Friday, December 7, 2007
Happy Holidays
I just wanted to wish everyone a Happy Holiday this time of year. I need to keep updating but I have been busy lately.
Monday, August 27, 2007
Why annuities????
Today (and for the next few posts) I thought I'd write about the reasons to buy an annuity.
So let's start this off with a post about safety. The nice thing about buying fixed-deferred annuities is the have no 'stock market' risk. Not only will get a return on your money, you are guaranteed to get a return of your money.
Even with a fixed-index annuity which pays you an interest rate the moves with the changes in the stock market, you are guaranteed not to lose money in the market.
Even with years to go before retirement, gen xers would be smart to put a portion of their money in vehicles that don't lose money.
Of course you always have the risk of insurance company defaulting but you use insurance companies to insure your home, your cars, even your life.
So let's start this off with a post about safety. The nice thing about buying fixed-deferred annuities is the have no 'stock market' risk. Not only will get a return on your money, you are guaranteed to get a return of your money.
Even with a fixed-index annuity which pays you an interest rate the moves with the changes in the stock market, you are guaranteed not to lose money in the market.
Even with years to go before retirement, gen xers would be smart to put a portion of their money in vehicles that don't lose money.
Of course you always have the risk of insurance company defaulting but you use insurance companies to insure your home, your cars, even your life.
Friday, August 17, 2007
Fixed-index annuities, more thoughts
I am not advocating for the elimination of the stock market in your retirement portfolio. Like I said, I own mutual funds and stocks. Of course you have to make the decision for yourself.
I am suggesting everyone, whether young or old, should take a look at indexed annuities. They don't replace stock market investing but I do think they compliment it very well.
FIA's are also not a short-term savings vehicle. They are designed to be held for a number of years. Some have surrender charges as long as 15 years or more.
I am suggesting everyone, whether young or old, should take a look at indexed annuities. They don't replace stock market investing but I do think they compliment it very well.
FIA's are also not a short-term savings vehicle. They are designed to be held for a number of years. Some have surrender charges as long as 15 years or more.
Thursday, August 16, 2007
An example of an FIA crediting method
Yesterday I started writing about one of my favorite retirement savings vehicles, the fixed-index annuity.
So how does an insurance company credit an FIA contract with interest?
One popular design is the annual point-to-point reset design. Let me explain how this works.
This annuity takes one measurement of the index on day one, and another measurement exactly one year later (though some take an average of everyday over the last month). The difference in the index value is calculated and a percentage of change is determined. As an example:
Assume on December 31 2007 the index in the contract has a value of 1000. Assume on December 31, 2008 the value of the index is 1100. The difference is 10 percentage points. Theoretically the insurance company would credit all those contract holder's that purchased their annuity on December 31 with a ten percent increase. But, if you remember from yesterday the annuity never gets the full growth of the index, only a portion.
Right now some of my favorite point-to-point contracts are utilizing what they call a participation rate to limit the gain of the contract.
Let's look at the example again and let's assume a 50% participation rate. The policy would credit a 5% gain (50% of 10%).
And on December 31, 2008 the new index value is 1100 and the next year's gain or loss will be measured against the 1100 value.
If you had purchased an annuity with $10,000 the value would now be $10,500. Of course if you were able to buy the index itself with your $10,000 it would now be worth $11,000.
Now let's take a look at what happens in a down year.
Assume on July 31, 2007 the index value is 1000 and on July 31, 2008 the value is 750. What interest rate does the annuity contract credit? 0%. While those that purchased the index directly had a 25% loss, the index annuity didn't lose anything. And as an added bonus, the new starting point is 750. So any gain or loss for the year 2008 will be measured against the 750 index value.
If the next year (July 31, 2008 to July 31, 2009) the index goes from 750 to 800 the index annuity with a 50% participation rate would credit about a 3.5% gain. If you had bought the index directly in on July 31, 2007 you'd still be down 20%.
With a $10,000 purchase, the index annuity value would be $10,350 while money that bought the index directly would be value at $8000.
And that is the reason I like index annuities so much. If I knew what the stock market was going to do each year, I wouldn't buy an indexed annuity, ever. If I knew the stock market was only going to go up, I'd buy as much of the index as I could afford, I might even be tempted to borrow some money to invest.
But that's not how the market works. Sometimes it goes up, and sometimes it goes down. Personally I do own some stocks and some mutual funds. But I also own a few indexed annuities. I like to have some money that I won't ever lose.
I hope the clears up a little confusion on fixed-indexed annuities. Of course there are bunch of different ways FIA's credit interest, this is just one of the options.
So how does an insurance company credit an FIA contract with interest?
One popular design is the annual point-to-point reset design. Let me explain how this works.
This annuity takes one measurement of the index on day one, and another measurement exactly one year later (though some take an average of everyday over the last month). The difference in the index value is calculated and a percentage of change is determined. As an example:
Assume on December 31 2007 the index in the contract has a value of 1000. Assume on December 31, 2008 the value of the index is 1100. The difference is 10 percentage points. Theoretically the insurance company would credit all those contract holder's that purchased their annuity on December 31 with a ten percent increase. But, if you remember from yesterday the annuity never gets the full growth of the index, only a portion.
Right now some of my favorite point-to-point contracts are utilizing what they call a participation rate to limit the gain of the contract.
Let's look at the example again and let's assume a 50% participation rate. The policy would credit a 5% gain (50% of 10%).
And on December 31, 2008 the new index value is 1100 and the next year's gain or loss will be measured against the 1100 value.
If you had purchased an annuity with $10,000 the value would now be $10,500. Of course if you were able to buy the index itself with your $10,000 it would now be worth $11,000.
Now let's take a look at what happens in a down year.
Assume on July 31, 2007 the index value is 1000 and on July 31, 2008 the value is 750. What interest rate does the annuity contract credit? 0%. While those that purchased the index directly had a 25% loss, the index annuity didn't lose anything. And as an added bonus, the new starting point is 750. So any gain or loss for the year 2008 will be measured against the 750 index value.
If the next year (July 31, 2008 to July 31, 2009) the index goes from 750 to 800 the index annuity with a 50% participation rate would credit about a 3.5% gain. If you had bought the index directly in on July 31, 2007 you'd still be down 20%.
With a $10,000 purchase, the index annuity value would be $10,350 while money that bought the index directly would be value at $8000.
And that is the reason I like index annuities so much. If I knew what the stock market was going to do each year, I wouldn't buy an indexed annuity, ever. If I knew the stock market was only going to go up, I'd buy as much of the index as I could afford, I might even be tempted to borrow some money to invest.
But that's not how the market works. Sometimes it goes up, and sometimes it goes down. Personally I do own some stocks and some mutual funds. But I also own a few indexed annuities. I like to have some money that I won't ever lose.
I hope the clears up a little confusion on fixed-indexed annuities. Of course there are bunch of different ways FIA's credit interest, this is just one of the options.
Wednesday, August 15, 2007
A great retirement planning tool!
Today I thought I'd mix it up and write about one of my favorite retirement savings products:
Fixed-Indexed Annuities (formerly called equity-indexed annuities)
Imagine sitting down at a blackjack table in Las Vegas with these rules:
You can never lose money when you lose a hand. You get to keep your bet. If you lose ten hands in a row, you still get to keep your original bet.
But it comes at price. The price is when you win, you only win a portion of the amount of the bet.
Would you like to play blackjack with those rules?
That's essentially the nuts and bolts of a fixed-indexed annuity.
What is a standard fixed (deferred) annuity?
A deferred-annuity is an insurance product that earns interest much like a certificate of deposit with one great exception; annuities earn interest tax-deferred. You don't actually pay taxes on your interest earnings until you withdraw the money.
Would you rather earn 5% interest in a taxable CD or in a tax-deferred annuity? That's not hard to figure out.
Now annuities are not short-term savings vehicles. They are to be held for retirement planning. Just to make sure you are using them for retirement the tax law states that if you take any money out of an annuity prior to age 59 1/2 you will incur a 10% tax penalty on the amount withdrawn.
But if you are saving money for retirement in a regular CD it would be a wise decision to look at annuities sold by insurance companies.
The truly amazing aspect of the FIA though is the fact you never lose interest. Now of course there are risks such as insurer default but you use insurance companies to insure your home and possessions, so it is no more of a risk than you have with your homeowners insurance.
Even if the stock market goes down, these FIA's guarantee you will earn some positive interest.
Now you will never earn as much interest as you would if you were invested directly in the S&P 500 for example but you can't lose money either if the index tanks.
I'm in my early 30's and a portion of my retirement program is in FIA's. In fact last year I earned over 6% in one contract and another contract earned 7%. Not too bad.
I love FIA's and I truly think everyone should take a good hard look at them.
If you would like more information, I can send you out a buyers guide to fixed annuities. Just drop me an e-mail at brad.j.baldwin@gmail.com.
Fixed-Indexed Annuities (formerly called equity-indexed annuities)
Imagine sitting down at a blackjack table in Las Vegas with these rules:
You can never lose money when you lose a hand. You get to keep your bet. If you lose ten hands in a row, you still get to keep your original bet.
But it comes at price. The price is when you win, you only win a portion of the amount of the bet.
Would you like to play blackjack with those rules?
That's essentially the nuts and bolts of a fixed-indexed annuity.
What is a standard fixed (deferred) annuity?
A deferred-annuity is an insurance product that earns interest much like a certificate of deposit with one great exception; annuities earn interest tax-deferred. You don't actually pay taxes on your interest earnings until you withdraw the money.
Would you rather earn 5% interest in a taxable CD or in a tax-deferred annuity? That's not hard to figure out.
Now annuities are not short-term savings vehicles. They are to be held for retirement planning. Just to make sure you are using them for retirement the tax law states that if you take any money out of an annuity prior to age 59 1/2 you will incur a 10% tax penalty on the amount withdrawn.
But if you are saving money for retirement in a regular CD it would be a wise decision to look at annuities sold by insurance companies.
Right now regular annuity rates and CD rates are very similar. And I would bet in the next couple of years, annuity rates will actually be higher than CD rates. Add in the tax deferral and it seems like a no-brainer to me.
So what is a fixed-index annuity?
Instead of declaring an interest rate at the start of the term like a bank declares a CD's interest rate, some annuities base their interest rate on the movement of the stock market. These are called fixed-indexed annuities (FIA's for short). Based on a formula declared within the annuity contract itself, FIA's use the movement of one (or more) of the major stock market indices to determine an interest rate.
Primarily the FIA's use the S&P 500 as the index although many now use the Dow Jones and some even use Lehman Brother bond index.
The truly amazing aspect of the FIA though is the fact you never lose interest. Now of course there are risks such as insurer default but you use insurance companies to insure your home and possessions, so it is no more of a risk than you have with your homeowners insurance.
Even if the stock market goes down, these FIA's guarantee you will earn some positive interest.
Now you will never earn as much interest as you would if you were invested directly in the S&P 500 for example but you can't lose money either if the index tanks.
I'm in my early 30's and a portion of my retirement program is in FIA's. In fact last year I earned over 6% in one contract and another contract earned 7%. Not too bad.
I love FIA's and I truly think everyone should take a good hard look at them.
If you would like more information, I can send you out a buyers guide to fixed annuities. Just drop me an e-mail at brad.j.baldwin@gmail.com.
Thursday, August 2, 2007
Summer heat...
It has been hot here. Seems like every week we see temperatures in the 100's. I will be posting again in the next few days. If there's a type of insurance you'd like a little information on, please drop me a line.
Wednesday, May 2, 2007
Disability Insurance Awareness Month, May 2007
This is the first annual Disability Insurance Awareness Month. You will probably see a bunch of ads for disability insurance month. Finally someone has listened. We absolutely need to raise the awareness for the need for disability income insurance.
Check out http://life-line.org for more information on disability income awareness month.
Also, check out this link if you want to learn the FACTS about disabling illnesses and injuries:
http://life-line.org/real-risk.html
Did you know nearly 48% of mortgage foreclosures are due to a disability? Only 4% are due to death. Also, only one house in about 1800 will ever burn down, and yet every homeowner I know has insurance in case of fire.
Another interesting statistic I came across today: There are about 170,000,000 life insurance policies in force in America today. But less than 6,000,000 indivudually-owned disability income policies. Knowing what you now know about mortgage foreclosures it's time to take a look at disability income.
Check out http://life-line.org for more information on disability income awareness month.
Also, check out this link if you want to learn the FACTS about disabling illnesses and injuries:
http://life-line.org/real-risk.html
Did you know nearly 48% of mortgage foreclosures are due to a disability? Only 4% are due to death. Also, only one house in about 1800 will ever burn down, and yet every homeowner I know has insurance in case of fire.
Another interesting statistic I came across today: There are about 170,000,000 life insurance policies in force in America today. But less than 6,000,000 indivudually-owned disability income policies. Knowing what you now know about mortgage foreclosures it's time to take a look at disability income.
Tuesday, May 1, 2007
Do you need another reason to buy whole life insurance on a child?
I forgot one of the best reasons to buy a participating-whole-life-insurance policy on a child:
The rates will never ever go up. The rate I pay today, will be the same rate my son pays when he is 65 on this policy. I can tell you the rate a 35 year old pays for a new policy for the amount of insurance I am buying on my son is a whole lot higher than the rate he will be paying when he is 35.
In fact he may he may be able to quit paying the premium long before he is 65 but that is a different topic for a different day.
The rates will never ever go up. The rate I pay today, will be the same rate my son pays when he is 65 on this policy. I can tell you the rate a 35 year old pays for a new policy for the amount of insurance I am buying on my son is a whole lot higher than the rate he will be paying when he is 35.
In fact he may he may be able to quit paying the premium long before he is 65 but that is a different topic for a different day.
Wednesday, April 25, 2007
The burning question: Should you buy life insurance on children?
Do children need life insurance?
No, they don't need it, but I'll give you plenty of reasons why you will want to buy insurance on children.
I know a lot of "experts" out there advise against buying life insurance on children because no one depends on them. While technically true, no one depends on them, there is an expense when a child passes away.
Let me explain. Having a week old son in my life has really made me ponder this question. I can't imagine the heart ache of losing a child. In just over 7 days with my son I can't image being without him now.
So here are the facts:
5 Reason why I am buying life insurance on my son.
1. Funerals are expensive. The average cost of a funeral is now approaching $10,000. Faced with the horror of burying a child, do you really want to have to withdraw cash from your savings account or even worse have to charge a funeral on a Visa card in the amount of $10,000, $15,000 or even $20,000?
2. Life insurance on children is cheap. It will never get cheaper.
3. My son is healthy. Life insurance is not bought with money, it is bought with health. You can have all the money in the world, but if you can't qualify health wise they won't sell you life insurance at any price. God forbid my son faces a chronic illness sometime in his life, at least he will have a life insurance policy to protect those he loves in the future.
4. Guaranteed purchase option. This sort of ties in with number 3. I also added a rider to my son's policy that allows him to buy more life insurance in bunches of $50,000 every 3 years once he reaches from the age of 22 until he reaches age 40 without having to prove insurability. It doesn't matter what his health status is in the future, he has the right (not the obligation) to buy more life insurance. Do you suppose his family will appreciate the forethought if he becomes ill in the future and can't qualify for life insurance?
5. His life insurance policy will be a great money teaching tool. The fact is by the time most of us reach 65 we are either dead or broke. Most seniors rely on Social Security as their means of survival. Our savings rate in this country is a negative number, our government spends money it doesn't have, we all have seen payday loan or car title loan offices popping up. Spending is a disease in this country. The basis of any solid financial plan should be solid life insurance protection. When I teach my son about money I'm going to pull out his life insurance policy and explain how it all works. It will be the basis for a successful financial future for my son.
No, my child doesn't have any one that depends on him now, but when he does in the future they'll be glad he has this policy.
No, they don't need it, but I'll give you plenty of reasons why you will want to buy insurance on children.
I know a lot of "experts" out there advise against buying life insurance on children because no one depends on them. While technically true, no one depends on them, there is an expense when a child passes away.
Let me explain. Having a week old son in my life has really made me ponder this question. I can't imagine the heart ache of losing a child. In just over 7 days with my son I can't image being without him now.
So here are the facts:
5 Reason why I am buying life insurance on my son.
1. Funerals are expensive. The average cost of a funeral is now approaching $10,000. Faced with the horror of burying a child, do you really want to have to withdraw cash from your savings account or even worse have to charge a funeral on a Visa card in the amount of $10,000, $15,000 or even $20,000?
2. Life insurance on children is cheap. It will never get cheaper.
3. My son is healthy. Life insurance is not bought with money, it is bought with health. You can have all the money in the world, but if you can't qualify health wise they won't sell you life insurance at any price. God forbid my son faces a chronic illness sometime in his life, at least he will have a life insurance policy to protect those he loves in the future.
4. Guaranteed purchase option. This sort of ties in with number 3. I also added a rider to my son's policy that allows him to buy more life insurance in bunches of $50,000 every 3 years once he reaches from the age of 22 until he reaches age 40 without having to prove insurability. It doesn't matter what his health status is in the future, he has the right (not the obligation) to buy more life insurance. Do you suppose his family will appreciate the forethought if he becomes ill in the future and can't qualify for life insurance?
5. His life insurance policy will be a great money teaching tool. The fact is by the time most of us reach 65 we are either dead or broke. Most seniors rely on Social Security as their means of survival. Our savings rate in this country is a negative number, our government spends money it doesn't have, we all have seen payday loan or car title loan offices popping up. Spending is a disease in this country. The basis of any solid financial plan should be solid life insurance protection. When I teach my son about money I'm going to pull out his life insurance policy and explain how it all works. It will be the basis for a successful financial future for my son.
No, my child doesn't have any one that depends on him now, but when he does in the future they'll be glad he has this policy.
Friday, March 16, 2007
4 Common Mistakes People Make Buying Life Insurance
1. Life Insurance’s Dirty Little Secret…
In every other type of insurance there is the presumption of “IF”. Auto policies pay IF you get in a wreck. Home policies pay IF your house burns down. Liability insurance pays IF you are sued.
Life Insurance goes past the IF and right onto WHEN…
With life insurance, we aren’t asking if you will die, only when you will die.
Car insurance policies take a look at the average number of wrecks over large group of insureds and charge premium accordingly. Some people will NEVER get in a car wreck. Even some people who choose not to buy car insurance will never get in a wreck. BUT – everyone dies.
So you see life insurance deals with a certainty. Not a possibility. And you must treat it the same way. It is certain you will die. Get over the shock and deal with in a direct and forthright manner.
Buy YOUNG, Save Forever…
The rate you pay for life insurance is based on the age you are WHEN YOU BUY it. I am an advocate of buying high limits on young people – the cost won’t ever be lower and they will never be healthier.
Buy life insurance in large chunks and buy it as young as you possibly can. Listen, insurance companies won’t overinsure you. They have strict underwriting guidelines which allow them to issue you only a limited amount of life insurance. So buy as much as you can. Your family will need it.
The reasons to buy young is simple. Evidence of health conditions are a lot less stringent the younger you are. But the biggest reason is…
COST. At a younger age you are cheaper to insure. This applies to people in any age group.
Each day you wait, costs you money!
You are responsible for the people you leave behind. You DO take it with you!
Finally - What you take with you, when you Go…
Everyone says you can’t take anything with you when you die…in fact you take a lot with you.
The income to pay the mortgage…
The contributions to your children’s education fund…
The retirement account you are building for you and your spouse…
Money to buy the groceries…
Even if you are a stay-at-home parent, you take your skills at child care with you, and what are those services worth…
Here’s some good advice…
Buy life insurance. Lots of it. Protect your family just like you protect your home and cars. They deserve it. You’ll sleep lots better at night. Don’t turn an emotional tragedy into a financial disaster. Life insurance is the tool to use.
Sure you could spend the money on something else. But what’s more important?
In every other type of insurance there is the presumption of “IF”. Auto policies pay IF you get in a wreck. Home policies pay IF your house burns down. Liability insurance pays IF you are sued.
Life Insurance goes past the IF and right onto WHEN…
With life insurance, we aren’t asking if you will die, only when you will die.
Car insurance policies take a look at the average number of wrecks over large group of insureds and charge premium accordingly. Some people will NEVER get in a car wreck. Even some people who choose not to buy car insurance will never get in a wreck. BUT – everyone dies.
So you see life insurance deals with a certainty. Not a possibility. And you must treat it the same way. It is certain you will die. Get over the shock and deal with in a direct and forthright manner.
Buy YOUNG, Save Forever…
The rate you pay for life insurance is based on the age you are WHEN YOU BUY it. I am an advocate of buying high limits on young people – the cost won’t ever be lower and they will never be healthier.
Buy life insurance in large chunks and buy it as young as you possibly can. Listen, insurance companies won’t overinsure you. They have strict underwriting guidelines which allow them to issue you only a limited amount of life insurance. So buy as much as you can. Your family will need it.
The reasons to buy young is simple. Evidence of health conditions are a lot less stringent the younger you are. But the biggest reason is…
COST. At a younger age you are cheaper to insure. This applies to people in any age group.
Each day you wait, costs you money!
You are responsible for the people you leave behind. You DO take it with you!
Finally - What you take with you, when you Go…
Everyone says you can’t take anything with you when you die…in fact you take a lot with you.
The income to pay the mortgage…
The contributions to your children’s education fund…
The retirement account you are building for you and your spouse…
Money to buy the groceries…
Even if you are a stay-at-home parent, you take your skills at child care with you, and what are those services worth…
Here’s some good advice…
Buy life insurance. Lots of it. Protect your family just like you protect your home and cars. They deserve it. You’ll sleep lots better at night. Don’t turn an emotional tragedy into a financial disaster. Life insurance is the tool to use.
Sure you could spend the money on something else. But what’s more important?
Wednesday, March 7, 2007
Still here....
I'm still posting but I have been busy lately so I have nothing new to add to the blog. Please keep checking back.
Friday, February 16, 2007
How To Buy Insurance; Home, Car, Life...
Look, we all need insurance. None of us want to pay for the privilege, but we all want the benefits.
So how do you buy insurance? With homeowners insurance you buy enough insurance to fully rebuild your home if it was to burn down. You don't want to build 3/4th of your home. You want the whole thing back the way it was, before the fire wiped it out. You might even want to build a little nicer house, too bad the insurance company will not over-insure you. Now determining the value is a bit tricky, but your insurance company will not allow you to insure a $200,000 house for $1,000,000.
Seems simple.
How about your car insurance? If you drive a 2006 Ford F150 Supercab truck and you decide to insure it, you will want a 2006 Ford to replace the one that gets totalled in an accident. Now you may only NEED a Nissan Frontier, heck you may only need a Ford Escort, but you aren't insuring what you need but what is lost.
For the same reason an insurance company will not allow you to over-insure your house, they won't allow you to over-insure your car. If you drive a 2005 Dodge Intrepid, you can't buy insurance so if it gets wrecked you get a Porche.
So this brings us to life insurance. How much life insurance should you buy. I am here to tell you right now people a lot smarter than me (insurance actuaries) have determined how much you can buy. These really smart people won't let their insurance company sell you anymore than you are worth. For people under age 40, it is pretty common to be able to buy 20 times your annual income but no more.
Think about. If you earn $50,000 a year and you wish to replace the $50,000 with insurance proceeds, assuming you can earn 5% on your money you need a bucket with $1,000,000 in it. $1,000,000 kicking off 5% a year equals $50,000. $50,000 times 20 is $1,000,000.
Now if you search the internet you are going to find hundreds of different formulas, estimates, and equations on the 'right amount' of insurance. Forget it.
You will find two schools of thought generally. One says you need to buy 5 to 10 times your income in life insurance. Quite a spread don't you think? If you make $50,000 a year you they say should buy between $250,000 and $500,000 worth of insurance. What a joke? What amount should you buy? Neither is enough to keep your family living the same lifestyle they were before your death.
The other school of thought is called the needs analysis. Total up your family's needs and their is the amount of insurance. If you search ten needs analysis websites, you will probably find 10 different needs analysis formulas. Which one is right? The other problem is that your needs change constantly. Do you really want to recalculate your needs annually?
Life insurance isn't rocket science. You don't need scientific equations to calculate an amount of insurance. Buy as much as you can so you are sure your family will will be taken care of. So they will remember you with love for the foresight and for the protection you gave them rather than with contempt for putting them out on the street.
I recommend buying life insurance in the amount to fully replace your income in case you become another cardiac arrest statistic. You buy life insurance because you want a shed in the backyard that will be full of all the food clothing, and shelter your family will ever need. You can also see the registrar of the university showing you the tuition of his college.
So how do you buy insurance? With homeowners insurance you buy enough insurance to fully rebuild your home if it was to burn down. You don't want to build 3/4th of your home. You want the whole thing back the way it was, before the fire wiped it out. You might even want to build a little nicer house, too bad the insurance company will not over-insure you. Now determining the value is a bit tricky, but your insurance company will not allow you to insure a $200,000 house for $1,000,000.
Seems simple.
How about your car insurance? If you drive a 2006 Ford F150 Supercab truck and you decide to insure it, you will want a 2006 Ford to replace the one that gets totalled in an accident. Now you may only NEED a Nissan Frontier, heck you may only need a Ford Escort, but you aren't insuring what you need but what is lost.
For the same reason an insurance company will not allow you to over-insure your house, they won't allow you to over-insure your car. If you drive a 2005 Dodge Intrepid, you can't buy insurance so if it gets wrecked you get a Porche.
So this brings us to life insurance. How much life insurance should you buy. I am here to tell you right now people a lot smarter than me (insurance actuaries) have determined how much you can buy. These really smart people won't let their insurance company sell you anymore than you are worth. For people under age 40, it is pretty common to be able to buy 20 times your annual income but no more.
Think about. If you earn $50,000 a year and you wish to replace the $50,000 with insurance proceeds, assuming you can earn 5% on your money you need a bucket with $1,000,000 in it. $1,000,000 kicking off 5% a year equals $50,000. $50,000 times 20 is $1,000,000.
Now if you search the internet you are going to find hundreds of different formulas, estimates, and equations on the 'right amount' of insurance. Forget it.
You will find two schools of thought generally. One says you need to buy 5 to 10 times your income in life insurance. Quite a spread don't you think? If you make $50,000 a year you they say should buy between $250,000 and $500,000 worth of insurance. What a joke? What amount should you buy? Neither is enough to keep your family living the same lifestyle they were before your death.
The other school of thought is called the needs analysis. Total up your family's needs and their is the amount of insurance. If you search ten needs analysis websites, you will probably find 10 different needs analysis formulas. Which one is right? The other problem is that your needs change constantly. Do you really want to recalculate your needs annually?
Life insurance isn't rocket science. You don't need scientific equations to calculate an amount of insurance. Buy as much as you can so you are sure your family will will be taken care of. So they will remember you with love for the foresight and for the protection you gave them rather than with contempt for putting them out on the street.
I recommend buying life insurance in the amount to fully replace your income in case you become another cardiac arrest statistic. You buy life insurance because you want a shed in the backyard that will be full of all the food clothing, and shelter your family will ever need. You can also see the registrar of the university showing you the tuition of his college.
Friday, February 9, 2007
The pitfalls of bad home insurance!
Let's face it. Not all insurance is created equally. There is good insurance and there is bad insurance. Some times you don't find out the difference until it comes time to collect.
Heed my warning: You Must Make Sure You Have Replacement Cost On Your Homeowners Insurance For Your Personal Property.
Look, insurance for property can be summed in one of two statements.
ACV: Actual cash value - This insurance is bad insurance. It would pay you the diminished value of your stuff if something happens to it. As an example: your 32 inch television you bought 4 years ago for $500.00 is now worth about $100.00 This insurance would pay you only $100.00.
Replacement cost - This is good insurance. When you buy a 32 inch television you want to be able to replace it with a 32 inch television. This insurance will pay the replacement cost so you can buy a similar television to the one that you lost.
Always buy replacement cost on your contents.
Heed my warning: You Must Make Sure You Have Replacement Cost On Your Homeowners Insurance For Your Personal Property.
Look, insurance for property can be summed in one of two statements.
ACV: Actual cash value - This insurance is bad insurance. It would pay you the diminished value of your stuff if something happens to it. As an example: your 32 inch television you bought 4 years ago for $500.00 is now worth about $100.00 This insurance would pay you only $100.00.
Replacement cost - This is good insurance. When you buy a 32 inch television you want to be able to replace it with a 32 inch television. This insurance will pay the replacement cost so you can buy a similar television to the one that you lost.
Always buy replacement cost on your contents.
Wednesday, February 7, 2007
Will You Be Able To Rebuild Your Home After a Fire????
Construction Costs
I am amazed to say that it seems like every year now construction costs are going up and rather quickly. I am certainly no construction expert but sources seem to indicate a continual increase with no relief in site.
We use software in our business to help determine a replacement cost for a piece of property like a home. This software calculates the price it would cost to rebuild a home starting from scratch. I know most people are quite surprised when we tell them the rebuilding price. I've seen some people's homes under insured by more than $60,000 and that's on a home with a replacement cost of less than $250,000. How happy would you be if your home burned down and the insurance company only paid to rebuild 2/3rds of it?
I guess I'm recommending you either get a contractor to give you an estimate on rebuilding your home or you ask your agent to calculate a new replacement cost estimate. While it is ultimately up to you to determine how much to insure your house for, an agent should be able to provide you with some assistance with the figure.
I know we all want to pay as little as possible for insurance, but you want your insurance to actually reimburse you for your loss. Make sure you insure your home properly.
I am amazed to say that it seems like every year now construction costs are going up and rather quickly. I am certainly no construction expert but sources seem to indicate a continual increase with no relief in site.
We use software in our business to help determine a replacement cost for a piece of property like a home. This software calculates the price it would cost to rebuild a home starting from scratch. I know most people are quite surprised when we tell them the rebuilding price. I've seen some people's homes under insured by more than $60,000 and that's on a home with a replacement cost of less than $250,000. How happy would you be if your home burned down and the insurance company only paid to rebuild 2/3rds of it?
I guess I'm recommending you either get a contractor to give you an estimate on rebuilding your home or you ask your agent to calculate a new replacement cost estimate. While it is ultimately up to you to determine how much to insure your house for, an agent should be able to provide you with some assistance with the figure.
I know we all want to pay as little as possible for insurance, but you want your insurance to actually reimburse you for your loss. Make sure you insure your home properly.
Friday, February 2, 2007
How to protect yourself from the damages of a HUGE lawsuit
I've been thinking a little bit more about liability limits.
It seems to me, many types of insurance are easy to shop for. When you buy life insurance there is only so much life insurance a life insurance company will sell you. Generally before age 40 or so, you can buy 20 times your annual income and no more. Life insurance actuaries have discovered that if you are allowed to buy more than that you truly may be worth more dead than alive. (Some companies, due to low interest rates have bumped that to 25 or 30 times your income for now.)
If you want to buy disability income insurance you can generally buy up 60% to 70% or your pretax income in benefits.
If you buy fire insurance on your house, the company will only sell you enough insurance to rebuild your house. They won't sell you enough insurance to build a house with 4 more bedrooms and 2 more bathrooms than your current home. Some of us might be tempted to burn down our home so we could build a much nicer home.
Those are called objective risks. When I can't work because I've got cancer, I know how much income I'm missing out on. If my boat sinks to the bottom of Flathead Lake, I know how much a new boat will cost.
Subjective Risk....explained
The subjective risks of liability opens a Pandora's Box of issues. If I'm at fault in a car accident, I really have no idea how much I'll be liable for until after the matter works its way through the court system. Now if I have good insurance hopefully the company can settle long before I have to go to trial. But that doesn't always happen. Sometimes the insurance company will insist we go to trial. And in some cases, for people that don't buy enough insurance, the insurance company writes the injured party a check for the liability limit on your policy and tells you you are on your own to defend yourself the rest of the way.
Imagine a car accident in which 'John Doe' is at fault. John Doe wanted to drive legally so he bought the state minimum limits of car insurance, in Montana that is $25,000 per person for bodily injury, $50,000 per accident for bodily injury. Now if John is in a serious accident chances are the insurance company is going to try to get the injured party to settle for $25,000. If the insurance company can't, then insurance company is going to write a check for $25,000 to the injured party and then be done with the issue.
One of the nice features of a car insurance policy is that the insurance company will provide you with a civil defense. And they will continue to provide you with that defense until your liability limits have been exhausted. A bonus feature is that the defense usually (all of the companies of which I write private passenger car with for sure) is outside the limit of liability on the policy. So you may have $100,000 per person limit on your policy and in fact the insurance company may pay out the $100,000 to an injured person plus they may provide you with a defense that was in addition to that limit. So they may provide you with $130,000 worth of money when all is said and done.
Now our friend John has seemingly been fiscally responsible and saved himself a little bit of money on insurance premiums by buying the minimum liability limits. But when the time comes for him to actually use the insurance he finds out just how irresponsible he has been. Once the insurance company settles with the railroad engineer (who won't be working for at least a year and has huge medical bills, physical therapy bills, and pain and suffering) for $25,000 our friend John now must compensate the engineer out of his own pocket for the remainder of the bills. John will probably have to sell his home and car. John will have to cash in his savings. He will probably have to sell his toys, like a boat or motorcycle. And at some point a judge just may insist some of John's wages be garnished to help the Engineer with his bills.
Seems like an unlikely scenario. Does it happen? You bet it does.
I'm not a fan of insurance premiums. I'd rather not pay them just like you probably don't want to pay them. But I certainly want the benefits of a good policy and unfortunately that costs money.
I don't really know how much is enough and I really don't have a good answer on how to help you determine how much is enough. My suggestion is buy as much liability insurance as your car insurance company will sell you on your car insurance policy. Many people should consider adding a personal umbrella liability insurance policy. With this you can add $1,000,000 ore more dollars of insurance.
It seems to me, many types of insurance are easy to shop for. When you buy life insurance there is only so much life insurance a life insurance company will sell you. Generally before age 40 or so, you can buy 20 times your annual income and no more. Life insurance actuaries have discovered that if you are allowed to buy more than that you truly may be worth more dead than alive. (Some companies, due to low interest rates have bumped that to 25 or 30 times your income for now.)
If you want to buy disability income insurance you can generally buy up 60% to 70% or your pretax income in benefits.
If you buy fire insurance on your house, the company will only sell you enough insurance to rebuild your house. They won't sell you enough insurance to build a house with 4 more bedrooms and 2 more bathrooms than your current home. Some of us might be tempted to burn down our home so we could build a much nicer home.
Those are called objective risks. When I can't work because I've got cancer, I know how much income I'm missing out on. If my boat sinks to the bottom of Flathead Lake, I know how much a new boat will cost.
Subjective Risk....explained
The subjective risks of liability opens a Pandora's Box of issues. If I'm at fault in a car accident, I really have no idea how much I'll be liable for until after the matter works its way through the court system. Now if I have good insurance hopefully the company can settle long before I have to go to trial. But that doesn't always happen. Sometimes the insurance company will insist we go to trial. And in some cases, for people that don't buy enough insurance, the insurance company writes the injured party a check for the liability limit on your policy and tells you you are on your own to defend yourself the rest of the way.
Imagine a car accident in which 'John Doe' is at fault. John Doe wanted to drive legally so he bought the state minimum limits of car insurance, in Montana that is $25,000 per person for bodily injury, $50,000 per accident for bodily injury. Now if John is in a serious accident chances are the insurance company is going to try to get the injured party to settle for $25,000. If the insurance company can't, then insurance company is going to write a check for $25,000 to the injured party and then be done with the issue.
One of the nice features of a car insurance policy is that the insurance company will provide you with a civil defense. And they will continue to provide you with that defense until your liability limits have been exhausted. A bonus feature is that the defense usually (all of the companies of which I write private passenger car with for sure) is outside the limit of liability on the policy. So you may have $100,000 per person limit on your policy and in fact the insurance company may pay out the $100,000 to an injured person plus they may provide you with a defense that was in addition to that limit. So they may provide you with $130,000 worth of money when all is said and done.
Now our friend John has seemingly been fiscally responsible and saved himself a little bit of money on insurance premiums by buying the minimum liability limits. But when the time comes for him to actually use the insurance he finds out just how irresponsible he has been. Once the insurance company settles with the railroad engineer (who won't be working for at least a year and has huge medical bills, physical therapy bills, and pain and suffering) for $25,000 our friend John now must compensate the engineer out of his own pocket for the remainder of the bills. John will probably have to sell his home and car. John will have to cash in his savings. He will probably have to sell his toys, like a boat or motorcycle. And at some point a judge just may insist some of John's wages be garnished to help the Engineer with his bills.
Seems like an unlikely scenario. Does it happen? You bet it does.
I'm not a fan of insurance premiums. I'd rather not pay them just like you probably don't want to pay them. But I certainly want the benefits of a good policy and unfortunately that costs money.
I don't really know how much is enough and I really don't have a good answer on how to help you determine how much is enough. My suggestion is buy as much liability insurance as your car insurance company will sell you on your car insurance policy. Many people should consider adding a personal umbrella liability insurance policy. With this you can add $1,000,000 ore more dollars of insurance.
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