Posted: February 21st, 2012 | Author: Joe | Filed under: Insurance, Tips | Tags: Auto Insurance, Insurance, Life Insurance, PMI, Private Mortgage Insurance, Tips | 3 Comments »
Fear sells, and nothing is more fearful than the future. Insurance agents have known this for ages, and the most unscrupulous of them will play up the fear factor to the hilt. That’s not to say that all insurance is unnecessary or that all agents are fear mongers. Insurance has a definite purpose – to protect you from the financial risk of some future event that, while unlikely to happen would be financially devastating if it were to happen.
Many insurance policies sold today are simply unnecessary in most cases. Knowing which policies are needed and which aren’t will go along way toward arming yourself with the knowledge needed to protect yourself from less honest agents.
1. Private Mortgage Insurance (PMI).
First up on the hit parade is the onerous PMI. Many homeowners only become aware of this after they buy a home an see their monthly mortgage payment has this extra fee included. PMI has nothing to do with protecting you or your home. It’s insurance for the bank to insure against the possibility that you default on your mortgage.
You didn’t expect the bank to pay for its insurance, did you?
Private Mortgage Insurance is required for loans with less than 20% equity – either a refinance for more than 80% of the value of the home, or a mortgage with less than a 20% down payment.
PMI can only be avoided in the initial opening process of the loan, after you’ve got the loan you have to wait until you have at least 20% equity in the home. This can be due to appreciation in the home’s value, which is unlikely in the current housing market, or by paying down the loan. Homeowners can accelerate this process by making extra payments – just make sure they are principal only payments.
(check out Why A Mortgage Loan Without PMI Is A Bad Idea.)
2. Extended Warranties.
An extended warranty is basically insuring against a breakdown of the product outside what’s covered by the basic warranty. That may mean a breakdown after the basic warranty has expired, or a breakdown of something not covered by the basic warranty.
Unless you’re purchasing a high-ticket item, the warranty is likely to cost almost as much as a total replacement. I paid $115 for my first lawnmower. At the time of check out, the sale clerk tried to upsell me on a 3 year extended warranty. I would “only” cost me 30 bucks a year. That would have been $90 in total – for a $115 lawnmower!
The dirty little secret on most warranties is that they only cover the things that rarely go wrong to begin with. So in most cases, you’re better off playing the odds that it won’t break. This is especially true if you save up the entire purchase price of the item before buying, and don’t buy on credit. Also, waiting for prices to come down helps too. I might be tempted to get the extra warranty on a $5,000 new flat screen television, but a $700 one? Not so much.
But then, the thought of spending so much on a “want” makes my frugal self revolt. 
3. Automobile Collision Insurance.
Collision insurance is meant to cover the cost of repairs if your vehicle is involved in an accident. This isn’t necessarily useless. It depends on your financial situation and your car. I drive old cars that I can either pay for entirely or pay for mostly, leaving me with a lower loan amount.
Banks typically require you to carry collision insurance, so if you have a loan you will likely get stuck with this bill. But after the loan is paid off, the car is likely worth less that the insurance premiums you’re paying (are darn close)! In which case, you’d be better off putting that money into a savings account for car repairs (should they arise) or a new(er) car.
4. Rental Car Insurance.
People buy this?
Apparently they do, but they probably shouldn’t. Most people rarely need a rental car while their car is in for repairs, and if they do the cost is far cheaper than what they would pay in premiums. Personally, the few times my car has been in the shop long enough to need alternative transportation, the shop has provided either a loaner car or paid for the rental car.
5. Flight Insurance.
I’m not sure what this is meant to cover. I gather it’s meant pay your survivors should you die in a plane crash, but your life insurance would do that anyway.
6. Water Line Coverage.
Ah, now we’re getting to the really fringe insurance types.
This policy would cover the repair costs of the water line that runs from the street to your house. The likelihood that this would ever become a problem is slim – especially in new neighborhoods and given the relatively short distance covered in most suburban neighborhoods.
7. Life Insurance for Children
Life insurance is meant to cover the income of the insured in the event that they die prematurely. Children don’t have dependents to worry about. Some agents try to sell this kind of insurance as an investment for the child’s future. This gets to the Term Life Insurance vs. Whole (or Universal) Life Insurance debate. (see Life Insurance: What kind should I buy?) The same is true in this case – skip the whole life policy and invest the money that would go toward a premium in a Roth IRA for the child. (See Secret # 2. Make Your Grandchild a TAX-FREE Millionaire!) It will perform better with less fees and he’ll have access to the contribution amounts for his first home, while the rest will continue to snowball toward retirement.
This is meant to cover your expenses if someone steals your card or makes fraudulent purchases. It’s a complete waste because you’re only liable up to $50 by law, and most credit card companies wave that for good customers.
9. Mortgage Life Insurance.
Mortgage life insurance pays off your house in the event of your death. This is useless, since it’s the purpose of Life insurance to begin with , only life insurance will pay off the mortgage, and your children’s college expense and anything else you need.
10. Unemployment Insurance.
With government unemployment benefits lasting over a year, you’re far better off building an emergency savings account and using that to supplement the unemployment checks. If you can make Unemployment Insurance premium payments, you can make contributions to an emergency fund.
Check out the inspiration for this article and 5 more unnecessary Insurance Policies.
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Posted: May 31st, 2011 | Author: Joe | Filed under: Insurance | Tags: Insurance, Life Insurance, Mortgage Insurance, Mortgages | 4 Comments »
I had never heard of Mortgage Protection Insurance until a week ago. I usually only get bills and credit card offers in the mail these days, but last week I got something new. Here’s how it happened…
The case of the misleading mailing.
The mailing was a nondescript brown envelope with an unfamiliar return address and nothing else on the outside besides my address and red letters that looked as though they were hand-stamped and read:
“Requested materials inside”
Requested materials? I don’t remember requesting any materials from anyone.
At first glance it seemed like a credit card application. I’ve received many in unmarked envelopes like this and even a few with “URGENT” printed in red on the front. But this seemed just different enough to make me curious.
When I tore into the envelope, I discovered a half-page typed form stating in large letters at the top:
“Notice of mortgage protection.”
It looked important, and had “return promptly” printed off to the side in bold lettering. Then I saw that everything below that heading was a bunch of fill-in-the-blank questions, with very detailed information about me and my mortgage.
Whoever this was knew the exact total outstanding amount of my mortgage. Once I saw that they were asking if I or my spouse use tobacco, I realized what this was – a life insurance product. My eye moved to the bottom and read:
“Pay your mortgage with your life insurance policy!”
I say this is a misleading mailing because I never requested anything from anyone about Mortgage Protection Insurance. Furthermore, the mailing was meant to look like something I should fill out and return ASAP or I might be jeopardizing my mortgage, and hence my home. I have no idea even who the insurance company is or how they got my info, though I assume my bank sold it to them as one of their partner relationships that I cannot opt out of.
What is mortgage protection life insurance?
So enough about this scam mailing, what is Mortgage Protection Insurance, and is it a good idea?
Mortgage Protection Insurance (MPI) is essentially a life insurance policy that will pay off the outstanding balance on your mortgage if you die before your house is paid off. Sometimes disability insurance is included, so your mortgage payments will be made for you in the event you become disabled and cannot work.
It is also sometimes called Mortgage Payment Protection Insurance (MPPI).
MPI vs. PMI – What’s the difference?
The financial services sector and insurance companies love their alphabet soup of acronyms. MPI and PMI sound similar, but they are two very different things.
PMI stands for Private Mortgage Insurance. You are required by law to pay for PMI when you purchase a home with less than 20% down payment. Private Mortgage Insurance is not for you and it’s not to pay your mortgage if you lose your job. It is solely for the bank, and it pays their insurance policy on you in the event that they need to foreclose on the property. Essentially, it helps mitigate the bank’s loss on the property if you default on your mortgage and there is less than 20% equity on the property.
Mortgage Protection Insurance on the other hand has nothing to do with the bank.
MPI is life insurance you buy from an insurance company and its only purpose is to pay your mortgage in the event you die. Another variant of this includes disability insurance, to make your mortgage payments if you become disabled and find yourself without a paycheck.
Reasons not to buy Mortgage Protection Insurance
There may be some cases where Mortgage Protection Insurance makes sense, but I think there are many reasons it doesn’t makes sense most of the time. Here’s why…
The first, and most obvious case is when you own your own home. No mortgage? No sense in paying for an insurance product that you could never benefit from.
Unfortunately, I do not fall into that category as I still have a mortgage I will be paying off for the next 20 years.
So here are the reasons I will not be buying MPI anytime in the foreseeable future:
- I already have a life insurance policy, and my mortgage was considered when determining the amount of the policy.
- Mortgage Protection Insurance is a waste of money.
Consider this: one of the main reasons for getting life insurance is to replace your income if you die. The idea being that your beneficiaries can have that money to use as they need. Paying off the mortgage should be one of the expenses factored into the coverage amount. One major problem with MPI is that the when you die, the insurance company will send a check directly to your mortgage company. Your beneficiaries have no choice in the matter.
What if your spouse wants to sell the house instead?
What if paying off the mortgage doesn’t make financial sense?
Consider that today’s mortgage rates are historically low. Rates will eventually rise, and most likely inflation will rise with them. So, it’s entirely possible that someone who takes out a mortgage today or refinances at today’s low rates and who is faced with a life insurance payout 10 or 15 years from now will be in a situation where they would actually make money putting that lump sum in a high yield savings account instead of paying off the mortgage.
Just such a situation happened in the early 1980′s. A person receiving a lump sum could have made 18% a year by putting that money in a money market account. Contrast that with the potential 7-10% mortgage rate and you’ll see why it was a money loser.
But it’s even worse than that. When the insurer pays the benefit for Mortgage Protection Insurance, it’s paid directly to the mortgage company- not the beneficiary. The beneficiary has no control whatsoever over the money, but worse still – MPI is a declining-benefit policy!
It’s called a declining-benefit policy because while the premium payment remains constant, the payout is reduced over time to keep up with the declining outstanding mortgage amount. That means you end up paying a steady amount in premiums, and get less back over time.
Compare that with fixed, lump sum payout of a standard life insurance policy and you see why MPI really only benefits the insurance company, not the insured.
As I see it, Mortgage Protection Insurance is a bad idea (generally speaking) because:
- You have no control over how the benefit payout is used – it pays off the remaining mortgage, and that’s it!
- The amount you receive in payout goes down, while premiums stay constant.
- Standard term life insurance is a better buy because it provides greater control and flexibility over how the payment is used, and provides a larger payout relative to MPI over time.
Given these reasons, and those stated further up, I’m taking a pass on Mortgage Protection Insurance.
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Posted: March 12th, 2011 | Author: Joe | Filed under: Insurance, Tips | Tags: Infographic, Insurance, Life Insurance, Tips | No Comments »
Buying life insurance is a must if you have small children, and may be a good idea in other situations as well. But for many people, buying life insurance is a daunting task and often goes undone. For some, it’s trying to decide what kind of life insurance is right for them. For others, it’s trying to determine how much insurance they need.
Well, here’s a concise infographic detailing the basic questions you should ask yourself. It’s courtesy of BankRate.com and it should serve as a very handy starting point on what can be one of the biggest financial decisions for you and your family.
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Posted: March 9th, 2010 | Author: Joe | Filed under: Insurance | Tags: Insurance, Life Insurance, life settlement | 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)?
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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