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Tennessee Family Expected Insurance For Nothing – Boner of the Week!

December 12, 2011 by Average Joe 8 Comments

The Boner of the Week! is awarded every Monday to the most outrageous event, quote or story I read about this week.

Usually I discuss outlandish or erroneous quotes in the Boner of the Week! segment. This time, let’s tackle an event.

home after fire According to this story, a Tennessee family living in a rural area without fire protection didn’t pay a $75 annual fee to a nearby city to receive services. When their home went up in flames, firefighters stood by and watched the couple’s home burn to the ground.

At first glance, this appears to be a fire department and government politics problem. “On further review,” to quote the highbrow program Monday Night Football, I believe the Boner of Week! occurred when the family opted not to pay–what now appears to have been—a pretty important ‘insurance” bill before their house fire occurred.

Here’s my rationale:

1) They don’t live inside the city in question and.

2) Homeowners inside the city boundaries pay taxes for fire protection. Those outside are asked to pay a small fee to receive house fire support.

3) The family opted not to pay the fee, in essence declining the city’s coverage plan.

Don’t think I’m heartless. We’re experiencing a similar situation personally. Nearly ten years ago my in-laws met with me to discuss long term care insurance. My father in law, a smart man who’s always been a good friend, was vehemently opposed to it.

He said, “I’m not paying for that overpriced insurance. It’s a rip-off.”

Yesterday wife returned from Detroit, where she was helping my mother in law decide on options for home health care, because he’s suffered a major stroke. My mother in law is meeting with elder law attorneys, looking for ways to cut down on costs while keeping his quality of life high.

There aren’t many options now, because they made a critical decision back then to decline coverage.

It’s fair to assume that my in-laws will now spend about $70,000 per year (or more) of their own money on his care. Just like this family declined fire protection, had they purchased a long term care policy ten years ago, the break-even point on buying “that overpriced insurance” would have been only several months into the nursing home stay.

They chose to self insure. Now they’re faced with the consequences.

So is the Tennessee family that decided to opt out of fire “insurance.” They had a house fire and no fire protection coverage.

Maybe there are larger societal implications here. Maybe not. Maybe it’s that we live in a time when everyone seems to want someone else to take care of us. I believe this event is simply another wake up call: nobody cares about your situation more than YOU. Take care of yourself. Make your choice and live with the consequences.

What steps should you take to prevent making poor insurance coverage decisions?

1) Examine the probability of an event, such as a long term care situation or house fire.

2) Evaluate the cost to cover the probability

3) Decide whether it should be insured, or if you can handle it yourself.

In this case, seventy-five bucks might have saved a ton of personal property from this house fire. Often people will forego insurance because they don’t have the funds to pay the premium. Insurance is created specifically for times when funds are short. If there’s enough money to cover the unlikely need for fire protection and you follow some fire prevention safety tips, maybe it makes sense to avoid the fee.

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Filed Under: Insurance, Meandering, risk management, smack down! Tagged With: Boner of Week, free financial advice, free financial advisor, Insurance, Tennessee fire, Tennessee house burns

Life Insurance: What’s the Right Type of Life Insurance?

November 29, 2011 by Average Joe 6 Comments

 

I’m not a big television watcher, so I’m sorry to say that I don’t see much Dancing with the Stars. I know, you had such high hopes for me. My wife watches the show, so sometimes when I’m playing around on “the Twitter” I’ll sit with her on the sofa. On more than one occasion, I’ve half-witnessed a total breakdown by the “star” because the workouts were too hard. What’s interesting is that these “stars” end up achieving nothing on the show while the harder working pairs continue on. Even if they don’t win, those stars that worked hard talk about how rewarding it was to learn something new.

That’s what we’re going to do today: throw out rules of thumb and learn how insurance works. I am totally an analogy ninja.

He did so well last time, The Other Guy is back to write another scintillating post on insurance. If you missed his last one, you may want to start here: Find the Right Amount of Life Insurance in 10 Minutes.

Everyone wants to use rules of thumb, or “what I heard from my friend” to decide which insurance is best. Why throw a dart when it’s nearly as easy and far more profitable to just do the homework?

I hear experts tell us to always buy term insurance. Or they moan that universal life coverage is a rip-off. I agree that there is one type of insurance that’s best for everyone, but:

The best type depends on what you’re going to use the coverage for and how long you’ll need it.

Decisions …so before you believe someone telling you that one type of insurance is better than another, minions, know the available types and how they work! Last week I shared a quick formula to determine how much coverage you’ll need. Let’s use another quick method to understand your choices when it comes to life insurance.

Just as a carpenter needs to know the difference between a hammer and a drill, you’ll need to know all the types of insurance to pick the best kind. Don’t worry, I’ll keep it entertaining.

Term Insurance is probably that most well known type of coverage. Because it’s stripped down coverage, it’s often the only type available in workplace plans. Term insurance is nearly as easy to understand as first grade math: you pay for a specific amount of insurance which covers a set amout of time, called a ‘term’.

Helpful example: Barry Manilow purchases a $250,000 10-year term policy. If he dies during the term, Mandy, his beneficiary would receive $250,000 tax free simoleons. If Barry expires one minute after the term ends, the insurance company owes Mandy nothing.

Whole Life Insurance is equally well known. These plans began decades ago as an alternative to term coverage mainly because the coverage lasts…wait for it…your whole life. Awesome, huh? I know. Marketing and naming wizards, those insurance companies. Most whole life policies contain a “cash value” component that can be cashed in by the owner. Whole life policies require payment for their…drum roll please…whole life, unless you buy a policy that can be “paid up” early. Generally speaking, whole life = coverage for your whole life and premiums for your whole life.

What’s awesome about whole life insurance? Guarantees! If you continue to pay the premium to the insurance company and keep your account in good standing, it’s guaranteed to last. The cash value grows at a guaranteed rate, so you don’t need to worry about interest rate fluctuation much. It’s a wonderful policy type for the super-nervous people of the world.

Universal Life Insurance is a variation on whole life – at some point insurance people said, “Wouldn’t it be cool if the payments to the policy and death benefit could be partially flexible?” Maybe they didn’t ask that exact question, but it makes the point. People who own this insurance pay extra (just like with whole life coverage) to add money to a cash value portion of the policy.

Once enough cash value accumulates, you can sit back and let the cash cover the costs instead of paying more money from your wallet. Many policies allow you to raise or lower the amount of coverage without having to purchase another one.

What’s another key difference between universal life and whole life insurance? Okay, I’ll tell you: universal policy interest rates on cash often float with interest rates. Awesome during 1980 when CDs were paying over 10 percent. Now, though, with the value of savings through the floor, universal policy rates are Coyote Ugly. And no, that’s not code for awesome, like the model-bar.

Variable Universal Life is the newest of the 4 major types. Those crazy insurance companies were getting smoked because the average saver decided to invest money into the financial markets. Marketing people said, pulling their hair out, “what will we do to keep business coming in?” Once again, the phrasing is off, but VUL policies (as they’re known in insurance lingo) were a reaction to the widespread use of mutual funds and other investment tools.

Initially developed in the late 70’s and early 80’s, these types of contracts allow for investment in various stock/bond accounts (similar to mutual funds, but not the same). The major draw of VUL? Flexibility of investments became the name of the game – and the opportunity to have market-like returns right inside your very own life insurance policy. In the go-go 1990’s, this was awesome. Since then, many investors have had middling returns and unpredictable results.

Which is best for the salesman?

In the interest of fair disclosure, I’m going to let you in on a little secret. Life insurance is a BIG commission check…I mean GIGANTIC. You wouldn’t believe how much. Let me give you an example: If you’re a 40-year old man buying a term policy that costs $100/mo; your insurance sales person gets around $850-$900 cash for the first year of your premium payments. Yes, you read that right, you basically pay a year’s worth of premiums to cover the commission amount. I don’t mean to infer that this is bad…it’s just how things operate.

Just thought you’d like to know.

Whole Life, Universal Life, and Variable Universal Life are even bigger payers. I remember receiving a check for over $25,000 for a single $400,000 Variable policy I sold early in my career. I also remember a $70,000 commission check for a $2 million policy. Big money.

My goal isn’t to make you angry. It’s to help you know the broker’s game.

…which brings brings us to the “One Question You Should Ask Before You Buy Anything”:

“Mr. Broker, how much money are you going to make if I buy this insurance?”

I was never ashamed to admit to my clients how much money I’d earn…a good advisor has no reason to be deceptive. But, if he hems and haws…maybe this “complex insurance investment strategy” that sounded pretty cool benefits him more than you. In my opinion, the actual commission is irrelevant – it could be $2 or $20,000, I don’t care – it’s how he answers the question.

All Insurance Types Cost The Same

Sometimes insurance agents will mention that permanent policies, such as universal or whole life, are less expensive than term insurance. I’ll lay it out and let you decide:

Sure, like some margarines are saltier than others, some carriers offer better premiums for smokers, race-car drivers, or 45-year olds. That’s true. However, insurance ‘costs’ among competitors are far closer than you’d initially imagine.

In the above example you’ll see the differences between permanent and term. Notice additional fees (in the right chart, 5 percent is deducted as an additional charge—this fee can be higher or lower depending on the carrier).

Here’s how all insurance costs are similar:

Insurance is sold in $1,000 increments. Imagine pulling up to the insurance store drive thru and ordering 500 $1,000 units of insurance. The cashier calculates the cost based on two factors: your age and the number of $1,000 units you’re purchasing. I hate to disclose this secret: actuarially you’re more likely to die every year you age.

With permanent life insurance, your “cash value” grows over time, reducing the amount of life insurance you buy from the insurance company – which makes it seem like you’re paying less for coverage.

A second handy example: if Jeff Gordon races to buy $500,000 of coverage and he stuffs $50,000 of cash into the policy – his beneficiary would receive $450,000 of insurance and $50,000 OF JEFF’S OWN MONEY to total $500,000.

Permanent life insurance is only cheaper because you’re paying extra into cash when you’re young, which lowers the amount you’re buying later on when it’s expensive.

Whole life, UL and VUL insurances in many ways are forced savings accounts added to life insurance.

Which Should You Buy?

So…which one is best? Well, that’s a loaded question – but here’s what I think. Start by determining how long you’ll need coverage. For the vast majority of savers, maxing out a Roth IRA and 401(k) plan and buying term insurance is the right answer. If you have a long term need and have a maxed out Roth IRA, 401(k) and you still have money left over…well then maybe a permanent policy may be a better choice.

For this reason, using term insurance for succession planning needs at work or estate liquidity needs to cover estate taxes usually ends in disaster. These policies need to be in-force when you die, so permanent insurance works best.

If you’re a worrier about outliving your insurance and want forced savings, whole life, UL and VUL aren’t the enemy. I’ve had clients purchase permanent insurance only because they wanted security and were comfortable paying a lot of money for it. These policies work, but for a cost.

Because most families need life insurance for a fixed amount of time and have other ways to save money, term is often the best choice.

Related articles
  • Find the Right Amount of Life Insurance in 10 Minutes (thefreefinancialadvisor.com)
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Filed Under: Insurance, Planning, risk management Tagged With: Barry Manilow, buying life insurance, free advisor, free financial advisor, Insurance, Insurance policy, life insurance, Universal Life, Universal Life Insurance, whole life insurance

Find the Right Life Insurance Amount in 10 Minutes

November 23, 2011 by Average Joe 6 Comments

Another note from AverageJoe’s Thanksgiving visit to the in-laws:

Dear blog diary,

I’ve just trounced my mother-in-law at Scrabble again. It was absolute luck that the triple word score was open for my play of “austerity.” Of course, I had to hide a U and Y in my sleeve to place a nine-letter score. Luckily, we’ve both had enough “holiday cheer” that she didn’t notice. I know that to be a good son-in-law I should let her win, but not until I get a chance to play the word “bailout.”

Between all this winning and making Rice Krispies Turkey Pop Treats, I totally can’t be bothered to post anything today. Instead, I’ve opened the basement and let out The Other Guy, so named because he’s still a practicing financial advisor and doesn’t understand that being associated with me would totally be good for business. Whatever.

We’ll have a special piece tomorrow, but will completely understand if you don’t have time to read it. Safe travels, everyone!

Now, on to the Other Guy:

 

 

A couple of weeks ago, after being sick for about 10 days, I finally went to the doctor. Apparently, I have ‘walking pneumonia.’ I told the doctor that I don’t do any physical exercise, including walking, so I couldn’t possibly have “walking” anything.

In any event, I didn’t feel well. I began to contemplate my own mortality and then an idea popped in my mind: let’s spend a couple of days talking about life insurance! It’s obviously everyone’s favorite topic…and as a financial advisor who doesn’t like to be sold some insurance, I make the perfect teacher. As AverageJoe did with the “evaluate a mutual fund in 10 minutes” post, I’m going to break it down nice and easy for ya’.

Here goes:

Before anything, let’s not waste time evaluating coverages if we don’t have to. All too often, insurance sales professionals and financial advisors will just make the assumption that you need it and proceed to sell it to you. Here’s an easy way to determine if you need life insurance at all:

Questions to ask:

Does anyone rely on you for financial support, either right this moment or if you got hit by lightning?

If you’re single and/or have no dependents, there’s almost a zero point zero percent chance that you need life insurance. I might be convinced that a small group policy so that someone can bury you is adequate. If you have charitable intentions, there are insurance strategies that work really well….but that’s all. Nothing more.

Don’t let an insurance salesman tell you otherwise.

For those of you who have people relying on you for financial support here’s an easy way to calculate how much you need. Is this the best way? Nope. However, once we walk through these steps you’ll be on your way to making a good insurance decision.

Every life insurance discussion contains assumptions. You’ll need to make some to decide what amount is right for you. At the least, you’ll need to know where assumptions have been made, so you’re able to change directions if you need to.

Here are a few assumptions:

If married, I usually assume with clients that they’ll want the mortgage paid off when they die. Even if both spouses have a full time job and can still afford the house, I’ve seen too many people “go off the deep end” when their spouse dies to determine whether everything will remain stable at work and home. I can understand leaving this out, but at the least I’d evaluate your insurance cost with and without this cost before deciding to drop it.

You may find the additional cost is worth the pain.

If you have children, I assume you’ll want them to go to college, and you’ll want it paid for . Maybe not Harvard or Yale, but you want them to have some level of in-state public university education. Since college costs increase 8-10 percent per year on average, this is one of the most expensive budget items a family can face.

Let’s have the discussion here that we’ll have in client meetings: Maybe you paid for your own college expenses. Evaluate your children and savings and not your personal situation when you went to school. With costs rising quickly, do you want them to have this burden?

Here’s how much life insurance you’ll need…plus or minus the assumptions above plus a few more below.

Add together all of your debts, including your mortgage: $__________________

I’ve done the math on an average in-state tuition in the chart below. Add in these costs: $__________________

Next, we’re going to give your family basic income to live on. Here are where we need to make some large assumptions. Take your annual post tax (take home) income and multiply by 80%. This assumes that your family will live on 80 percent of your current salary if you’ve died. There are better ways to do this. Instead, determine what percent your family would need in the event of your death and use that percentage.

Divide this amount by .05. This means that you’ll need to peel off 5 percent to live on. This single number creates (again) huge assumptions. The biggest? It’s that you’ll continue to live on this income stream even as inflation skyrockets. Once again, we’re trying to get in the ballpark, so if you’re trying to do this the “quick and dirty” way, we’ll be close, but there are better ways.

Place your answer here: $__________________

Add up these 3 lines, that’s how much you need.
$__________________

Now, often, I’ve seen insurance salespeople stop at this point. Not good. Remember, you have some current savings! The goal of insurance in most situations is to replace income that you don’t yet have.

Subtract the amount of money you already have saved from the final number.

$__________________
Buy the difference.

Education Chart

Age $ needed today Age $ needed today
0 $78,855.87 11 $64,200.32
1 $77,395.57 12 $63,011.43
2 $75,962.32 13 $61,844.55
3 $74,555.61 14 $60,699.28
4 $73,174.95 15 $59,575.22
5 $71,819.86 16 $58,471.98
6 $70,489.86 17 $57,389.16
7 $69,184.50 18 $56,326.40
8 $67,903.30 19 $34,071.75
9 $66,645.83 20 $23,139.91
10 $65,411.65 21 $11,792.45

Later, we’ll have a discussion on the various types of insurance you should consider and the #1 question you should ask before you buy anything from any insurance sales person.

As always, this exercise is more about understanding the variables that go into making a good decision as much as it is about the final product. Plug in your own unique situation and evaluate many types of coverage thoroughly before buying life insurance.

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Filed Under: Insurance, Planning, risk management Tagged With: Agents and Marketers, Business, Financial adviser, Financial services, Insurance, Insurance policy, Life, life insurance

There’s Something Wrong With The Car

November 10, 2011 by Average Joe 19 Comments

There are good days and then there are bad days. Neither of those descriptions fit last Saturday morning.

I woke up to my son running in the door.

Nick: Dad, there’s something wrong with the car. You have to come outside.

me: Where did Kim Kardashian run off to?

Nick: Dad, wake up. Come outside.

me: What time is it?

Nick: 7 o’clock. Come outside. There’s something wrong with the car.

me: (suddenly realizing Kim isn’t coming back, I’m not drunk in a Beverly Hills swimming pool and I’m a happily married parent of twin 16 year olds) What’s wrong with the car?

Nick: Just come outside

Cheryl: Go, Joe

me: (I’m thinking to myself: why don’t you go?) I’m saying out loud: Okay

(18 years! Why do you ask?)

Cheryl (to Nick): What’s wrong with the car, honey.

Nick: I hit a mailbox.

me: Okay. (out of bed, throw on jeans and a tee-shirt, follow Nick outside)

I shouldn’t interrupt the story here, but it’s time for a little op/ed piece.

Who the F$%# decided that mailboxes should go in brick structures? My mailbox looks like this:

Our Mailbox

Awesome dent in the side, huh? I was going to actually change this mailbox until some kids late at night kept driving down our street with a kid out the car window slamming a baseball bat into everyone’s property. Where before, I saw a rotten looking mailbox, now I saw less cost when it’s finally destroyed.

So, back to our story…..

I’m following Nick through the house, expecting to see my mailbox on its side, with maybe a little dent in the car fender. My son has been driving for six weeks. We’ll have a talk about it and he’ll go to his swim meet. We’ll laugh about it when he’s 35 years old.

Heading up the stairs, I realize that many of my neighbor’s mailboxes look like this:

random neighborhood mailbox

Holy brick-house, Batman! The front end of the car might be crumpled around that thing. Now I’m worried. By the time we hit the front door my pace is almost as fast as a cop headed for Dunkin’ Donuts.

me: Whose mailbox did you hit?

Nick: Huh? (he’s 16. I omitted most of the 16-isms for brevity, but had to leave one “huh?” in here.)

me: Whose mailbox?

Nick: Bill’s

me: Oh sh$#.

Bill lives across the street and has a mailbox similar to the one above. The front of our Saturn Aura is probably crushed in. Being a Saturn, it’s a collector’s item (that’s a joke, by the way. Some are apparent, others I’ll point out as we go.).

me: How did it happen?

Nick: I was trying to change a CD.

me: Nick! Don’t try to change a CD while driving. Keep your hands on the wheel. (I think I’m giving good parenting advice here, but I’m not. It turns out that my daughter–remember I said I had two driving? My insurance company remembers….and giggles out loud.–My daughter had a GLEE CD playing LOUD. I know because, when I turned on the car, it was still playing. My poor son. A Glee CD. The Horror.  Forget the mailbox, I would have hit Bill’s house hard enough to end it all.)

Here’s what I see. Remember that as a recovering advisor for 200 families, it’s difficult to amaze me. I’ve pretty much seen it all.

Except this:

Wheelie!

We call it “Wheelie!” or “Full-Sized Car Statue on an attractive brick base.”

My car is on two wheels (the left two if we want to be technical about it), and is TETTERING ON THE TOP OF my neighbor’s brick mailbox).

me: How the hell did you get the car all the way on top of it?

Nick: I don’t know.

Me: What did you tell me inside? Something’s wrong with the car?

Nick: Yeah.

Me: Understated. In social circles, that’s classy.

It took TWO wreckers to get the mailbox out from under the car. One to pick up the front end and another to drag out the mailbox.

Do you know that whole thing about people getting their 15 minutes of fame? The wrecker drivers all took pictures with their cameras “for the record.” I’m sure my car claimed its 15 minutes and more that night. You may have already seen this picture on Facebook.

So, in closing: please read my blog. Click on every advertising link. Next week I’ll have advice on how to deal with your car insurance company, and how to write big $%#!ing checks without shaking (much).

Filed Under: Debt Management, Insurance, irrelevant stories, Meandering Tagged With: car accident, car insurance, full-sized car statue, mailboxes, Saturn Aura pics

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