February 4, 2013 By

Advice not to fund 401(k) is a red flag

Dear Liz: You recently suggested an insurance salesman be reported to state regulators because he suggested a reader stop funding a 401(k) and instead fund an insurance contract with after-tax dollars. You were way out of line. It’s very likely tax rates will be going up, so it may make sense to trade a tax benefit now for a better one in the future.

Answer: You might have a valid point if the reader were wealthy enough to be funding a life insurance policy or annuity in addition to his 401(k) contributions. Wealthier people are already facing higher tax rates, and they are more likely to be in the same bracket, or perhaps even a higher one, when they retire.

The fact that the insurance salesman suggested the reader redirect his retirement contributions to the insurance contract indicates the reader didn’t have the cash flow to do both. So it’s still quite likely that the reader will drop into a lower tax bracket in retirement, in which case he’s given up a valuable tax break now for a less valuable one in the future.

A red flag should go up anytime an insurance salesperson recommends you stop funding a tax-deductible retirement plan or that you tap home equity to buy whatever he or she is selling. That indicates the product was designed for someone wealthier than you. At the very least, you should run the purchase past a fee-only financial planner — someone who doesn’t earn commissions on product sales — to make sure you’re getting the whole story.

Filed Under: Insurance, Q&A, Retirement Tagged With: , , , , ,
July 26, 2012 By

Are you paying too much for car insurance?

Shopping for auto insurance is still a pain in the butt.

I’d hoped it would be better by now. I’d hoped that the Internet would make the whole process more transparent. But you still have to check several Web sites and pick up the phone to call a few agents to get a truly comprehensive picture of what various insurers are charging. Some of the big companies don’t participate with online comparison services (which is why you have to visit their sites and, often, talk to an agent to get a quote).

Why would you go through the hassle? Because the differences in premiums can be huge–not just hundreds of dollars a year, but thousands.

That’s because insurers are all different. They have different policies and ideas about what poses a risk and how much of that risk they want to take. If they don’t want teen drivers, for example, they will make it extremely painfully expensive to add one. Other insurers will just make it painfully expensive.

Insurers also adjust their pricing to add or shed customers. If they want to get bigger in a certain market, they’ll chop their prices to attract more drivers. If they decide they’ve gone overboard, they will jack their premiums above their competitors to slow new applications. If you’re a long-time customer who doesn’t know any better, you could find yourself paying a lot more for the same basic coverage than you’d pay with one of those competitors.

If you want some incentive to start getting quotes, check out CarInsurance.com’s Rate Comparison Chart and then read Des Toups’ accompanying post, “The most and least expensive cities for car insurance.” The average premiums cited conceal a lot of variation, Des noted.

For example, the average rate from six major insurance carriers for ZIP code 48101 in Dearborn, Mich., was $2,522 — but that included rates as low as $1,776 and as high as $4,374.

Des ran the numbers for a ZIP Code closer to me–90025, or West Los Angeles. There the average was $1,915, but the range was from $1,106 to $3,136.

Price isn’t the only thing to consider, of course. How fast and how well the company handles claims matters a lot, too. Your state insurance commissioner may have complaint data that will help you figure out which companies to avoid, like this one at California’s Department of Insurance. The number to pay attention to is the “justified complaint ratio” which divides legitimate complaints by the number of policies the insurer has in the state. Just as there are big difference in price, there are also big differences in complaints.

In any case, you shouldn’t assume you’re getting the best deal. Every year or two, check around to make sure.

Filed Under: Liz's Blog Tagged With: , , ,
May 1, 2012 By

Term or whole life? What you need to know

Dear Liz: My mother and her insurance agent swear by whole-life insurance policies. I am 45 and have heard from everyone else to only have term life, which is what my husband and I both have. We have a 15-year-old daughter. Can you please put in layman’s terms what a whole-life policy is and what the benefits are?

Answer: Term insurance provides a death benefit if you die during the “term” of the policy. Term insurance provides coverage for a limited time, such as 10, 20 or 30 years. It has no cash value otherwise and you can’t borrow money against it.

Whole-life policies combine a death benefit with an investment component. The investment component is designed to accumulate value over time that the insured person can withdraw or borrow against. Whole-life policies are often called a type of “permanent” life insurance, since they’re designed to cover you for life rather than just a designated period.

If you need life insurance — and with a daughter who is still a minor, you certainly do — the most important thing is to make sure you buy a big enough policy to cover the financial needs of your dependents. This is where whole-life policies can be problematic, since the same amount of coverage can cost up to 10 times what a term policy would cost. Many people find they can’t afford sufficient coverage if they buy permanent insurance. Also, many people don’t have a need for lifetime insurance coverage. Once your kids are grown and the mortgage is paid off, your survivors may not need the coverage a permanent policy would provide.

If you are interested in a whole-life policy, make sure to run it by a fee-only financial planner who can objectively evaluate the coverage to make sure it’s a good fit for your circumstances.

Filed Under: Insurance, Q&A Tagged With: , , ,
April 23, 2012 By

Insurance scores aren’t the same as credit scores

Dear Liz: I have very high credit scores, but recently got a notice from my homeowners insurance company saying that my rates were rising because there had been a number of inquiries on my credit report. The inquiries were as a result of my looking for the best deal on a mortgage refinance, and we applied for a retail card to save the 5% on our purchases. Do many insurers use FICO scores as a rate determiner?

Answer: Insurance companies don’t use FICO scores to set rates, but they do use somewhat similar formulas that incorporate credit report information in a process called “insurance scoring” to set premiums. Insurers, and some independent researchers, have found a strong correlation between negative credit and a person’s likelihood of filing claims. (California and Massachusetts are among the few states that prohibit the practice.)

The formulas insurers use sometimes punish behavior that has only a minor effect on your FICO scores. Since insurers use different insurance scoring formulas, however, you may well find a better deal by shopping around.

Filed Under: Credit Scoring, Insurance, Q&A Tagged With: , , , , ,
April 3, 2012 By

20 best cars for teens

My good buddy Des Toups has a nice piece at CarInsurance.com about the best cars for teens. He started with the 65 cars that made the Insurance Institute for Highway Safety’s 2008 Top Safety Picks list, then whittled them down to those with likely price tags of $15,000 or less, average or better reliability, and gas mileage of 20 mpg or higher. He also has some good suggestions for how to keep somewhat of a lid on insurance costs–although make no mistake: you are going to feel it deep in the wallet when you insure a teen driver.

The #1 car? An Audi. For the rest of the list, click here.

Filed Under: Liz's Blog Tagged With: , , ,
March 27, 2012 By

Save money. Don’t multi-task.

The barista had to ask three times for her order before the woman finally responded. She’d been so busy nattering away to her friend in line that she didn’t notice she was now at the front.

And the fun wasn’t over. When it was time to pay, the woman pulled out her wallet and dug fruitlessly inside, opening the same compartments over and over, all the while keeping up the nonstop chatter.

As the seconds ticked passed and the line grew, what started out as vaguely annoying became absolutely absurd. The barista looked at me, the next person in line, and widened her eyes in exasperation.

I shrugged. I was just grateful I’d encountered this person in a coffee shop rather than on the road, where she probably thinks she can drive while talking on the phone just fine.

Obviously, she can’t. None of us can. Multi-tasking is a myth, and only works when both the things you’re trying to do are brain-dead simple–like folding laundry and watching TV. Anything more complicated, and you’re likely to do one or both things far worse than if you’d concentrated on a single task.

But multi-tasking isn’t just stupid. It can be expensive. Consider:

  • Talking on a cell phone while driving is as dangerous as driving drunk. You’re four times as likely to be in an accident.
  • Texting while driving raises your chances of an accident by 20 times.
  • Not only are you risking injury and death–and the injury and death of others–but you’re just begging for a nice juicy lawsuit. As Nolo Press puts it, “plaintiffs have argued (and some courts have agreed) that a driver was legally at fault for the accident (“negligent,” in legalese) because the driver used a cell phone immediately before or during the collision.”
  • If a plaintiff’s attorney can successfully argue that a phone call is distracting, think how much easier his or her case will be if you were texting–which any idiot knows you shouldn’t do in a car.
  • Even if everybody walks away without stunning medical bills, you can bet your life your auto insurance rates will skyrocket.

It’s not that hard to turn off the phone and put it away when you drive. You’ll drive better, and you could save yourself a fortune.

Filed Under: Liz's Blog Tagged With: , , ,