The two main categories of life insurance are term and permanent life insurance.
Term life insurance policies are sold for a fixed number of years that matches your needs. Term life policies are often sold for terms of 10 or 20 years.
You may decide that you and your spouse will have enough income from Social Security and retirement pensions when you retire in 10 years. As a result, you decide you only need a policy in case you die in the next 10 years.
A term life insurance company underwrites your policy, using historical data on insurees with similar risk characteristics to calculate a premium. (Relevant risk characteristics include your health history, age, and gender. You complete a health condition questionnaire and physical exam in order to obtain a certificate of insurability.)
Once you receive a quote for a term life policy, you make level premium payments for the term of the policy. If you die before the end of the term, your beneficiary receives a death benefit. With term life insurance, your policy lapses if you stop paying premiums.
When the policy term ends, you generally have the option to renew, but at a higher premium. A higher premium reflects a greater likelihood of your death during the renewal term. (You're older, after all.) Insurers like to say that your mortality risk is higher, justifying the higher premiums.
Permanent life insurance is different from term life insurance. For one, permanent life insurance provides coverage until you, the policyholder, die. You may cancel, or surrender, a permanent life policy but will likely have to pay a surrender charge. Surrender charges are like paying a back-end load when you sell shares of a mutual fund—it lowers the investment performance of the policy.
A second major distinction of permanent life insurance is that your policy builds up a cash value. Cash value is also called cash surrender value (CSV). This buildup in cash value occurs because you invest a part of your permanent life premiums.
How these premiums are invested is what determines what type of permanent life insurance you have. The most common types are whole life, universal life, and variable life insurance.
For example, you may pay $1,000 in premiums over a 12-month period. If the premiums are invested and increase in value, the future premium necessary to keep your policy active may drop to, say, $500. As a result, your premiums accumulate a cash value of $500 after the first year.
Your cash value is the amount you are entitled to if you cancel your policy. With some types of permanent life insurance, you can use the cash value in your policy to adjust either your death benefit or premiums. Alternatively, if the cash value of your policy declines, your death benefit may also decline.
Cash value is a personal asset. You should include this asset when you prepare a statement of your personal net worth. When you apply for a loan, for example, you should disclose the cash value of an insurance policy as a personal asset. You can also use the cash value of an insurance policy as collateral for a loan request.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Sunday, February 1, 2009
Estimating Coverage Needs
Life insurance provides payments to your beneficiaries that replaces some or all of your income if you die during the coverage period. These payments make up what is called a death benefit.
In exchange for insurance coverage, the insured person (insuree) makes periodic payments called premiums to the insurance company (insurer). To determine a policy premium, the insurer uses a method called underwriting. The insuree is also called the policyholder.
In order to be eligible for coverage, the insuree receives a certificate of insurability. This is an endorsement of the insurance company's willingness to sell a policy. A certificate of insurability is sometimes required for certain changes in policy coverage.
Most life insurance policies are taken out to replace family income in the event of an untimely death. As a result, these policies often designate a spouse, child, sibling, or parent as beneficiary. The policy may also designate more than one beneficiary.
Some types of life insurance allow you to change your premiums or stop paying them for a while. These premiums are called flexible premiums. This situation occurs if the investments that are funded by some of your premiums earn a higher-than-expected rate of return.
An expedient way of determining the right amount of coverage is to take a multiple of your annual salary. For example, a multiple of 5 and annual salary of $50,000 would equal policy coverage of $250,000. The following five steps can help you to more accurately estimate your coverage needs:
Determine your coverage period. For example, if you think the next 20 years of your life are essential to provide for a young family, a 20-year coverage period would be appropriate.
Calculate the expenses that require coverage. If you are a main breadwinner in the family and die suddenly, the family is sure to feel the financial impact. You might decide to buy a policy that insures half of your salary for the first 10 years of the policy and 25% for the subsequent 10 years.
Additionally, your death will have some expenses associated with it. Funerals routinely cost a few thousand dollars or more. You may also have other debts or funds that either need to be repaid immediately or replenished when you die.
Reduce the amount of required coverage by available assets and income. Assets that you own today can be sold to pay off debts or raise cash. Selling these assets might reduce the amount of necessary policy coverage. Additionally, any future income that your beneficiaries are expected to receive will reduce the coverage amount.
Add estimates for inflation, interest rates on savings, and taxes. Inflation leads to higher expenses in the future. If your beneficiary's income fails to grow at the same rate, your coverage may be inadequate. On the other hand, if interest rates on your savings keep pace with inflation, you shouldn't have to increase your coverage. For taxation of life insurance benefits, see IRS Pub. 525: "Taxable and Nontaxable Income."
(Note: This document is in Portable Document Format (PDF). If you do not have a PDF reader installed on your computer, you can download a version of Acrobat Reader for free at Adobe Systems' Web site.)
Find other ways to lower your premiums. Since your health is a large determinant of your premiums, consider avoiding tobacco and alcohol. A healthy medical history helps.
Skydiving, motorcycle riding, and scuba diving are activities with higher accident and fatality rates. Avoiding these kinds of "insurance risks" can help to lower your premiums.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
In exchange for insurance coverage, the insured person (insuree) makes periodic payments called premiums to the insurance company (insurer). To determine a policy premium, the insurer uses a method called underwriting. The insuree is also called the policyholder.
In order to be eligible for coverage, the insuree receives a certificate of insurability. This is an endorsement of the insurance company's willingness to sell a policy. A certificate of insurability is sometimes required for certain changes in policy coverage.
Most life insurance policies are taken out to replace family income in the event of an untimely death. As a result, these policies often designate a spouse, child, sibling, or parent as beneficiary. The policy may also designate more than one beneficiary.
Some types of life insurance allow you to change your premiums or stop paying them for a while. These premiums are called flexible premiums. This situation occurs if the investments that are funded by some of your premiums earn a higher-than-expected rate of return.
An expedient way of determining the right amount of coverage is to take a multiple of your annual salary. For example, a multiple of 5 and annual salary of $50,000 would equal policy coverage of $250,000. The following five steps can help you to more accurately estimate your coverage needs:
Determine your coverage period. For example, if you think the next 20 years of your life are essential to provide for a young family, a 20-year coverage period would be appropriate.
Calculate the expenses that require coverage. If you are a main breadwinner in the family and die suddenly, the family is sure to feel the financial impact. You might decide to buy a policy that insures half of your salary for the first 10 years of the policy and 25% for the subsequent 10 years.
Additionally, your death will have some expenses associated with it. Funerals routinely cost a few thousand dollars or more. You may also have other debts or funds that either need to be repaid immediately or replenished when you die.
Reduce the amount of required coverage by available assets and income. Assets that you own today can be sold to pay off debts or raise cash. Selling these assets might reduce the amount of necessary policy coverage. Additionally, any future income that your beneficiaries are expected to receive will reduce the coverage amount.
Add estimates for inflation, interest rates on savings, and taxes. Inflation leads to higher expenses in the future. If your beneficiary's income fails to grow at the same rate, your coverage may be inadequate. On the other hand, if interest rates on your savings keep pace with inflation, you shouldn't have to increase your coverage. For taxation of life insurance benefits, see IRS Pub. 525: "Taxable and Nontaxable Income."
(Note: This document is in Portable Document Format (PDF). If you do not have a PDF reader installed on your computer, you can download a version of Acrobat Reader for free at Adobe Systems' Web site.)
Find other ways to lower your premiums. Since your health is a large determinant of your premiums, consider avoiding tobacco and alcohol. A healthy medical history helps.
Skydiving, motorcycle riding, and scuba diving are activities with higher accident and fatality rates. Avoiding these kinds of "insurance risks" can help to lower your premiums.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
How Term Life Works
Term life insurance policies are sold for a specific number of years. Ten- and 20-year terms are the most common. The "term" in term insurance means the following:
Number of years your policy coverage lasts. A term life insurance policy's death benefit is only paid if the policyholder dies during the coverage period. If the term ends or the policyholder stops paying premiums, the policy lapses. A lapsed policy is a worthless policy.
Number of years you are required to pay premiums. Term life insurance requires you to pay premiums regularly in order to maintain policy coverage. Term life insurance does not build up cash value the way premiums do for permanent life insurance.
Larger premiums when renewing the policy. When you first buy a term life policy, you may decide you only want coverage for 10 years. Ten years later, however, your circumstances may have changed. You may decide to renew the policy.
While your insurer is unlikely to deny coverage, it will charge you a higher premium. Let's face it: you're 10 years older and death is that much more certain. Your insurer will demand a higher premium to compensate it for the higher probability of your death in the renewal period.
Term life insurance provides insurance coverage in exchange for a premium that is generally cheaper than a premium for permanent life insurance. Also, term life insurance is often paid with level premiums, at least until it's time to renew the policy.
The following table shows how premiums generally are generally quoted according to your health, age, and gender. The table shows a range of level premiums from one of the many Web sites that provide free online quotes for term life insurance premiums. (You will still need to obtain a certificate of insurability from a physician to verify that your health condition is as good as you claim it to be.)
The candidate is a healthy, non-smoking 50-year-old seeking a $100,000 term life policy in California. For example, this person would pay somewhere between $151 and $325 in annual premiums for a 10-year term life policy.
Range of (level) term life premiums, 10 and 20 years:Gender Term Range of
annual premiums
Male 10 years $186 - $325
Female 10 years $151 - $240
Male 20 years $312 - $501
Female 20 years $225 - $378
Source: Lifeinsurance.net.
These quotes are intended only as a sample to show the relative ranges of premiums. These are not intended as marketable quotes. You see that the quotes for women are cheaper, reflecting a longer average life span and lower fatality rate from accidents.
In addition, you see how the premiums increase for the 20-year term. The higher premiums incorporate the higher mortality risk associated with the longer period. A 50-year-old has a greater probability of dying within 20 years than within 10 years.
To help you decide whether term or permanent insurance is best for you, you should evaluate the various types of permanent life insurance. The major types are whole life, universal life, and variable life insurance.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Number of years your policy coverage lasts. A term life insurance policy's death benefit is only paid if the policyholder dies during the coverage period. If the term ends or the policyholder stops paying premiums, the policy lapses. A lapsed policy is a worthless policy.
Number of years you are required to pay premiums. Term life insurance requires you to pay premiums regularly in order to maintain policy coverage. Term life insurance does not build up cash value the way premiums do for permanent life insurance.
Larger premiums when renewing the policy. When you first buy a term life policy, you may decide you only want coverage for 10 years. Ten years later, however, your circumstances may have changed. You may decide to renew the policy.
While your insurer is unlikely to deny coverage, it will charge you a higher premium. Let's face it: you're 10 years older and death is that much more certain. Your insurer will demand a higher premium to compensate it for the higher probability of your death in the renewal period.
Term life insurance provides insurance coverage in exchange for a premium that is generally cheaper than a premium for permanent life insurance. Also, term life insurance is often paid with level premiums, at least until it's time to renew the policy.
The following table shows how premiums generally are generally quoted according to your health, age, and gender. The table shows a range of level premiums from one of the many Web sites that provide free online quotes for term life insurance premiums. (You will still need to obtain a certificate of insurability from a physician to verify that your health condition is as good as you claim it to be.)
The candidate is a healthy, non-smoking 50-year-old seeking a $100,000 term life policy in California. For example, this person would pay somewhere between $151 and $325 in annual premiums for a 10-year term life policy.
Range of (level) term life premiums, 10 and 20 years:Gender Term Range of
annual premiums
Male 10 years $186 - $325
Female 10 years $151 - $240
Male 20 years $312 - $501
Female 20 years $225 - $378
Source: Lifeinsurance.net.
These quotes are intended only as a sample to show the relative ranges of premiums. These are not intended as marketable quotes. You see that the quotes for women are cheaper, reflecting a longer average life span and lower fatality rate from accidents.
In addition, you see how the premiums increase for the 20-year term. The higher premiums incorporate the higher mortality risk associated with the longer period. A 50-year-old has a greater probability of dying within 20 years than within 10 years.
To help you decide whether term or permanent insurance is best for you, you should evaluate the various types of permanent life insurance. The major types are whole life, universal life, and variable life insurance.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Variable Life Insurance
Variable life insurance is similar to universal life insurance. As the cash value of your policy accumulates, you can modify your policy's death benefit.
The two main differences between variable and universal life insurance are: 1) Variable life does not have flexible premiums, and 2) Variable life allows you to invest in riskier investments such as stocks, bonds, and mutual funds. (Universal life insurance is generally restricted to safe investments that earn a lower rate of return.)
As a result of the riskier investments, your cash value is likely to fluctuate more with a variable life insurance policy. This fluctuation means your death benefit is more likely to change from one month to the next. You may share in the upside potential, but you also share in any downside potential.
Before buying a variable life insurance policy, you should be aware of the risks involved in investing. It pays to be familiar with basic investment principles. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
The two main differences between variable and universal life insurance are: 1) Variable life does not have flexible premiums, and 2) Variable life allows you to invest in riskier investments such as stocks, bonds, and mutual funds. (Universal life insurance is generally restricted to safe investments that earn a lower rate of return.)
As a result of the riskier investments, your cash value is likely to fluctuate more with a variable life insurance policy. This fluctuation means your death benefit is more likely to change from one month to the next. You may share in the upside potential, but you also share in any downside potential.
Before buying a variable life insurance policy, you should be aware of the risks involved in investing. It pays to be familiar with basic investment principles. The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Policy Riders
A policy rider is a provision or modification to an existing insurance policy that provides additional coverage to an insurance policy. Generally, policy riders are sold separately from insurance policies.
Examples of riders include buying coverage to pay an accelerated death benefit, add your children to a life insurance policy, or to protect against an accidental death. A double indemnity rider pays twice the amount of the policy if you die accidentally.
A waiver of premium rider is a rider that lets you stop paying premiums for a policy if you become disabled for a sustained period of time before reaching age 60 or 65. The rider keeps your policy active by paying premiums for you. (In normal cases, a term life policy lapses when you stop paying premiums.)
Another example of a rider guarantees additional life insurance coverage without first having to obtain a certificate of insurability. (A certificate is often issued after you pass a physical exam.) This kind of policy rider is often called a guaranteed insurability rider.
You should evaluate whether a policy rider offers additional protection that you deem worth the extra expense. In some cases, a life insurer offers free rider coverage.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Examples of riders include buying coverage to pay an accelerated death benefit, add your children to a life insurance policy, or to protect against an accidental death. A double indemnity rider pays twice the amount of the policy if you die accidentally.
A waiver of premium rider is a rider that lets you stop paying premiums for a policy if you become disabled for a sustained period of time before reaching age 60 or 65. The rider keeps your policy active by paying premiums for you. (In normal cases, a term life policy lapses when you stop paying premiums.)
Another example of a rider guarantees additional life insurance coverage without first having to obtain a certificate of insurability. (A certificate is often issued after you pass a physical exam.) This kind of policy rider is often called a guaranteed insurability rider.
You should evaluate whether a policy rider offers additional protection that you deem worth the extra expense. In some cases, a life insurer offers free rider coverage.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Universal Life Insurance
The first type of permanent life insurance that we look at is universal life insurance. Universal life insurance is also called adjustable life insurance. Remember that, with permanent life insurance, some of your premium is invested. Features of universal life include:
Flexible premiums. After you pay an initial premium, universal life insurance provides flexibility in paying your premiums. For example, if the portion of invested premiums is growing, you can pay future premiums from this buildup in value.
Of course, the investment performance determines how much, if any, flexibility you have to modify your premiums. With universal life insurance, you invest a part of your premiums in a money market account or similar investment that earns a stable, positive rate of return. Insurance companies also offer universal life insurance with a guaranteed minimum rate of return.
Cash value feature. The portion of invested premiums accumulates a cash value. This cash value is held in an accumulation fund. You can withdraw the cash value from a universal life insurance policy. You can also claim it as an asset when you apply for a loan. Any withdrawals from the accumulation fund are deducted from the policy's cash value.
While the invested premiums of a universal life insurance policy are generally restricted to safe, low-yielding investments, a variable universal life insurance policy lets you invest a portion of premiums in riskier investments such as stocks and bonds. Variable universal life is a hybrid. It combines features of universal life and variable life insurance.
Death benefit. With universal life insurance, your beneficiary receives a death benefit when you die. Your beneficiary generally does not owe federal income taxes on the death benefit. Death benefits are also free from probate costs and can be protected from creditors in case of bankruptcy. Because of these features, universal life insurance is often used in estate planning.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Flexible premiums. After you pay an initial premium, universal life insurance provides flexibility in paying your premiums. For example, if the portion of invested premiums is growing, you can pay future premiums from this buildup in value.
Of course, the investment performance determines how much, if any, flexibility you have to modify your premiums. With universal life insurance, you invest a part of your premiums in a money market account or similar investment that earns a stable, positive rate of return. Insurance companies also offer universal life insurance with a guaranteed minimum rate of return.
Cash value feature. The portion of invested premiums accumulates a cash value. This cash value is held in an accumulation fund. You can withdraw the cash value from a universal life insurance policy. You can also claim it as an asset when you apply for a loan. Any withdrawals from the accumulation fund are deducted from the policy's cash value.
While the invested premiums of a universal life insurance policy are generally restricted to safe, low-yielding investments, a variable universal life insurance policy lets you invest a portion of premiums in riskier investments such as stocks and bonds. Variable universal life is a hybrid. It combines features of universal life and variable life insurance.
Death benefit. With universal life insurance, your beneficiary receives a death benefit when you die. Your beneficiary generally does not owe federal income taxes on the death benefit. Death benefits are also free from probate costs and can be protected from creditors in case of bankruptcy. Because of these features, universal life insurance is often used in estate planning.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Small Towns Opt for Terrorism Insurance
Small rural and suburban communities - some with few structures taller than a good-sized maple tree - might be unlikely targets for terrorists, but many of them are protecting their police stations and water towers with terrorism insurance.
The extra coverage is relatively inexpensive - for a small village it can amount to less than $100 a year - and in many cases it's a standard feature of government insurance pools. But some question whether it is necessary.
In April, leaders of West Baraboo, a Wisconsin village of 1,200, debated whether to purchase terrorism coverage.
"If terrorists got this far into the country, there wouldn't be anyone to make the claim anyway," said village clerk Mary Klingenmeyer. But the village board voted 5-2 to pay $87 annually for the coverage.
"We had quite a few outlying areas laughing at us," Klingenmeyer said. "Maybe we'll have the last laugh."
James Hamilton, director of pooling programs at the National League of Cities Risk Information Sharing Consortium, said terrorism coverage is a common feature among the league's 34 affiliated state insurance pool programs, which cover nearly 16,000 towns, cities and schools.
"Even though the chance (of a terrorist attack) may be very minute -- if something were to happen, they don't want to be caught without protection," Hamilton said. The town of Plainfield, Ind., population about 24,000, decided that its proximity to a major highway, an airport and a rail system made coverage worth the extra $1,700 a year, said clerk Wesley Bennett.
"For $150 a month we felt it was appropriate to get that kind of coverage for the amount of assets we have," Bennett said.
Wisconsin offers coverage in pool policies
The state of Wisconsin's Local Government Property Insurance Fund provides terrorism coverage at no extra charge in its pool insurance policies, which cover more than 1,100 Wisconsin public entities, according to Eileen Mallow, Wisconsin's assistant deputy commissioner of insurance. The insured include small villages such as Endeavor, Wis., population 440. West Baraboo is not part of the state pool. According to Klingenmeyer, the town opted to get its insurance through a local agency.
Mallow said none of the 1,100 pool members have made a terrorism insurance claim. There haven't been any claims in Nebraska and South Dakota either, according to officials who work for pools in those states.
In 2005, Wisconsin hired a consultant to assess the state's terrorism risk. "We concluded that there is no significant additional risk that we need to charge extra for," Mallow said.
Jill Dalton, a managing director at Marsh Inc., a global insurance broker, said that 40% of the smaller public entities that Marsh insures purchase terrorism coverage. About 69% of large public entities buy the plans, she said.
Dalton said the cost of terrorism insurance for a municipality varies, based on factors such as the size of a deductible, a policy's limit and how many policies have been sold in an area.
Claire Wilkinson, vice president of global issues for the Insurance Information Institute, said a Marsh study last year indicated the median cost of terrorism insurance for a public entity in 2006 was $37 per $1 million of insured value, down from $44 per million in 2004. So a community insuring $80 million of property might pay about $3,000 annually on terror insurance.
Rates differ based on risk
Wilkinson said different public entities will pay different rates based on their risk.
"There are complex issues which go into the rating," she said. "It's not like hurricane risk. Insurers have less experience with terrorism risk and it's very difficult to predict the frequency and severity of attacks."
Two years ago, Lincolnshire, a suburban Chicago village of about 7,000 people, opted to drop its terrorism coverage. The move saved the village about $6,000, according to Village Manager Robert Irvin.
A community that suffered losses from a large terrorist attack could qualify for FEMA aid, said Ronald Cuccaro, president and CEO of Adjusters International, a disaster recovery consulting organization.
Cuccaro said terrorism insurance could help a community that suffered smaller losses in an attack.
"Let's say there was a small terrorist attack that carried just a few million dollars worth of damage," he said. "That may not be large enough to qualify for a declared disaster."
Cuccaro said after the 9/11 terrorist attacks, insurance companies began to exclude terrorism protection from their coverage. He said this prompted the Terrorism Risk Insurance Act, which was signed into law in 2002, which he said acts as a federal backstop for insurance companies.
But insurance doesn't cover everything. Cuccaro said terrorism coverage is specifically defined in policies and generally needs to be an event carried out by a group of people for political purposes.
"Just because it is exploding doesn't mean it will be covered," he said.
John Piernot, a retired postal worker who lives in West Baraboo, said he doesn't blame village leaders for making sure the community is covered. But he doesn't feel the village is at great risk.
"As far as I'm concerned, if the product were offered, I wouldn't buy it," he said.
Jones reports for The Post-Crescent in Appleton, Wis.
The extra coverage is relatively inexpensive - for a small village it can amount to less than $100 a year - and in many cases it's a standard feature of government insurance pools. But some question whether it is necessary.
In April, leaders of West Baraboo, a Wisconsin village of 1,200, debated whether to purchase terrorism coverage.
"If terrorists got this far into the country, there wouldn't be anyone to make the claim anyway," said village clerk Mary Klingenmeyer. But the village board voted 5-2 to pay $87 annually for the coverage.
"We had quite a few outlying areas laughing at us," Klingenmeyer said. "Maybe we'll have the last laugh."
James Hamilton, director of pooling programs at the National League of Cities Risk Information Sharing Consortium, said terrorism coverage is a common feature among the league's 34 affiliated state insurance pool programs, which cover nearly 16,000 towns, cities and schools.
"Even though the chance (of a terrorist attack) may be very minute -- if something were to happen, they don't want to be caught without protection," Hamilton said. The town of Plainfield, Ind., population about 24,000, decided that its proximity to a major highway, an airport and a rail system made coverage worth the extra $1,700 a year, said clerk Wesley Bennett.
"For $150 a month we felt it was appropriate to get that kind of coverage for the amount of assets we have," Bennett said.
Wisconsin offers coverage in pool policies
The state of Wisconsin's Local Government Property Insurance Fund provides terrorism coverage at no extra charge in its pool insurance policies, which cover more than 1,100 Wisconsin public entities, according to Eileen Mallow, Wisconsin's assistant deputy commissioner of insurance. The insured include small villages such as Endeavor, Wis., population 440. West Baraboo is not part of the state pool. According to Klingenmeyer, the town opted to get its insurance through a local agency.
Mallow said none of the 1,100 pool members have made a terrorism insurance claim. There haven't been any claims in Nebraska and South Dakota either, according to officials who work for pools in those states.
In 2005, Wisconsin hired a consultant to assess the state's terrorism risk. "We concluded that there is no significant additional risk that we need to charge extra for," Mallow said.
Jill Dalton, a managing director at Marsh Inc., a global insurance broker, said that 40% of the smaller public entities that Marsh insures purchase terrorism coverage. About 69% of large public entities buy the plans, she said.
Dalton said the cost of terrorism insurance for a municipality varies, based on factors such as the size of a deductible, a policy's limit and how many policies have been sold in an area.
Claire Wilkinson, vice president of global issues for the Insurance Information Institute, said a Marsh study last year indicated the median cost of terrorism insurance for a public entity in 2006 was $37 per $1 million of insured value, down from $44 per million in 2004. So a community insuring $80 million of property might pay about $3,000 annually on terror insurance.
Rates differ based on risk
Wilkinson said different public entities will pay different rates based on their risk.
"There are complex issues which go into the rating," she said. "It's not like hurricane risk. Insurers have less experience with terrorism risk and it's very difficult to predict the frequency and severity of attacks."
Two years ago, Lincolnshire, a suburban Chicago village of about 7,000 people, opted to drop its terrorism coverage. The move saved the village about $6,000, according to Village Manager Robert Irvin.
A community that suffered losses from a large terrorist attack could qualify for FEMA aid, said Ronald Cuccaro, president and CEO of Adjusters International, a disaster recovery consulting organization.
Cuccaro said terrorism insurance could help a community that suffered smaller losses in an attack.
"Let's say there was a small terrorist attack that carried just a few million dollars worth of damage," he said. "That may not be large enough to qualify for a declared disaster."
Cuccaro said after the 9/11 terrorist attacks, insurance companies began to exclude terrorism protection from their coverage. He said this prompted the Terrorism Risk Insurance Act, which was signed into law in 2002, which he said acts as a federal backstop for insurance companies.
But insurance doesn't cover everything. Cuccaro said terrorism coverage is specifically defined in policies and generally needs to be an event carried out by a group of people for political purposes.
"Just because it is exploding doesn't mean it will be covered," he said.
John Piernot, a retired postal worker who lives in West Baraboo, said he doesn't blame village leaders for making sure the community is covered. But he doesn't feel the village is at great risk.
"As far as I'm concerned, if the product were offered, I wouldn't buy it," he said.
Jones reports for The Post-Crescent in Appleton, Wis.
Health Insurance Tips...Shop for Private Insurance
Buying private health insurance is the only coverage option for some consumers and the most frugal for others -- even if they have an employer-sponsored plan to choose from. A healthy, 30-year-old male in Texas, for example, could pay as little as $37 a month with a private policy, according to Insurance.com. That's $250 a year less than the national average employee pays for individual coverage. (On the other hand, someone with a pre-existing condition might pay upwards of $2,500 a year for private insurance -- five times the cost of the company plan.)
Shopping for inexpensive private insurance, however, requires a substantial commitment of both time and effort, says Jonathan Pletzke, author of "Getting a Good Deal on Your Health Insurance Without Getting Ripped Off." Every insurer gets to set its own requirements within the confines of state regulations, he explains. That makes for a complex web of options, many of which hinge on the results of a physical exam. (For buying tips, click here. Still not sold? Click here to assess the pros and cons of going private.)
Also, check state-run programs that offer free or low-cost insurance. Use the five-question survey at the Foundation for Health Coverage Education to determine your eligibility for different policies. Women and children have better odds of obtaining coverage -- even if they aren't low-income, says Lebherz. A pregnant woman in California could make as much as $63,000 a year and still qualify for free health care through state insurer Medi-Cal.
Shopping for inexpensive private insurance, however, requires a substantial commitment of both time and effort, says Jonathan Pletzke, author of "Getting a Good Deal on Your Health Insurance Without Getting Ripped Off." Every insurer gets to set its own requirements within the confines of state regulations, he explains. That makes for a complex web of options, many of which hinge on the results of a physical exam. (For buying tips, click here. Still not sold? Click here to assess the pros and cons of going private.)
Also, check state-run programs that offer free or low-cost insurance. Use the five-question survey at the Foundation for Health Coverage Education to determine your eligibility for different policies. Women and children have better odds of obtaining coverage -- even if they aren't low-income, says Lebherz. A pregnant woman in California could make as much as $63,000 a year and still qualify for free health care through state insurer Medi-Cal.
Health Insurance Tips..Increase Your Out-of-Pocket Costs
A good thing to keep in mind is that insurance is supposed to protect against a catastrophe, not pay for regular health maintenance costs. The more you agree to pay for things out of pocket in the form of deductibles and co-payments, the less you'll fork over in premiums. "For young, healthy people, it's a good way to save," says Phil Lebherz, founder of the Foundation for Health Coverage Education, a nonprofit. You're not paying for doctors' visits you won't make, or services you won't use. A 25-year-old woman that increases her Oxford Health Plans deductible from $2,000 to $2,850, for example, could cut her monthly premiums by 18%.
Even better: Many high-deductible plans are paired with heath savings accounts, which allow you to stow away pretax contributions that grow tax-free and can be rolled over from year to year. Both employer and employee can add to the account. Until the deductible is met, any health-care expenses are paid out of the HSA. Keep health-care costs low, and it's possible to come out ahead, says Lebherz. But if you have significant health problems or expenses, the downside of this strategy can quickly outweigh any advantage.
Even better: Many high-deductible plans are paired with heath savings accounts, which allow you to stow away pretax contributions that grow tax-free and can be rolled over from year to year. Both employer and employee can add to the account. Until the deductible is met, any health-care expenses are paid out of the HSA. Keep health-care costs low, and it's possible to come out ahead, says Lebherz. But if you have significant health problems or expenses, the downside of this strategy can quickly outweigh any advantage.
Don't Forfeit Your Flex Spending Account
INDIANAPOLIS (Dec. 30) - Stocking up on aspirin by Wednesday night will do more than blunt a New Year's Day hangover for many people across the country.
Purchases like that also help employees who hold health Flexible Spending Accounts whittle their balances before 2008 ends and, in many cases, they forfeit their money.
Benefits experts say there are several last-minute ways to use leftover money in these accounts. FSAs give consumers possible tax savings by letting them use money from payroll deductions on certain health-related expenses.
People with accounts that must be used by Dec. 31 have no time to schedule a medical procedure. Even squeezing in an eye exam may prove impossible, so it's time to start thinking about the small items.
Band-Aids, cough syrup, laxatives and even condoms are all eligible for flex spending dollars.
"Over the counter (medicine) tends to be the best way to use up those dollars at year-end that are just kind of lingering out there so you don't forfeit them," said Kelsey Horne, vice president of Dallas-based Taxsaver Plan, which administers FSAs for about 300 large employers.
She said a family of four tends to spend about $200 each year on over-the-counter items that can be reimbursed through an FSA.
Still before you go on a shopping spree, make sure that you've submitted all claims for eligible procedures done earlier in the year. Remember to include proper documentation.
Many people know prescription eye glasses are covered, but few realize FSAs also pay for nonprescription reading glasses, said Tracy Watts, a senior health care consultant with the human resources firm Mercer.
Transportation expenses for a medical visit also can be covered. That includes parking fees, a bus ticket or miles traveled in your car.
Scott Stoddard and his wife have never come close to leaving money in their FSA account. But the Bountiful, Utah, resident said he tracks his mileage every year just in case he has to submit a last-minute claim to use up lingering dollars.
Many people also fail to use their FSA accounts on dental braces, Horne said. She noted that the costs are covered by FSAs because they fix a medical problem and are more than just cosmetic.
The Internal Revenue Service fills several pages on its Web site with examples of expenses covered by FSAs. Among the items you'll find are Braille books and wages paid for nursing services.
But account holders should always check with their employer because a company can limit reimbursable expenses permitted by its plan, Watts said.
People also should avoid wiping out the corner drug store's Pepto-Bismol supply just to drain their FSA balance. Plan administrators watch for stockpiling, and they may reject claims where they think that happens.
FSA users also should know their deadlines. Many plans give account holders anywhere from 30 to 90 days after the end of the year to submit their receipts from that year.
The IRS also allows a separate grace period of up to two and a half months to incur expenses tied to the previous year. That means that for some plans, people will have until March 15 to use their 2008 account balances.
This grace period is becoming popular, according to Robin Downey, head of product development and consumer funds services for the managed care company Aetna Inc. Only 30 percent of Hartford, Conn.-based Aetna's clients offered the grace period this year, but Downey expects that to double next year.
Downey said the extra time should help people overcome their skepticism about the accounts.
"If we can give you a little grace period to help you use those dollars better, then you'll be more encouraged to put money into the FSA because that was the problem," she said.
If people don't use their account money before their plan's deadline, they lose it. However, the remaining balance doesn't fall into a black hole.
Employers must spend it on a benefit area covered by the Employee Retirement Income Security Act. That means it can offset administrative fees for the FSA or for another health plan, Horne said.
Still FSA users are best served by spending every last dollar. What's left behind could be significant. Aetna estimates that about 14 percent of its FSA users leave an average of $723 each year.
Purchases like that also help employees who hold health Flexible Spending Accounts whittle their balances before 2008 ends and, in many cases, they forfeit their money.
Benefits experts say there are several last-minute ways to use leftover money in these accounts. FSAs give consumers possible tax savings by letting them use money from payroll deductions on certain health-related expenses.
People with accounts that must be used by Dec. 31 have no time to schedule a medical procedure. Even squeezing in an eye exam may prove impossible, so it's time to start thinking about the small items.
Band-Aids, cough syrup, laxatives and even condoms are all eligible for flex spending dollars.
"Over the counter (medicine) tends to be the best way to use up those dollars at year-end that are just kind of lingering out there so you don't forfeit them," said Kelsey Horne, vice president of Dallas-based Taxsaver Plan, which administers FSAs for about 300 large employers.
She said a family of four tends to spend about $200 each year on over-the-counter items that can be reimbursed through an FSA.
Still before you go on a shopping spree, make sure that you've submitted all claims for eligible procedures done earlier in the year. Remember to include proper documentation.
Many people know prescription eye glasses are covered, but few realize FSAs also pay for nonprescription reading glasses, said Tracy Watts, a senior health care consultant with the human resources firm Mercer.
Transportation expenses for a medical visit also can be covered. That includes parking fees, a bus ticket or miles traveled in your car.
Scott Stoddard and his wife have never come close to leaving money in their FSA account. But the Bountiful, Utah, resident said he tracks his mileage every year just in case he has to submit a last-minute claim to use up lingering dollars.
Many people also fail to use their FSA accounts on dental braces, Horne said. She noted that the costs are covered by FSAs because they fix a medical problem and are more than just cosmetic.
The Internal Revenue Service fills several pages on its Web site with examples of expenses covered by FSAs. Among the items you'll find are Braille books and wages paid for nursing services.
But account holders should always check with their employer because a company can limit reimbursable expenses permitted by its plan, Watts said.
People also should avoid wiping out the corner drug store's Pepto-Bismol supply just to drain their FSA balance. Plan administrators watch for stockpiling, and they may reject claims where they think that happens.
FSA users also should know their deadlines. Many plans give account holders anywhere from 30 to 90 days after the end of the year to submit their receipts from that year.
The IRS also allows a separate grace period of up to two and a half months to incur expenses tied to the previous year. That means that for some plans, people will have until March 15 to use their 2008 account balances.
This grace period is becoming popular, according to Robin Downey, head of product development and consumer funds services for the managed care company Aetna Inc. Only 30 percent of Hartford, Conn.-based Aetna's clients offered the grace period this year, but Downey expects that to double next year.
Downey said the extra time should help people overcome their skepticism about the accounts.
"If we can give you a little grace period to help you use those dollars better, then you'll be more encouraged to put money into the FSA because that was the problem," she said.
If people don't use their account money before their plan's deadline, they lose it. However, the remaining balance doesn't fall into a black hole.
Employers must spend it on a benefit area covered by the Employee Retirement Income Security Act. That means it can offset administrative fees for the FSA or for another health plan, Horne said.
Still FSA users are best served by spending every last dollar. What's left behind could be significant. Aetna estimates that about 14 percent of its FSA users leave an average of $723 each year.
Hawaii launches 10-minute, $10 online/phone doc consultations
Good news for those of you who live in Hawaii and are under the weather; a doctor's consultation is no further away than your phone or computer. The state has launched a new program which offers a 10-minute phone or online consultation for as little as $10 for those covered by the state's predominant insurance carrier, HSMA. Those without coverage will pay $45.
The program is designed to take some of the burden off hospitals which routinely are called upon to treat patients who use the emergency room as a family physician for simple, easily treated maladies. Patients can now reach a doc 24/7 by phone, and, if they have a webcam, can even have a face-to-face consultation. The service will be used to treat easily diagnosed problems, for follow-up consultations, and to provide guidance about how to follow up maladies that require hands-on examinations and care.
I'm all in favor of such a service; many times, a quick answer to a simple question is all I need. For example, I once bit my tongue in my sleep, and the bleeding continued for quite some time. A late-night visit to the emergency room ($$$$) only served to inform me that this is normal, and no, they didn't stitch such wounds. If I'd had this service, I could have saved myself a bunch of time and money.
According to Ina Fried of CNET News, island physicians welcome the work. They are paid $25 per 10-minute phone consultation, which they can integrate into their normal schedule to fill otherwise open slots.
If this is successful, look for other vendors to offer even cheaper deals by routing calls to physicians overseas.
The program is designed to take some of the burden off hospitals which routinely are called upon to treat patients who use the emergency room as a family physician for simple, easily treated maladies. Patients can now reach a doc 24/7 by phone, and, if they have a webcam, can even have a face-to-face consultation. The service will be used to treat easily diagnosed problems, for follow-up consultations, and to provide guidance about how to follow up maladies that require hands-on examinations and care.
I'm all in favor of such a service; many times, a quick answer to a simple question is all I need. For example, I once bit my tongue in my sleep, and the bleeding continued for quite some time. A late-night visit to the emergency room ($$$$) only served to inform me that this is normal, and no, they didn't stitch such wounds. If I'd had this service, I could have saved myself a bunch of time and money.
According to Ina Fried of CNET News, island physicians welcome the work. They are paid $25 per 10-minute phone consultation, which they can integrate into their normal schedule to fill otherwise open slots.
If this is successful, look for other vendors to offer even cheaper deals by routing calls to physicians overseas.
It's 'buyer beware' on subprime loans
Remember when you're shopping for a subprime loan, it doesn't mean lenders don't want your business. Just the opposite, actually, but it does mean you'll pay more for the money you borrow -- all the more reason to shop carefully.
"Often buyers aren't doing the shopping," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. "A borrower needs to step back at this point and say, 'I've gotten this offer. Let me get some independent advice and maybe get a few more offers before I decide.'"
The need to shop and compare "is even more important for the subprime borrower," he says.
The gray area
First, are you certain you're subprime? The credit score used to separate prime from subprime varies with the lender and loan.
"Typically, usually below 600, it's safe to say is always subprime," says Barry Paperno, manager of customer service for Fair Isaac Corp., which designed the FICO score. "From 600 to 650 is kind of a gray area, depending on the lender."
A good rule of thumb is that the cutoff will be a FICO score around 620, says Fishbein.
"It's not standard," he says.
Two lenders looking at the same customer could rank him differently. "It's just not as uniform a standard as many borrowers think," says Fishbein. "This has created some confusion in the marketplace."
That means you don't take the first loan you're offered, especially if the rates are subprime. "Anybody in the mid-600 range, credit score-wise, should be very, very careful," says Robert Manning, finance professor at the Rochester Institute of Technology and author of "Credit Card Nation," "particularly if it's an unsolicited loan."
Instead, recognize that you're a commodity.
"Often people feel like they're not desirable as a customer and are happy if anybody wants to work with them," says Fritz Elmendorf, vice president of communications for the Consumer Bankers Association, a financial services trade group.
If you're on the edge, you can do a couple of things. First, be careful where you shop.
Try credit unions and banks that make both prime and subprime loans, says Ira Rheingold, executive director of the National Association of Consumer Advocates. If you're mortgage shopping, try some of the Internet sites that let you shop a variety of lenders simultaneously.
Some lenders are subprime, says Rheingold. "If you walk in and are eligible for prime, they may not be able to provide it to you."
Second, do all those things that will boost your scores a few points. Pay off balances (as much as you can). Keep making on-time payments. If you know you need a home or car loan, don't apply for other forms of credit, such as credit cards, even those preapproved offers or store cards. Inquiries can reduce your score as much as 10 percent, which is a lot if you're on the line between subprime and prime. When you do start shopping for your big loan, keep all your applications within a 14-day period so that the entire process is certain to be counted as one inquiry by the credit bureaus.
"Often buyers aren't doing the shopping," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. "A borrower needs to step back at this point and say, 'I've gotten this offer. Let me get some independent advice and maybe get a few more offers before I decide.'"
The need to shop and compare "is even more important for the subprime borrower," he says.
The gray area
First, are you certain you're subprime? The credit score used to separate prime from subprime varies with the lender and loan.
"Typically, usually below 600, it's safe to say is always subprime," says Barry Paperno, manager of customer service for Fair Isaac Corp., which designed the FICO score. "From 600 to 650 is kind of a gray area, depending on the lender."
A good rule of thumb is that the cutoff will be a FICO score around 620, says Fishbein.
"It's not standard," he says.
Two lenders looking at the same customer could rank him differently. "It's just not as uniform a standard as many borrowers think," says Fishbein. "This has created some confusion in the marketplace."
That means you don't take the first loan you're offered, especially if the rates are subprime. "Anybody in the mid-600 range, credit score-wise, should be very, very careful," says Robert Manning, finance professor at the Rochester Institute of Technology and author of "Credit Card Nation," "particularly if it's an unsolicited loan."
Instead, recognize that you're a commodity.
"Often people feel like they're not desirable as a customer and are happy if anybody wants to work with them," says Fritz Elmendorf, vice president of communications for the Consumer Bankers Association, a financial services trade group.
If you're on the edge, you can do a couple of things. First, be careful where you shop.
Try credit unions and banks that make both prime and subprime loans, says Ira Rheingold, executive director of the National Association of Consumer Advocates. If you're mortgage shopping, try some of the Internet sites that let you shop a variety of lenders simultaneously.
Some lenders are subprime, says Rheingold. "If you walk in and are eligible for prime, they may not be able to provide it to you."
Second, do all those things that will boost your scores a few points. Pay off balances (as much as you can). Keep making on-time payments. If you know you need a home or car loan, don't apply for other forms of credit, such as credit cards, even those preapproved offers or store cards. Inquiries can reduce your score as much as 10 percent, which is a lot if you're on the line between subprime and prime. When you do start shopping for your big loan, keep all your applications within a 14-day period so that the entire process is certain to be counted as one inquiry by the credit bureaus.
5 money mistakes even smart people make
You know how to comparison shop and you contribute regularly to your 401(k) plan.
But there are common mistakes that even money-savvy people can make.
If you've ever let your spouse control the finances, or you've put off examining your credit report or bought something frivolous just because you had a coupon, read on to find out how to banish cash conundrums from your life for good.
Money mistake No. 1: Minding the pennies and missing dollars.
Have you ever driven across town because you wanted to cash in a 50-cent coupon? Do you spend a lot of time searching out bargains and clipping coupons? "It's sweating the small stuff," says Ginita Wall, founder of the Women's Institute for Financial Education and a financial adviser in San Diego. "You're concentrating so much on clipping coupons and getting bargains, you're forgetting what your overall goals are. Then you'll take the money you saved and just spend it on something else."
Also, being pennywise can sometimes cost you more money than you save. For example, you may spend more in gas than you save from the coupon if you have to drive across town to redeem it.
Smart cents solution: Think of your goal.
It's fine to save cents by clipping coupons and shopping around for bargains, but be sure to keep your bigger goal in mind. Why are you saving the money? Is it for your kid's college education, your vacation fund, a new car? Then take the money you save and put it where it will do the best. For example, many grocery stores have banks inside. If you save $7 with coupons, walk over to the bank right then and deposit that $7 into your savings account.
Money mistake No. 2: Being confused by credit reports.
Whenever you seek credit, whether it's a new store card, a car loan or a mortgage, the lender checks your credit report to determine your creditworthiness.
"Credit reports are the most important decision-making tool for creditors," says Catherine Williams, vice president of financial literacy for Money Management International. Even potential employers and landlords can request your report to find out if you'll be a responsible employee or tenant. That's why mistakes on your credit report, whether they're caused by the credit agency or are the result of identity theft or fraud, can make your life miserable.
Smart cents Solution: Check your report.
"Everybody owes it to themselves to get a copy of their credit report, and you should know that the 2003 FACTA (Fair and Accurate Credit Transaction Act) (had) a provision to allow consumers one free copy every year from each of the three major credit bureaus -- Equifax, Experian and TransUnion," says Williams.
You should request a copy of your credit report every year and before making any major purchase. The Web site annualcreditreport.com, sponsored by the three major credit reporting agencies, serves as a centralized, authorized source for consumers to request free credit reports from all three sources. When you request reports there, you can also choose to pay to receive a copy of your credit score.
Each agency differs slightly in the information it carries, so it's a good idea to check all three reports. Also, the reports should come with supporting information on how to read the data and dispute mistakes.
The three bureaus are TransUnion, Equifax and Experian. You can also request credit reports directly from the agencies, usually for a fee, and dispute your credit report's errors.
Money mistake No. 3: Letting budgeting get you down.
Feeling guilty that you don't have a budget? You're not alone. Many people find budgeting such a drag that they just don't do it, says Wall.
Smart cents solution: Do 'spot budgeting.'
Don't feel that you have to budget down to the last penny. If budgeting is a burden, you can do "spot budgeting" instead, says Wall. "Pick three or four categories where you think you can trim expenses -- such as clothes and entertainment -- and cut down on those. You don't need to worry about every expense."
Money mistake No. 4: Letting your money leak away.
Money leaks are those little ways you spend money, usually automatically, without even thinking about it, and often without enjoying it. The daily candy bar at work, the midmorning cappuccino, the $20 bill you hand your kid whenever she asks for money. "That money might be better used for something you would enjoy, such as saving for a cruise," says Wall.
Smart cents solution: Write it down.
Keep a little piece of paper and a pencil in your wallet, suggests Wall. Every time you spend money, jot down what you spent it on and how much it cost. "In three weeks, you'll be able to see where the money is going -- like, gee, the kids are tapping me for $20 every time I turn around ... so your kids may be your money leak," says Wall. "Time to corral in the kids -- no more 'Bank of Mom and Dad."'
Money mistake No. 5: Being out of touch.
Letting your partner have total control of the family finances can spell bad news. If you don't know how much money you have, where key financial documents are stored or how to pay bills or taxes, you could be in for a rude surprise should you ever need to handle the finances on your own.
Smart cents solution: Hold money meetings.
Both partners should know what's going on financially, even if they divvy up the financial duties, says Wall. Even if your spouse is in charge of taxes and investments, for instance, you need to have a handle on those areas, and you should keep your spouse in the loop on your bill paying and budgeting duties.
That's why Wall suggests holding monthly "money meetings" where you and your spouse fill each other in on how much you're earning, what your goals are, where your money's going, how much you're saving and any problems that may be rearing their heads.
"It doesn't mean to sit down and criticize what the other has done," she says. "The treasurer is reporting to the board of directors about where the family stands."
But there are common mistakes that even money-savvy people can make.
If you've ever let your spouse control the finances, or you've put off examining your credit report or bought something frivolous just because you had a coupon, read on to find out how to banish cash conundrums from your life for good.
Money mistake No. 1: Minding the pennies and missing dollars.
Have you ever driven across town because you wanted to cash in a 50-cent coupon? Do you spend a lot of time searching out bargains and clipping coupons? "It's sweating the small stuff," says Ginita Wall, founder of the Women's Institute for Financial Education and a financial adviser in San Diego. "You're concentrating so much on clipping coupons and getting bargains, you're forgetting what your overall goals are. Then you'll take the money you saved and just spend it on something else."
Also, being pennywise can sometimes cost you more money than you save. For example, you may spend more in gas than you save from the coupon if you have to drive across town to redeem it.
Smart cents solution: Think of your goal.
It's fine to save cents by clipping coupons and shopping around for bargains, but be sure to keep your bigger goal in mind. Why are you saving the money? Is it for your kid's college education, your vacation fund, a new car? Then take the money you save and put it where it will do the best. For example, many grocery stores have banks inside. If you save $7 with coupons, walk over to the bank right then and deposit that $7 into your savings account.
Money mistake No. 2: Being confused by credit reports.
Whenever you seek credit, whether it's a new store card, a car loan or a mortgage, the lender checks your credit report to determine your creditworthiness.
"Credit reports are the most important decision-making tool for creditors," says Catherine Williams, vice president of financial literacy for Money Management International. Even potential employers and landlords can request your report to find out if you'll be a responsible employee or tenant. That's why mistakes on your credit report, whether they're caused by the credit agency or are the result of identity theft or fraud, can make your life miserable.
Smart cents Solution: Check your report.
"Everybody owes it to themselves to get a copy of their credit report, and you should know that the 2003 FACTA (Fair and Accurate Credit Transaction Act) (had) a provision to allow consumers one free copy every year from each of the three major credit bureaus -- Equifax, Experian and TransUnion," says Williams.
You should request a copy of your credit report every year and before making any major purchase. The Web site annualcreditreport.com, sponsored by the three major credit reporting agencies, serves as a centralized, authorized source for consumers to request free credit reports from all three sources. When you request reports there, you can also choose to pay to receive a copy of your credit score.
Each agency differs slightly in the information it carries, so it's a good idea to check all three reports. Also, the reports should come with supporting information on how to read the data and dispute mistakes.
The three bureaus are TransUnion, Equifax and Experian. You can also request credit reports directly from the agencies, usually for a fee, and dispute your credit report's errors.
Money mistake No. 3: Letting budgeting get you down.
Feeling guilty that you don't have a budget? You're not alone. Many people find budgeting such a drag that they just don't do it, says Wall.
Smart cents solution: Do 'spot budgeting.'
Don't feel that you have to budget down to the last penny. If budgeting is a burden, you can do "spot budgeting" instead, says Wall. "Pick three or four categories where you think you can trim expenses -- such as clothes and entertainment -- and cut down on those. You don't need to worry about every expense."
Money mistake No. 4: Letting your money leak away.
Money leaks are those little ways you spend money, usually automatically, without even thinking about it, and often without enjoying it. The daily candy bar at work, the midmorning cappuccino, the $20 bill you hand your kid whenever she asks for money. "That money might be better used for something you would enjoy, such as saving for a cruise," says Wall.
Smart cents solution: Write it down.
Keep a little piece of paper and a pencil in your wallet, suggests Wall. Every time you spend money, jot down what you spent it on and how much it cost. "In three weeks, you'll be able to see where the money is going -- like, gee, the kids are tapping me for $20 every time I turn around ... so your kids may be your money leak," says Wall. "Time to corral in the kids -- no more 'Bank of Mom and Dad."'
Money mistake No. 5: Being out of touch.
Letting your partner have total control of the family finances can spell bad news. If you don't know how much money you have, where key financial documents are stored or how to pay bills or taxes, you could be in for a rude surprise should you ever need to handle the finances on your own.
Smart cents solution: Hold money meetings.
Both partners should know what's going on financially, even if they divvy up the financial duties, says Wall. Even if your spouse is in charge of taxes and investments, for instance, you need to have a handle on those areas, and you should keep your spouse in the loop on your bill paying and budgeting duties.
That's why Wall suggests holding monthly "money meetings" where you and your spouse fill each other in on how much you're earning, what your goals are, where your money's going, how much you're saving and any problems that may be rearing their heads.
"It doesn't mean to sit down and criticize what the other has done," she says. "The treasurer is reporting to the board of directors about where the family stands."
Wachovia Quits Offering Risky Mortgage Loan
CHARLOTTE, N.C. (June 30) - Beleaguered consumer bank Wachovia Corp. said Monday it will quit offering a mortgage payment option that allows borrowers to pay less each month than the bank charges in interest.
The choice to pay less was one of the options of Wachovia's controversial Pick-A-Payment mortgages, which offer customers four different payment options each month. Wachovia said it will no longer offer the less-than-full interest payment option on all new home loans.
Wachovia also said it is waiving all prepayment fees associated with its Pick-A-Payment mortgages.
Critics have said paying less than the amount of interest charged can lead to negative amortization. That means the borrower owes more than the value of their home, increasing the chance of foreclosure.
"I think in a difficult time, a lot of people are looking to find ways to avoid foreclosure and we want to make sure our customers have the right products to meet their needs," said Wachovia spokesman Don Vecchiarello.
The move is a major pullback for the nation's fourth-largest bank, which started offering the loan after it purchased California-based mortgage specialist Golden West Financial Corp. in 2006. The portfolio of Pick-A-Payment loans is currently worth $120 billion.
Wachovia said it plans to continue offering a loan with three different payment options for customers: one for the full amount of interest accrued, and payments of principal and interest on a 15- and 30-year repayment schedule. Whether the bank retains the "Pick-A-Payment" name, has yet to be determined, Vecchiarello said.
"They are taking the riskiest component out, as they should," said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "There is no one in this market that should be in a loan like that, not right now."
Like many of the nation's leading financial institutions, Wachovia has been hit hard by a widespread slump in the nation's housing market and ongoing credit crunch. The bank forced out Chief Executive Ken Thompson amid rising loan losses and a series of miscues, including the decision to buy Golden West for roughly $25 billion at the height of the nation's housing boom.
The bank's battered stock tumbled further Monday, falling 67 cents, for more than 4 percent, to $15.55 in late afternoon trading. Wachovia shares fell as low as $14.70, a 16-year low, earlier in the day.
In April, before Wachovia slashed its dividend 41 percent and reported what was to become a $707 million first-quarter loss, the bank said it would revise the underwriting policies in its mortgage loan business - a step that could make it harder to take out a loan at the bank.
The bank had said earlier that month it was considering halting Pick-A-Payment mortgage loans in 17 California counties that have been hit hard by falling home prices and rising foreclosures.
Last week, Wachovia said it has hired Wall Street Investment firm Goldman Sachs Group to analyze its loan portfolio and evaluate various alternatives.
The choice to pay less was one of the options of Wachovia's controversial Pick-A-Payment mortgages, which offer customers four different payment options each month. Wachovia said it will no longer offer the less-than-full interest payment option on all new home loans.
Wachovia also said it is waiving all prepayment fees associated with its Pick-A-Payment mortgages.
Critics have said paying less than the amount of interest charged can lead to negative amortization. That means the borrower owes more than the value of their home, increasing the chance of foreclosure.
"I think in a difficult time, a lot of people are looking to find ways to avoid foreclosure and we want to make sure our customers have the right products to meet their needs," said Wachovia spokesman Don Vecchiarello.
The move is a major pullback for the nation's fourth-largest bank, which started offering the loan after it purchased California-based mortgage specialist Golden West Financial Corp. in 2006. The portfolio of Pick-A-Payment loans is currently worth $120 billion.
Wachovia said it plans to continue offering a loan with three different payment options for customers: one for the full amount of interest accrued, and payments of principal and interest on a 15- and 30-year repayment schedule. Whether the bank retains the "Pick-A-Payment" name, has yet to be determined, Vecchiarello said.
"They are taking the riskiest component out, as they should," said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "There is no one in this market that should be in a loan like that, not right now."
Like many of the nation's leading financial institutions, Wachovia has been hit hard by a widespread slump in the nation's housing market and ongoing credit crunch. The bank forced out Chief Executive Ken Thompson amid rising loan losses and a series of miscues, including the decision to buy Golden West for roughly $25 billion at the height of the nation's housing boom.
The bank's battered stock tumbled further Monday, falling 67 cents, for more than 4 percent, to $15.55 in late afternoon trading. Wachovia shares fell as low as $14.70, a 16-year low, earlier in the day.
In April, before Wachovia slashed its dividend 41 percent and reported what was to become a $707 million first-quarter loss, the bank said it would revise the underwriting policies in its mortgage loan business - a step that could make it harder to take out a loan at the bank.
The bank had said earlier that month it was considering halting Pick-A-Payment mortgage loans in 17 California counties that have been hit hard by falling home prices and rising foreclosures.
Last week, Wachovia said it has hired Wall Street Investment firm Goldman Sachs Group to analyze its loan portfolio and evaluate various alternatives.
Loans & Interest Deductions
You may not be able to avoid borrowing some money to help pay for college. Stafford loans and Perkins loans are the two major loan programs that loan directly to students. (A third category, PLUS loans, are loans made directly to parents to help them pay for a child's cost of attending an undergraduate program.)
Stafford loans are either subsidized or unsubsidized loans. Stafford loans are disbursed by a bank or other private lender that participates in the Federal Family Education Loan Program (FFELP). The government may disburse the loan directly through the Federal Direct Student Loan Program (FDSLP).
The amount you can borrow with a Stafford loan depends on whether you are an undergraduate or graduate student. You can also borrow different yearly amounts depending on your year in college or whether you are a graduate student.
Undergraduate students who are dependent on their parents can borrow up to a total amount of $23,000, or $46,000 if independent. Graduate students who are dependent on their parents can borrow up to a total of $65,500, or $138,500 if independent.
The interest rate on Stafford loans is indexed to the yield on 3-month T-bills. The margin on the loan is 1.7 percentage points above the T-bill yield until you graduate. After you graduate, the margin increases to 2.3 percentage points. Stafford loans have a lifetime cap of 8.25%. (This cap may be revised.) With a Stafford loan, you may defer interest payments until the loan's grace period expires. (The deferred interest is added to your loan amount.)
Perkins loans are student loans that the school makes directly to the student with the use of government funds. The federal government pays the interest during school and during a grace period that lasts nine months. The interest rate cap on a Perkins loan is 5%.
To apply for either a Stafford or Perkins loan, as well as any other federal financial aid, you must complete a Free Application for Federal Student Aid (FAFSA).
As a result of the 2001 tax law, you can take a tax deduction of up to $2,500 for interest expense paid on student loans over the entire loan term. (Previously, you were limited to taking a deduction during the first 60 months of the loan term.)
The tax law also increases the income limits for taking this deduction. For taxpayers filing a single return in 2008, your allowable deduction begins to phase out when your modified adjusted gross income (MAGI) reaches $55,000. The allowable student-interest deduction phases out completely when your MAGI reaches $55,000. For married taxpayers filing a joint return, the increased income limits are $115,000 and $145,000, respectively.
To take a student loan interest deduction, enter the amount of the deduction on line 33 of the 2007 IRS Form 1040. (Note: This document is in Portable Document Format (PDF). If you do not have a PDF reader installed on your computer, you can download a version of Acrobat Reader for free at Adobe Systems' Web site.)
If your income falls within the income limits shown above, see IRS Pub. 970: "Tax Benefits for Higher Education" to calculate a partial deduction.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Stafford loans are either subsidized or unsubsidized loans. Stafford loans are disbursed by a bank or other private lender that participates in the Federal Family Education Loan Program (FFELP). The government may disburse the loan directly through the Federal Direct Student Loan Program (FDSLP).
The amount you can borrow with a Stafford loan depends on whether you are an undergraduate or graduate student. You can also borrow different yearly amounts depending on your year in college or whether you are a graduate student.
Undergraduate students who are dependent on their parents can borrow up to a total amount of $23,000, or $46,000 if independent. Graduate students who are dependent on their parents can borrow up to a total of $65,500, or $138,500 if independent.
The interest rate on Stafford loans is indexed to the yield on 3-month T-bills. The margin on the loan is 1.7 percentage points above the T-bill yield until you graduate. After you graduate, the margin increases to 2.3 percentage points. Stafford loans have a lifetime cap of 8.25%. (This cap may be revised.) With a Stafford loan, you may defer interest payments until the loan's grace period expires. (The deferred interest is added to your loan amount.)
Perkins loans are student loans that the school makes directly to the student with the use of government funds. The federal government pays the interest during school and during a grace period that lasts nine months. The interest rate cap on a Perkins loan is 5%.
To apply for either a Stafford or Perkins loan, as well as any other federal financial aid, you must complete a Free Application for Federal Student Aid (FAFSA).
As a result of the 2001 tax law, you can take a tax deduction of up to $2,500 for interest expense paid on student loans over the entire loan term. (Previously, you were limited to taking a deduction during the first 60 months of the loan term.)
The tax law also increases the income limits for taking this deduction. For taxpayers filing a single return in 2008, your allowable deduction begins to phase out when your modified adjusted gross income (MAGI) reaches $55,000. The allowable student-interest deduction phases out completely when your MAGI reaches $55,000. For married taxpayers filing a joint return, the increased income limits are $115,000 and $145,000, respectively.
To take a student loan interest deduction, enter the amount of the deduction on line 33 of the 2007 IRS Form 1040. (Note: This document is in Portable Document Format (PDF). If you do not have a PDF reader installed on your computer, you can download a version of Acrobat Reader for free at Adobe Systems' Web site.)
If your income falls within the income limits shown above, see IRS Pub. 970: "Tax Benefits for Higher Education" to calculate a partial deduction.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Shopping for an Auto Loan
Shopping for an auto loan is usually about price and loan terms -- which lender is offering the lowest interest rates and best rebates, for example.
When you buy an auto from a dealer, it is likely to direct you to a lender, often one that specializes in making auto loans to buyers of a particular make of auto.
You can find online lenders on the Internet that focus on auto loans. Other lenders are aggregators, which act as a kind of wholesaler or broker to pull together the best loan rates and terms from a variety of lending institutions. In exchange for identifying potential customers, lenders pay a fee to aggregators. As a result, you should be skeptical if a loan aggregator seeks payment from you.
Buying an auto is a major financial deal. However, it has gotten easier as technology has improved the loan underwriting process and the auto industry has grown more aggressive in its sales tactics.
Similar to other online transactions, applying for an auto loan online requires you to complete an online application and trust the lender or aggregator to use secured-sockets-layer (SSL) or similar encryption technology. If in doubt, read the lender's privacy policy.
If you have an existing auto loan, you may want to check with your current lender, either through a visit to its Web site or a visit to a retail branch.
Your lender may be willing to negotiate a reduction in the loan rate if your payment history has been good. Your current lender is also most familiar with your credit history. If your lender stonewalls you, you may be able to find better loan terms with other institutions.
When you buy an auto from a dealer, it is likely to direct you to a lender, often one that specializes in making auto loans to buyers of a particular make of auto.
You can find online lenders on the Internet that focus on auto loans. Other lenders are aggregators, which act as a kind of wholesaler or broker to pull together the best loan rates and terms from a variety of lending institutions. In exchange for identifying potential customers, lenders pay a fee to aggregators. As a result, you should be skeptical if a loan aggregator seeks payment from you.
Buying an auto is a major financial deal. However, it has gotten easier as technology has improved the loan underwriting process and the auto industry has grown more aggressive in its sales tactics.
Similar to other online transactions, applying for an auto loan online requires you to complete an online application and trust the lender or aggregator to use secured-sockets-layer (SSL) or similar encryption technology. If in doubt, read the lender's privacy policy.
If you have an existing auto loan, you may want to check with your current lender, either through a visit to its Web site or a visit to a retail branch.
Your lender may be willing to negotiate a reduction in the loan rate if your payment history has been good. Your current lender is also most familiar with your credit history. If your lender stonewalls you, you may be able to find better loan terms with other institutions.
6 steps to better, cheaper car insurance
The National Association of Insurance Commissioners, or NAIC, recommends that consumers review car insurance policies every year. Yet, only 20 percent to 35 percent of people actually do so, according to the NAIC.
There are many benefits to annually reviewing your car policy. Either you'll confirm that you have the right coverage for your needs, or you'll gather crucial information for making smart decisions about switching providers.
If you decide to shop around for a better deal, investigate new companies carefully to avoid any policy pitfalls. While most consumers simply look for the best price, it's important to consider other factors. Can the new company successfully underwrite a policy under the terms you request? Is it considering rate hikes in the near future? Have you timed your switch so that you won't have a lapse in coverage?
Shifting gears
Changing insurance companies can sometimes save you money, but also consider other factors when deciding which policy is best for you.
Annual car insurance review:
1. Determine if your needs have changed.
2. Check your company's discounts first.
3. Make apples-to-apples comparisons.
4. Get accurate quotes from companies.
5. Look for quality reputation.
6. Make sure you have continuous coverage.
Determine if your needs have changed
When reviewing your current policy, think about whether recent life changes might require you to revise coverage limits or to add new coverage.
"Don't just copy existing coverage," says Pat Moore, a partner with Antalek and Moore Insurance Agency in Beacon, N.Y. "Your situation may have changed, requiring different coverage treatment."
Factors that may cause you to reconsider the terms of a policy include events such as adding a new member to the family, driving to a different job location or purchasing a new car.
"I find that a lot of people are underinsured," says Mike Jones, an agent with Alfa Insurance Company in Montgomery, Ala. "For example, some policyholders may only have $25,000 of coverage to repair someone else's vehicles. If you consider that the average car is in the $25,000 to $35,000 range, then a multiple-car accident will wipe out your coverage. The other people involved in the accident will be looking to you personally to make up the difference."
In addition to reviewing coverage amounts, this is also a good time to examine optional products such as rental reimbursement coverage and emergency road service.
Check your current company's discounts first
As you're shopping around, don't forget to check with your existing provider to see if you can get a better deal than the one you have now.
"If people get a renewal quote in the mail, sometimes they go (insurance) shopping," says Jacki Frank, owner of Tri-County Agency of Brick, N.J. "But their current agent could also offer them another solution."
For example, many insurance companies provide discounts to consumers who purchase multiple policies. So, if you've just bought a home and are considering insuring it through the same company that covers your car, check to see if a discount is available.
Also, verify that your current insurer is aware of any changes you've made that could qualify you for a car insurance discount. Installing anti-theft devices, getting good grades at school, taking a driver-safety course or switching to a vehicle with lower mileage can help reduce rates.
There are many benefits to annually reviewing your car policy. Either you'll confirm that you have the right coverage for your needs, or you'll gather crucial information for making smart decisions about switching providers.
If you decide to shop around for a better deal, investigate new companies carefully to avoid any policy pitfalls. While most consumers simply look for the best price, it's important to consider other factors. Can the new company successfully underwrite a policy under the terms you request? Is it considering rate hikes in the near future? Have you timed your switch so that you won't have a lapse in coverage?
Shifting gears
Changing insurance companies can sometimes save you money, but also consider other factors when deciding which policy is best for you.
Annual car insurance review:
1. Determine if your needs have changed.
2. Check your company's discounts first.
3. Make apples-to-apples comparisons.
4. Get accurate quotes from companies.
5. Look for quality reputation.
6. Make sure you have continuous coverage.
Determine if your needs have changed
When reviewing your current policy, think about whether recent life changes might require you to revise coverage limits or to add new coverage.
"Don't just copy existing coverage," says Pat Moore, a partner with Antalek and Moore Insurance Agency in Beacon, N.Y. "Your situation may have changed, requiring different coverage treatment."
Factors that may cause you to reconsider the terms of a policy include events such as adding a new member to the family, driving to a different job location or purchasing a new car.
"I find that a lot of people are underinsured," says Mike Jones, an agent with Alfa Insurance Company in Montgomery, Ala. "For example, some policyholders may only have $25,000 of coverage to repair someone else's vehicles. If you consider that the average car is in the $25,000 to $35,000 range, then a multiple-car accident will wipe out your coverage. The other people involved in the accident will be looking to you personally to make up the difference."
In addition to reviewing coverage amounts, this is also a good time to examine optional products such as rental reimbursement coverage and emergency road service.
Check your current company's discounts first
As you're shopping around, don't forget to check with your existing provider to see if you can get a better deal than the one you have now.
"If people get a renewal quote in the mail, sometimes they go (insurance) shopping," says Jacki Frank, owner of Tri-County Agency of Brick, N.J. "But their current agent could also offer them another solution."
For example, many insurance companies provide discounts to consumers who purchase multiple policies. So, if you've just bought a home and are considering insuring it through the same company that covers your car, check to see if a discount is available.
Also, verify that your current insurer is aware of any changes you've made that could qualify you for a car insurance discount. Installing anti-theft devices, getting good grades at school, taking a driver-safety course or switching to a vehicle with lower mileage can help reduce rates.
Don't ignore car ownership
This won't necessarily come up when buying insurance, but vehicle ownership can make all the difference in potential payouts. "There's absolutely no good reason to own a car jointly," says Dr. Steven Podnos, principal at Wealth Care, a financial planning and investment advisory firm in Merritt Island, Fla. If a husband and wife share ownership, both are exposed to liability if one causes an accident. Both can be sued.
Parents should be aware of the age of majority (usually 18) in their state. When the kids reach it they should assume title for their cars so that parents can avoid liability for any mishaps caused by drivers who are of age, but still young.
Parents should be aware of the age of majority (usually 18) in their state. When the kids reach it they should assume title for their cars so that parents can avoid liability for any mishaps caused by drivers who are of age, but still young.
Don't assume all cars need the same insurance
Just as you shouldn't waste insurance on minor incidents, Bogue says some cars just don't need the full insurance package. Drivers always need to maintain their liability insurance in case they cause an accident but some cars just aren't worth the hassle and expense. For example, Bogue's third vehicle is an old Toyota pickup that he uses sparingly. He wouldn't miss it if it "fell off a cliff tomorrow." Insuring it with a reasonable deductible would be useless, he says; it would irritate insurers without promising much upside in the event of a claim.
Don't have a tiny deductible
When buying auto insurance, consumers frequently think of it as a way to protect themselves against every ding and scratch. That's a bad idea. "You should insure for what you cannot afford to lose," says financial planner Jeffrey Bogue of Bogue Asset Management. That means, don't have a miniscule deductible of $100 or even $250. "If you nickel-and-dime the insurance companies with these small claims, you may get socked with a premium hike or they may say 'we're not going to insure you,' " he says.
Policies with higher deductibles (Bogue says $1,000 is often sensible) that extend to higher coverage levels are not necessarily more expensive and protect drivers from costs associated with more serious car problems. Higher-deductible policies also cost less.
Don't assume the insurance salesman is your friend
The best insurance policies for consumers aren't necessarily the ones that bring in the best numbers and bonuses for salespeople, says Andrew Tignanelli, president of Luthersville (Md.)-based money management outfit Financial Consulate. Remember that the next time you go shopping for car insurance. Often it's in the salesman's best interest to sell the "least amount of insurance that they can possibly justify." Smaller policies leave insurers less exposed to risk and proportionately tend to be more expensive. As a result, they're more likely to be profitable for the insurer. Because of this conflict of interest and other factors, Tignanelli says he finds that even wealthy clients are often underinsured.
Make sure you have "liability" coverage, which is usually mandatory in most states and covers the costs of another person's car damage and injury. "Comprehensive" will protect you if your car gets stolen, catches fire, or is damaged without coming into contact with another car. And "collision" covers damages if your car collides with another vehicle or object, no matter who's at fault.
Make sure you have "liability" coverage, which is usually mandatory in most states and covers the costs of another person's car damage and injury. "Comprehensive" will protect you if your car gets stolen, catches fire, or is damaged without coming into contact with another car. And "collision" covers damages if your car collides with another vehicle or object, no matter who's at fault.
Tuesday, January 20, 2009
Car Insurance: Policy to insure your vehicles helpful tips
Here are five of the most common blunders to steer around when choosing a policy to insure your wheels.
Recently Five for the Money took a look at some of the biggest mistakes consumers make when buying life insurance (see BusinessWeek.com, 2/1/07, "Life Insurance Blunders to Avoid"). This week we'll tackle car insurance. Auto insurance isn't as fraught a subject as life insurance; buying a sensible policy doesn't need to be a reminder of inevitable death. But that doesn't mean it's easy to negotiate. Having the wrong car insurance, or making the wrong claims, can put a serious ding in someone's financial health.
As with life insurance, some of the rules are straightforward: shop around to ensure a fair deal and review your policy annually to make sure that it still fits your life and financial condition. Here are a few other common mistakes policyholders should swerve away from:
1. Don't assume the insurance salesman is your friend.
The best insurance policies for consumers aren't necessarily the ones that bring in the best numbers and bonuses for salespeople, says Andrew Tignanelli, president of Luthersville (Md.)-based money management outfit Financial Consulate. Remember that the next time you go shopping for car insurance. Often it's in the salesman's best interest to sell the "least amount of insurance that they can possibly justify." Smaller policies leave insurers less exposed to risk and proportionately tend to be more expensive. As a result, they're more likely to be profitable for the insurer. Because of this conflict of interest and other factors, Tignanelli says he finds that even wealthy clients are often underinsured.
Make sure you have "liability" coverage, which is usually mandatory in most states and covers the costs of another person's car damage and injury. "Comprehensive" will protect you if your car gets stolen, catches fire, or is damaged without coming into contact with another car. And "collision" covers damages if your car collides with another vehicle or object, no matter who's at fault.
2. Don't have a tiny deductible.
When buying auto insurance, consumers frequently think of it as a way to protect themselves against every ding and scratch. That's a bad idea. "You should insure for what you cannot afford to lose," says financial planner Jeffrey Bogue of Bogue Asset Management. That means, don't have a miniscule deductible of $100 or even $250. "If you nickel-and-dime the insurance companies with these small claims, you may get socked with a premium hike or they may say 'we're not going to insure you,' " he says.
Policies with higher deductibles (Bogue says $1,000 is often sensible) that extend to higher coverage levels are not necessarily more expensive and protect drivers from costs associated with more serious car problems. Higher-deductible policies also cost less.
3. Don't assume all cars need the same insurance.
Just as you shouldn't waste insurance on minor incidents, Bogue says some cars just don't need the full insurance package. Drivers always need to maintain their liability insurance in case they cause an accident but some cars just aren't worth the hassle and expense. For example, Bogue's third vehicle is an old Toyota pickup that he uses sparingly. He wouldn't miss it if it "fell off a cliff tomorrow." Insuring it with a reasonable deductible would be useless, he says; it would irritate insurers without promising much upside in the event of a claim.
4. Don't ignore car ownership.
This won't necessarily come up when buying insurance, but vehicle ownership can make all the difference in potential payouts. "There's absolutely no good reason to own a car jointly," says Dr. Steven Podnos, principal at Wealth Care, a financial planning and investment advisory firm in Merritt Island, Fla. If a husband and wife share ownership, both are exposed to liability if one causes an accident. Both can be sued.
Parents should be aware of the age of majority (usually 18) in their state. When the kids reach it they should assume title for their cars so that parents can avoid liability for any mishaps caused by drivers who are of age, but still young.
5. Don't forget your umbrella.
Umbrella policies tend to be very cheap and can help drivers (and homeowners) weather the most severe storms. Say there's been a severe car accident that involves significant property damage extending beyond what a solid insurance policy covers. When this happens, policyholders need umbrellas to shelter them from liability extending beyond the limits of their standard policy.
Since these umbrella policies protect against only the worst accidents, they rarely pay out and so can be bought for very little, sometimes $200 for a policy stretching from where the liability stops to around $2 million in damages, according to John Discepoli of Discepoli Financial Planning near Cincinnati. This could be an amount of car insurance coverage that allows most drivers a smooth ride.
Recently Five for the Money took a look at some of the biggest mistakes consumers make when buying life insurance (see BusinessWeek.com, 2/1/07, "Life Insurance Blunders to Avoid"). This week we'll tackle car insurance. Auto insurance isn't as fraught a subject as life insurance; buying a sensible policy doesn't need to be a reminder of inevitable death. But that doesn't mean it's easy to negotiate. Having the wrong car insurance, or making the wrong claims, can put a serious ding in someone's financial health.
As with life insurance, some of the rules are straightforward: shop around to ensure a fair deal and review your policy annually to make sure that it still fits your life and financial condition. Here are a few other common mistakes policyholders should swerve away from:
1. Don't assume the insurance salesman is your friend.
The best insurance policies for consumers aren't necessarily the ones that bring in the best numbers and bonuses for salespeople, says Andrew Tignanelli, president of Luthersville (Md.)-based money management outfit Financial Consulate. Remember that the next time you go shopping for car insurance. Often it's in the salesman's best interest to sell the "least amount of insurance that they can possibly justify." Smaller policies leave insurers less exposed to risk and proportionately tend to be more expensive. As a result, they're more likely to be profitable for the insurer. Because of this conflict of interest and other factors, Tignanelli says he finds that even wealthy clients are often underinsured.
Make sure you have "liability" coverage, which is usually mandatory in most states and covers the costs of another person's car damage and injury. "Comprehensive" will protect you if your car gets stolen, catches fire, or is damaged without coming into contact with another car. And "collision" covers damages if your car collides with another vehicle or object, no matter who's at fault.
2. Don't have a tiny deductible.
When buying auto insurance, consumers frequently think of it as a way to protect themselves against every ding and scratch. That's a bad idea. "You should insure for what you cannot afford to lose," says financial planner Jeffrey Bogue of Bogue Asset Management. That means, don't have a miniscule deductible of $100 or even $250. "If you nickel-and-dime the insurance companies with these small claims, you may get socked with a premium hike or they may say 'we're not going to insure you,' " he says.
Policies with higher deductibles (Bogue says $1,000 is often sensible) that extend to higher coverage levels are not necessarily more expensive and protect drivers from costs associated with more serious car problems. Higher-deductible policies also cost less.
3. Don't assume all cars need the same insurance.
Just as you shouldn't waste insurance on minor incidents, Bogue says some cars just don't need the full insurance package. Drivers always need to maintain their liability insurance in case they cause an accident but some cars just aren't worth the hassle and expense. For example, Bogue's third vehicle is an old Toyota pickup that he uses sparingly. He wouldn't miss it if it "fell off a cliff tomorrow." Insuring it with a reasonable deductible would be useless, he says; it would irritate insurers without promising much upside in the event of a claim.
4. Don't ignore car ownership.
This won't necessarily come up when buying insurance, but vehicle ownership can make all the difference in potential payouts. "There's absolutely no good reason to own a car jointly," says Dr. Steven Podnos, principal at Wealth Care, a financial planning and investment advisory firm in Merritt Island, Fla. If a husband and wife share ownership, both are exposed to liability if one causes an accident. Both can be sued.
Parents should be aware of the age of majority (usually 18) in their state. When the kids reach it they should assume title for their cars so that parents can avoid liability for any mishaps caused by drivers who are of age, but still young.
5. Don't forget your umbrella.
Umbrella policies tend to be very cheap and can help drivers (and homeowners) weather the most severe storms. Say there's been a severe car accident that involves significant property damage extending beyond what a solid insurance policy covers. When this happens, policyholders need umbrellas to shelter them from liability extending beyond the limits of their standard policy.
Since these umbrella policies protect against only the worst accidents, they rarely pay out and so can be bought for very little, sometimes $200 for a policy stretching from where the liability stops to around $2 million in damages, according to John Discepoli of Discepoli Financial Planning near Cincinnati. This could be an amount of car insurance coverage that allows most drivers a smooth ride.
Shopping for an Auto Loan
Shopping for an auto loan is usually about price and loan terms -- which lender is offering the lowest interest rates and best rebates, for example.
When you buy an auto from a dealer, it is likely to direct you to a lender, often one that specializes in making auto loans to buyers of a particular make of auto.
You can find online lenders on the Internet that focus on auto loans. Other lenders are aggregators, which act as a kind of wholesaler or broker to pull together the best loan rates and terms from a variety of lending institutions. In exchange for identifying potential customers, lenders pay a fee to aggregators. As a result, you should be skeptical if a loan aggregator seeks payment from you.
Buying an auto is a major financial deal. However, it has gotten easier as technology has improved the loan underwriting process and the auto industry has grown more aggressive in its sales tactics.
Similar to other online transactions, applying for an auto loan online requires you to complete an online application and trust the lender or aggregator to use secured-sockets-layer (SSL) or similar encryption technology. If in doubt, read the lender's privacy policy.
If you have an existing auto loan, you may want to check with your current lender, either through a visit to its Web site or a visit to a retail branch.
Your lender may be willing to negotiate a reduction in the loan rate if your payment history has been good. Your current lender is also most familiar with your credit history. If your lender stonewalls you, you may be able to find better loan terms with other institutions.
When you buy an auto from a dealer, it is likely to direct you to a lender, often one that specializes in making auto loans to buyers of a particular make of auto.
You can find online lenders on the Internet that focus on auto loans. Other lenders are aggregators, which act as a kind of wholesaler or broker to pull together the best loan rates and terms from a variety of lending institutions. In exchange for identifying potential customers, lenders pay a fee to aggregators. As a result, you should be skeptical if a loan aggregator seeks payment from you.
Buying an auto is a major financial deal. However, it has gotten easier as technology has improved the loan underwriting process and the auto industry has grown more aggressive in its sales tactics.
Similar to other online transactions, applying for an auto loan online requires you to complete an online application and trust the lender or aggregator to use secured-sockets-layer (SSL) or similar encryption technology. If in doubt, read the lender's privacy policy.
If you have an existing auto loan, you may want to check with your current lender, either through a visit to its Web site or a visit to a retail branch.
Your lender may be willing to negotiate a reduction in the loan rate if your payment history has been good. Your current lender is also most familiar with your credit history. If your lender stonewalls you, you may be able to find better loan terms with other institutions.
Stuck in your car lease? Not necessarily
If you took out a car lease only to find that, with a change in your circumstances, your can no longer afford your lease , you may want to check out LeaseTrader.com. The ten-year-old firm is in the business of matching drivers in the market for a short-term lease with those looking to get out of an existing one. For its trouble, the company collects a fee, of course.
The process, which has been OK'd by almost all the car manufacturer's financing departments, works this way:
Person A, the lease holder, posts the vehicle and details of the lease on LeaseTrader
Person B, who wants to pick up a vehicle on a short-time lease, selects yours
Person B's credit-worthiness is confirmed
The vehicle lease is transferred from Person A to Person B. The buyer is not required to pay an down payment to the leasing company.
Person A pays LeaseTracker $79 for the service and $149 for the transfer
While the average time between posting and transfer is 3-7 weeks, according to a LeaseTrader exec quoted in Advertising Age, the site is hoping to drop that significantly with a new marketing campaign. LeaseTrader claims that it has seen demand grow threefold as nervous drivers look to shorter term leases in an unstable economy.
A couple of caveats, however: people who find themselves with burdensome leases are often people who also don't understand how to negotiate favorable deals, so the lease you assume might be on the high side. You may also have to include a wide swath of the U.S. to find enough candidate vehicles; near my home, there were almost none. Extending my search to 1,000 miles found a number of them, but retrieving a vehicle from that distance would cost me something in time, mileage or shipping.
If you're looking for to get out from under your lease, or looking for a nice ride for a short commitment, this seems like an interesting alternative to consider.
The process, which has been OK'd by almost all the car manufacturer's financing departments, works this way:
Person A, the lease holder, posts the vehicle and details of the lease on LeaseTrader
Person B, who wants to pick up a vehicle on a short-time lease, selects yours
Person B's credit-worthiness is confirmed
The vehicle lease is transferred from Person A to Person B. The buyer is not required to pay an down payment to the leasing company.
Person A pays LeaseTracker $79 for the service and $149 for the transfer
While the average time between posting and transfer is 3-7 weeks, according to a LeaseTrader exec quoted in Advertising Age, the site is hoping to drop that significantly with a new marketing campaign. LeaseTrader claims that it has seen demand grow threefold as nervous drivers look to shorter term leases in an unstable economy.
A couple of caveats, however: people who find themselves with burdensome leases are often people who also don't understand how to negotiate favorable deals, so the lease you assume might be on the high side. You may also have to include a wide swath of the U.S. to find enough candidate vehicles; near my home, there were almost none. Extending my search to 1,000 miles found a number of them, but retrieving a vehicle from that distance would cost me something in time, mileage or shipping.
If you're looking for to get out from under your lease, or looking for a nice ride for a short commitment, this seems like an interesting alternative to consider.
Ten reasons you shouldn't loan money to friends
Most of us will, as we grow up, at some point be hit up for a loan by a friend. Most of us agonize over the decision, but there's no reason you should. To prepare you against that day, consider this list of ten reasons you shouldn't loan money to your friend.
1. Your impression of your friend will forever after be colored by the memory of that loan, whether or not it was repaid promptly. When he walks into the room, some part of you will always hear a giant sucking sound.
2. There are no terms for such a loan that will not feel either miserly or foolishly generous. Every friend views himself as a sub-prime candidate.
3. You will lose confidence that your friendship is based on common regard, and begin to wonder if his bonhomie is that of a car salesman.
4. Your friend will forever be looking for a way to repay the favor or,
5. failing that, will come to resent you for the debt of that favor.
6. You will become an enabler of her profligate ways, sharing responsibility for any self-destructive choices she makes with your money. Yes, you helped pay for the Harley she wrapped around a telephone pole.
7. You will learn something about your friend you would be better off not knowing. He's a QVC junkie?
8. Every time you pass on buying something because you can't afford it, you'll think of the money you loaned to your friend.
9. People drift apart as their natures diverge, but the bond of the loan will keep you tied together like a bad marriage.
10. Other friends will also start to view you as a lender of last resort.
Of course, there are many offsetting reasons to go ahead and make the loan. But you don't need any help with that decision, right?
1. Your impression of your friend will forever after be colored by the memory of that loan, whether or not it was repaid promptly. When he walks into the room, some part of you will always hear a giant sucking sound.
2. There are no terms for such a loan that will not feel either miserly or foolishly generous. Every friend views himself as a sub-prime candidate.
3. You will lose confidence that your friendship is based on common regard, and begin to wonder if his bonhomie is that of a car salesman.
4. Your friend will forever be looking for a way to repay the favor or,
5. failing that, will come to resent you for the debt of that favor.
6. You will become an enabler of her profligate ways, sharing responsibility for any self-destructive choices she makes with your money. Yes, you helped pay for the Harley she wrapped around a telephone pole.
7. You will learn something about your friend you would be better off not knowing. He's a QVC junkie?
8. Every time you pass on buying something because you can't afford it, you'll think of the money you loaned to your friend.
9. People drift apart as their natures diverge, but the bond of the loan will keep you tied together like a bad marriage.
10. Other friends will also start to view you as a lender of last resort.
Of course, there are many offsetting reasons to go ahead and make the loan. But you don't need any help with that decision, right?
It's 'buyer beware' on subprime loans
Remember when you're shopping for a subprime loan, it doesn't mean lenders don't want your business. Just the opposite, actually, but it does mean you'll pay more for the money you borrow -- all the more reason to shop carefully.
"Often buyers aren't doing the shopping," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. "A borrower needs to step back at this point and say, 'I've gotten this offer. Let me get some independent advice and maybe get a few more offers before I decide.'"
The need to shop and compare "is even more important for the subprime borrower," he says.
The gray area
First, are you certain you're subprime? The credit score used to separate prime from subprime varies with the lender and loan.
"Typically, usually below 600, it's safe to say is always subprime," says Barry Paperno, manager of customer service for Fair Isaac Corp., which designed the FICO score. "From 600 to 650 is kind of a gray area, depending on the lender."
A good rule of thumb is that the cutoff will be a FICO score around 620, says Fishbein.
"It's not standard," he says.
Two lenders looking at the same customer could rank him differently. "It's just not as uniform a standard as many borrowers think," says Fishbein. "This has created some confusion in the marketplace."
That means you don't take the first loan you're offered, especially if the rates are subprime. "Anybody in the mid-600 range, credit score-wise, should be very, very careful," says Robert Manning, finance professor at the Rochester Institute of Technology and author of "Credit Card Nation," "particularly if it's an unsolicited loan."
Instead, recognize that you're a commodity.
"Often people feel like they're not desirable as a customer and are happy if anybody wants to work with them," says Fritz Elmendorf, vice president of communications for the Consumer Bankers Association, a financial services trade group.
If you're on the edge, you can do a couple of things. First, be careful where you shop.
Try credit unions and banks that make both prime and subprime loans, says Ira Rheingold, executive director of the National Association of Consumer Advocates. If you're mortgage shopping, try some of the Internet sites that let you shop a variety of lenders simultaneously.
Some lenders are subprime, says Rheingold. "If you walk in and are eligible for prime, they may not be able to provide it to you."
Second, do all those things that will boost your scores a few points. Pay off balances (as much as you can). Keep making on-time payments. If you know you need a home or car loan, don't apply for other forms of credit, such as credit cards, even those preapproved offers or store cards. Inquiries can reduce your score as much as 10 percent, which is a lot if you're on the line between subprime and prime. When you do start shopping for your big loan, keep all your applications within a 14-day period so that the entire process is certain to be counted as one inquiry by the credit bureaus.
"Often buyers aren't doing the shopping," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. "A borrower needs to step back at this point and say, 'I've gotten this offer. Let me get some independent advice and maybe get a few more offers before I decide.'"
The need to shop and compare "is even more important for the subprime borrower," he says.
The gray area
First, are you certain you're subprime? The credit score used to separate prime from subprime varies with the lender and loan.
"Typically, usually below 600, it's safe to say is always subprime," says Barry Paperno, manager of customer service for Fair Isaac Corp., which designed the FICO score. "From 600 to 650 is kind of a gray area, depending on the lender."
A good rule of thumb is that the cutoff will be a FICO score around 620, says Fishbein.
"It's not standard," he says.
Two lenders looking at the same customer could rank him differently. "It's just not as uniform a standard as many borrowers think," says Fishbein. "This has created some confusion in the marketplace."
That means you don't take the first loan you're offered, especially if the rates are subprime. "Anybody in the mid-600 range, credit score-wise, should be very, very careful," says Robert Manning, finance professor at the Rochester Institute of Technology and author of "Credit Card Nation," "particularly if it's an unsolicited loan."
Instead, recognize that you're a commodity.
"Often people feel like they're not desirable as a customer and are happy if anybody wants to work with them," says Fritz Elmendorf, vice president of communications for the Consumer Bankers Association, a financial services trade group.
If you're on the edge, you can do a couple of things. First, be careful where you shop.
Try credit unions and banks that make both prime and subprime loans, says Ira Rheingold, executive director of the National Association of Consumer Advocates. If you're mortgage shopping, try some of the Internet sites that let you shop a variety of lenders simultaneously.
Some lenders are subprime, says Rheingold. "If you walk in and are eligible for prime, they may not be able to provide it to you."
Second, do all those things that will boost your scores a few points. Pay off balances (as much as you can). Keep making on-time payments. If you know you need a home or car loan, don't apply for other forms of credit, such as credit cards, even those preapproved offers or store cards. Inquiries can reduce your score as much as 10 percent, which is a lot if you're on the line between subprime and prime. When you do start shopping for your big loan, keep all your applications within a 14-day period so that the entire process is certain to be counted as one inquiry by the credit bureaus.
Auto insurance industry takes the gas money savings from small car owners
Gary E. Sattler
Oct 27th 2008 at 8:00AM
Text SizeAAA
Filed under: Insurance, Transportation
Many drivers of smaller automobiles may be smiling about their fuel cost savings, but their smiles may soon fade when they start to realize that the auto insurance industry is taking a share of the money that they aren't paying for gasoline. Let it not be said that smaller automobiles don't come with a cost trade off.
An examination of automobile insurance premiums from The Wall Street Journal reveals that the nature of smaller autos makes them justifiably more expensive to insure. For some smaller cars, such as some of the new hybrid models, replacement parts can be difficult to obtain, and labor costs are sometimes higher than for conventional autos. Additionally, hybrid cars can often take longer to repair.
Karen Block, an independent insurance agent in Medford Wisconsin, indicates that the situation is quite basic and easy to understand. She stated: "Smaller cars have statistically higher repair costs." The Wall Street Journal article reports: "A recent study by the Highway Loss Data Institute, an affiliate of the IIHS, found that overall insurance costs for crash damage were higher for 11 of 12 hybrid cars and SUVs than for their gas-only counterparts."
While the owners of smaller cars may be paying higher costs to have their own cars repaired, it should be noted that their premiums for property damage liability may be lower. This is due to the fact that, when compared to larger vehicles in similar collisions, smaller cars tend to do less damage to the things they hit. There is concern however, that this condition may also mean that smaller cars offer their occupants a reduced level of crash protection, which is why I keep myself surrounded by a full sized Chevy pick-up truck, and keep my wife in her well built Jeep SUV.
Oct 27th 2008 at 8:00AM
Text SizeAAA
Filed under: Insurance, Transportation
Many drivers of smaller automobiles may be smiling about their fuel cost savings, but their smiles may soon fade when they start to realize that the auto insurance industry is taking a share of the money that they aren't paying for gasoline. Let it not be said that smaller automobiles don't come with a cost trade off.
An examination of automobile insurance premiums from The Wall Street Journal reveals that the nature of smaller autos makes them justifiably more expensive to insure. For some smaller cars, such as some of the new hybrid models, replacement parts can be difficult to obtain, and labor costs are sometimes higher than for conventional autos. Additionally, hybrid cars can often take longer to repair.
Karen Block, an independent insurance agent in Medford Wisconsin, indicates that the situation is quite basic and easy to understand. She stated: "Smaller cars have statistically higher repair costs." The Wall Street Journal article reports: "A recent study by the Highway Loss Data Institute, an affiliate of the IIHS, found that overall insurance costs for crash damage were higher for 11 of 12 hybrid cars and SUVs than for their gas-only counterparts."
While the owners of smaller cars may be paying higher costs to have their own cars repaired, it should be noted that their premiums for property damage liability may be lower. This is due to the fact that, when compared to larger vehicles in similar collisions, smaller cars tend to do less damage to the things they hit. There is concern however, that this condition may also mean that smaller cars offer their occupants a reduced level of crash protection, which is why I keep myself surrounded by a full sized Chevy pick-up truck, and keep my wife in her well built Jeep SUV.
Auto Insurance for Teenagers
Teens and Car Insurance
When teenagers first begin to drive, they quickly discover that auto insurance is and will continue to be a major factor in their driving lives.
First, they discover that it is required by state laws. In most states you cannot buy a car, get tags, or drive a car without at least a minimum level of auto insurance.
Second, they discover that insurance is expensive, especially for teenagers, and especially for male teenagers under 18 years old.
Third, teens often don't understand why insurance is important and why it is needed, and why it is smart to have it.
Why do I need insurance?
Teens often question the need for insurance, especially when it is so expensive — and they don't expect to ever be an accident anyway. Let's ask this question a slightly different way. Under what conditions would you not need auto insurance?
If you were financially wealthy and didn't care about the risk of losing a substantial portion of your wealth, you could self-insure. That is, you would use your own money to pay for damage repairs, a replacement vehicle if your current vehicle is stolen or destroyed, towing and storage charges, rental car charges, medical bills associated with an accident, lawsuits by other parties when you are at fault in an accident that causes damages, injuries, or death, as well as attorney fees, and property damages.
However, those who might be able to self-insure don't for two reasons. First, the cost of auto insurance is relatively small compared to the potential financial losses associated with self-insurance. Why risk losing thousands or millions of dollars in an at-fault lawsuit? Second, states have laws requiring liability insurance as a way of proving financial responsibility. Although a bank full of cash might seem to accomplish the same thing, most state laws don't see it that way. State laws vary, so car insurance in New Jersey is not the same as in California.
Another reason for having auto insurance for those who buy with a loan or lease is that bank and finance companies insist on it. In fact, most require "full coverage" insurance, which exceeds minimum state law requirements. They want to protect their investment during the time of the loan or lease. If the vehicle is destroyed or stolen while they still have money invested, they want to be sure they are paid first.
In summary, you need car insurance to protect you, protect your finances, protect your family, protect your finance company, and protect other parties and property for which you might be responsible. Insurance is all about protection.
Types of insurance
An auto insurance policy might include one or more of the following types of coverage:
Liability - Protection from risks associated with property damage and personal injury to others. Legal actions against at-fault drivers is becoming more common and more expensive. Multi-million dollar legal settlements are not unusual. Without insurance, a single accident could easily ruin an unfortunate family's life. For this reason, liability coverage is the most important part of such a policy. Liability insurance is required by law in most states.
Comprehensive - Protection from the cost of non-collision damages, vandalism, theft, weather-related damage, or natural disasters. Comprehensive coverage typically pays for the cost of repairs, or in the case that the vehicle is totally destroyed or stolen, the cost of a replacement vehicle - at "cash value" of the old vehicle. A deductible lessens the amount you are paid.
Collision - Protection from the cost of repairing damages to your own vehicle. A deductible lessens the amount you are paid, but also reduces premium cost.. If the cost of repairs exceeds about 75% of the value of the vehicle, the insurance company may decide to "total" the vehicle and pay fair-market replacement cost.
Medical - Pays medical costs to you or other parties for accidental injuries associated with your automobile. There are limits specified in your policy regarding maximum amounts paid for each incident.
Uninsured Motorist - Protection from costs associated with an accident caused by another driver with insufficient liability coverage - or no liability coverage.
Towing and Labor - Pays cost of towing and storing your damaged or disabled vehicle. Maximums usually apply.
Rental Reimbursement - Pays cost of renting a replacement vehicle after an accident.
Gap Coverage - Pays the difference between the amount owed on a loan or lease and the "cash value" paid by your insurance company in case of theft, fire, or accident. A gap waiver or gap insurance is usually provided with most leases, but not loans. Some auto insurance companies offer it and some do not. If you are going to be "upside down" on your loan, it's good coverage to have.
How much coverage do you need?
Many drivers view auto insurance as a necessary evil and buy as little coverage as they can get by with to minimize costs. State laws may dictate what and how much liability coverage is required, and whether no-fault coverage is required. If you buy with a loan or lease, the finance company may dictate minimum coverage requirements. They may even tell you the maximum deductible you can choose.
Beyond the requirements of your state laws or finance company, you have some ability to determine the kind of coverage you want, how much, what deductible, and what add-ons you want. Generally, the more coverage you have, the better you are protected.
For example, you can add more liability coverage, which can be a smart thing to do in these days of multi-million dollar legal settlements, especially when medical costs are involved. Many policies only cover $50,000 or less. If your auto insurance policy doesn't cover the full cost of a large settlement, you are personally responsible for the remainder.
You can also adjust your deductible amount, within limits. If you have sufficient cash available in case of an accident, you can set a high deductible to reduce your premium cost. However, many people who set high deductibles really can't afford to pay but bet on the chance they'll never have to. Not a good move.
Dropping collision and comprehensive coverage is another opportunity to save money. You should only do it, however, if you can afford to buy a replacement vehicle or pay for repairs from your own pocket. As mentioned previously, your loan or lease company may require this coverage even though you feel you don't want it.
Many insurance companies now look at your credit score and offer lower rates to people with high scores - 700 and above. You should know your FICO® credit score before you begin shopping for insurance.
Whose policy is it anyway?
Until a teen becomes 18 years old, they cannot buy insurance on their own. Therefore, most teens are simply added to their parents' policy, which is less expensive than a separate policy anyway. Some teens believe that they can simply not inform the parents' insurance company and avoid the high cost. Not very smart. It might work until the first time the teen is involved in an accident. At that juncture, the insurance company can and will declare no responsibility to cover the costs or lawsuits associated with that accident — and will likely cancel the parents' policy.
How much does auto insurance cost for a teenager?
There is no simple answer to that question. It depends on the type of car (see Cheapest Cars to Insure), where the car is driven, how many miles it is driven, for what purpose it is driven, and what discounts apply. Furthermore, insurance companies are regulated by state laws and rates can differ widely across state lines, even for the same insurance company. In some cases, a teenager may pay as little as $500 a year while in other cases can pay $3000 or more.
Get rate quotes
If you are buying a new policy or adding a teenager to an existing policy, the Internet makes it easy to shop for the best rates. Most people are already paying too much for their auto insurance. Companies frequently adjust rates such that no one company stays in the low cost leader slot very long. Unless you get new quotes every year, you never know that you might be able to get better rates from a different auto insurance company. It's easy to get free rate quotes online.
We recommend NetQuote to get a free insurance quote. It's fast and easy, and they work with multiple companies to get you the lowest rates and best coverage. NetQuote is the nation's oldest insurance broker company (see CBS News with comment). They can get the best rates by shopping your requirements to Allstate, Progressive, AIGdirect, Farmers, and other major insurers. Since these companies are competing with each other for your business, rates are as low as you'll find anywhere.
When teenagers first begin to drive, they quickly discover that auto insurance is and will continue to be a major factor in their driving lives.
First, they discover that it is required by state laws. In most states you cannot buy a car, get tags, or drive a car without at least a minimum level of auto insurance.
Second, they discover that insurance is expensive, especially for teenagers, and especially for male teenagers under 18 years old.
Third, teens often don't understand why insurance is important and why it is needed, and why it is smart to have it.
Why do I need insurance?
Teens often question the need for insurance, especially when it is so expensive — and they don't expect to ever be an accident anyway. Let's ask this question a slightly different way. Under what conditions would you not need auto insurance?
If you were financially wealthy and didn't care about the risk of losing a substantial portion of your wealth, you could self-insure. That is, you would use your own money to pay for damage repairs, a replacement vehicle if your current vehicle is stolen or destroyed, towing and storage charges, rental car charges, medical bills associated with an accident, lawsuits by other parties when you are at fault in an accident that causes damages, injuries, or death, as well as attorney fees, and property damages.
However, those who might be able to self-insure don't for two reasons. First, the cost of auto insurance is relatively small compared to the potential financial losses associated with self-insurance. Why risk losing thousands or millions of dollars in an at-fault lawsuit? Second, states have laws requiring liability insurance as a way of proving financial responsibility. Although a bank full of cash might seem to accomplish the same thing, most state laws don't see it that way. State laws vary, so car insurance in New Jersey is not the same as in California.
Another reason for having auto insurance for those who buy with a loan or lease is that bank and finance companies insist on it. In fact, most require "full coverage" insurance, which exceeds minimum state law requirements. They want to protect their investment during the time of the loan or lease. If the vehicle is destroyed or stolen while they still have money invested, they want to be sure they are paid first.
In summary, you need car insurance to protect you, protect your finances, protect your family, protect your finance company, and protect other parties and property for which you might be responsible. Insurance is all about protection.
Types of insurance
An auto insurance policy might include one or more of the following types of coverage:
Liability - Protection from risks associated with property damage and personal injury to others. Legal actions against at-fault drivers is becoming more common and more expensive. Multi-million dollar legal settlements are not unusual. Without insurance, a single accident could easily ruin an unfortunate family's life. For this reason, liability coverage is the most important part of such a policy. Liability insurance is required by law in most states.
Comprehensive - Protection from the cost of non-collision damages, vandalism, theft, weather-related damage, or natural disasters. Comprehensive coverage typically pays for the cost of repairs, or in the case that the vehicle is totally destroyed or stolen, the cost of a replacement vehicle - at "cash value" of the old vehicle. A deductible lessens the amount you are paid.
Collision - Protection from the cost of repairing damages to your own vehicle. A deductible lessens the amount you are paid, but also reduces premium cost.. If the cost of repairs exceeds about 75% of the value of the vehicle, the insurance company may decide to "total" the vehicle and pay fair-market replacement cost.
Medical - Pays medical costs to you or other parties for accidental injuries associated with your automobile. There are limits specified in your policy regarding maximum amounts paid for each incident.
Uninsured Motorist - Protection from costs associated with an accident caused by another driver with insufficient liability coverage - or no liability coverage.
Towing and Labor - Pays cost of towing and storing your damaged or disabled vehicle. Maximums usually apply.
Rental Reimbursement - Pays cost of renting a replacement vehicle after an accident.
Gap Coverage - Pays the difference between the amount owed on a loan or lease and the "cash value" paid by your insurance company in case of theft, fire, or accident. A gap waiver or gap insurance is usually provided with most leases, but not loans. Some auto insurance companies offer it and some do not. If you are going to be "upside down" on your loan, it's good coverage to have.
How much coverage do you need?
Many drivers view auto insurance as a necessary evil and buy as little coverage as they can get by with to minimize costs. State laws may dictate what and how much liability coverage is required, and whether no-fault coverage is required. If you buy with a loan or lease, the finance company may dictate minimum coverage requirements. They may even tell you the maximum deductible you can choose.
Beyond the requirements of your state laws or finance company, you have some ability to determine the kind of coverage you want, how much, what deductible, and what add-ons you want. Generally, the more coverage you have, the better you are protected.
For example, you can add more liability coverage, which can be a smart thing to do in these days of multi-million dollar legal settlements, especially when medical costs are involved. Many policies only cover $50,000 or less. If your auto insurance policy doesn't cover the full cost of a large settlement, you are personally responsible for the remainder.
You can also adjust your deductible amount, within limits. If you have sufficient cash available in case of an accident, you can set a high deductible to reduce your premium cost. However, many people who set high deductibles really can't afford to pay but bet on the chance they'll never have to. Not a good move.
Dropping collision and comprehensive coverage is another opportunity to save money. You should only do it, however, if you can afford to buy a replacement vehicle or pay for repairs from your own pocket. As mentioned previously, your loan or lease company may require this coverage even though you feel you don't want it.
Many insurance companies now look at your credit score and offer lower rates to people with high scores - 700 and above. You should know your FICO® credit score before you begin shopping for insurance.
Whose policy is it anyway?
Until a teen becomes 18 years old, they cannot buy insurance on their own. Therefore, most teens are simply added to their parents' policy, which is less expensive than a separate policy anyway. Some teens believe that they can simply not inform the parents' insurance company and avoid the high cost. Not very smart. It might work until the first time the teen is involved in an accident. At that juncture, the insurance company can and will declare no responsibility to cover the costs or lawsuits associated with that accident — and will likely cancel the parents' policy.
How much does auto insurance cost for a teenager?
There is no simple answer to that question. It depends on the type of car (see Cheapest Cars to Insure), where the car is driven, how many miles it is driven, for what purpose it is driven, and what discounts apply. Furthermore, insurance companies are regulated by state laws and rates can differ widely across state lines, even for the same insurance company. In some cases, a teenager may pay as little as $500 a year while in other cases can pay $3000 or more.
Get rate quotes
If you are buying a new policy or adding a teenager to an existing policy, the Internet makes it easy to shop for the best rates. Most people are already paying too much for their auto insurance. Companies frequently adjust rates such that no one company stays in the low cost leader slot very long. Unless you get new quotes every year, you never know that you might be able to get better rates from a different auto insurance company. It's easy to get free rate quotes online.
We recommend NetQuote to get a free insurance quote. It's fast and easy, and they work with multiple companies to get you the lowest rates and best coverage. NetQuote is the nation's oldest insurance broker company (see CBS News with comment). They can get the best rates by shopping your requirements to Allstate, Progressive, AIGdirect, Farmers, and other major insurers. Since these companies are competing with each other for your business, rates are as low as you'll find anywhere.
Lease-End Considerations
It's never too soon to be thinking about the end of your lease. Many people who know they should do some homework and prepare for the beginning of a lease overlook the need to also prepare for the end of the lease as the time nears.
Your lease-end options
At the normal end of a lease, you may have the following options: return your vehicle, extend your lease, re-lease, purchase, or trade.
Depending on the details of your particular lease situation, some of these options may be available to you while others will not be.
How it works
About a month before the end of your lease, you will be contacted by your leasing company. They will instruct you regarding having your vehicle inspected and returned to them. Normally, the return is made to a dealer, from which the lease company will pick up the vehicle.
They may also remind you of your option to purchase your vehicle and provide you a purchase buyout price, which may be a better price than stated in your lease contract. They may also offer to extend your lease for specified terms. They won't tell you, but you may also be able to use your vehicle as a trade-in on a new lease or purchase.
Be careful of your lease-end decision
Don't make a quick decision about which lease-end option you'll take. For example, if you simply return your vehicle to the lease company without doing your homework, you may be handing them built-in value that belongs to you. They'll love you for the gift.
But what if you have exceeded your mileage limits or have some damage to your vehicle? Is it best to return, or to purchase? Can the mileage and damage fees be negotiated if you decide to return?
Is extending your current lease or re-leasing a smart thing to do? When is it advisable to use your leased car as a trade-in? Do you still have to pay for excess mileage and wear-and-tear?
If you decide to purchase, do you have to pay the lease company's purchase price? Is it negotiable? How do you determine what price to offer? Why do some lease companies refuse to negotiate? Does purchasing avoid paying mileage and damage fees?
What to do
Answering the above questions and deciding what to do requires a little homework and careful consideration of all your options. Remember, it's just as important to make the right decisions at the end of a lease as it is at the beginning. But each situation is different and must be examined on its own merits. There is no standard answer that fits every case.
Getting answers
If you need help in making your lease-end decision, our Lease Kit contains a special comprehensive section, "Lease-End Advisor," that provides answers to all the above questions, as well as a detailed explanation of each of your lease-end options — and how to go about determining which option will work best for you, given your particular situation.
If you decide to buy your vehicle, this section of the Lease Kit tells you what to pay and how to deal with the lease company. If you're in a position to trade, it'll tell you how.
If you are over your mileage limits or have excessive wear and tear, this section tells you how to handle this common situation. In some cases it's better to return; in others, it's better to buy or trade.
If you think you might want to re-lease your vehicle, this section of the Lease Kit explains how to determine if this is a smart choice and warns of some common problems.
If you decide to return your vehicle, this section of the kit tells you what to expect. It explains how to handle the inspection and return process to minimize the possibility of surprises from the lease company.
Your lease-end options
At the normal end of a lease, you may have the following options: return your vehicle, extend your lease, re-lease, purchase, or trade.
Depending on the details of your particular lease situation, some of these options may be available to you while others will not be.
How it works
About a month before the end of your lease, you will be contacted by your leasing company. They will instruct you regarding having your vehicle inspected and returned to them. Normally, the return is made to a dealer, from which the lease company will pick up the vehicle.
They may also remind you of your option to purchase your vehicle and provide you a purchase buyout price, which may be a better price than stated in your lease contract. They may also offer to extend your lease for specified terms. They won't tell you, but you may also be able to use your vehicle as a trade-in on a new lease or purchase.
Be careful of your lease-end decision
Don't make a quick decision about which lease-end option you'll take. For example, if you simply return your vehicle to the lease company without doing your homework, you may be handing them built-in value that belongs to you. They'll love you for the gift.
But what if you have exceeded your mileage limits or have some damage to your vehicle? Is it best to return, or to purchase? Can the mileage and damage fees be negotiated if you decide to return?
Is extending your current lease or re-leasing a smart thing to do? When is it advisable to use your leased car as a trade-in? Do you still have to pay for excess mileage and wear-and-tear?
If you decide to purchase, do you have to pay the lease company's purchase price? Is it negotiable? How do you determine what price to offer? Why do some lease companies refuse to negotiate? Does purchasing avoid paying mileage and damage fees?
What to do
Answering the above questions and deciding what to do requires a little homework and careful consideration of all your options. Remember, it's just as important to make the right decisions at the end of a lease as it is at the beginning. But each situation is different and must be examined on its own merits. There is no standard answer that fits every case.
Getting answers
If you need help in making your lease-end decision, our Lease Kit contains a special comprehensive section, "Lease-End Advisor," that provides answers to all the above questions, as well as a detailed explanation of each of your lease-end options — and how to go about determining which option will work best for you, given your particular situation.
If you decide to buy your vehicle, this section of the Lease Kit tells you what to pay and how to deal with the lease company. If you're in a position to trade, it'll tell you how.
If you are over your mileage limits or have excessive wear and tear, this section tells you how to handle this common situation. In some cases it's better to return; in others, it's better to buy or trade.
If you think you might want to re-lease your vehicle, this section of the Lease Kit explains how to determine if this is a smart choice and warns of some common problems.
If you decide to return your vehicle, this section of the kit tells you what to expect. It explains how to handle the inspection and return process to minimize the possibility of surprises from the lease company.
Car insurance companies are all different
It's important to re-examine your car insurance at least once a year and every time you acquire a new car. Insurance companies frequently change their rate structures. A company that offers the best rates today may be the highest cost company after they raise their rates.
Furthermore, a company that offers the best rates for minimum-coverage, high-deductible insurance may not offer the best rates for the higher level coverage you need for leasing. Actually, you may be able to find a car insurance company that offers high level coverage for about the same rate as another company's low level coverage.
Recommendations
Before the Internet came along, it was quite a chore to shop for auto insurance. Now, it's a breeze because most companies have web sites. Insurance brokers are also online, making it extremely easy to get multiple instant quotes from different companies from a single source. They save you the trouble of contacting individual insurance companies because they do it for you. The services of these online brokers are free to consumers. They make their money from the insurance companies.
You are under no obligation to accept any quote offered by these companies. There are no fees or costs involved to get quotes from them. It's a no-lose deal. If you don't get rates you like, you can shop elsewhere.
When asking for a quote, you'll get the most accurate quote if you provide all the information requested, including your social security number. If you choose to withhold some of this information, you can still get a "ballpark" quote.
Because some companies base rates partially on credit scores, providing your social security number allows the company to access your credit records for a more accurate quote. These credit inquiries are considered "soft" inquiries and do not count against your score.
Furthermore, a company that offers the best rates for minimum-coverage, high-deductible insurance may not offer the best rates for the higher level coverage you need for leasing. Actually, you may be able to find a car insurance company that offers high level coverage for about the same rate as another company's low level coverage.
Recommendations
Before the Internet came along, it was quite a chore to shop for auto insurance. Now, it's a breeze because most companies have web sites. Insurance brokers are also online, making it extremely easy to get multiple instant quotes from different companies from a single source. They save you the trouble of contacting individual insurance companies because they do it for you. The services of these online brokers are free to consumers. They make their money from the insurance companies.
You are under no obligation to accept any quote offered by these companies. There are no fees or costs involved to get quotes from them. It's a no-lose deal. If you don't get rates you like, you can shop elsewhere.
When asking for a quote, you'll get the most accurate quote if you provide all the information requested, including your social security number. If you choose to withhold some of this information, you can still get a "ballpark" quote.
Because some companies base rates partially on credit scores, providing your social security number allows the company to access your credit records for a more accurate quote. These credit inquiries are considered "soft" inquiries and do not count against your score.
How to minimize insurance costs
What most people don't know is that they are probably already paying too much for their car insurance. It's too easy just to stick with the same company you've been with for years, even though rates are lower elsewhere. Rates change frequently. One company can have the best rates one year, another the next year.
So, if you intend to lease and the insurance coverage requirements are higher than you currently have, you can nearly always get the higher level of insurance at about the same rate as you are currently paying by simply investing a little time shopping by comparing quotes from a few other insurance companies, asking for discounts that you already qualify for, and adjusting your coverage.
Insurance companies offer a variety of discounts based on driving records, other policies with the same company, having multiple cars, safety equipment, and such. Of course, vehicle make/model, repair costs, claim history, driving record, and driver age also affect insurance costs. Even your credit score can affect your insurance rates with many companies.
Free FICO® Credit Score Estimator
The vehicle you buy or lease can have a huge effect on your insurance rates, regardless of which company you choose. A Honda Accord will cost you less to insure than a Cadillac Escalade, not so much because the Honda is a less expensive vehicle, but because the Escalade is one of the top most-stolen vehicles in the country.
Is it possible to find dirt-cheap car insurance? No, but you can mimimize what you pay by shopping smart and asking for discounts. Rates between different insurance companies vary greatly.
Here are some of the possible discounts you should ask about. Be aware that all auto insurance companies may not offer all of these discounts.
[ ] $500 deductible
[ ] $1,000 deductible
[ ] More than one car
[ ] No accidents in 3 Years
[ ] No moving violations in 3 years
[ ] Driver training courses
[ ] Defensive driving courses
[ ] Anti-theft devices
[ ] Good credit score
[ ] Low annual mileage
[ ] Air bags
[ ] Anti-lock brakes
[ ] Traction and stability control systems
[ ] Daytime running lights
[ ] Student drivers with good grades
[ ] Auto and homeowners coverage with the same company
[ ] College students away from home
[ ] Long-time customer
[ ] Other discounts
The key to car insurance savings is not the number of discounts, but the final premium cost. A company that offers few discounts may still have lower overall prices.
So, if you intend to lease and the insurance coverage requirements are higher than you currently have, you can nearly always get the higher level of insurance at about the same rate as you are currently paying by simply investing a little time shopping by comparing quotes from a few other insurance companies, asking for discounts that you already qualify for, and adjusting your coverage.
Insurance companies offer a variety of discounts based on driving records, other policies with the same company, having multiple cars, safety equipment, and such. Of course, vehicle make/model, repair costs, claim history, driving record, and driver age also affect insurance costs. Even your credit score can affect your insurance rates with many companies.
Free FICO® Credit Score Estimator
The vehicle you buy or lease can have a huge effect on your insurance rates, regardless of which company you choose. A Honda Accord will cost you less to insure than a Cadillac Escalade, not so much because the Honda is a less expensive vehicle, but because the Escalade is one of the top most-stolen vehicles in the country.
Is it possible to find dirt-cheap car insurance? No, but you can mimimize what you pay by shopping smart and asking for discounts. Rates between different insurance companies vary greatly.
Here are some of the possible discounts you should ask about. Be aware that all auto insurance companies may not offer all of these discounts.
[ ] $500 deductible
[ ] $1,000 deductible
[ ] More than one car
[ ] No accidents in 3 Years
[ ] No moving violations in 3 years
[ ] Driver training courses
[ ] Defensive driving courses
[ ] Anti-theft devices
[ ] Good credit score
[ ] Low annual mileage
[ ] Air bags
[ ] Anti-lock brakes
[ ] Traction and stability control systems
[ ] Daytime running lights
[ ] Student drivers with good grades
[ ] Auto and homeowners coverage with the same company
[ ] College students away from home
[ ] Long-time customer
[ ] Other discounts
The key to car insurance savings is not the number of discounts, but the final premium cost. A company that offers few discounts may still have lower overall prices.
What's the deal with car insurance when leasing?
When you lease, your vehicle belongs to the lease company. They want to make sure that their investment is covered should you have an accident that damages or destroys the vehicle, or if the vehicle is stolen. They may also want you to have sufficient liability coverage in case you are at fault in causing an accident. This not only protects you from financial disaster, but it also protects the lease company if they should be held partly responsible.
Of course, having sufficient car insurance coverage is smart whether you are leasing or not. Many people attempt to get by with minimum coverage required by law but it's a big risk since there's so much to lose. Accidents do happen. Large lawsuits are common. If you have insufficient car insurance coverage, you can be personally sued for additional money after your insurance has been paid. Many smart consumers add additional coverage with "umbrella" policies.
Of course, having sufficient car insurance coverage is smart whether you are leasing or not. Many people attempt to get by with minimum coverage required by law but it's a big risk since there's so much to lose. Accidents do happen. Large lawsuits are common. If you have insufficient car insurance coverage, you can be personally sued for additional money after your insurance has been paid. Many smart consumers add additional coverage with "umbrella" policies.
Car Lease Insurance
Some things you need to know about insurance before you lease
Most auto lease companies require you to maintain insurance coverage as follows:
Liability coverage: $100,000 per person / $300,000 per occurrence
Property liability coverage: $50,000
Comprehensive and collision for actual value with no more than $500 deductible.
In Canada, $1,000,000 in liability coverage is required for car insurance when leasing.
This may be more coverage than you would normally buy, which could mean an additional leasing expense — unless you know how to get better rates. Most people are already paying too much for insurance, before they lease.
Most auto lease companies require you to maintain insurance coverage as follows:
Liability coverage: $100,000 per person / $300,000 per occurrence
Property liability coverage: $50,000
Comprehensive and collision for actual value with no more than $500 deductible.
In Canada, $1,000,000 in liability coverage is required for car insurance when leasing.
This may be more coverage than you would normally buy, which could mean an additional leasing expense — unless you know how to get better rates. Most people are already paying too much for insurance, before they lease.
Two Types of Leases
Two types of car leases - open and closed
Automobile leases come in two varieties: closed-end and open-end. There's a big difference between the two types and you should understand that difference before you sign your lease contract. Federal regulations require that the type of lease be clearly indicated on all lease contracts.
Dealer salespeople typcially don't have this level of understanding of leases. So, don't ask. You'll only get the
answer he/she thinks you want to hear. Read the contract form for yourself.
Closed-end leases, sometimes called "walk-away" leases, are most common for consumer leases today. This type of lease allows you to simply return your vehicle at the end of the lease and have no other responsibilities other than possible payment of excessive damage or mileage charges.
Closed-end leases are based on the concept that the number of miles you drive annually is fairly predictable (12,000 miles per year is typical), that the vehicle will not be driven in rough or abusive conditions, and that its value at the end of the lease (the residual) is therefore somewhat predictable.
At the time you lease, the leasing company estimates the vehicle's lease-end residual value based on the expected number of driven miles. If the vehicle is actually worth less than the residual when you turn it in, the leasing company takes the financial hit, not you.
On the other hand, if the vehicle is worth more than the residual, and you have the option to purchase, you may want to buy the vehicle, then keep driving it or sell it and make a profit. This happens frequently.
Open-end leases are used primarily for commercial business leasing. In this case the lessee, not the leasing company, takes all the financial risks, which is not so much a problem for a business, since the cost can be expensed. Annual mileage on a business lease is usually much greater and less predictable than the average 12,000 miles-per-year of a non-business lease.
In open-end leases, you are responsible for paying any difference between the estimated lease-end value (the residual) and the actual market value at the end of the lease. This could amount to a significant sum of money if the market value of your vehicle has dropped or you drive many more miles than expected. Often, the residual for an open-end lease is set much lower than for a non-business closed-end lease, which reduces the lease-end risk, but can significantly increase the monthly payment amount.
Business Leasing
This web site is primarily about consumer leasing, not commercial or business leasing. Although there are similarities, there are also many differences. Evaluation of a business lease is best handled by a tax accountant or business finance advisor who is familiar with details of the business and it's financial objectives.
If you are interested in a business lease, see the fleet manager at your local dealer to make arrangements and to determine which type of lease will be best for your business — after consulting with your tax advisor.
Consumer Leasing
As a consumer, make sure you only agree to a closed-end consumer lease. Even though most non-business leases you'll encounter will be of this type, read your contract closely just to be certain. Most consumer lease contract forms will clearly state, at the top of the form, that it is for a closed-end lease.
Automobile leases come in two varieties: closed-end and open-end. There's a big difference between the two types and you should understand that difference before you sign your lease contract. Federal regulations require that the type of lease be clearly indicated on all lease contracts.
Dealer salespeople typcially don't have this level of understanding of leases. So, don't ask. You'll only get the
answer he/she thinks you want to hear. Read the contract form for yourself.
Closed-end leases, sometimes called "walk-away" leases, are most common for consumer leases today. This type of lease allows you to simply return your vehicle at the end of the lease and have no other responsibilities other than possible payment of excessive damage or mileage charges.
Closed-end leases are based on the concept that the number of miles you drive annually is fairly predictable (12,000 miles per year is typical), that the vehicle will not be driven in rough or abusive conditions, and that its value at the end of the lease (the residual) is therefore somewhat predictable.
At the time you lease, the leasing company estimates the vehicle's lease-end residual value based on the expected number of driven miles. If the vehicle is actually worth less than the residual when you turn it in, the leasing company takes the financial hit, not you.
On the other hand, if the vehicle is worth more than the residual, and you have the option to purchase, you may want to buy the vehicle, then keep driving it or sell it and make a profit. This happens frequently.
Open-end leases are used primarily for commercial business leasing. In this case the lessee, not the leasing company, takes all the financial risks, which is not so much a problem for a business, since the cost can be expensed. Annual mileage on a business lease is usually much greater and less predictable than the average 12,000 miles-per-year of a non-business lease.
In open-end leases, you are responsible for paying any difference between the estimated lease-end value (the residual) and the actual market value at the end of the lease. This could amount to a significant sum of money if the market value of your vehicle has dropped or you drive many more miles than expected. Often, the residual for an open-end lease is set much lower than for a non-business closed-end lease, which reduces the lease-end risk, but can significantly increase the monthly payment amount.
Business Leasing
This web site is primarily about consumer leasing, not commercial or business leasing. Although there are similarities, there are also many differences. Evaluation of a business lease is best handled by a tax accountant or business finance advisor who is familiar with details of the business and it's financial objectives.
If you are interested in a business lease, see the fleet manager at your local dealer to make arrangements and to determine which type of lease will be best for your business — after consulting with your tax advisor.
Consumer Leasing
As a consumer, make sure you only agree to a closed-end consumer lease. Even though most non-business leases you'll encounter will be of this type, read your contract closely just to be certain. Most consumer lease contract forms will clearly state, at the top of the form, that it is for a closed-end lease.
Advantages of Car Leasing
Car leasing can offer advantages and be an attractive alternative to buying, although it's not for everyone, as we'll discuss later. You must decide about the importance and priority of these benefits to you.
So, what are the potential advantages of leasing?
Lower Monthly Payments
Because you only pay for the portion of the car or truck that you actually use, your monthly payments are 30%-60% lower than for a purchase loan for the same car and same term.
More Car, More Often
Since your monthly payments are lower, you get more car for the same money and drive a new vehicle every two to four years, depending on the term length of your leases.
Fewer Maintenance Headaches
Most people like to lease for a term that coincides with the length of the manufacturer's warranty coverage so that if something goes wrong with the car, the repairs are always covered.
Lower Upfront Cash Outlay
Most leases require little or no down payment, which makes getting into a new car more affordable and frees up your cash for other things. However, you can choose to make a down payment, or trade in your old vehicle, to lower your monthly payment amount.
Lower Tax Bite
In most states of the U.S. and in Canada, you don't pay sales tax on the entire value of a leased vehicle as you would if you purchased. You're only taxed on the portion of the value that you use during your lease. The tax is spread out and paid along with your monthly lease payment instead of being paid all at once.
No Used-Car Hassles
With leasing, the headaches of selling a used car are eliminated. When your lease ends, you simply turn it back to the leasing company and walk away, unless you decide to buy it or trade it.
Gap Coverage Included
Most leases automatically include free "gap" protection in case your vehicle is totaled in an accident or stolen, and you still owe more than the vehicle is worth. Loans do not generally come with gap protection.
So, what are the potential advantages of leasing?
Lower Monthly Payments
Because you only pay for the portion of the car or truck that you actually use, your monthly payments are 30%-60% lower than for a purchase loan for the same car and same term.
More Car, More Often
Since your monthly payments are lower, you get more car for the same money and drive a new vehicle every two to four years, depending on the term length of your leases.
Fewer Maintenance Headaches
Most people like to lease for a term that coincides with the length of the manufacturer's warranty coverage so that if something goes wrong with the car, the repairs are always covered.
Lower Upfront Cash Outlay
Most leases require little or no down payment, which makes getting into a new car more affordable and frees up your cash for other things. However, you can choose to make a down payment, or trade in your old vehicle, to lower your monthly payment amount.
Lower Tax Bite
In most states of the U.S. and in Canada, you don't pay sales tax on the entire value of a leased vehicle as you would if you purchased. You're only taxed on the portion of the value that you use during your lease. The tax is spread out and paid along with your monthly lease payment instead of being paid all at once.
No Used-Car Hassles
With leasing, the headaches of selling a used car are eliminated. When your lease ends, you simply turn it back to the leasing company and walk away, unless you decide to buy it or trade it.
Gap Coverage Included
Most leases automatically include free "gap" protection in case your vehicle is totaled in an accident or stolen, and you still owe more than the vehicle is worth. Loans do not generally come with gap protection.
Saturday, January 17, 2009
Luxury Car Lease
Why lease a luxury car? What's different about luxury car leasing?
Luxury car leasing is different
How is it different? It's not that luxury cars are more expensive, or that the leasing process is different, but because the consumer doing the leasing is typically different.
Luxury car consumer
High-end automotive consumers have different priorities, different values, bigger bank accounts, and prefer to transact business differently than people acquiring less expensive vehicles.
They have a tendency to lease rather than buy. "High-line" vehicles are leased at the rate of 50% - 70%, depending on brand, compared to only 20% - 30% for non-luxury models.
Luxury auto consumers tend to value time, efficiency, quality of service, and business relationship when dealing with financing. Spending a great deal of time shopping and haggling for bargain deals is less important that establishing a relationship with a company they can trust and depend on to genuinely look out for their interests.
High-end customrs tend to be more loyal to a brand and a dealership over a long period of time.
Luxury cars make good leases
Luxury automobiles make the best lease values, dollar for dollar, due to high lease-end residual values relative to MSRP. In fact, luxury vehicles, as a category, are leased significantly more often than vehicles in any other category.
The best lease deals are for those vehicles, such as Lexus, Mercedes, Porsche, Land Rover, and BMW, with the highest future resale values, or residual values, relative to their original cost. A high residual value creates a low monthly lease payment.
In fact, a better lease deal can often be obtained by leasing a high-residual luxury car than by leasing a car with a lower residual value, even though the price of the luxury car is the same or greater. This is the reason smart automotive consumers tend to lease a luxury vehicle.
Being smart about money is a typical characteristic of high-end car leasers. High-line leasing consumers are not trying to save a few bucks — they have the money to buy the car they want. They simply know that it's not smart to put money into depreciating assets (automobiles) when that money could be used for more productive purposes.
Independent lease companies and luxury cars
More than 20% of luxury automobile consumers finance their loans and leases outside of car dealerships, according to a recent report by JD Power and Associates.
Independent lease companies such as Primelease can, in most cases, beat luxury car dealers on prices and lease rates because high-end manufacturers don't subsidize deals and offer incentives nearly to the extent that low-mid-range vehicle manufacturers do. Furthermore, luxury car dealers don't like to be viewed as "discounters."
Finance companies who lease luxury cars typically require their clients to have "prime" credit ratings. This means a high FICO® credit score of 700 or greater. Lower credit scores can mean higher lease rates, large down payments, and security deposits — and possibly higher insurance rates.
For high-line vehicle leases an independent lease company can be more flexible and responsive to customers' needs than dealers, who are restrained by car manufacturers' rules. For example, when new models come out and are limited in dealers' inventories, independent lease companies can search the entire country for the exact car you want.
Benefits of leasing luxury cars
People who lease high-line cars like the convenience of a quick easy business transaction, like having a new style car every two or three years, like avoiding maintenace and repair headaches, and like avoiding disposing of used cars. They also like the option of minimizing cash outlay.
In summary, luxury car leasing is different, the people who lease luxury cars are different, and the companies who lease luxury cars are different.
Luxury car leasing is different
How is it different? It's not that luxury cars are more expensive, or that the leasing process is different, but because the consumer doing the leasing is typically different.
Luxury car consumer
High-end automotive consumers have different priorities, different values, bigger bank accounts, and prefer to transact business differently than people acquiring less expensive vehicles.
They have a tendency to lease rather than buy. "High-line" vehicles are leased at the rate of 50% - 70%, depending on brand, compared to only 20% - 30% for non-luxury models.
Luxury auto consumers tend to value time, efficiency, quality of service, and business relationship when dealing with financing. Spending a great deal of time shopping and haggling for bargain deals is less important that establishing a relationship with a company they can trust and depend on to genuinely look out for their interests.
High-end customrs tend to be more loyal to a brand and a dealership over a long period of time.
Luxury cars make good leases
Luxury automobiles make the best lease values, dollar for dollar, due to high lease-end residual values relative to MSRP. In fact, luxury vehicles, as a category, are leased significantly more often than vehicles in any other category.
The best lease deals are for those vehicles, such as Lexus, Mercedes, Porsche, Land Rover, and BMW, with the highest future resale values, or residual values, relative to their original cost. A high residual value creates a low monthly lease payment.
In fact, a better lease deal can often be obtained by leasing a high-residual luxury car than by leasing a car with a lower residual value, even though the price of the luxury car is the same or greater. This is the reason smart automotive consumers tend to lease a luxury vehicle.
Being smart about money is a typical characteristic of high-end car leasers. High-line leasing consumers are not trying to save a few bucks — they have the money to buy the car they want. They simply know that it's not smart to put money into depreciating assets (automobiles) when that money could be used for more productive purposes.
Independent lease companies and luxury cars
More than 20% of luxury automobile consumers finance their loans and leases outside of car dealerships, according to a recent report by JD Power and Associates.
Independent lease companies such as Primelease can, in most cases, beat luxury car dealers on prices and lease rates because high-end manufacturers don't subsidize deals and offer incentives nearly to the extent that low-mid-range vehicle manufacturers do. Furthermore, luxury car dealers don't like to be viewed as "discounters."
Finance companies who lease luxury cars typically require their clients to have "prime" credit ratings. This means a high FICO® credit score of 700 or greater. Lower credit scores can mean higher lease rates, large down payments, and security deposits — and possibly higher insurance rates.
For high-line vehicle leases an independent lease company can be more flexible and responsive to customers' needs than dealers, who are restrained by car manufacturers' rules. For example, when new models come out and are limited in dealers' inventories, independent lease companies can search the entire country for the exact car you want.
Benefits of leasing luxury cars
People who lease high-line cars like the convenience of a quick easy business transaction, like having a new style car every two or three years, like avoiding maintenace and repair headaches, and like avoiding disposing of used cars. They also like the option of minimizing cash outlay.
In summary, luxury car leasing is different, the people who lease luxury cars are different, and the companies who lease luxury cars are different.
Car Leasing and Car Renting - What's the Difference?
Many automotive consumers assume that car renting and car leasing are the same thing, or are very similar.
Not true.
This misconception may come about from the fact that apartment renting – which is very familiar to most people – and apartment leasing are essentially the same thing.
It is therefore natural for someone not familiar with car leasing to assume that it is much like apartment renting or leasing.
It is not.
What is car renting?
Car rental companies exist to fulfill the short-term automobile use needs of traveling business people, vacationers, or those who might need a particular type of vehicle for temporary use.
Rental cars are owned by a rental company and are made available to customers for relatively short-term use. The company maintains and services its vehicles and carries basic insurance. Customers agree to not damage the vehicle, to buy gas, to purchase additional insurance if personal auto insurance is not applicable, and to return the vehicle within a specified time. All maintenance is handled by the rental company.
Rent rates are determined by the car rental company, based on a daily or weekly fee, and includes either unlimited mileage or an additional mileage rate. The method by which rates are determined is not revealed to customers and can vary widely, even within the same rental company, based on various discount schemes.
Rental companies make money by renting the same car over and over again.
Car renting is not a form of financing, as is leasing.
Car renting is much the same as apartment renting or leasing.
What is leasing?
By contrast, leasing is actually a method of vehicle financing that is very similar to loan financing. A lease company — or manufacturer's finance company – only gets involved after a customer decides he wants lease financing. The lease company buys the car from the dealer at the customer-negotiated price and loans it back to the customer.
The "loan" in this case is not money, but a vehicle. Since the lease company has invested money in the vehicle, they expect to be paid interest on that money. Since all cars depreciate in value, they also want to be compensated for the reduced value of the vehicle as the customer adds miles to it and as the vehicle becomes older. It will not be worth as much when it's returned to them as when it was new.
At lease-end, vehicles are returned to the lease company as the final payment of the "loan." Lease payments are easy to calculate using a well-defined formula used throughout the leasing industry, unlike car renting for which there is no way for customers to calculate rental rates.
In short, lease payments are determined by the negotiated selling price of the vehicle, anticipated depreciated value at lease-end (residual value), term (length of lease), and the money factor (financing rate, similar to interest rate). See How Car Lease Payments are Calculated.
A leased vehicle is usually only leased once, when it's new, not over and over again like a rental car.
How are car renting and car leasing different
Leasing is a form of financing; renting is not. Lease terms begin at 24 months; renting can be for as little as a day or less.
You may be able to swap cars in the middle of a rental; not so with leasing. Since leasing is a form of financing, customer credit scores, income, and debt are important; not so with renting.
Leasing appears on your credit report just like a loan; renting does not. Defaulting on a lease damages your credit score; defaulting on a rental does not.
With renting, you choose your vehicle from rental companies' available makes and models. With leasing, you can lease any new vehicle make and model you want.
It's easy to end a rental early by simply returning the car, while ending a lease early can be very costly, because it's a long-term contract.
For the same length of time, renting is much more expensive than leasing.
Why car leasing is not like apartment leasing
Cars depreciate in value and require money to purchase. Leasing pays for the depreciation and interest on the money provided by a lease company to purchase the car.
Apartments are real estate and generally don't rapidly depreciate in value, as do automobiles. In fact, many increase in value unless they are not maintained well. Therefore apartment rental fees do not pay for specifically depreciation or anything else specific. There is no interest or finance charges. An apartment owner needs to make enough money to pay the mortgage, taxes, utilities, upkeep, and make a profit. He can rent his apartment over and over again, long after it's new.
There is no formula to calculate apartment rental rates, as there is with car leasing.
Nothing to show for your money
It's true with apartment renting that you have absolutely nothing to show for the money you've paid, and rental rates can easily be higher than mortgage payments for a home.
It's also true with car leasing that you have nothing to show for your money. However....you've paid 30%-60% less than loan payments for the same car, and you have specifically paid for your car's depreciation, and only the depreciation, not the entire vehicle cost.
The money you've lost to depreciation is exactly the same money that is lost by someone who has purchased the same car with a loan. His car depreciates exactly the same amount as your leased car, but he pays for the entire vehicle. He therefore has nothing to show for that part of the money that is lost to depreciation if he sells or trades. That money is gone, for both a buyer and a leaser.
Not true.
This misconception may come about from the fact that apartment renting – which is very familiar to most people – and apartment leasing are essentially the same thing.
It is therefore natural for someone not familiar with car leasing to assume that it is much like apartment renting or leasing.
It is not.
What is car renting?
Car rental companies exist to fulfill the short-term automobile use needs of traveling business people, vacationers, or those who might need a particular type of vehicle for temporary use.
Rental cars are owned by a rental company and are made available to customers for relatively short-term use. The company maintains and services its vehicles and carries basic insurance. Customers agree to not damage the vehicle, to buy gas, to purchase additional insurance if personal auto insurance is not applicable, and to return the vehicle within a specified time. All maintenance is handled by the rental company.
Rent rates are determined by the car rental company, based on a daily or weekly fee, and includes either unlimited mileage or an additional mileage rate. The method by which rates are determined is not revealed to customers and can vary widely, even within the same rental company, based on various discount schemes.
Rental companies make money by renting the same car over and over again.
Car renting is not a form of financing, as is leasing.
Car renting is much the same as apartment renting or leasing.
What is leasing?
By contrast, leasing is actually a method of vehicle financing that is very similar to loan financing. A lease company — or manufacturer's finance company – only gets involved after a customer decides he wants lease financing. The lease company buys the car from the dealer at the customer-negotiated price and loans it back to the customer.
The "loan" in this case is not money, but a vehicle. Since the lease company has invested money in the vehicle, they expect to be paid interest on that money. Since all cars depreciate in value, they also want to be compensated for the reduced value of the vehicle as the customer adds miles to it and as the vehicle becomes older. It will not be worth as much when it's returned to them as when it was new.
At lease-end, vehicles are returned to the lease company as the final payment of the "loan." Lease payments are easy to calculate using a well-defined formula used throughout the leasing industry, unlike car renting for which there is no way for customers to calculate rental rates.
In short, lease payments are determined by the negotiated selling price of the vehicle, anticipated depreciated value at lease-end (residual value), term (length of lease), and the money factor (financing rate, similar to interest rate). See How Car Lease Payments are Calculated.
A leased vehicle is usually only leased once, when it's new, not over and over again like a rental car.
How are car renting and car leasing different
Leasing is a form of financing; renting is not. Lease terms begin at 24 months; renting can be for as little as a day or less.
You may be able to swap cars in the middle of a rental; not so with leasing. Since leasing is a form of financing, customer credit scores, income, and debt are important; not so with renting.
Leasing appears on your credit report just like a loan; renting does not. Defaulting on a lease damages your credit score; defaulting on a rental does not.
With renting, you choose your vehicle from rental companies' available makes and models. With leasing, you can lease any new vehicle make and model you want.
It's easy to end a rental early by simply returning the car, while ending a lease early can be very costly, because it's a long-term contract.
For the same length of time, renting is much more expensive than leasing.
Why car leasing is not like apartment leasing
Cars depreciate in value and require money to purchase. Leasing pays for the depreciation and interest on the money provided by a lease company to purchase the car.
Apartments are real estate and generally don't rapidly depreciate in value, as do automobiles. In fact, many increase in value unless they are not maintained well. Therefore apartment rental fees do not pay for specifically depreciation or anything else specific. There is no interest or finance charges. An apartment owner needs to make enough money to pay the mortgage, taxes, utilities, upkeep, and make a profit. He can rent his apartment over and over again, long after it's new.
There is no formula to calculate apartment rental rates, as there is with car leasing.
Nothing to show for your money
It's true with apartment renting that you have absolutely nothing to show for the money you've paid, and rental rates can easily be higher than mortgage payments for a home.
It's also true with car leasing that you have nothing to show for your money. However....you've paid 30%-60% less than loan payments for the same car, and you have specifically paid for your car's depreciation, and only the depreciation, not the entire vehicle cost.
The money you've lost to depreciation is exactly the same money that is lost by someone who has purchased the same car with a loan. His car depreciates exactly the same amount as your leased car, but he pays for the entire vehicle. He therefore has nothing to show for that part of the money that is lost to depreciation if he sells or trades. That money is gone, for both a buyer and a leaser.
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