,000. But your insurance has probably not kept pace. So you’ll be destroyed financially if you have a catastrophic loss.
It gets even worse if you have a mortgage on your property. You can lose your home in a disaster through foreclosure and be sued by the lender for losses on the loan. Am I scaring you yet? That’s my intention.
A couple of years ago I bought a foreclosure in a mountain community. In that case, the insurer sent an appraiser out and told me I needed more insurance because of the expense of rebuilding on a mountain. Again, I was happy to comply.
The possibilities of a catastrophic loss are minimal, but why take the chance of having your wallet disrupted just as terribly as your life in the case of the unthinkable?
Document your belongings with a video camera or online
Every year on her birthday, my wife grabs a video camera and does a “walk and talk” around our home to document all of our belongings. No, my wife isn’t showing off. She just knows that if you have legitimate losses from a house fire or other catastrophes, the insurance adjuster might assume you’re trying to put something over on him—even if you’re not. Videotaping your belongings helps you prove what you say you’ve lost.
When Lane is done, she then stores the tape at her parents’ home. After all, that tape won’t do you any good if it melts in your home or apartment during a fire! A fireproof safe is another great place to store the tape.
Now, obviously, her choice of day is entirely arbitrary; you can do this any day of the year. It’s just important to remember to get it done once a year so you can account for new possessions.
Video cameras can be had for $100 or less these days, but they can save you thousands of dollars if your house was to ever catch fire. That videotape becomes an insurance policy for your insurance policy.
KnowYourStuff.org is a free website that lets you document all your belongings online and store the info on a secure server. It is a free service of the Insurance Information Institute.
Consider flood insurance if you live near a flood zone
Every year seems to bring a rash of flooding in our country. In 2009, it was in the Southeast. The year before that, it was in the Midwest. And who can forget the hurricane season of 2005 with Katrina, Rita, and Wilma?
On my show team, we experienced the devastation of the flooding in 2009. The entire ground floor of my executive producer’s Atlanta home was flooded while she and her husband were enjoying their tenth anniversary in Cancún.
Our associate producer Joel Larsgaard, a slew of Christa’s neighbors, and I helped move furniture and other belongings to higher ground at her home while she was stuck in Mexico. Joel had a vested interest in what happened at the house because Christa was allowing him to store some of his belongings in her garage while he was house hunting.
Here’s an important lesson for you: There’s no excuse for not buying flood insurance through the National Flood Insurance Program if you are adjacent to a floodplain. Simply visit FEMA.gov and look for “flood insurance” in their quick-links section.
Flood insurance is subsidized at extra-cheap rates by your fellow taxpayers and covers damage for up to $250,000. Renters can buy a special version of flood insurance that’s also subsidized.
Insurers will not offer you additional coverage unless you first have this separate coverage from the feds. Typically, there’s a thirty-day waiting period from the time you purchase a flood policy before it becomes effective.
Buy renters insurance if you rent
More than one in three of us now rent a home. That makes renters insurance a necessity that you need to know about.
In general, landlords are not responsible for your belongings. The sole exception is in the case of “negligence” on the part of the landlord, which is very hard to prove in a court of law. So you’re on the hook if your belongings are stolen, damaged, or destroyed in a fire. That’s where renters insurance comes in.
You’ll typically pay around $15 per month, or $150–$250 annually, for renters insurance. One of my TV producers recently sold her house and moved into an apartment where she was actually required by the landlord to have renters insurance.
Be certain that your policy includes relocation assistance and replacement value coverage. The latter will help avoid protracted battles over the price of depreciating assets like old electronics. You’ll just get one lump-sum payout to replace your items rather than having to haggle over the depreciated value of a three-year-old TV.
A free C.L.U.E. report shows what insurers know about you
Knowledge is power, as the old saying goes, and the more access you have to what insurers know about you, the better off you are. Some insurance companies, when you call up and ask questions, will log it on your Comprehensive Loss Underwriting Exchange (C.L.U.E.) report. This is a tactic that makes other insurance companies not want to insure you.
But you can order your free C.L.U.E. report once a year just like you can order your credit report, and if something turns up false, challenge it. A giant research firm called LexisNexis recently took over operations for ChoiceTrust, which is a group I used to talk about that gives you free access to your C.L.U.E. reports once a year.
C.L.U.E reports come in two flavors. There’s one for personal property loss pertaining to your house and one for auto loss. You must be the owner of the home or vehicle you’re requesting a report on; you can’t do it speculatively for a car or property you’re thinking about buying.
Here’s how a C.L.U.E. report can benefit you: Sellers need every advantage they can get in today’s tight real estate market. I think a C.L.U.E. report can be one piece of the puzzle. If you’re trying to sell your home, why not request the personal property report on your residence and make it available for prospective buyers to see?
Sure, the buyers will get the property inspected as a condition of purchase, but having the C.L.U.E. report handy is just another way to assure them they’re not buying a property loaded with hidden problems that got passed on to the insurer.
Visit PersonalReports.LexisNexis.com to request your C.L.U.E. reports. You will have to give your Social Security number and you will be charged if you need a homeowners report on more than one address. While you’re there, you can also request an employment history report and resident history report on yourself for nada.
LIFE INSURANCE
Buy level-term life insurance
Simple is better when it comes to buying life insurance, and level-term insurance is just about as simple as you can get. “Level term” means you buy insurance for a set number of years depending on your age and your family, and the premium remains the same for that number of years. The only purpose of life insurance is to replace your income (or your spouse’s) for your family if you die.
For example, if you have young kids and you want to provide financial security for them until they are adults, you would want a twenty-year term policy. If you’re thirty-five and it’s just you and your spouse, you might want to provide for the remainder of your spouse’s life in the event of your death. So you’d probably want a thirty-year term policy. Or not. It’s really a personal family choice.
If you have no dependents at all, you don’t need to buy any life insurance. And don’t buy insurance on children. A three-year-old doesn’t earn a salary, so there’s no need to replace his or her income.
Life insurance has gotten much cheaper over the years, in part because people are living longer. Add into the mix the Internet, which has made it ultra-easy to compare prices when shopping for life insurance. The result is that term life insurance costs have dropped by two-thirds in the last fifteen years. That’s a great deal!
So if you bought a policy when you were thirty and now you’re forty-five, you can get a new life insurance policy at a much lower rate than fifteen years ago. As long as your health hasn’t declined, you’ll still be able to get great deals. Visit AccuQuote.com, Insure.com, or QuickQuote.com to comparison shop for term coverage.
Buy ten times your annual income with term life
As I said in the tip above, life insurance is meant to replace your income. My rule of thumb is to buy an amount equal to six to ten times your annual salary, before taxes.
So if you make $40,000 a year, get $400,000 of life insurance to replace your income. If that’s too rich for your blood, make sure you buy at least six times your salary. In this example, that would be $240,000.
If you decide to get term life insurance, the best way to buy is by checking for a financially strong company that offers low premiums. AMBest.com is a good site for research purposes. Free registration is required to use this site.
If you are in a whole life policy (sometimes referred to as “permanent insurance”) with a substandard company, you can borrow the cash value and use those proceeds to buy a term policy from a strong company. Don’t cancel a whole life policy. Once you’ve purchased it, it’s best to keep it. If you’re changing insurers, do not cancel your existing policy until you pass the medical underwriting for the new policy.
Look for a financially solid insurer
During the financial meltdown of 2008, a lot of people fell into a life insurance purgatory when several big insurers went bust. This is a very difficult and precarious position to be in as a policyholder.
The insurance industry has long been regulated by the states. But it became clear that state guaranty funds would not be adequate to handle the insolvency of large providers. So the federal government had to cough up additional taxpayer money as a backstop.
Who would have ever thought you’d need insurance for your insurance?! See my next entry for more details on what happens when a life insurer fails.
The best way to avoid this problem is to do all you can to never face it in the first place. That means you need to make smart choices when you’re buying insurance. I recommend buying only from companies that are rated A++ or A+ by A.M. Best—one of the top companies when it comes to making pronouncements about different insurers’ relative financial strength.
Be sure you have the company’s exact name when you’re checking out its rating. For example, a search for “Prudential” on A.M. Best’s website turns up more than fifty results that detail all of the company’s holdings and its sub-companies. You need to know that you’re really looking for “Prudential Insurance Co. of America,” which, incidentally, is rated A+ as I write this.
Remember, anything less than an A+—even an A—is unacceptable. Don’t be tempted by low premiums when you’re shopping around. Stick with insurers of top strength, even if you have to pay more for it.
If you’re a veteran, get USAA
The brave men and women in our all-volunteer military have long had access to USAA, a one-branch bank in Texas that provides top-tier banking and insurance services to military customers all over the world.
At one time, you had to apply for membership in USAA within 180 days after an honorable separation from the military. Now, however, that requirement has changed and all honorably discharged members of the military (and their families) can join regardless of how long ago they served.
This highly respected company—which offers banking, auto insurance, homeowners insurance, and life insurance—is often rated as having just about the best customer service of any company in America by J. D. Power and Associates, Consumer Reports, and other sources.
USAA’s new expanded membership policy opens the doors for so many more people. But what can you do if you’ve never served in the military and still want a great company? I recommend checking out Amica Mutual. Amica is often acknowledged in the industry as an equal to USAA.
With both Amica and USAA, it’s not about getting the lowest premiums on insurance. But both offer service that is great when the chips are down and you need an insurer to stand by you.
Know your level of state guaranty coverage if your insurer fails
What happens when a life insurer fails? Unlike banks, insurance companies are regulated at the state level, not the federal level. So there’s no FDIC as there is for banks that can step in with money if an insurer goes insolvent. A state guaranty association is the last line of defense in the event of a failure.
Most states have coverage levels of $100,000 to $300,000 for individual policyholders. The National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) can help determine the level of protection your state provides. Visit NOLHGA.com and click on the “Policyholder Info” tab to see a drop-down menu with links to each state’s guaranty fund.
However, there is one caution about state guaranty associations. In the very unlikely event your insurer fails, the associations usually won’t have enough money on hand to make everyone whole right away. So there might be an indeterminate waiting period until you get your money. Contrast that with the FDIC approach: If a bank goes bust today, you get your insured money tomorrow.
If you’re going to buy substantial insurance, then be sure to have it split up among different insurers to be proactive about protecting yourself. Never exceed your state’s guaranty fund coverage level in any one policy.
Again, though, the best advice I can give is to avoid the threat of having to wait for your money if an insurer goes bust. And do that in the first place by sticking with companies that are rated A++ or A+ by A.M. Best.
Don’t buy insurance from commissioned salespeople
The insurance industry is one in which bad apples exist right alongside good apples. Ultimately, however, this is an industry that would not exist if not for a real need. For some families, a life insurance policy can mean the difference between poverty and financial survival when a primary provider dies. Still, I want to alert you to some dangers.
Insurance salespeople are exempt from what’s called “fiduciary responsibility,” much like full-commission stockbrokers. Fiduciary responsibility simply means your interests must be put first in all business dealings ... and sadly, insurance salespeople are not required to do that.
Let me go off on a tangent for a moment to really drive home a point about what this means. Let’s say you go to a full-commission stock brokerage. Under what used to be called the “Merrill Lynch rule” in the industry, investment firms are allowed to do what helps them first as long as the investment they put you in is “generally suitable” for your situation. So if, for example, it would be great for you to own a stock fund, the full-commission brokerage can pick the most expensive, lowest-performing stock fund for you that earns the firm a big commission. They might be more motivated to do that than to guide you to a high-performing fund that keeps its expenses low.
The same thing is true when you talk to an insurance salesperson. When it comes to life insurance, 98 percent of us would be well served with a plain, simple level-term insurance policy. But in huge numbers, we’re pushed to buy whole life. Why? Because it has huge commissions, not like the tiny commissions on level-term insurance.
I’m not saying that there aren’t a lot of fine, decent people selling insurance. There are. And honest commissioned salespeople will rise above their personal interests and sell what’s right for you. But you’ve got to at least be aware that insurance salespeople are not held to fiduciary standards, no matter how nice and charming they might seem.
Don’t sell your life insurance policy for quick cash
More and more people who are elderly or ill are selling their life insurance policies to score some quick cash. Yet the world of death futures contracts, or life settlements as they’re also known, is fraught with dangers.
Let’s say you have a $100,000 policy. Your insurer might quote the cash value of your policy at only $5,000 if you were to turn it in. But someone in the free market might offer you $15,000 or $20,000 for your policy if you sign over the rights to them.
The company or person you sell to then pays your premiums and hopes you die in a hurry! Unfortunately, when you do, your heirs won’t get any payment. It all goes to the new policyholder.
For investors, death futures are pitched as a way to earn a great return on your money. Beware that there are untold numbers of scams in this field, and there’s no way to be certain you’re dealing with legit players.
If you have a policy and insist on selling it, start by finding out the cash value from your insurance company. If you want to sell it in the free market, be sure to get quotes from multiple companies who buy life insurance policies. The quotes will likely be all over the board, and there might be tax consequences in taking a payout.
Finally, beware the example of Larry King. The media personality sold his policies and is now worried he’ll be knocked off for the proceeds. Don’t sell a policy if you’re subject to paranoia.
Know the “true” investment return on your life insurance policy
If you have an old life insurance policy that you’ve been paying the premiums on for years, it can be difficult to know whether it’s beneficial to keep paying for it or to dump the thing.
That’s where a service from the Consumer Federation of America (CFA) can come in handy. For $80, there’s a man named James Hunt who will run an analysis to determine the true investment returns on any cash-value life insurance policy—be it whole life, universal life, or variable life.
Hunt will compare the cash-value policy with the alternative of buying lower-premium term insurance and investing the premium savings in a bank account or a mutual fund. You get a computer printout comparing average annual rates of return over five-, ten-, fifteen-, and twenty-year periods with detailed explanations.
At just $80, it’s got to be a money loser for the CFA. But it could represent thousands of dollars in savings to you over time. Simply visit EvaluateLifeInsurance.org or call 603-224-2805 to get started.
Get a quote for an immediate annuity
If you’ve listened to my radio show anytime during the past twenty years, you know that an annuity is a four-letter word in my mind. Most annuities have massive commissions and massive expenses. That’s why they’re pushed by commissioned salespeople, especially those in banks who target customers complaining about puny interest rates on CDs.
But there’s one annuity that might be a great deal for a lot of people. It’s called an “immediate payout annuity” (aka life annuity).
When you retire, you might not have enough money to provide for your monthly needs from savings. So there are companies that turn a supply of money into a lifetime stream of income. Immediate payout annuities are entirely legitimate, but they have so little in the way of commissions that they’re never pushed by salespeople.
As with anything else, there are good providers and bad providers of life annuities out there. SmartMoney magazine recently ranked the top immediate annuity providers, based on who gives the highest monthly income and who is the financially strongest insurer. Their top four included USAA, State Farm, New York Life, and Penn Mutual Life.
If you’d like to check out some quotes on your own, try visiting ImmediateAnnuities.com for their instant annuity quote calculator.
One knock against life annuities that I often hear is, “What if I pour all my money into an immediate payout annuity and then I die next week?” It’s true that all the money will be gone and there will be none for your heirs.
That’s why you can opt for a special provision called “period certain,” which means that there will be a guaranteed payout to heirs (typically for twenty years) even in the event of your death. The monthly benefit will drop by about 10 percent if you take the period certain option, but at least it guarantees to provide something for your survivors.
My banker was very persuasive in trying to sell me a $300,000 variable annuity with a death benefit wrapper as well as a $200,000 life insurance policy on my 79-year-old mother. I am the co-trustee of a large estate and my mom is the trustee. She depends on me to make the right decisions. I have heard Clark talk about red flags where variable annuities are concerned. I talked this over with my banker and he told me that different investments work for different situations and there is no such thing as a bad investment . . . RED FLAG. He showed me how the annuity would make tons of money in 7 years and the $300,000 would never go down and would always go up. This stuff was very complicated. We talked for 1 hour one day and 1 1/2 hours the next on this dry subject. What did I do? Played it safe and put all the money in a one-year CD and told the banker that I wasn’t comfortable with annuities and life insurance policies and I didn’t understand them well enough to invest. End of story. Thanks, Clark!
Debbie W., CA