Insurance Archives - The Free Financial Advisor

Every Homeowner Should Have Flood Insurance-Here’s Why!

May 17, 2021 by Tamila McDonald Leave a Comment

No homeowner imagines being the victim of a natural disaster. A serious flood can be devastating. Floods can damage your home and personal property with surprising speed. However, not having flood insurance can make the entire situation worse. Without the right coverage, your losses may not be covered. If you’re wondering why every homeowner should have flood insurance. Here’s what you need to know.

What Flood Insurance Is and What It Covers

Flood insurance is a type of coverage that is separate from a traditional homeowners insurance policy. Anyone who lives in an area with flood risk can potentially purchase this supplemental policy.

It specifically focuses on flood-related damage caused by natural disasters, as well as other causes. Usually, flood insurance covers damage in specific categories.

First, flood insurance will commonly handle structural damage to your home. This includes the actual building, as well as some related systems, like electrical, plumbing, and HVAC.

Second, flood insurance may cover your personal property. This includes damaged furniture that isn’t salvageable and similar household items, as well as clothing. However, this isn’t always part of the starting flood insurance policy, so you may need to request it be added if you want this protection.

Now, certain high-value items may not be fully covered by base flood insurance. This can include art, antiques, jewelry, firearms, or electronics above a certain value. In those cases, you may need flood insurance riders to add that coverage, just as you do with traditional homeowners policies.

Additionally, it’s important to note that every policy is different. Before you make assumptions about your coverage, review your flood insurance policy carefully. Ask questions about what is and isn’t protected, and request add-ons if needed to provide you with the level of protection you’re after.

Why Homeowners Need Flood Insurance

Typically, flood insurance fills a gap that many homeowners have in the primary policy. While homeowners insurance does cover some types of water damage under the hazard insurance segment of their policy, flooding events usually aren’t classified as the covered kind of hazard. As a result, damage caused by a flood may not be covered, leaving you without financial support to repair your home or replace your personal property.

Essentially, if you don’t have flood insurance, you’ll have to handle all related costs out of pocket. For most homeowners, this simply isn’t feasible. Flood repairs to a structure can be incredibly costly. Similarly, replacing all of your damaged personal belongings could take thousands and thousands of dollars.

It’s also important to note that homeowners with mortgages who live in higher-risk areas may be required by their lender to have flood insurance. This is especially true for anyone who uses government-backed financing sources, as there are federal laws requiring the coverage for properties they finance in high-risk zones. However, other lenders often follow suit, even if there isn’t a legal requirement.

The mandate for flood insurance is similar to them requiring homeowners insurance in general. It ensures the property is protected should a flood event occur and, since the lender is technically the owner until you pay off the mortgage, they have a vested interest in protecting its value.

How to Find Out if You’re in a High-Risk Flood Area

If you want to see if a property is in a high-risk flood area, the simplest way is to use the Federal Emergency Management Agency (FEMA) Flood Map Service Center. Simply enter your address into the search bar, and the site will display a map that identifies your home’s risk level.

You may be able to turn to other state and local resources as well. State emergency management agencies may have flood maps, for example, so they can be worth checking if you find the FEMA results lacking.

Should Low-Risk Property Owners Skip Flood Insurance?

No, homeowners in low-risk areas shouldn’t skip flood insurance. Even if you live in a low-risk area, going without flood insurance means you aren’t protected should the unexpected occur.

Low-risk doesn’t mean risk-free. Many natural events are unprecedented. But even if they weren’t deemed likely, your base homeowners policy won’t cover the related damage if it is excluded in your policy.

Additionally, risk levels can change over time. An area that wasn’t previously flood-prone can suddenly become so for a variety of reasons. Climate change, land development, and similar shifts can alter water flow through regions, turning areas that previously didn’t experience flooding into moderate or high-risk areas.

Where to Get Flood Insurance

If you need flood insurance, you can call your homeowners insurance company to see if they offer it. Some insurers have flood insurance riders, while others may require a separate policy for that specific kind of coverage.

However, not all insurance companies offer flood insurance. If that’s the case, you may not be able to secure flood insurance through your homeowners policy provider. Instead, you’ll turn to the National Flood Insurance Program, a system run by FEMA, that can help you find a provider that covers homeowners in your area.

Do you think every homeowner should have flood insurance? Have you decided to risk it and go without flood insurance? Has flood insurance ever saved you from financial hardship? Share your thoughts in the comments below.

Lower Your Homeowners Insurance Costs by Getting a CLUE

September 12, 2013 by Average Joe 2 Comments

Scoring a CLUE report might help you avoid nasty surprises with your homeowners coverage.

The majority of homeowners do not have a clue when it comes to the insurance industry database known as CLUE, despite the fact that this computerized tracking system can significantly impact their insurance premiums. If your property becomes red flagged within the system, for example, you may see your rates skyrocket for no apparent reason.

What is CLUE?

The Comprehensive Loss Underwriting Exchange is essentially a vast computer database that keeps track of insurance claims for properties all over the United States. Insurance companies who pay a fee to subscribe to CLUE are provided with up-to-date reports related to information about damage to properties or insurance claims to pay for repairs. Those insurers can then use that data to help them make decisions about who to insure, how much to charge for insurance, and so forth. CLUE also offers similar services to track auto insurance information.

Your Home’s Track Record

In a way, CLUE is kind of like a credit reporting agency. Each of us has a credit history, or should, and credit bureaus keep track of that history by filling our confidential files with information pertaining to things like income, our ability to repay loans on time, and how much debt we carry. When you apply for credit the lender will analyze your credit report and decide whether or not to lend to you. Similarly, insurance companies rely on CLUE to help them manage their risks when issuing homeowner’s or auto insurance policies. There are no laws that prohibit this kind of reporting and it is perfectly legal for insurers to use the data for underwriting or rating purposes.

What’s in a CLUE Property Report

Your home’s CLUE report will contain information like the name on your homeowner’s policy and a description of the home that’s insured. Beyond that basic data, however, it also shows claim information. If you filed a claim after a tree fell on your house during a hurricane, for instance, the CLUE report will probably show the date you filed your claim and how much the insurance company paid you to cover your losses. CLUE maintains those kinds of records for up to seven years. The insurance company will check your CLUE report when you apply for insurance and if they find you have multiple expensive claims, they may be reluctant to insure your home or even raise your premiums.

Nightmare Scenarios

About 10 years ago, when the use of CLUE was gaining widespread acceptance and popularity within the insurance industry, several news outlets reported on some of the more harrowing CLUE-related homeowner experiences. One couple said they bought a home, for example, and two months later their homeowner’s insurance premiums rose by more than $200. The insurance company explained that, three years prior to purchasing the property, there was a claim against it, and based on that claim the premium had been adjusted upward. Before long, the insurance company dumped them and cancelled the policy.

Negative Impact Even without Filing Claims

Other consumers said they wound up in the database even though they never filed a claim. Some homeowners told their insurance agents that there was damage to their home after vandalism or an accident, but that they were going to pay for the repairs out of pocket instead of filing an official claim. Just because they shared that information with the insurer, however, the damage report went into their CLUE report. One homeowner said that after he paid for flood damage himself – but told his insurance company about the incident – they cancelled his policy. That was despite the fact that he never filed a claim in 30 years as a loyal customer.

Access to Your CLUE Report

The bottom line is that if you own a home, it’s a good idea to obtain a copy of your CLUE report and scan it for errors that could impact your insurance. If you are planning to buy a home, you may want to ask the seller to show you a copy of a recent CLUE report, just to make sure you aren’t buying a property that could have exceptionally high insurance costs. CLUE reports are, incidentally, protected by the Fair Credit Reporting Act and can only be accessed by the owner or lender for the property.

To receive your report, call toll free at 1-866-312-8076 or visit the website personalreports.lexisnexis.com, and request it. Should you discover any mistakes or discrepancies, you can report them directly to LexisNexis – the company that now operates CLUE. They will be obligated to get in touch with your insurance company, investigate your complaint, and notify you of the results of their inquiry within 30 days. You also have the right to submit an explanation in writing – basically telling your side of the story – so that LexisNexis can include that statement in future CLUE reports.

Tom Kerr writes for CompareWallet.com in addition to others. He has been an avid writer for years, even winning awards for work he’s done.

Three Steps to an Iron-Clad Protection Plan

April 18, 2013 by The Other Guy 11 Comments

“No one knows the day or the hour…”

Unfortunately, that phrase is so true. We here in the O.G. house, along with the whole FFA crew, join those across the world in thinking about (dare I say ‘praying for’) those impacted by the terrorism in Boston, the terrible storms in the Midwest, and the explosion in Texas. The phrase “when it rains, it pours” comes to mind.

These recent events have encouraged me–nay, they’ve compelled me, to write another bit about protection planning. There are three crucial pieces to a well-designed protection plan and collectively, they are the single most important part of your overall financial plan. I don’t care what funds you use, what your company 401(k) match is, or even how many pre-IPO shares of Google you own – without an adequate protection plan in place, you have nothing.

Are you worried about your protection strategy? Here are three steps to an iron-clad protection plan.

Step 1: Forget the 6 months notion – head right to 12 months of cash

Many financial professionals suggest three to six months worth of expenses in a cash reserve position. That’s baloney. If you were sick or injured, would you want to be counting backwards from 90 until you run out of money? I didn’t think so. Skip three months and six and head right to 12 months of lifestyle-sustaining cash reserve, especially if you work for yourself or in an unstable industry…and what industry ISN’T unstable these days? This will take some work to figure out, because it’s not just your annual salary, but rather what you need to sustain your lifestyle for the next 12 months. We’ve discussed saving in a Roth IRA as a dual-purpose account HERE if that suits you better.

Why do you need so much in cash?

First of all, what exactly is “so much” anyway? Obviously, “so much” is a relative and personal term – I have one client who “only” has $90,000 in his savings. That’s on top of the “nearly empty” checking account with $55,000 in it. Oh, and he spends $60,000 a year – 100% covered by his pension. Cash is king. It allows you to negotiate (doctors have different “cash” prices – as do other businesses) and is easily accessible. The last thing you want in an emergency is to be floating credit card balances while your insurance company decides how and when they’re going to pay. Get emergency cash now. Make a plan and do it.

Step 2: Buy disability insurance beyond what your company provides

This is an increased cost, no doubt, but who among us could live on less than 50% of your current income? I know things around here would get a little tight, for sure! Remember what I said a few minutes ago about “lifestyle-sustaining” income? If something tragic happens, should that mean that your kids can’t play soccer anymore? What about dance class? If you’re no longer able to work for the rest of your life, do you think you should continue to build up a retirement nest-egg? Disability coverage only usually pays until age 65! Then what will you do?

It’s usually best to find your own outside coverage in addition to what your employer provides. Group coverage will be 100% taxable when you receive it. Coverage paid for entirely by you is 100% tax-free.

Take this example:

Let’s say you make $80,000 a year as an electrical engineer. You have group disability of 60% that kicks in after you’ve exhausted all your vacation and sick time. Sixty-percent of $80,000 is $48,000, right? Now, let’s subtract 25% for taxes, so that leaves you with $36,000, or roughly $3,000 a month. You were making $5,000 a month after tax. Can you today cut two grand out of your household budget? No? I didn’t think so. Everyone’s cost may be different, but let’s say a disability policy that pays you $2,000/mo DI costs $150/mo. That’s $1,800 a year…is it worth it? Let’s put it another way: Your boss says, “Hey Jimmy, we’re going to cut your salary from $80,000 to $78,200 from now on, but if you even get sick or can’t work ‘cause you’re too hurt, you’ll get all your pay until you retire.” What would you think? I think you’d take that plan.

Go, right now, do not pass go, do not collect $200, go now and acquire an disability application. Fill said application out and send in the first month’s premium. Do it now.

Step 3: Buy a gazillion dollars of life insurance.

I won’t spend a ton of time on this – we’ve discussed this many times before….but whatever you think you need for life insurance, double it…then double it again. Too many people buy only a minimal amount of life insurance. If people rely on you for money now or in the near future, go online to a life insurance wholesale shop (if you can’t think of any, in the US, google “buy life insurance”…there are a lot of interesting blogs about life insurance. If you are based in UK, then I recommend reading this blog for latest news and updates related to life insurance.) and purchase a policy. Twenty or thirty years should do it and the policy had better have lots of zeros (at least 6) and a number bigger than 1 at the beginning. Does that sound like too much coverage? If you ask any financial planner who’s had a client die–who’s had the unfortunate task of delivering a life insurance check to a widow or survivor–they all know that the survivor nearly always says the same thing: “Is that it? How am I supposed to make it on that?”

If you want to get technical, read this to figure out how much you’ll need.

I hate that these evil and terribly tragic things happen. I, in no way shape or form, can justify them or even begin to make sense of them. In the days and weeks ahead, we’ll hear from the culprits and it still won’t make sense. What I do know is this: We cannot ever predict the future. We can only have a plan on the shelf to execute once tomorrow is here.

So You Want to Manage Your Own Money?

September 4, 2012 by Average Joe 29 Comments

A friend texted me this morning.

“We should talk soon. Julie is coming around to the idea of us managing our own money.”

It seems easy, right? My initial reaction to my friend was, “That’s awesome!” because it is. There are few things more satisfying than achieving your financial dreams and knowing that you climbed the money management mountain yourself.

No “money-god” came down and did it for you.

You didn’t need the Powerball numbers.

You actually plotted a financial course and landed safely at your destination.

For my friend, and for you if you’re about to embark on this journey, there’s good news and bad news: the good news is that it isn’t difficult to manage your own money.

The bad news is that to effectively manage your own money you’ll need to be ready to face some fairly difficult tasks.

Two Types of People

When I was a professional advisor, I’d meet some smart people who wanted to jump into their own money management and wanted an expert with an opinion to look over their shoulder, hold them accountable, and make sure they didn’t miss any “I” dotting or “T” crossing.

…and then there were other, often equally-smart people who wanted to hand it over to me and have someone else take care of it for them.

Believe it or not, most advisors I knew preferred the latter type of client and loathed the first one. Someone questioning their motives? Someone asking “why are we doing it this way?” all the time? That’s preposterous!

But if you’re going to ever learn how to manage your own money, you’ll need to be the first type, not the latter.

The steps aren’t difficult:

The Steps to Managing Your Own Money

My kids are reading myths in school. In the story of Hercules, he faces a series of challenges to achieve is goal.

I look remarkably like the guy on top, but I’m a little paler and not quite as naked. And I have less hair.

You’ll have a series of gauntlets in your way too, if you want to manage your own money.

1) Write out your goals. I’m not talking about writing:

Retirement

College

New Boat

Fall Deeper in Love

Real goal writing has a specific time, dollar amount and vision attached.

I want to be able to live on $65,000 per year (in today’s dollars) by age 65 without having to work every day. With this money I’d like to: (here you write your bucket list, which should include visiting every NASCAR track in the country).

That’s a goal you can shoot for and be excited about (except for visiting the track at Pocono, which I thought was pretty overrated).

2) Next, you write out all the hurdles in your way.

– I have $25,000 in credit card debt (separate by interest rate, term, amount)

– I have to put two children through college

– I know nothing about money management

3) Then, you find one of the nearly bazillion financial calculators online (you can use our powerful little PlanWise calculator here on the site!) and figure out how much you need to save to reach your goal.

– I need to save $250 per month to reach my dream if I achieve an 8% return.

Armed with your money management return information, now you figure out how to come up with $250 per month.

– Tweak your budget

– Pay down debt

– Take on more work

4) Before investing, though, you have a big problem. You have to insure yourself against some of the huge “what if’s” out there for you and your family:

What if you die?

What if you are disabled?

What if you have a car accident?

You’ll need to create a will and evaluate insurances.

5) Finally, you begin the heavy task of research to find investments that have historically achieved 8%.

No Step is Difficult, You Just Shouldn’t Miss One

As you can see, when you take on the hard task and decide to manage your own money, getting it right will be difficult. Each area demands time and energy:

– Planning, milestones and tracking

– Budget, income advancement and debt reduction

– Insurance need projection and comparison analysis

– Estate planning

– Investment allocation, picking and monitoring

These are five basic money management steps, but each packs a punch!

I Don’t Mean To Imply You Can’t Do It

As soon as I finish this piece I’m calling my buddy and talking him through these points. Before he takes on the task, he should know how long the financial security road really is. Going in with your eyes wide open is half the battle if you plan to win the “manage your own money” game.

He can do it, and so can you!

2 Guys & Your Money Episode 9: NerdWallet, Buying a House, Insurance Costs & Combining Family Finances

September 3, 2012 by Average Joe 8 Comments

Never listened to a podcast before? You can tap the button above to enjoy the show on your computer, use iTunes to subscribe for free (new shows will load automatically!), or listen through Stitcher.

For information on how to subscribe through iTunes.

For information on how to listen through Stitcher.

Holy Ton of Topics, Batman!

On this special Labor Day edition of the podcast, we introduce a new reality show coming via NerdWallet, Kathleen from Frugal Portland joins the roundtable team for a rousing discussion of couple’s finances, and PK tells you why your insurance premiums are high (and of course, draws the correlation to “too big to fail”…always the overachiever).

Show Notes

<Open> Hello, Stitcher listeners!

Details on listening to the show through Stitcher: www.stitcher.com

Thanks to ING Direct for the show sponsorship. $50 off to open an account, details here.

Home Ownership: Is now the time? Here’s the FRED chart that spurred this discussion.

<> PK’s Fractional Sense: Insurance premiums & Too Big To Fail

<> Let’s Give Something Away. Congrats to our winner, John @ Married (With Debt).

To enter the September drawing for a copy of the board game The Settlers of Catan;, guess the voice in the show and send your answer to joe (at) the free financial advisor (dot) com. We’ll choose from the correct answers one winner on the last day of September.

Will Weaton’s TableTop show episode featuring Settlers of Catan:

<> Roundtable: Thanks to Kathleen from FrugalPortland for joining us this week.

Our topic: Married couples: should they combine finances?

The ClubThrifty Posts that spurred this discussion: Greg’s Article & Holly’s Article.

<> Interview withAmelia Granger: Nerdwallet.

<> End Show: Joe saw The Campaign (wait for DVD), watching on Netflix:Louie: Season One; w/ comedian Louis C.K. (likes a lot, but you have to be comfortable w/ rated R situations and humor)

And then, a link you may-or-my-not need for this show: Sri Lanka referenced article in the-segment-that-shall-not-be-named

For more information on our weekly contributors: PK, Carrie Smith, Dominique Brown, Len Penzo and Dr. Dean, here’s their bio page.

Would you like to be on the show? Have a topic for the show? Like to advertise on the show? Write to Joe (at) thefreefinancialadvisor.com.

Speaking of advertisers, if you’d like to take advantage of the ING $50 sign up bonus, visit www.thefreefinancialadvisor.com/ING50.

Enjoy the show!

2 Guys & Your Money Episode #007: Jeff Rose Interview – The Life Insurance Movement

August 20, 2012 by Average Joe 6 Comments

Nearly as suave as some other 007 you may know, this episode features the one, the only: Jeff Rose from GoodFinancialCents.com. He’s leading the tsunami of financial posts coming your way Wednesday, as the Life Insurance Movement roars across the blogosphere. Jeff talks about the movement, why life insurance, and common misconceptions, tricks and tips around life insurance policies.

OG & Average Joe discuss Roshawn Watson’s post on poverty at RoshawnWatson.com. What does it mean to be poor in America?

PK from DQYDJ.NET wonders if people with more money have more leisure. You might be surprised by his findings.

We give away Dave Ramsey’s book the Total Money Makeover by answering a simple audio quiz. Who is the person in the audio segment (hint: it’s a current or former person on the show).

And, of course, we can’t forget the roundtable team of Len Penzo, Dominique Brown and Carrie Smith who answer the questions: 1) What is your idea of a good coach (financial or otherwise); and 2) What’s going on in your financial life right now? We’ll talk planning, money surprises and refinancing during this segment.

Find more information about our contributors here: Our Podcast Team

Thanks for listening, everyone!

Show Notes:

<> Open: Poverty in America, a discussion of Roshawn Watson’s Do Americans Know What Poverty Is?

<9:25> Fractional Cents w/ PK from DQYDJ.NET: The Cost of Leisure

<13:02> Let’s Give Something Away: Dave Ramsey’s classic book: The Total Money Makeover. Guess the name of the person in our soundclip. Send your answer to joe@thefreefinancialadvisor.com. One correct winner will win the book!

<18:53> Roundtable with Carrie Smith (CarefulCents.com), Dominique Brown (YourFinancesSimplified.com) and Len Penzo (Len Penzo dot Com).

Topic #1: Let’s talk financial coaches. What are the characteristics of a good coach. Are you a good coach?

Topic #2: What’s going on in your personal financial house?

<37:28> Jeff Rose from GoodFinancialCents.com interview: Life Insurance Movement

<50:10> End of Show. Movies!

OG: Caddyshack (again) (Thumb up)

Joe: Hope Springs (Thumb up), The Red Violin on Netflix (Thumb Way Up), headed to see Bourne Legacy tonight.

Meeting an Advisor? Understand Fees by Bringing This Checklist

May 23, 2012 by Average Joe 9 Comments

Yesterday I posted a riveting story about advisor fees.

How do you know all the fees an advisor may charge?

The good news: this isn’t my first fee-rodeo, so I’ve meticulously prepared and will present to you, hot out of the oven, a fee checklist. Now when you meet an advisor you can ask intelligent questions about what fees you may pay.

Isn’t this exciting? Of course it is. Let’s begin:

___ Advisory fee. This fee is an umbrella fee for services rendered.

What services are included?

Financial plan? Yes / No (how often is the plan updated?)
Budget review? Yes / No (will you advise on line items?)
Net worth review? Yes / No (do you make suggestions on assets for the fee?)

Often advisors say they will recommend new homes for assets, however, those new places are through them, garnering the advisor another fee. Will they make recommendations of funds/ETFs/other investments outside of their control?

Insurance review? Yes / No (In many states advisors can’t review insurances for a fee. However, they can make recommendations on appropriate amounts of insurance.)
1040 review? Yes / No (Again, advisors have to be careful here. Some aren’t allowed to give specific tax advice.)
Tax strategy? Yes / No (Will you recommend comprehensive tax plan?)
Asset allocation? Yes / No (Many advisors will calculate where your assets lie on an Ibbotson efficient frontier and recommend asset changes based on your goals.)
Estate review? Yes / No

___ Wrap fees on personally managed funds. Sometimes an advisor will charge fees based on the percentage of assets inside of an account. Often, these fees range from 0.5% to 2.0% Remember that funds inside these plans have fees also, so ask what the average fee is for funds inside the account and add it to the fee.

___ Wrap fees on outside managed funds. Often advisors will recommend outside advisors to manage all or a portion of your assets. Fees generally range from 0.5% to 3.0% of assets managed, per year.

Wrap accounts are easy to remember if you think of plastic wrap around your assets managed in the account. Instead of trading and holding fees, you’ll pay the “wrap” fee on the entire amount inside of the wrapper.

__ Trading costs. Are there commissions for trades? What would those be?

__ Commissions to buy funds. Does the advisor use mutual funds? Are there fees to buy, sell or hold the fund? What are those fees?

__ Insurance commissions. If the advisor completes an insurance analysis, are you expected to buy insurance through them or do you go outside? What types of insurance does the advisor make recommendations on?

When I was an advisor, I’d recommend an insurance amount needed. Then I’d prepare quotes through companies I represented and recommended my clients shop other firms, such as Zander insurance (Dave Ramsey’s company).

__ Annuities, Private REITs and Limited Partnerships. Does the advisor recommend these product types? Do they receive commissions when they recommend these products? Annuities may pay up to a 9 percent commission. Often REITs (real estate investment trusts) will pay nearly the same amount to the advisor.

__ Cash products. Do you recommend savings accounts, CDs and other similar cash accounts? Are these through you, banks or credit unions? How do they work?

__ Mortgages, auto loans and revolving credit. Do you recommend these products for a commission?

__ Other outside experts. Should I expect to pay other experts, such as attorneys (estate plan) or CPAs (tax review)? If so, it’s important to know that there may be even more fees after you write your first check.

In Defense of Financial Advisor Fees

May 22, 2012 by Average Joe 20 Comments

I was a fee hater.

Like a younger, more handsome John Bogle, I would rail on fees. I’d stand on every rooftop screaming about avoiding fees at all cost.

For this reason, when I was a financial advisor, I provided what I thought was top-notch service and undercharged for it every day.

How much did I charge? My minimum fee was $500 per year.

Undercharged? There is no such thing, Joe! Less fees = better. Duh! You should have charged $300!

Think so, do you? Sit close, young padewan, while Uncle Joe tells you a story:

My Experience With Fees

Early in my career I lucked into the opportunity to give speeches on behalf of one of the top advisors in the country. I’d fly wherever he wished and spoke to rooms full of people about good planning. In exchange, he allowed me to move my offices into his suite.

Awesome! What a break for a new advisor; I’d get to see the inner workings of a well-honed operation and maybe glean some tips.

At first I was disappointed. All I saw was what looked like a cookie-cutter assembly line of advice and deliverables. Many clients received offshoots of similar advice. The firm never stuck their neck out. They avoided complex situations at all cost.

That lead me to believe that he was among the best in the country only because he could “sell” people on ways he’d jack up their fees.

…and jack he did. I rarely saw him charge less than $2,500 for planning, then garner asset management fees on top of that. He was a fee-based selling machine.

One day the operations manager and I were talking. I asked a polite question about how redundant their process management workflow seemed. To give you an idea of what I thought about this guy: I’m sure the term “cocky smartass” wouldn’t be far off the mark.

He said, “Have you noticed that we charge five times what you charge?”

I smiled. “Yes.” What a loser. I could never charge what they did! They were just leeches, skimming off of their client’s blood.

He said, “We charge five times more because we’re five times better than you.”

I took it personally.

I shouldn’t have.

Three months later, we were in agreement:

he was five times better than me.

Why He Was Better

This planner was so good, I’d worked right under his nose and hadn’t noticed his skill. The systems were sublime. Where I’d seen cookie-cutter assembly lines before, now I saw a brilliant asset allocation arrangement. Where I’d believed he was charging excess dollars to put boring plans in place, he was dotting every “I” and crossing every “T” for clients…mostly doing the boring stuff that usually was swept under the rug.

In short, he had a proven system of asset management and plan building. If you wanted that service, he covered his costs with his fees. If you didn’t want it, you should probably look elsewhere.

He didn’t try to be everything to everyone.

What You Can Learn

You don’t have to pay $2,500 or more to some advisor if you’re willing to perform the critical tasks that this advisor captained for his clients:

1) Design a plan that covers the six areas of financial planning and rigorously maintain the plan according to a set schedule. Make sure everyone involved is up-to-speed with the details.

2) Build a system to check and maintain your assets against your plan. He had systems in place to notify him when assets deviated too much from the plan. Build your own set of alarms.

3) Carefully guard against taxes and excess fees. This seems like an oxymoron, because this advisor charged a ton of money, but his fees were largely performance based. To increase his fees (and his client’s net worth) he had to ensure the plan was a lean-mean-return-gathering-machine. The only way to do that was to develop a comprehensive tax strategy (example: tax efficient investments outside of IRAs while tax-eaters inside shelters) and low-cost investments.

4) Scour insurances for opportunities. This advisor would review all of his client’s insurances regularly (every two years) to find wasted money. He’d also use insurances wisely to plug holes. One place he nearly always recommended: disability coverage.

5) Build legacies. He was the adamant that everyone either had a family or charitable organization they’d want to have flourish if they couldn’t use their own money. He’d make sure that the estate plan was air-tight and (as with insurance) review these plans every two years.

6) Set communication systems. Clients received a newsletter every six weeks. There was a conference call scheduled for two quarters of the year, along with two face to face meetings. Generally, the face to face meetings were comprehensive and the phone calls were “just checking up.” While he “allowed” only one member of a marriage to take part in phone calls, he was adamant that both spouses attend meetings. He’d become especially irate if one didn’t understand finances and didn’t want to participate. His thinking: if the knowledgeable spouse passed away, the other was screwed.

He also wasn’t afraid to call every client when markets imploded. During the 2002 and 2008 crisis, his whole team was on the phone non-stop, sharing information and passing along strategies. Usually, he wasn’t changing course, because his asset allocation model was already designed to weather downturns. However, clients loved hearing from him.

Was some of this overkill? Maybe. Often insurance and estate planning needs didn’t change. However, when something did, the advisor was on top of it fairly quickly.

It’s a Choice

During my 16 years as an advisor, there were many clients who refused to pay fees even though they would have been far better off had they paid this advisor. It’s fine to accomplish your financial goals without an advisor (in fact, if you’re willing to complete the six steps above, I’d recommend it). But if you decide not to, make sure you’ve designed systems for success and aren’t just being cheap.

Financial planning is just one example. Are there areas of your life where you’d be better off paying a fee and you just can’t do it? Are you cheap?

(Photo credit: Hands Clenching Dollars, Muffett, Flickr; Couple and Advisor, Jerry Bunkers, Flickr)

Disability Insurance Optional? I Think Not. – Our Boner of the Week!

January 2, 2012 by Average Joe 6 Comments

Hey, it’s always fun to say stuff off the cuff with friends, but when you have readers who take your words seriously and act on them….it’s probably best to do some research first. Our Boner of the Week! Is the most outrageous thing I’ve read on the internet in the last seven days.

…and we’re back to personal finance blogs!

A well-known blogger this week described disability insurance as “optional” in an article about types of insurance you should pursue. Really? Maybe it’s “optional” in the same way other insurances may be bypassed if you have other forms of coverage, but I don’t think it’s “optional” like the guacamole on my nachos at Buffalo Wild Wings. Don’t get me wrong, I’m not really a guacamole or disability insurance lover, but I can safely pass on the former. The latter….well, let us see for ourselves…..

When you’re deciding which insurances you need, disability coverage should be at the top of your list.

Here are the reasons why:

– If you can’t work, you can’t feed yourself without income. Unless you’re hoping for that awesome government check every month, disability insurance will protect your family and your things. Know why? You’ll still have income.

– Don’t think it’s going to happen to you? Think again. There’s some great news when it comes to auto accidents. Roads are becoming safer. There were just over 33,000 highway accident fatalities in 2009, as compared to over 43,000 in 2005. Instead of dying, people are just maimed.

Gratuitous Kind-of-Funny Picture to Break Up the Post!

Need Statistics? How about these eye-popping numbers on disability:

o As of 2009, persons in the U.S. have a 12 percent chance of suffering a disability. (Cornell University)

o Just over 1 in 4 persons who are 20 years old today will suffer a disability. (Council for Disability Awareness)

o Over 12 percent of the population is currently disabled. (CDA)

o 61 percent of wage earners personally know someone who has been disabled for three months or longer during their working career. (CDA)

Insurance is about odds. I dislike insurance policies as much as the next guy. That’s why my goal is to only buy insurances that I’ll probably need and avoid those that I won’t. Because I’m determining the chance of risk, it makes sense for me to check the probability of the occurance of need.

So, let’s examine the chances of a disability vs. other types of insurance listed in the piece:

Disability: 1:12 (Cornell University, listed above)

Auto: 5.67:100 (collision claims, according to Insurance Information Institute)

Home: 6:100 (Insurance Information Institute)

In fact, the author of the piece acknowledges the high rate of disability but still lists it as optional insurance. I can’t understand this logic.

Life insurance isn’t considered optional in her piece…in fact it’s listed as the third most important type of coverage (behind auto and health). But to express it in the most crude terms possible….isn’t your family better off if you’re dead than if you’re sucking down food and taking up space? They’ll have to cart you to the doctor and help you with basic activities. You’ll use electricity as you watch television or listen to the radio instead of work. It’s not fun for you and expensive for your family.

Not working? Long Term Care coverage isn’t even mentioned in the blogger’s piece and represents a huge hole in the financial plans of retirees who have enough money to protect but not enough to withstand the huge costs associated with custodial care on a daily basis. I won’t go into these facts here, because it’s slightly off-topic.

I’m tired of:

– “financial professionals” describing insurances and listing disability policies as the stepchild of the industry.

– consumers saying “I have disability through work, so I’m all set.” Workplace disability coverage often is capped at a staggeringly low amount of coverage. Why? Because a disability is expensive and insurance to cover a disability is expensive. Do your homework before flippantly deciding that “my insurance through work is enough.”

Still, maybe the blogger is off the hook. Here’s when you don’t need disability coverage:

1) if you have enough money to cover a disability, you can self-insure.

2) if your income stream comes from places that would be unaffected by your disability, and your health care coverage will tackle additional costs.

I’d like to believe that when she wrote “optional” next to disability insurance she meant to write “optional” next to every insurance coverage. Otherwise, I’m sure she meant that you should explore disability insurance as thoroughly as you would health, auto, home and life insurance.

Dearest minions,

When some professional writer, television talking head, or paid advisor tells you to look past an insurance type, always reach for statistics. Although I’m as bad at math as the next personal financial blogger, the numbers will usually find a way to lead me to the truth. The truth in this case: find adequate disability coverage.

Now it’s your turn. What insurances aren’t “optional” in your life? Which do you skip and take the risk?

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.

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.