Insurance

Insurance is probably the most expensive product sold that is the least understood। Nearly 1 in every 12 dollars spent in our economy goes to pay for some type of insurance (6.8% of all household spending in 1993). Studies by the nonprofit National Insurance Consumer Organization show that more than nine in ten Americans purchase and carry the wrong types and amounts of insurance coverage. By contacting your state's Department of Insurance you might be able to compare rates for your area for different insurance products. Life is filled with uncertainties (accidents, illness, disability, death, fires, floods, earthquakes, etc.) which require us all to take risk daily. The purpose of insurance is to allow us to transfer the unacceptable risk of loss to someone else. Understanding risk management is the first step in planning for insurance needs. Making wise decisions when purchasing insurance requires that the buyer have an understanding of the basics so that insurance can be bought not sold.

Simply put, there are only two categories of insurance:

• Material Insurance




• Personal Insurance
  

MATERIAL INSURANCE INCLUDES:

1. Homeowner's
2. Renter's/Condominiums/Townhouses
3. Umbrella
4. Auto
5. Other

1. Homeowner's
Homeowner's insurance (not the same as Mortgage Insurance) insures against the risk of damage to your house, property or injury to other people as a result of a wide range of calamities। In addition, your policy will cover various miscellaneous items such as additional living expenses (loss of use) if you are forced to move out while repairs are made. Be aware that the policy terms required by lenders does not always provide adequate protection for the homeowner. Insure that your policy has adequate coverage.

The factors that determine your homeowner rates are
Prior loss experiences of the insurance company

• State Insurance Commission Rate Regulations




• Location, value and type of structure insured




• Amount of coverage purchased




• Premium Discounts

2. Renter's/Condominiums/Townhouses
Because the needs of renters, condo owners and townhouse dwellers are different, there are special policies for these situations। As with a homeowner’s policy, these policies cover belongings, provide liability protection and pay for additional living expenses if a fire or other disaster forces you to temporarily move out. With some exceptions and limitations, these policies cover all of the personal property regardless of where the property is when the loss occurs. In most cases, they will also cover your children's property (up to policy limits) while they are away at college. Condominium and townhouse policies will also specify coverage for the dwelling or improvements.

3. Umbrella Insurance
An umbrella insurance policy provides you with added liability coverage on both your home and auto(s). For example, if someone slips and falls from a crack in your sidewalk and successfully sues you for money damages, your personal liability policy can provide coverage to pay the damages. These policies are called "excess" policies because they insure the "excess liability" over the limits which otherwise may be provided in your homeowner's, auto, or other insurance policies.
Umbrella insurance coverage should be considered if you are building or have already built a significant estate that could be lost through the judicial process. In addition, this coverage is appropriate even if you have little current net worth but you have substantial future earning power. Many financial advisors recommend that you obtain umbrella liability insurance coverage at least equal to your net worth (assets minus liabilities). The cost of the insurance is relatively inexpensive considering the amount of coverage you are obtaining. Some excess liability policies cover the cost of legal defense; others do not. You should determine if your coverage includes this feature and what, if any, limits on legal costs are included in the policy.
For approximately $200 - $300 dollars a year, you can increase your liability coverage by $1,000,000। For example, if your current liability limit on your homeowner's policy is $300,000; a one million-dollar umbrella policy would give you $1,300,000 of total liability coverage. This is a small cost to pay for a lot of protection. An umbrella or excess liability policy can be purchased through your existing homeowner's or auto insurance company.

4. Auto Insurance

(be sure to check your individual policy and coverage needs before deciding to adjust your policy coverage)
Auto insurance rates are determined by where you live, type of vehicle, discounts, your driving record and your age. Each is a statistically based risk for a specific population. The higher the risk associated with a person, the more he or she is likely to pay for coverage. Many states provide rate guides by area. Check out the rate guide for Texas or check out your state). State laws say that you must either have insurance, or be able to provide evidence that you have the financial resources to pay a judgment against you in the event that you should cause injury or damage to another person. Most state laws (except New Hampshire, Tennessee, Wisconsin) require that you carry a minimum amount of liability insurance.
There are two basic categories of auto insurance coverage: liability (bodily injury and property damage) and damage to your auto (collision and comprehensive)। A typical auto policy is divided into different parts. (Depending on the coverage you need, not all of the parts will be included on your policy)

5. Other
There are many other types of material insurance that are generally a waste of your hard-earned dollars. You should carefully consider whether the risk against what the policy is protecting is worth the money being spent. The goal is to accumulate adequate cash reserves and not rely on these extremely expensive policies. There are several types of material insurance that you should either avoid or carefully consider not buying:

1. Extended warranty and repair plans
2. Credit card protection
3. Home warranty plans
4. Insuring packages in the mail
5. Contact lens insurance

Talk about Personal Insurance on next post.

Debt

Types of Consumer Debt:

Credit Cards
There are 7,000 institutions issuing credit cards (Visa, MasterCard) in the United States, 30,000 different credit card programs (Visa, MasterCard, Discover, American Express and Diners Club), 200 million new credit cards issued in 2000 with an average charge per transaction (Visa, MasterCard) of approximately $70.00. Source: CardWeb.com, Inc.

The average interest rate charged on credit cards is approximately 14% with the highest credit card interest rate being charged by CompuCredit at 41%. In 2001, the average U.S. household with at least one credit card owed $8,562, up from $2,985 in 1990. The average credit card holder has 6.5 credit cards while the average number of cards per household is 14.3. Source: CardWeb.com, Inc.

The top three sources of revenue for credit card companies is 1) Interest 2) Merchant fees and 3) Late fees. In June 1996, the U.S. Supreme Court ruled that commercial banks could charge whatever fees they want on credit cards, anywhere in the country. The 1996 ruling preempts state laws regarding card fees for an out-of-state issuer. Since then, late fee revenue generated to bank credit card issuers has soared from $1.7 billion to $7.3 billion, annually. Since 1996, average late fees have more than doubled, from an average of $13.28 to $29.84. Survey found that 58.3% of consumers say they have been hit with late fees during the past year (2001). Source: CardWeb.com, Inc.

How much does your credit card cost?Did you know that making the minimum payments on a $3,000 balance carrying an 18% APR will take 431 months (almost 36 years) to pay off and cost you $7,511.74 in interest? WOW! That is what I call prison! And just think, you did it voluntarily! Source: CardTrak

Some of the common rationalizations that are used to justify credit cards:

Must have a credit card to cash a check.
Must have a credit card to rent a car.
Must have a credit card to rent a motel.
Must have a credit card for business.

Each of the above needs can be satisfied with a debit card. However, there are some car rental companies that do not accept debit cards.
Even for those who claim to pay their credit card balances off each month, there is still the hidden danger of over spending। Surveys prove that when plastic is used 54% more is spent for food items and 12 to 18% more for non-food items. A credit card provides a great convenience but the same convenience is available with a debit card. The most important concern with spending money is when it is impulsive and unmonitored. No matter whether your purchases are made with cash, check, debit card or credit card, the only way to stop impulsive spending is when all of your purchases are for budgeted items. A monthly budget provides a means of control and accountbility.

A very simple test that you can give yourself to determine if you should have a credit card consist of two questions.
Are ALL of your credit card purchases for budgeted items?
Do you ALWAYS pay your credit card bill in full on the date it is due?
If you answered no to either question above, you failed the test and should conduct PLASTIC SURGERY on both his and hers credit cards.

Home Equity Loans
Equity is computed by subtracting the amount owed from the market value of your house. For example, if the market value of your house is $150,000 and you owe $100,000, then your equity is equal to $50,000. The job of many lending institutions is to find a way to convince you to pay them a fee and interest to help you spend your hard earned equity.
There are several creative schemes that have been devised to help you turn your equity into debt. One such way is a credit card that is tied to the equity in your house. As you use the credit card, the debts are paid with your home equity (until it is gone). Another program I have seen allows the home owner to use their equity to purchase an automobile. There is nothing like taking money that is appreciating and purchasing something that goes down in value like a rock. You might ask, "What have I got to lose?" You could lose your house!
The bait used to attract many people into the home equity trap is that the debt is tax deductible, the deduction only applies to the interest portion of the loan and does not justify the cost of the debt. These type of loans have high interest rates that normally float (fluctuate with the economy).


Finance Companies and Thrifts
Finance companies and thrifts are the ultimate "rip-off" when it comes to lending money। These companies specialize in high risk loans and charge extremely high interest rates! Depending on state regulations governing interest rate caps, these loans can be 20+%. The bait used for many of these loans is 90 days same as cash. They prey on the needs of those who live paycheck to paycheck with poor credit. Be aware that on the 91st day of the loan you will be charged interest for the previous 90 days if the loan is not paid in full.

Friendly Loans and Co-signing
One of the best ways to lose a friend or strain a relationship is to borrow money from a friend or family member. You would be better off just giving the money to the friend or family member.
When it comes to co-signing on a loan with a friend or family member, NEVER do it! When you co-sign with someone you are in effect borrowing the money. If your friend or family member defaults on the loan, you are 100% liable. This has the potential of destroying the relationship.

Debt Consolidation
Lenders who market debt consolidation loans normally pay all of your bills off and then let you pay them, plus a fee. This method might decrease the number of checks you write monthly but will in most cases increase the number of months you write the checks. The bait used for this type of loan is "one easy payment"! Debt consolidation does not eliminate the debt, it merely juggles it around. This method of getting out of debt should not be used (even if it is at a lower interest rate) until the spending problem is corrected.

Saving

While people in other countries are saving 10%-15% of their annual incomes, the savings rate of Americans has fallen below 4%. According to the Commerce Department, savings as a percentage of after-tax income have been reported the lowest since the government began tracking the rate on a monthly basis in 1959. Saving money is not unspiritual nor does it represent a lack of faith. Saving money becomes wrong only when it turns into hoarding. Saving money in order to purchase a future need and prepare for the prospects of advancing years are signs of a wise steward. If saving money does not become a lifestyle, DEBT will!

Why save money?
First, you need to understand the difference between the terms save and invest. Saving money merely means to put it aside as a store or reserve. Investing money means to commit it in order to earn a financial return.
There are basically two practical reasons why you need to save money:

To build a strong FINANCIAL FOUNDATION and then
To build a strong FINANCIAL FUTURE.

How do I save money?
As basic as it might sound, before you can save money, you have to spend less than you spend. In order to do this, you must do one of two things or a combination of :

Limit your lifestyle and or Increase your Income

What should I do with the money I save?

Once you have identified the amount of money that you can save each month, those saved dollars should be systematically directed towards five goals called the "Five-Step Plan". The first three steps make up the financial foundation. Steps 4 and 5 are the keys to building a solid financial future. Steps 1, 2, and 3 should be accomplished in order. When step 1 has been completed, you can then start working on step 2. When step 2 has been completed, you can move to step 3. Accomplishing steps 4 and 5 will be a life-long process that will ensure a solid financial future.
Financial Foundation (Steps 1-2-3):

Step 1: Checking Account Reserve
Most Americans are living paycheck to paycheck (week-to-week) with little or no cash reserves to call upon in the event of a negative financial event. Assuming that your monthly budget is in place and all of your monthly expenses (including minimum payments on debts) are covered, all of your surplus dollars should be directed towards building a cash reserve in your checking account. How much? To start with, a minimum of $1,000. The reserve in your checking account will allow you to stop living week-to-week and serve as a temporary emergency fund until you can get to step 3 where you will build a real emergency fund in your savings account. If at anytime during the accomplishment of steps one through three you are required to use any of the $1,000, you must immediately return to step one in order to restore your checking account surplus to $1,०००.

Step 2: Debt
The second step is to systematically apply all of your monthly surplus dollars towards the elimination of consumer debts (credit cards, auto loans, student loans, furniture & appliance loans, etc.).

Step 3: Savings Account
The last step in building the financial foundation is the establishment of a real emergency fund (contingency account). The emergency fund should be used only for real emergencies! These might include unanticipated medical expenses, a temporary layoff, a transition between jobs as a result of downsizing/termination or unexpected auto repairs. Financial planners often recommend having 3-6 months living expenses set aside in a contingency account. I suggest your goal be a minimum of $10,000. The emergency fund is not an investment but rather a cash reserve. The emergency fund should be located in a place that guarantees safety and stability of principle and is completely liquid (easily and quickly converted to cash). A good place to store these funds would be a money market mutual fund (MMF), a credit union or even a NOW account at your local bank. MMFs are essentially as safe as insured money market accounts offered by banks, have check writing privileges and charge no withdrawal penalties, but pay 1%-1.5% more.

Financial Future (4-5):

Step 4: Major PurchasesSteps four and five can be started simultaneously. At this point you are ready to begin building a strong financial future. The purpose of step four is to get you into a position to be able to pay cash for all of your known major purchases (autos, vacations, Christmas, household furnishings, down payment on a house, etc.). Paying cash for major items will allow you to enjoy the benefits of compounding in a positive direction. Compounding is magical, but when it is in a negative direction it's like a chain and ball. These funds should be stored in an account that offers safety and stability of principle along with liquidity unless the item you are saving for will not be purchased within the next five years. In such a case, you can consider options that might allow for a greater return.

Step 5: Long-term Savings
Step 5 requires that you begin investing your savings in order to financially for the long-term needs of your household and to increase your assets in order to serve God more fully. You need to determine your investment goals and develop an investment program that fits your tolerance for risk. Your enemies are inflation, taxes and procrastination (not necessarily in that order). I recommend that all of your long-term investments first be invested through your qualified investment option. As you gain control of your finances and begin to build wealth, you must be careful that you do not put your trust in your riches.