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Bankruptcy Can Prevent You From Refinancing Your Mortgage - Even With A Credit Score Of 700!?

Posted on | March 12, 2010 | No Comments

Don Taylor, over at Bankrate.com, recently received a question about Bankruptcy and mortgage refinancing that I think is a poignant reminder of how serious bankruptcy is and how long it can follow you.

The reader writes to Mr. Taylor and pleads his case:

We have about 60 percent equity in our home. We both have credit scores above 700 and both have good incomes. We recently tried to refinance our home mortgage loan at a lower interest rate but, because I filed for bankruptcy three years ago (with the discharge completed two years ago), the lender wasn’t willing to approve a loan with me as a co-borrower. (My spouse was not involved in the bankruptcy.)

The reader goes on to state that they have been in the home for 19 years, presumably with the same loan and bank. Mr. Taylor does remark on being surprised that the bankruptcy is still preventing them from refinancing their mortgage, so maybe they haven’t held this loan for the full 19 years. This point isn’t stated one way or the other.

Regardless, the fact remains that the bank seems to have more stringent standards than simply a good credit score. Many banks have underwriting standards that delve deeper in the borrower’s credit history - especially since the sub-prime mortgage meltdown. Apparently, this bank still weighs the bankruptcy more heavily than the current credit score.

Of course, the bank recommends that the reader’s spouse be the borrower, and that they can then get mortgage insurance to pay off the home in the event of the spouse’s death. This is not surprising as banks often make far more on selling loan insurance than they do on the loan transaction itself.

The bottom line is that a bankruptcy can have far greater and longer lasting impact than you may think, and that rebuilding your credit score alone may not be enough to offset the black mark on your history.

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Life Insurance Settlements: A Bad Deal?

Posted on | March 9, 2010 | 5 Comments

Did you now that you can sell your insurance policy to a 3rd party and receive an immediate lump sum?

I never knew this existed until I came across The Trade-offs of Selling Your Life Insurance in SmartMoney magazine.

The process is called “life settlement”, and it works like this…

Would you take cash for your life (insurance)?

Would you take cash for your life (insurance)?

A life settlement company approaches an elderly or seriously ill person and offers to pay them a lump sum of cash in exchange for their life insurance policy. The life settlement company then sells the policy to a Wall street broker who in turn sells it to a hedge fund or investment bank who is then responsible for paying the premiums on the policy, but receives the death benefit upon the original holder’s passing.

For example: Meet Bob, a 68 year old retiree with a million dollar life insurance policy. Bob has some health issues, and not enough money to pay for the care he needs to stay a live a few more years to see his grand kids grow up a little more. Enter a life settlement agent, we’ll call him agent Smith.

Agent Smith offers Bob $400,000 for his life insurance policy. For Bob, it looks like a win-win scenario: he gets the money he needs today, in exchange for a policy that he may not even be able to pay the premium on and that wouldn’t help him anyway since he’d have to be dead to get the money, and his wife has already passed away.

If Bob lives another 5 years, then the investors get their $1 million, which works out to be $120,000 per year (before taxes and premiums are subtracted). For those of you playing at home, that’s a 30% annual return!

So, who owns Bob’s life?

At this stage in the game you may be wondering (as I was): That sounds great, but who owns Bob’s life?

The short answer is: whoever holds Bob’s life insurance policy has become the beneficiary.

So, most likely it’s the investment bank, pension fund or hedge fund since wall street is packaging multiple life settlement policies together into single bonds.

What’s the risk?

For Bob, there is no risk. The risk is assumed by the investors, and the risk is that Bob will live longer than expected. The longer Bob lives, the less return the investors make.

Who wins?

The earlier Bob passes away, the better the monetary result for the investors. So, if Bob dies early, the investors win.

The brokers and agents for the life settlement companies win because they make a commission and earn a fee for the transactions.

Who loses?

The direct losers here are Bob’s children, since they will now not see a dime from the insurance upon his death.

But what if Bob had no children or family to leave behind?

Fair enough. In that case, the insurance company loses since there is now no chance of Bob defaulting on his premium and since the hedge fund, pension fund or investment bank that now owns his life insurance policy will likely outlast Bob, the insurance company is guaranteed to have to pay the original death benefit of $1 million.

In a less direct way, the rest of life insurance customer lose out because to cover the increase in death claim payouts, the insurance companies have to raise premium prices.

Why it’s a bad deal.

I think life settlements are a bad deal because they target the elderly and seriously ill, they potentially increase the cost of life insurance for everyone and they are entirely unregulated which makes this a breading ground for fraudulent and unscrupulous life settlement companies to prey on the hopes and fears of the elderly.

Consider this statement from a NYT article on the subject:

the industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, have criticized life settlement brokers for coercing the ill and elderly to take out policies with the sole purpose of selling them back to the brokers, called “stranger-owned life insurance.”

Besides, it’s a relatively small portion of the population that can really benefit from this. After all, unless you have a large estate or a significantly younger spouse, it rarely makes sense to even carry a life insurance policy this late in life.

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A Simple Way to Avoid the 10 Most Common Tax Mistakes.

Posted on | March 8, 2010 | No Comments

Investopedia has their list of The 10 Most Common Tax-Filing Mistakes available on Yahoo! Finance. According to them, the top 10 list looks like this:

  1. Wrong Filing Status
  2. Wrong Address
  3. Incorrect or Missing Social Security Numbers
  4. Unsigned Return
  5. Math Errors
  6. Tax Computation Errors
  7. Incorrect Identification Numbers
  8. Incorrect Financial Institution Information
  9. Undocumented Deductions
  10. Wrongly Claiming — or Forgetting to Claim — Credits And Rebates

Let’s stop and think about these for a moment. Most of these are simple data entry errors, and most are probably the same from one year to the next. Your mailing address doesn’t change that often, and your Social Security Number certainly doesn’t (unless you have extremely bad luck with identity theft).

I use Turbo Tax to do my taxes, but all tax software offers the same simply data entry and import features. I haven’t had to enter information like this in years - since I started using Turbo Tax. I entered it the first year, double (and triple) checked before I submitted my tax return and haven’t looked back since.

The same goes for computation errors and deductions. Most tax software (any worth its cost) will automatically compare your information with the available deductions to make sure you don’t leave anything on the table.

With software like Turbo Tax and HR-Block Tax Cut, there’s no reason to fall victim to these tax mistakes.

Of course, if you wrongly claim a dependant, no software is going to be able to catch that so you still need to know what you’re entering. But as a user of Tax Software, it’s comforting to me to know that most of the top 10 tax mistakes are not my problem. What about you?

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When To Switch Car Insurance.

Posted on | February 28, 2010 | 1 Comment

If you’re like most people, once you get your auto insurance you stick with the company until they increase your premium, or give you grief over filing a claim. But you can actually save some money switching your car insurance in some circumstance.

You can save money when you switch insurance providers at the right time.

You can save money when you switch insurance providers at the right time.

Here of five of those circumstances where you might find cheaper car insurance if you switch your car insurance provider.

1. Your credit score has changed you first purchased the policy.

If your credit score is significantly lower or higher than when you originally purchased your insurance policy, then you probably should start shopping around when it’s time to renew. The reason is that many national car insurance companies use your credit score as part of their formula for determining your premium. People with higher credit scores tend to get lower insurance premiums. Conversely, those with low credit scores tend to pay more.

So it makes obvious sense to shop for a better rate when your score has improved, but why shop around if your score has gone down? I mean, aren’t you at a disadvantage and probably pay more?

Yes, but not always.

Some insurance companies weigh your credit score less than your driving history. So, if you have a lousy credit score but an accident free history, you may get a lower premium on your auto insurance if you shop around and find a company that weighs the score less heavily.

If you fit the low credit score category, then you should try to improve your credit score, and contact your state department of insurance for help in finding an insurer who favors driving records over credit histories.

2. You just started working from home.

Many insurance companies charge higher premiums for driving more miles. It just makes sense - the more you drive, the greater the chance of being involved in an accident, and the greater the likelihood you will file a claim.

But if you’ve started working from home, or drastically cut your commute distance it may make sense to either notify your insurer or start looking for a company that will give you a discount on your auto insurance for driving less.

The range of what is considered for the low-mileage driving discount depends on the state.

3. You’re in the middle of a long-term car lease or loan.

With car loans reaching the 60 and 72 month range, people can end up owing more than the car is worth and insuring the car for more than it’s worth. Long lease financing favors lower monthly payments, but the car depreciates faster than the principal is paid on the loan, and the can leave you owing money if your car is totaled since the insurance company will only pay for the market value of the car.

One solution to this problem is GAP insurance, which covers the gap in what the insurance company would pay and how much you still owe on the car loan. Many insurers offer a discount on GAP insurance if you switch your auto insurance to them.

Of course, a better solution would be to take out a shorter term loan and not end up upside down in the first place, but not everyone has the income to manage that.

4. You buy a home, or obtain a company car.

Homeowner’s need homeowner’s insurance, and many insurers offer a multi-policy discount if you buy both homeowner’s and auto insurance from them.

If you recently were given a company car as part of a promotion or new job, then you may even be able to get a multiple-car discount.

5. Your children reach driving age.

Once junior is old enough to start driving, and gets his license you’ll need to notify your insurance company. There won’t be any discount for adding junior to your policy, but some companies are more competitive than others when it comes to insuring younger drivers.

Photo by daniel.sound.

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