Steps You Can Take To Improve Your Credit Score

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What determines how much you pay for car insurance? Your driving record? Yes. Claims history? Yep. The neighborhood? For sure.

Credit report? Yes. Wait. What?

It’s true. Credit history plays a significant role in determining into how much we pay for auto insurance. The reason: experience shows that people with lower credit scores will file more claims than those with better credit histories, who tend to drive more responsibly.

Related: How To Boost Your Credit Score

So, it turns out there’s a thing called an auto insurance credit score that insurance companies assign to every applicant. These numbers are usually generated the Fair Isaac Corporation (the FICO people) or another credit bureau called ChoicePoint. The car insurance score works much like the FICO credit evaluation system with applicants assigned a ratings number based on a variety of factors. The Fair Isaac scale runs from 300 to 900, with 700 and above considered a good score and 800-plus top-shelf. ChoicePoint runs from 300 to 997, with 770-pplus considered a good risk.

Your insurance score is based largely on your credit score (mostly bill payment history and past-due accounts) with your insurance claims history and driving record also weighting the scale.

It is possible to be denied insurance based on your credit, but that practice is illegal in some states, including California, Massachusetts and Hawaii. The insurance score is more often used to quotes rates and offer discounts to lower-risk applicants. The premiums paid based on one’s credit score can vary widely. A recent study showed that people with poor credit pay 91% more for car insurance than those with excellent scores.

Even if your insurance score isn’t poor, it’s worth trying to improve that number. If you can quality for a discount that reduces your premium just $15 per month, you’ll save $180 a year on insurance.

Insurers use a similar scoring system for home insurance applicants, so your savings may compound if you own a house.

It’s not hard to improve your insurance score. It just takes time and discipline. First, drive more attentively to avoid those costly run-ins with Johnny Law. Avoid filing fender-bender level insurance claims if you can cover the damage out of pocket. Irritating, for sure, but the long-term savings are worth eating a modest repair bill.

Related: Insurance 101: The Basics On Insurance

Next, improve your credit score. Get a copy of your credit report – it’s free -- and make sure everything is correct; that there are no undeserved black marks. Clean up any legitimate issues, and then focus on paying down your consumer debt and paying your bills on time.

As your FICO number slowly rises, so will the benefits of having a strong credit score, including lower insurance premiums, better rates on loans, including a mortgage, easier apartment rentals, and, in some cases, a leg-up when applying for a job.

Get that credit report today!

Insurance 101: The Basics On Insurance

Insurance 101 Insurance… it’s the financial product you don’t need until you do. Let’s be honest, nobody likes to discuss the possibility (or probability) of bad things happening, but we all know they do. We also know that nobody likes to deal with insurance companies. However, they are legally and contractually bound to the provisions outlined in the contract as long as you (the policyholder) hold up your end of the bargain which generally just entails paying your premiums on time.

If you’re like me, you want to focus on the things in life that you enjoy or that you’re compensated for (HINT: your job), and you don’t want to spend valuable time learning the “ins and outs” of complex insurance policies.

Related: How To Buy An Engagement Ring: Don't Forget The Insurance

There are a few things that everyone should be familiar with so let’s look at a few insurance basics. To simplify as much as possible, we whittled it down to these three:

  • Premium – What you pay for the insurance coverage.
  • Deductible – What you are on the hook for should a loss occur (before the insurance company will step in and pay).
  • Coverage Amounts – What the insurance company is on the hook for after your deductible has been satisfied.

In general, their relationship to one another is as follows:

  • The higher the deductible, the lower the premium and vice versa.
  • The higher the coverage amount, the higher the premium and vice versa.

In the event of a covered loss (car accident, a tree falling on your house, disability preventing you from earning income, etc.) you will be on the hook for the deductible amount and the insurance company will pay the difference up to the limit specified in the policy.

Related: HSA? IDK! An Explanation of Health Savings Accounts

So where do we go from here? How do we prioritize where we devote our protection dollars and how do we decide what needs to be insured?

Considering that you can insure almost anything, there won’t be a lack of insurance policies to buy. Therefore, we believe it’s important to consult an independent insurance broker who is licensed with different insurance carriers and is able to present and explain the different intricacies of each contract. But finding this individual can be tough!

We wanted to provide a list of what to look for when searching for an insurance broker.

  1. Trust
    • This is the most important aspect to look for. Maybe you know them personally or are introduced by a mutual friend whom you trust. You want someone who will shoot you straight, explain the pros and cons of various policies and present you with options from which you can choose.
  2. Independent
    • Can they sell you policies from more than one insurance company? Many brokers work for one insurance company but there may be a better policy out there for your situation and you want your broker to be able to shop the market for you.
  3. Compensation
    • How is your broker paid? Most insurance companies pay their brokers’ commissions for selling their policies. Inherently there is nothing wrong with this but this compensation structure often drives brokers to be “pushy” or perhaps “oversell” the consumer which creates a frustrating and negative experience. The important thing is to understand and feel comfortable with how your broker is paid.
  4. Licensing
    • This one may go without saying, but it’s worth noting that insurance brokers must be licensed to sell policies. Be sure the prospective broker you’re talking to has the appropriate license.

By no means is this list comprehensive, but we wanted to provide a place to start. We feel it’s important to have a trustworthy insurance broker on your financial dream team.

Related: Podcast - Putting Together Your Financial Dream Team

 

To Insure or not to insure…that is the question

  Insurance is the financial product you don’t need until you do. Unfortunately all insurance companies know this, so they go to great lengths to properly protect themselves. Well, so should we! Let’s be honest, nobody likes to discuss the possibility (or probability) of bad things happening but we all know they do. We also know that nobody likes to deal with insurance companies. Whatever the case may be, there always seems to be a “loophole” where they get off the hook. However, they are legally and contractually bound to the provisions outlined in the contract as long as you (the policy holder) hold up your end of the bargain…which generally just entails paying your premiums on time.

 

In the most basic of terms, we buy insurance to protect things of great value.

It’s important to be educated on the topic and knowledgeable of what your policy stipulates. You can buy insurance for just about anything…cars, homes, income, TVs, the Vegas dealer drawing Blackjack…the list goes on and on.

Let’s start with some insurance basics. To simplify as much as possible, there are a few key items and definitions to be familiar with:

Premium – What you pay for the insurance coverage.

Deductible – What you are on the hook for should loss occur (before the insurance company will step in and pay). Sometimes this will be in the form of an elimination period.

Coverage Amounts – What the insurance company is on the hook for after your deductible has been satisfied.

In general their relationship to one another is as follows:

 

The higher the deductible, the lower the premium and vice versa.

The higher the coverage amount, the higher the premium and vice versa.

 

In the event of a covered loss (car accident, tree falling on your house, disability preventing you from earning income, etc.) you will be on the hook for the deductible amount and the insurance company will pay the difference up to the limit specified in the policy.

 

Okay, so now that you know the basic principles of insurance, where do we go from here?

Let’s look at some of your most valuable possessions; car, house, baseball cards, grandfather’s watch, golf clubs, Mac Book? All of these are valuable and can be insured, but arguably the most valuable possession you have is your ability to generate an income, which can be insured in a couple of ways. So how do we prioritize where we devote our protection dollars?

Of course we all know that cash flow is king. From bills to savings to vacation money, it all hinges on generating cash flow. Undoubtedly, the most devastating loss to a household is the loss of income, either due to death or disability of the primary wage earner. Consider this:

 

70% of U.S. households with children under 18 would have trouble meeting everyday living expenses within a few months if a primary wage earner were to die today.

40% of U.S. households with children under 18 say they would immediately have trouble meeting everyday living expenses.

 

With those startling figures one would assume that, given its significance, income would be protected with insurance. However, less than 45% of individuals owned life insurance, and less than 40% owned disability insurance. On top of this, there’s a good chance that even the ones who are insuring their income, are most likely under-insuring.

 

Now, how do we go about putting this protection in place?

Well, the keys here are to understand what we need to protect, and that requires us to know what we’re spending. For a household making $100,000, saving 20%, paying taxes with 30% and spending 50%, they would need to replace about $50,000 annually if they were to have their primary bread-winner be disabled and unable to work for a significant period of time. To simplify this process, most individual disability policies will replace 60% of your income. If it’s an individually owned policy and you are paying the premiums with after-tax dollars, then the monthly benefit comes to you tax-free, so the monthly budget is now protected.

That is a simple example and the reality is disability policies can be very complex. It’s important to consult an independent insurance advisor who is licensed with different insurance carriers, and is able to present and explain the many different intricacies of each contract.

Life insurance is not too different. The goal is to provide financial means in the event of loss of a wage earner. There are two common ways to decide how much insurance to put in place; one is income replacement, and the other is liability pay down. While there is no right or wrong way to go about putting coverage in place, we’re going to focus on income replacement. In a similar exercise as discussed before, it’s important to decide how much monthly cash flow needs to be replaced.

Using the example above, let’s say we want to replace $50,000 per year. What amount of insurance would we need to be in-force to safely generate the cash flow back into the household? Using a 5% rate of return, which over a long period of time is reasonable for a balanced portfolio, we would need to put $1 million dollars of insurance in place. Similar to the tax treatment of disability insurance, life insurance proceeds are generally paid to the beneficiaries free of federal and state tax.

 

The reality is simple. Insurance, when used properly, is a very powerful financial tool.

The issue is, the way insurance is bought and sold. Insurance companies pay their agents’ commissions for selling their policies. Inherently there is nothing wrong with this, however this compensation structure can often drive an agent to be “pushy” and “over sell” the consumer which creates a frustrating and negative experience. Remember, though, not all agents are created equal, and it’s important to develop a relationship with someone you trust. Someone who will shoot you straight, explain the pros and cons of various policies and present you with several options from which you as the consumer can choose between.

Selling life insurance policies for cash

I’ll tell you right out of the gate – this might be the creepiest financial topic I’ve ever researched. But, just like any financial option that you have available to you, I feel like it’s my job to shed some light on the subject. Life Settlements, formally known as Viatical Settlements, elicit a great deal of emotion. “Selling your life insurance policy so that someone else can collect on it when you die?” – The thought of it is just uncomfortable.

Here’s how Life Settlements work: This is a financial product where a group or company will buy a seller’s life insurance policy while that person is still alive for less than the value of the full death benefit. Then, once the original owner of the policy passes away, the company that purchased the policy is able to collect the full amount of the death benefit (as opposed to the original owner’s beneficiaries).

It’s a little creepy, right? But I wanted to figure out if there was any upside to these “life settlements” for me and you. The life settlement industry actually began about 20 years ago as a way for crucially ill patients who needed to pay for medical attention to receive a lump sum of cash in return for someone else to ultimately collect on what was originally their death benefit. Now it’s an option for not only those facing health issues, but also people having financial difficulties in retirement that would prefer (or need) cash today rather than leaving behind a life insurance death benefit.

Generally speaking, big institutional investors engage in life settlements via large pools of policies as a means of generating excess returns. Think of life settlements as a way for pension funds, endowments and hedge funds to diversify their investment portfolios. By and large, though, these investments are not suitable for individuals… so don’t get excited about buying them.

However, your life insurance policy could be up for sale as a means of last resort.

The first step to knowing if a Life Settlement is a good idea for you is to look at your own financial fingerprint. Run your current finances while also thinking about the ultimate unknown – your own longevity. AARP is now saying that the number of people living until the age of 100 will increase 900 percent by 2050.

So, is it a good deal for you to sell your policy?

Growing long-term care costs and increasing longevity are the two main drivers for the life settlement industry. Extended life expectancy means that life insurance premiums may eventually reach a point where they become too high to maintain. So if you have paid a great deal into a life insurance policy and are in need of liquidity, a life settlement may provide an outlet for you. Also, if you need that money for healthcare or any other reason, and you no longer have a need for the death benefit upon your passing, a life settlement may be an option for you.

Let’s look at an example for what this might look like. In trying to find some approximate numbers on what a policy might sell for, I talked with Stephen Terrell a Senior VP at Lifeline Capital Management – an Atlanta based company that specializes in life settlements. Here are a few thoughts and examples directly from the company:

“Life settlements depend on many factors including the size of premiums after conversion (from term insurance to universal insurance) and the health status of the client.”

A 79-year-old woman of above average health with a $2 million policy may receive $125,000 for her policy.

A 73-year-old male with a $500,000 policy in excellent health is not likely to receive an offer at all. This is due to life expectancy and the amount of premiums that would be required to keep the policy in force.

Look at a similar situation: A $500,000 policy for 73-year-old male in average health could qualify for a Life Settlement of approximately $50,000. Someone with average health might have diabetes and a manageable heart condition, or other conditions with similar lifespan-affecting consequences.

A 73-year-old male with poorer health would probably receive a larger offer, depending on the severity of the health conditions.

*Please note that there are many other factors of the policy not mentioned here that could affect the offer.

As you can see, today’s offer for cash is far less than the value of what the death benefit would be. There would be no reason to even entertain such an idea (selling your policy) unless you absolutely did not need (or want) the death benefit for your heirs – or you can no longer afford to continue making premium payments to keep the policy in force.

Another reason to keep your current life insurance is because once a life insurance policy is sold in a life settlement, the coverage remains in force and it may affect your future insurability. If your want to replace your coverage – either in the short or long term – then you have to work with insurance companies that are willing to write future policies, knowing the original coverage will still be in force. That can be a tricky proposition.

In full disclosure, I have never in my entire career as an Investment Advisor seen a client use one of these things. However, I thought it would be worth exploring here as you should know about every possible financial planning tool available to you.

Bottom Line: Life Settlements are only an option when you have an insurance policy that you just plain can’t afford anymore or don’t want anymore, and you are positive that you are going to let it lapse – meaning the death benefit coverage is going to go away.

Have you or anyone you know participated in a life settlement? What are your thoughts about them?

 

Wes Moss, the Chief Investment Strategist for Wela, writes a weekly blog for the AJC.com. You can find his original article here.

March Marketing Madness

Did you enter that $1 Billion Bracket Contest sponsored by Warren Buffett and Quicken Loan? Who knocked you out of contention, Mercer or Dayton? Oh, well, by the time you read this, every entrant will have been eliminated. But it was fun, wasn’t it? This much-buzzed-about-event also offers a great lesson for investors and consumers, alike. Specifically, insurance companies are smart, data driven and fantastic marketers.

Did you know that Warren Buffett’s core business is insurance? He gets more attention for his stakes in such iconic brands as Coke, Heinz, NetJets, Helzberg Diamonds and Fruit of the Loom. But he quietly makes huge profits from his stake in some 70 insurance operations, including GEICO.

Insurance is a business built on knowing the odds, working the numbers and selling protection. Warren Buffet knew the odds of you winning the billion dollars were somewhere between 9.2 quintillion-to-1 and 128 billion-to-1. To put them in perspective, your chance of being struck by lightning in America THIS YEAR is 700,000-to-1. So for Berkshire to write a policy that pays $25 million per year for 40 years or $500 million up front if you happen to beat those odds is kind of a no-brainer. Estimates are that the premium for the policy was in the ballpark of $10 million to $30 million – that’s a nice payday for the insurance company, assuming you don’t do the improbable. It’s a great business plan and a model for nearly every single product marketed by insurance companies.

Insurance is a great business because everybody needs it, either by law or to ease or minds about the future. We insure our cars, homes, lives, health, ability to work -- even our pets. Insurance companies know how to price your premiums so that in the unfortunate event that you need to use your policy, the company will have the money to cover your loss while remaining profitable for shareholders. It’s a good deal for everyone.

So, why not insure your investments, i.e. buy some sort of annuity (indexed annuity, variable annuity, etc.)? While insurance companies do offer protected investments, that’s not always the best way to establish and grow a nest egg. It sounds great when an insurance company offers all the upside of the market with none of the downside; or promises that if you die your heirs can inherit more money than the cash value of your investment account; or that you can get a 10 percent bonus up front for just investing.

But beware – as with any insurance product there are costs, rules and limitations. The insurance company invests your money in a very well diversified, very high quality portfolio over a very long period of time. Their holdings are no different than what you could own with an index fund or ETF. It then charges you considerable fees (think premiums) that guarantee the company will profit from your business, regardless of how you fare in the market. But again - they aren’t doing anything with your money (their investments) that you couldn’t do on your own.

This is one aspect of life where I suggest you skip the insurance. Is investing risky? Sure. But your own portfolio of thoughtful, consistent, long-term investments will offer more peace of mind than an insured product one laden with fees and rules. Ask Warren Buffett. I bet he’d tell you the same thing.

The “Can’t Lose” Annuity Trap

If you've listened to the radio for more than about 10 minutes lately, you've likely been hearing ads for “can’t lose” investments that promise you will benefit from raises in the stock market with no risk of losing your principal, even if the markets tank. While the commercials rarely so say, they are promoting annuities – more specifically “indexed annuities”.

At first glance, an indexed annuity seems pretty attractive. You purchase the annuity from a big name insurance company, which promises to return your principal to you “regardless of how the stock or bond market does”. The catch (or at least one of the catches) -- there’s usually a 10 to 15 year period of time where your money is locked up – and if you want to pull it out of the annuity, big surrender penalties can apply.

Nothing but upside, right? Well, sorta.

From the indexed annuities I’ve seen and studied, the financial upside is very limited. Based on the market’s performance over the past 25 years, annuity owners were doing very well if they earned a 2.5 percent per annum return. Remember, the insurance companies are only giving you small fraction of what the market they are tracking actually returns (these are referred to as “participation rates” and rates that “cap” your upside).

Oh, and by the way, annuities are only required by regulation to return 87.5 percent of your money (not the full 100 percent).

If those annuity owners had invested wisely and consistently in a balanced S&P 500 and government bond market blend, exposing themselves to some risk, their potential upside for that 25-year period was considerably higher, ranging from 6.5 to 7 percent per year.

In exchange for security and the very modest return potential provided by an annuity, you essentially lose significant access to the money you have invested, thanks to page after page of restrictions, lock-ups and handcuffs built into the contract.

I completely understand why individual investors remain skittish about the markets. The past 15 years in the stock market have been a rollercoaster.

A lot of folks – some of them deep into retirement –are still trying to piece together nest eggs that were shattered in the great recession of 2008. But if you are looking for a “guaranteed investment”, annuities aren’t the answer – too many restrictions, too much control from the annuity company, and a bet that the annuity company itself will not run into financial trouble - for too little return.

Instead, if you really want a “risk free asset” and are willing to leave your money invested for a full 10 years, just buy a Ten-Year US Government Treasury Bond that yields between 2.5 to 3 percent per year and hold it.

Not only does the United States of America back your principal, you would earn 25 to 30 percent in interest over 10 years.

That’s about as close to “can’t lose” as you’re going to find. But run the other way if any “company” promises you a guaranteed investment. What happens if the company itself goes away?

7 Questions to Ask Before Buying a Variable Annuity

As financial planners, we are constantly asked this question by folks nearing retirement: “You always preach the importance of building a portfolio that pays income in retirement. So, what about a variable annuity? I buy it now and it guarantees me a steady stream of income in retirement, right?”

Wellll... Yes, we are big advocates of investments that will pay you consistently once your working days are done. But, we are not convinced that a variable annuity is the best tool for that job.

An annuity is a product sold by insurance companies that is designed to invest money from an individual and then pay out a stream of income to that investor over a multi year period of time. A variable annuity promises a minimum return from an “income perspective” plus the possible of a larger income stream based on how well the annuity’s investments do over time.

Understand each of these 7 items before buying a variable annuity:

1. “Real vs. Theoretical”- Never forget that most variable annuities consist of two pools, or “buckets” of money – one “real” and one “theoretical.” The “real” pool of money is what you as an investor place in mutual funds (called sub-accounts) within the variable annuity. You can withdraw this entire pool of money at any time – minus, often times, a surrender charge. The “theoretical” pool of money is your initial investment amount that grows at a predetermined “rate” set by the insurance/annuity company–for many annuities today that rate is 5% per year. Sounds great right? But here’s the catch...you don’t have FULL ACCESS to the value of theoretical bucket. The “theoretical” bucket is there for you to take an income stream from at some point in the future.

2. Who’s Backing these predetermined rates? Annuities are not insured or guaranteed by the government.

3. Surrender Charges -Annuity surrender charges can be significant – often between 10 and 2 percent and can be imposed as long as 10 years after you buy the annuity.

4. The fees are brutal - The annual non-sales fees on annuities average 3-3.5% and typically include charges for “mortality and expense,” administration, and investment management.

5. Commissions - Sales commissions can range from 4% to 8% - a significant incentive for those selling annuities.

6. Getting back your own money? Be wary of annuities that promise things like “guaranteed 5 percent income”. Annuities with long surrender periods and/or high annual fees lock-up YOUR money for long periods of time and then slowly pay it back to you. Remember, you can receive an “income stream” equal to 5 percent per year by simply withdrawing your “own money” for 20 years before it would run out, even if your money earned a zero percent return. (100% divided by 20 years = 5% per year)

7. Baby Boomer Stampede – I wonder about what would happen if the baby boomer generation needed to “collect” on the “theoretical bucket” guarantee all at once...either no one will need it because the market does very well over the next 10 to 20 years, or everyone’s going to need it (because the market did poorly). If we face the latter, how are the annuity companies going to handle this stampede of baby boomers that all need to “collect” on the annuity company’s promise around the same time? Anyone remember AIG?

So in my opinion, the benefits of a variable annuity generally don’t justify the high annual fees and long surrender penalties. But, annuities might make sense for some people in certain situations. If you are panic-prone, the protection offered by the “theoretical” bucket in a variable annuity may work for you, and help you avoid making bad investment timing decisions.

I just want to make sure you are asking the right questions before you buy and annuity and make sure you’re getting an objective opinion before you do so! Talk to a financial advisor – not just an annuity salesman. Remember; never ask a butcher if you should eat meat for dinner.