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.
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