Insurance Coverage Not to Buy

Insurance Coverage Not to Buy

(text first published in 1994, source Consumer Federation of America’s).

The Consumer Federation of America’s Insurance Group is a non-profit, public interest organization that promotes the interests of insurance buyers. Here are some of its recommendations of insurance not worth buying:

Air travel insurance: It costs too much and pays back only about 10 cents for each dollar of premiums. It is not comprehensive. You’re more likely to die from a heart attack.

Life insurance if you’re single: If you have no dependents, there is no economic reason to buy life insurance since there is no economic catastrophe associated with your death.

Life insurance if you’re married with children and your spouse has a good job: If one of you dies, can the other get along on one income? If so, perhaps no life insurance is necessary beyond that which you have at work.

Mortgage insurance: You should use annual renewable term insurance to protect you and your family against all economic consequences of your death.

Insurance coverage not to buy. Photo by Elena

Insurance that pays only if you’re hurt or killed in a mugging: A classic example of “junk” insurance. This risk is covered by good life and health policies.

Contact lens insurance: The cost of a premium is about equal to the cost of a lens at a discount eyeglass store.

Cancer insurance: What good is a cancer insurance policy if you have a heart attack? To buy only specific illness coverage is like buying toothpaste one squeeze at a time.

Rental car insurance: Your own auto insurance policy probably covers you if you do damage to a rental car. Also, many credit cards cover this.

Life or health insurance sold to cover a car loan or other loan.

Rain insurance: It pays if it rains a lot on your vacations.

Health insurance that pays $100 a day while you are in the hospital in lieu of comprehensive coverage.

Health insurance on your pet.

(Source: Consumer Federation of America’s, text first published in 1994).

Homeowner’s Insurance

Homeowner’s Insurance

It doesn’t matter what you paid for your house. What you need to insure is the cost to rebuild it. The tow figures can be wildly different.

How much you need. The conventional formula for gauging how much insurance you need on your home is to figure not how much it would actually cost to rebuild it, then tack on the extras, such as the cost of central air conditioning of a new furnace. If you don’t afford insurance for 100 percent of the house’s value, make sure you’re covered for at least 80 percent. That way, if you suffer a partial loss – say, a fire destroys your bedroom – an insurer will likely cover the entire cost. If you’re less than 80 percent insured, your insurer will only pay that percentage of partial damages.

What your options are: There are three types of homeowner’s policies: cash-value, replacement cost and guaranteed replacement cost. Cast-value insurance is the least expensive. It will pay you whatever your valuables would sell for today, which is unlikely to buy you a similar new item. Replacement cost insurance will replace the item that was lost or damaged with something new, but not necessarily the same as the one you lost, because this type of insurance usually comes with a price cap. You’ll be able to replace, say, your furnace, but not necessarily with the best model. Guaranteed replacement cost insurance has no cap and offers the best coverage. The only thing it generally will not cover is the cost of upgrading your house to meet building codes that may have changed since the policy was issued.

Residential buildings at Humber River. Photo by Elena

Homeowner’s insurance also includes liability coverage. Most policies come with large sums worth of coverage. Unless your total assets are less than that, you should probably pay a little more and get more coverage. For example, experts counsel that if you have around $500,000 in assets, you need about $1 million in liability coverage. The best way to do this is to buy an “umbrella policy” that covers both your home and car. Liability coverage comes fairly cheap. It’s unlikely that a claim against you will exceed $300,000 so underwriters can afford to give you a price break. A $300, 000 to $1 million umbrella liability policy will cost anywhere from $500 annually, the average being about $400. For another $1 million in coverage, double the price.

What to watch out for: Cash-value coverage may be a little risky, since an investment you made years ago that is still holding up – such as a good furnace – may now be worth just a fraction of its cost. Replacement-cost coverage, which usually costs 10 percent to 20 percent more, is preferable – and worth it. You should be sure to find out if there are any caps on what will be reimbursed for individual items, such as jewelry. For example, the amount you can recover if all of your jewelry is stolen may be, say, $10,000, if that is the amount of the cap for jewelry. If you have valuables that are worth more, you may want to buy more insurance by adding riders to your policy. This generally costs about $2,00 per $100 of insurance.

Mutual Funds

Mutual Funds

Mutual funds are a collection of investments. Typically, a money manager will organize a pooled portfolio to invest collectively in stocks, bonds and money market securities. The fund’s aim is to make money to the investors who placed their capital into the portfolio. The goals of the mutual fund are generally stated in its prospectus. Mutual funds may also be called ‘investment companies’ or ‘registered investment companies’. Like in the case of all financial instruments, there are both pros and cons to investing in mutual funds. However, in today’s economy, they represent an important part of household finances and often contribute to retirement planning.

One of the problems faced by many small investors is that they do not have enough capital to invest. Indeed, common wisdom indicates that you have to have money in order to make money. However, mutual funds allow investors with less capital to participate in certain professionally managed funds, to which they would not have access individually.

New York, Manhattan. Photograph by Megan Jorgensen

An important distinction between hedge funds and mutual funds is that the latter are sold publicly, whereas the former are not. As far as the United States of America are concerned, mutual funds must be registered with the Securities and Exchange Commission (SEC). The SEC is an agency of the United States federal government regulating the securities industry. The SEC was created in 1934 with the Securities Exchange Act of 1934. The SEC’s main functions are to protect investors, ensure efficient markets and maintain an environment conducive to capital formation.

Thus, to sum up, a mutual fund is a professionally managed investment fund pooling money from several investors. A hedge fund is an investment vehicle which also pools monetary resources from several investors, but is quite different from a mutual fund, and a detailed discussion of hedge funds lies beyond the scope of the present essay.

Two for the Price of One

Two for the Price of One

Your agent may not tell you about this life insurance option.

Ever heard of a low-load policy? Probably not from your agent. Here’s what Consumer Reports said about it in a 1993 report. “Low-load policies may not be in the best interest of agents, but they are in the best interests of consumers. That’s because these policies aren’t sold by agents. Instead they are sold by phone and through fee-based financial planners. They charge an overall fee but receive no commission on the products they recommend.

Long-load policies are a variety of the universal-life policy, which is really two products in one: simple term insurance, which pays off it the policy-holder dies, and an investment account that earns interest anc can be used to pay for the term-insurance. Consumer Reports says a 45-year-old man who needs $250,000 in coverage will pay about $3,700 a year for a good universal-life policy.

Your insurance agent typically earns 50 percent of your first-year premium, but low-load policies cut out the middle-man. They also keep other costs lower and impose no, or very low, surrender charges on policy-holders who eventually drop their coverage. That makes them a particularly good deal in the early ears and, Consumer Reports says, a good deal in later years, too.

Ameritas, John Alden, USAA Life Southland, and Peoples Security/Commonwealth offer low-load policies. For a fee, they will take applications for policies and arrange for necessary medical exams. Planners charge less an hour for their services.

Two for the Price of One. Photo: Elena

Shopping Advice from a Pro

Insurance consultant Glenn S. Daily’s tips for shopping for life insurance

Find out the financial strength of the insurance company you’re considering. Although rating scales differ, you are probably safe if you stay above an AA on all five rating companies’ charts. Use policy illustrations only to screen out inferior products. They aren’t reliable in comparing policies because they don’t show premiums, interest rates, or guarantees.

Focus on the costs. You can’t predict earnings, but you can better the odds for a good return by avoiding companies with a lot of overhead expenses, such as high commissions, broad expense account allowances, and large administrative costs.

Don’t equate premiums with price. Low premiums can hide high commissions spread over years.

Don’t switch policies unless your current policy is not performing well. Though something newer may look better, you will pay a second commission while your existing policy was probably earning a return.

Investment Trust

Investment Trust

The term investment trust refers to a collective investment fund primarily in the United Kingdom. The term is somewhat misleading because the collection of investments does not constitute a trust per se, but a public company. Therefore, as the law defines corporations as separate, legal entities and persons, the fund falls under this same definition. However, the investment fund is a public limited company. Further, investment trusts are closed-ended trusts. The model of closed-ended funds means that a fixed number of shares are issued and may not be redeemed from the fund.

Similar to mutual funds, investors’ money is pooled together. In the case of investments trusts, the capital is obtained from the selling of the shares issued. The fund is typically administered by a fund manager, but lacks any employees. Just like with a corporation, a Board of Directors may take all the decisions concerning investing, operations and other activities. Once again like in the case of mutual funds, pooling capital together from several investors allows investors access to a larger number of companies to invest in, than they would be able to do by themselves. Historically, the first investment trust was the Foreign & Colonial Investment Trust created in 1868.

White flowers with red nerves. Illustration by Elena

Further, in the United Kingdom, REITs (Real Estate Investment Trusts) have the same structure and organization as an investment trust. Also, they must be UK resident and publicly registered with the Financial Services Authority. However, the Financial Services Authority (FSA) was a regulatory body of the financial services industry in the United Kingdom from 2001 to 2013. Due to the financial crisis and the possible regulatory failure of banks, the FSA was abolished. To avoid leaving the financial industry unregulated, the responsibilities of the FSA were divided between the Bank of England (the central bank), the Financial Conduct Authority and the Prudential Regulation Authority.