Answer: You’re not dealing with a financial advisor who has your best interests at heart. You’re dealing with a salesman who is mostly, if not solely, concerned about the commission he’s going to earn from selling you an insurance or investment product should you take his unsound advice.

Borrowing to invest is a risky strategy. Putting your home on the line to do so is particularly unwise. The interest rates on your home equity loan may be low now, but the rate is variable and can rise substantially. If you can’t make the payments, you could lose your home.

If he were honest, this is the pitch he would have made to you: “You don’t make enough money to afford the product I want to sell to you. Therefore, I want you to put your home at risk so I can make this commission. Your borrowing costs and the costs of this investment will likely eat up most of your returns, but at least I’ll have my money.”

If he’s selling insurance, you should report him to your state’s insurance commissioner. If he’s selling stocks or other investments, report him to the Securities and Exchange Commission.

If he has any professional investment credentials — which isn’t likely, but anything is possible — you should report him to the organizations that granted those.

Remember that anyone can call himself or herself a financial advisor. There are no education, experience or ethics requirements. If you want someone who meets higher standards, look for a certified financial planner or a personal financial specialist (a designation given to certified public accountants with financial planning training).

And pay attention to how the planner is paid. A fee-only planner accepts only the fees you pay, while a “fee-based” planner may accept commissions from the products he or she sells. If you don’t want commissions to affect the advice you get, consider a fee-only planner.

Answer: When deciding whether to pay off a mortgage, many people focus on how much interest they could save or what their “return” on their money would be. (If you’re in a 35% tax bracket for federal and state income taxes, for example, your return on paying off a 7% mortgage would be 4.6%.)

In reality, though, most people have better things to do with their cash than pay off relatively low-rate, tax-deductible debt.

Are you, for example, on track with your retirement savings? Do you have a substantial emergency fund? Most families would be wise to set aside a cash reserve to cover three to six months’ worth of expenses. Someone who is self-employed with a non-working wife might want to boost that emergency fund to 12 months’ worth of expenses.

Are you adequately insured? Since your wife is financially dependent on you, you probably should have a substantial life insurance policy. You may want to get one on her as well, if she cares for minor children and you’d have to hire a nanny if she died. You may also need disability coverage.

If you’ve covered all these bases and still want to pay off your mortgages, feel free. Otherwise, put the money to better use.

Answer: Only three states — California, Hawaii and Massachusetts — prohibit insurers from using credit information when calculating premiums. In other states, the practice is common, since insurers have discovered a strong correlation between people’s credit histories and their likelihood of costing an insurer money. (The worse the credit, the more likely they are to file claims, essentially.)

The states typically don’t regulate how insurers use credit information, so behavior that might not affect premiums at one company could jack them up at another. Closing credit cards might not help, because that could inflict its own damage by changing the credit-utilization portion of your insurance score with that company.

This is yet another reason it’s important to shop around occasionally for insurance: You can often find a better deal if you look.

Answer: You shouldn’t use insurance to cover costs that you easily could pay out of pocket. And if you couldn’t afford to replace your phone out of pocket, you’re spending too much on your phone.

Insurance is best used to protect against catastrophic expenses, not minor costs. When you use insurance to cover incidental expenses, you typically pay too much for the coverage — and that’s particularly true for cellphone insurance, which is ridiculously expensive for the protection you get. Plus, cellphone coverage is notorious for loopholes and exclusions that make it tough to make a claim should your phone be lost, stolen or destroyed.

After I spent the night in a hospital, we got a bill for just under $20,000. I don’t have health insurance (big mistake, I know). Because our combined income is more than $24,000, we were told we were not eligible for any discount. The woman I spoke with about the bill told me my options were to pay off the bill at $550 a month for the next three years, which is more than we pay for rent; pay the bill in full and get a 10% discount, which I do not have the money for; or file for bankruptcy.

We’re going to look at getting me on my wife’s insurance plan and see if we might be able to get them to retroactively cover some of the cost, but that doesn’t seem too likely even though the incident happened less than a week after we got married. What is the best course of action?

Answer: Don’t hold your breath about getting covered retroactively — that’s not going to happen. But get added to your wife’s insurance as soon as possible anyway. As you’ve seen, even the healthiest person is just one accident or illness away from potentially catastrophic bills, and having insurance will help you the next time.

Call the hospital and ask to speak directly to a financial counselor. Most hospitals have them, and they can help you review your situation to see if you might indeed qualify for discounts. Many hospitals offer some kind of financial aid or charitable program for people with incomes higher than yours.

Even if you don’t qualify for a charitable discount, you still might be able to reduce the bill if you can persuade the hospital to charge you what it would have charged an insurer for the same stay. Insurers negotiate significant discounts with providers, and you could end up paying quite a bit less if the hospital gives you the same discount.

If you can get the total bill reduced, you may be able to work out a payment plan with the hospital that you can afford. Whatever you do, try to avoid taking out a loan or using credit cards to cover this bill. A payment plan with the hospital typically won’t carry any interest, while the rates you would pay to a lender would probably be sky-high.

If the hospital won’t cooperate and you can’t pay the bill, bankruptcy might be the best of bad options. Otherwise the debt probably would be turned over to collection agencies that could hound you for years.

For more tips and strategies on how to negotiate your debt, pick up “The Medical Bill Survival Guide” by Nicholas Newsad.

But credit and debt expert Gerri Detweiler notes over at Credit.com blog that 2011 is likely to be the year when people finally get to see, for free, their FICOs as well as other scores being used to evaluate them. Detweiler does a good job of explaining why this is still a bit up in the air, but it appears that starting Jan. 1, some lenders will begin to share the credit scores they use to evaluate you when you apply for credit.

And then starting July 21, anyone who doesn’t get the best rate or terms because of a credit-based score will get free access to the score used, as  Senator Mark Udall’s Free Access to Credit Scores (FACS) legislation, which was part of the Dodd-Frank Wall Street Reform Act, takes effect. Since credit scores are so broadly used, this will affect anyone who because of his or her credit:

• gets turned down for a loan or has to pay a higher interest rate
• is required to get a co-signer
• must pay a higher rate for insurance coverage
• must make a deposit or a larger deposit with a utility or cell carrier

This is a great first step, but really, you should have free access to FICOs and any other score being used to evaluate you.

photo credit: rutlo

Face it–you have a lot of stuff. So much that if you tried to list everything you own from memory, you’d probably forget most of what you have. (Do you know how many pieces of clothing are in your closets and drawers? Can you list everything in the medicine chest? How about all those holiday decorations in the attic?)

But trying to remember a houseful of stuff is exactly what people face when they file an insurance claim after their home has been destroyed in a fire or natural disaster. Without a household inventory, it’s all but impossible to remember everything or even most things.

United Policyholders, a non-profit group that educates consumers about insurance issues and their rights, offers a lot of good tips and resources to help you get started on your inventory:

• Create a room-by-room inventory in Excel. UP provides an Excel sheet that lists items found in the typical home so you don’t have to start from scratch.
• Fill out a sample home inventory from a total loss insurance claim.
• Build your inventory with a flash drive that’s preloaded with the inventory spreadsheet. This was created with help from disaster victims who struggled to remember the contents of their home after it was damaged. (UP does request a $10 donation for the flash drive)
• Walk around your home with a video camera, talking about the items as you film. (Store the clip/chip/tape outside your home in a secure location, preferably in another area or state.)
• Pay an inventory specialist to do the work for you. Inventory specialists charge either by the hour or for the project. Some will store the data for you. Others will give you the disk or inventory list to store yourself. Visit the FIND HELP section on UP’s Web site by CLICKING HERE.

To access UP’s links to the Excel spreadsheets and other inventory tips, CLICK HERE.

Also, make sure you’ve got your disaster/home insurance in order. Not sure? Check out some of my previous columns:

• Do you need disaster insurance?
• 10 things your insurance may not cover
• Is your home underinsured? 8 key points

photo credit: captg

Home values have dropped across the nation. But that doesn’t mean you should reduce the coverage under your home insurance policy.

Why? The real estate value of your home is very different from the rebuilding cost. You could wind up seriously underinsured, says the Insurance Information Institute, a nonprofit group supported by the insurance industry. It suggests asking these key questions about your policy:

1. Do I have enough insurance to rebuild my home?
Your policy needs to cover the cost of rebuilding your home at current construction costs. The cost to rebuild your home is not based on the price you paid for your home, the real estate value in today’s market or even the cost of new construction, the III says. Rebuilding costs are often higher than new construction costs because of demolition and debris removal fees.

Extra coverage you should check on:

• Water back-up (damage from sewer or drain backup)
• Disaster coverage (floods and earthquake aren’t covered on the typical policy, and wind damage may or may not be)
• Building code upgrade, also known as ordinance or law coverage (pays for additional expense of rebuilding your home to comply with building codes that didn’t exist when the home was originally built).

2. Do I have enough insurance to replace all of my possessions?
Most homeowner policies provide coverage for your personal possessions of about 50 percent to 70 percent of the amount of insurance you have on the structure of your home. For example, if you have $100,000 worth of coverage on the structure, you would be covered for $50,000 to $70,000 worth of the contents of your home. You may need  more, particularly if you own antiques, guns, furs, expensive jewelry and artwork or business equipment–all of which may require separate “riders” to ensure adequate coverage.

You can insure your possessions in two ways: Actual cash value or their replacement cost. Actual cash value is the amount it would take to repair or replace your belongings  — minus depreciation. That $1,000 sofa may be only worth $50 today, which is all you’d get under an actual cash value system. A better bet: Replacement cost, which gives you the amount it would take to replace your belongings with items of comparable value and quality without deducting for depreciation.

3. Do I have enough insurance to protect my assets?
Home insurance also provides liability protection, which covers you against lawsuits for bodily injury or property damage that you or your family members cause to other people. The coverage pays for the cost of going to court (your defense) and court awards – up to the limit of your policy.

Most standard home and renter’s insurance policies provide at least $100,000 of liability coverage, but additional protection is available. You want to make sure you have enough insurance to protect your assets and finances should someone sue you. A good rule of thumb is to have liability insurance at least equal to your net worth. Even better: Get enough to cover twice your net worth. Extra liability coverage is not that expensive, and if you max out the available coverage on your policy you can get an “umbrella” policy that gives you $1 million or more for $200 to $300 a year.

Want to know more? Check out my columns for more tips:

• Is your home underinsured? 8 key points
• 3 costly myths about insurance
• Homeowners, demand your (insurance) rights

photo credit: Night Owl City

One of the biggest mistakes people make when they decide to store their extra stuff in a storage unit: They assume that their belongings are insured by the facility.

Nope. The storage facility has nothing to do with insurance, according to the Insurance Information Institute. It simply provides a place to stow your belongings.

Here are few things to consider if you’re going to stash your belongings in one of these units:

Do you really need to do this? You’re essentially paying rent on belongings you aren’t using. And if you aren’t using them, perhaps it’s time to get rid of them. Storing stuff temporarily while you’re moving is one thing. But long term? Maybe it’s time to “release” some of your items via a yard sale or charitable donation so that someone else can get some use out of them.

Check with your insurance company. If you own a home, your homeowner’s policy might cover items that are being stored, but then again, it might not. If you are a renter and have renters insurance, the same applies. Call your insurance company and ask if your items that are being stored are covered in your policy.

What some policies cover – and don’t. Most policies that include protection for storage provide coverage from theft and damage from fires, tornadoes and a few other disasters listed in the policy, says the Insurance Information Institute, a nonprofit group supported by the insurance industry. Most policies will not cover damage from flooding, earthquakes, mold and mildew, vermin (rats, termites, etc.) or poor maintenance. Some insurers may limit the amount of coverage to 10 percent of the amount of insurance you have on your overall personal possessions for items stolen or damaged away from home. Other insurers may offer higher limits.

Consider the type of insurance you need. Personal possessions can be covered on either an actual cash value or a replacement cost basis. An actual cash value policy pays only the depreciated value of an item.  A replacement cost policy would pay to replace the item at what it would cost to purchase it at the time of loss. Clearly, replacement cost is the way to go, especially since these policies generally run only about 10 percent more than actual cash value policies.

Ask about adding a “floater’’ or endorsement to your policy. If you’re storing really valuable property such as artwork, antiques, jewelry, furs etc., there might be dollar restriction on your standard policy. As your insurer about adding a floater or endorsement to your policy to make sure you’re fully covered on these items.

Don’t forget to make an inventory. This is probably one of the easiest things you can do.  Take photos, record purchase prices, serial numbers, appraisal forms and sales receipts. If your property is lost or stolen, an inventory can help you speed the claims process and substantiate your loss. It also helps you figure out how much insurance you really need.  (The Insurance Information Institute offers a free, online software program called “Know Your Stuff” to help you document your items. CLICK HERE to check it out.)

For more tips, check out some of my previous blog entries:

• “Cut your insurance costs, not coverage”
• “Consumer groups warn: Don’t go bare (on insurance coverage)”
• “Basic insurance questions still stump Americans”

photo credit: sterno74

We’re right in the thick of summertime driving, especially for teens, who spend 44 percent more hours driving each week now than during the school year.

If you haven’t looked at the financial and safety implications of adding a young driver to your household, here are some tips to consider from the Insurance Information Institute, a nonprofit group sponsored by the insurance industry:

Talk to your teen about costs. Explain how a driving infraction or accident can drive up insurance costs.

Insure your son or daughter on your own policy. It is generally cheaper to add your teens to your own policy than it is for them to purchase their own. If they are going to be driving their own car, insure it with your company so you can get a multi-vehicle discount.

Find out how your insurer assigns drivers to cars. Some insurers assign the driver who is the most expensive to insure (typically the teen) to the car that is the most expensive to insure. If you can, try to have your teen assigned to the least valuable car. Some insurers will allow policyholders to do this if the number of autos equals or exceeds the number of insured drivers on a policy. However, with this kind of deal, your teen can only use the car he or she has been assigned – even in an emergency.  You face penalties and your premiums might rise if your teen is involved in an accident in a car he/she was not assigned to drive.

Increase your liability insurance. State minimums for liability insurance will not be enough to fully protect you from lawsuits if your teen gets into an accident. If your teen is found negligent in an accident and the damages exceed your insurance limits, you will be held financially responsible and could be sued for those amounts not covered by your insurance. Consider an umbrella liability policy, which kicks in when you reach the limit on the underlying liability coverage in a homeowners, renters, condo or auto policy. For about $150 to $300 per year, you can buy a $1 million personal umbrella policy.

Let your insurer know when you teen is at school. You may be eligible for lower premiums once your teen is at college, providing he or she leaves the car behind.

Tell ‘em to get good grades. Most companies will give discounts for getting at least a “B” average in school and for taking a recognized driver training course.

Here’s a tip that the III didn’t offer, but I will: don’t let your teen drive an SUV or a sports car, which are tricky for inexperienced drivers to handle.

Above all – make sure you talk to your teen and get them into a good driving program. And set a good example. Their lives are at stake.

Need more information on insurance? Check out my columns for more advice:

• Cut the cost of insuring your teen driver
• What a car wreck could cost you
• Cut your auto insurance bills in half