Archives For Insurance

       According to insurance companies and their agents, you have an 80 percent chance of becoming disabled during your working years. I’m not sure about you, but that statistic just doesn’t mesh with my experience in life and the experience of people I know.

       Ron Lieber, author of the Your Money section of the New York Times, has a great article about the true odds of becoming disabled. I can’t do a better job than him in sharing the info he learned, so I recommend you check it out for yourself. I also want to share a link to a graph in the article because I want you to see it.

       I found this article from The Oblivious Investor who wrote about it on Twitter.

       What do you think about the true odds of becoming disabled and your need for disability insurance? Let me know in the comments.

       A fiduciary is a person in a position of trust who obligates himself to always act in the best interests of those who trust him. For example, the trustee of a trust is considered a fiduciary and must always act in the best interests of the trust’s beneficiaries. Fiduciaries are legally required to act in the best interests of those they’re serving, and they can never put their own interests first.

Why Does It Matter?

       So why should you care what (or who) a fiduciary is? In the financial world, there are two types of advisors:

  1. Those who are fiduciaries.

  3. Those who are not.

       If you understand what a fiduciary is, you’ll see that advisors who are fiduciaries are required to do what’s best for you. Advisors who are not fiduciaries are not held to such a standard. It’s perfectly legal for them to put their own interests first – to act in a way that might not provide the best benefits to you. Obviously, you want to use a fiduciary advisor whenever possible because of their legal responsibility to you.

       There are very clear guidelines on who is considered a fiduciary in the financial world and who is not. The following people are NOT considered fiduciaries:

  • Stock Brokers
  • Insurance Agents
  • Real Estate Agents acting on the other party’s behalf (This is common when you are buying, as most real estate agents are acting on behalf of the seller.)

       “Advisors” in this group do not represent you. They represent themselves, their company, or someone else. They have no legal responsibility to act in your best interest. They are simply not permitted to commit fraud or provide you with “unsuitable” recommendations. But the “unsuitable” standard is very broad and difficult to impose.

       On the other hand, people in these groups are considered fiduciaries:

  • Registered Investment Advisers (RIAs) or Investment Adviser Representatives (IARs)
  • Insurance Brokers
  • Real Estate Agents acting on your behalf
  • CPAs
  • Attorneys

       Advisors in this group are legally required to act and advise you only for your benefit and interests. They can never act in a way that is contrary to what is best for you. They must act with undivided loyalty to you. If they fail to do so, you are entitled to legal action against them. It’s not enough for them to just provide “suitable” recommendations. They must try their hardest to provide you with the best advice possible.

       Let’s use a simple example. If you go to a stock broker, the broker can recommend you invest in Fund A (as long as it’s “suitable”) even though Fund B is better for you. Why would he do this? Probably because Fund A will give him a higher commission.

       Now let’s say you go to a Registered Investment Adviser (or an Investment Advisor Representative – someone who works for an RIA). Because RIAs have a fiduciary duty to their clients, they’ll always be required to recommend you invest in Fund B since it’s your best option. RIAs can’t receive commissions or do anything that’s not in their client’s best interests. So who do you want to get your advice from? The stock broker or the RIA?

       It’s quite clear that fiduciaries are held to a much higher standard than non-fiduciaries. Whenever possible, you should seek to obtain advice from people who are held to a fiduciary standard. Ask your advisors if they are fiduciaries. Ask them if they are required to always act in your best interests. They are required to answer truthfully, and you should be wary of those who cannot answer with a confident and resounding “yes”.

       Have you ever heard of the term “fiduciary” before? Is there any aspect of the fiduciary duty/standard you’re not clear on? Let me know in the comments, and I’ll do my best to answer your questions!

       If you spend much time reading personal finance advice for Christians (either on Provident Planning or somewhere else), you’ll probably start to realize that it’s not all that different from other personal finance advice. Most of the good advice for Christians applies equally to non-Christians as well. Stick to a budget, spend less than you earn, avoid excessive debt, keep an emergency fund, minimize your taxes, don’t buy insurance you don’t need, save for the future – none of those things are particularly Christian in nature.

       There may be some points in which Christian personal finance and secular personal finance will differ, but, generally speaking, good personal finance advice is the same regardless of your religion. The difference – and this is a major difference – is in the ultimate purpose, the final goal, of following that good advice.

       As far as the world is concerned, it makes sense to make smart personal finance decisions because that’s what is best for you. Good money management will help you meet your goals, maximize your wealth, and get the most out of the money you’ve earned. And according to the world, that’s what you should do with your money. Use it for the things you want. Use it to meet your goals and fulfill your dreams.

       But for Christians, making smart decisions in our finances is not important just so we can maximize our wealth and meet all our desires. Our purpose is not to find fulfillment in this world and the things it offers. Our purpose is to honor and glorify God – to serve Him with our entire being in everything we do. Our goal is to do His will. And part of God’s will for us is to share His love by caring for those in need through generous giving. We don’t try to maximize our wealth for our own use. We try to maximize our wealth for God’s use.

       I want you to remember this as you read the articles I write. Many times there won’t be a Bible verse in a post. Personal finance in the Bible is more about the principles that should govern our decisions – not specific applications (like how to get out of debt). But it’s very important that we remember the purpose of seeking and following good financial advice.

       When I talk about spending less, it’s so we’ll have more to give. When I talk about earning more money, it’s so we’ll have more to give. When I talk about making smart financial choices, it’s so we’ll have more to give. It all comes back to giving – giving motivated by love that flows out of our response to God’s Gift to us.

       Yes, making good financial decisions will have benefits for you personally. But our focus as Christians is on the benefits those decisions will have for the Kingdom. In our efforts to follow good financial advice, let’s keep our eyes focused on Christ and our minds focused on how we can serve Him fully.

       The advice we follow may not be all that different from non-Christians. But the motivation, goals, and results should be very, very different. And that difference will serve as a witness for the power of God’s love working in our lives.

       What do you think makes Christian personal finance different? Let me know in the comments!

       I’m not sure if you’ve seen the commercials for Prudential’s Retirement Red Zone website, but I had and decided to see what it’s about. The commercial claims there’s a video on the website that will help you learn how to plan for a successful retirement when you’re near or just entering retirement.

       But when you get to their website, all you’ll find is one huge sales pitch for variable annuities – probably one of the worst choices you can make when it comes to retirement investments. Not only will you pay high expenses for the insurance side of things (the guarantee of income for life), you’ll pay high expenses on the investment side of things as well (the variable part of the annuity). Variable annuities, especially deferred variable annuities, are only suitable for a small number of people – and it’s not usually retirees (or those near retirement). Annuities can have a place in retirement planning but they’re not for everyone (which is what Prudential and other insurance companies would like you to think).

       The video you’ll find at Prudential’s Retirement Red Zone is not educational either. If you want to learn about annuities, you need to go somewhere else. They’re not something I’ve discussed yet on Provident Planning, but I’ll get to them eventually. Just know that there are some good reasons you probably shouldn’t be buying a variable annuity any time soon:

  1. High Fees – The fees for most annuities are quite high, and this is even more true with variable annuities. Costs do matter, so it’s important to consider them when making investment choices.

  3. Complexity – Each annuity comes with a prospectus, which is supposed to explain the product and costs to you, the buyer. But trying to read one of these documents is almost impossible. First, they’re HUGE. I downloaded a prospectus for one of Prudential’s annuities and it was 264 pages (8.5″ x 11″)! Second, they make up their own meanings for words so you must check their definitions, but even those can be difficult to parse out. And third, they’re not laid out in a way that’s easy to understand – even for financial professionals, much less the average consumer.

  5. Better Options – Finally, there are better ways to secure guaranteed income in retirement than variable annuities. As I said before, I’ve not explored these options so far, but I will as time goes on. Just know that you really need to consult a trusted financial advisor before purchasing an annuity. Once you buy it you can’t change your mind. (You can switch to another annuity, but you generally can’t get your money back without huge penalties.) And when I say trusted financial advisor, I don’t mean your stock broker or insurance agent. You need to find someone who is held to a fiduciary standard – which means they are legally required to put your best interests first when advising you.

       So that’s my public service announcement for today. If you want to continue learning about personal finance without the sales pitch, then sign up for free updates to Provident Planning today!

The Basics of Auto Insurance

Corey —  November 10, 2009

definitive car by fooosco on Flickr       If you’re interested in the basics of auto insurance and how you can save some money on your policy, you’ve come to the right place. We’re going to take a quick look at the coverages available under an auto insurance policy and how much you need.


       This section includes bodily injury liability and property damage liability for yourself and any uninsured or underinsured drivers who hit you. Bodily injury liability covers the damages you cause to other people. The coverage will pay for their medical bills and lost income up to the limits. The coverage limits are usually listed as $XXX,XXX/$XXX,XXX – the first number is the maximum payout for any one person’s injuries and the second number is the maximum payout for all people involved in a single accident. I recommend you get coverage of $100,000/$300,000 for your bodily injury liability.

       Property damage liability covers the cost to repair or replace someone else’s property that you damage in an accident. This is not limited to cars only but covers any kind of property. For example, if you crash into someone’s house, then your property damage liability coverage will pay for the repairs to their home. I recommend you get at least a $50,000 limit with this coverage, but $100,000 is better if that’s available to you.

       These same types of coverages apply to the uninsured and underinsured motorist options. The uninsured and underinsured coverages pay for the damages caused by others who either have no insurance or too little to cover all the costs. You should get the same amounts for these as you do for your own bodily injury and property damage liability coverage.

       Don’t skimp on these coverages because you want to save money. The state minimums will rarely be adequate if you cause an accident. You’d be surprised how little it costs to increase these coverage amounts.

Medical Payments, Personal Injury Protection, or First Party Benefits

       This coverage may go by various names depending on your state and insurance company, but they all mean essentially the same thing. These coverages pay for the medical expenses and lost wages you or your passengers suffer after an accident. Some states require this coverage, but most do not.

       If you have health insurance and disability insurance, there’s hardly any need for this coverage. The coverage amounts are generally insufficient unless you choose the most expensive options. So if your state requires this coverage but you’ve got decent health insurance and disability insurance, then choose the least expensive option available.

Collision and Comprehensive

       Collision coverage pays for damages to your vehicle caused by collisions with another vehicle or stationary object. Obviously, this applies to situations where you are at fault and have damages to your own vehicle. (If someone else is at fault, their liability coverage will pay for your damages.) If repairing your vehicle is not reasonable (above a certain % of the car’s value), then the insurance company will declare it “totaled” and pay you the cash value of your vehicle. Their valuation of your vehicle may be quite different from what you think it’s worth. Collision does not cover anything covered by comprehensive.

       Comprehensive coverage pays for damages to your vehicle caused by fire, theft, vandalism, hail, windstorm, riot, falling objects, flood, collision with an animal, or other events included in your policy contract. Each claim that falls under your collision or comprehensive coverage will be subject to a deductible. An easy way to save money on your insurance costs is to increase the deductible on these coverages. Just make sure you have enough money in your emergency fund to cover the higher deductible. (Yet another reason to have enough in your emergency fund!)

       If your vehicle is older, it may not be worth carrying collision and comprehensive coverage. Consumer Reports recommends dropping the coverage if the premium you pay for this coverage (check your insurance policy statement) is more than 10% of the book value of the vehicle. You can get a good estimate of the book value by using the private party value on Kelley Blue Book. For example, if your car is worth $5,000 according to Kelley Blue Book and your comprehensive and collision coverage costs more than $500/year, you should drop it.

The Extra Stuff

       Insurance companies offer a variety of extra options for auto insurance. These include rental reimbursement, towing and labor, and gap coverage. However, with an adequate emergency fund, you would be better off declining all forms of these special coverages. You’re better off saving your money for those emergencies than paying for such coverage.

The Top Tip for Saving Money on Your Auto Insurance

       The best way to save money on your auto insurance is to shop around every couple years. Auto insurance rates are always changing, and you may be able to get a better deal with a different company due to competition. You can do a simple search online using InsWeb to get quotes from multiple companies. If you want a quote from Geico, Progressive, or Esurance, you’ll have to go directly to their web sites.

       If you find a cheaper quote but don’t want to switch insurance companies, give your insurance company a call and let them know you’re shopping around. Tell them the insurance company you got the quote from and how much you were quoted. They may be willing to offer you a lower rate in an attempt to keep your business.

       If you have any questions, comments, or tips for saving money on auto insurance, please leave them below. Thanks!

       Last month, I posted several articles about life insurance. Today, I’m going to tell you why my wife and I have decided not to buy life insurance yet.

Our Situation

       We’re a young married couple with no kids (and none on the way). We’re both very healthy and both of us have college degrees. Michelle’s is in nursing and mine is in financial planning. The only debt we have is my student loan, which is very manageable and has a low, fixed interest rate of 4%. We also have an adequate emergency fund and we’re saving for a house.

If One of Us Dies

       In my articles I’ve advised you to only buy life insurance if you actually need it. You must determine if there is a true risk that needs to be insured. Figuring this out means that you need to ask yourself (and your spouse) what life will look like for the survivor. After going through this process, Michelle and I determined we don’t need life insurance.

       If I die, Michelle is fully capable of earning more than enough money to cover her needs. We do not have nor are expecting children, so she would be free to work as much as she needs to. We also do not have a large amount of debt that depends on two incomes. Because of her ability to earn a good income through nursing, Michelle would be able to meet her needs even if I die.

       If Michelle dies, I would also be able to manage. I’m in the process of becoming self-employed, and as it is right now I may not earn much money for quite a while. In the short run, we will be depending on Michelle’s income for our needs. But if Michelle were to pass away, we would have enough savings to cover my needs for a year while I start my business. If the business is not providing enough income for my needs at the end of that time, I’d need to find another way to earn some income. Even though the job market is not very bright for financial planning right now, I am comfortable taking the risk that I would have to do something (possibly anything) to earn money while I continue working on my business.

       So for us, there’s no financial risk if either one of us passes away prematurely at this time in our life together. That could easily change though if one of these three situations occurred:

We Have Children

       Once children are on the way or in the picture, we’ll be looking at this question again. Michelle will likely be at home more to take care of the children, and I’ll be the primary earner. At that point, if either of us were to die the survivor would need some financial help to make things work well. We’ll both get life insurance then.

One of Us Becomes Disabled

       If one of us were to become disabled, we’d need life insurance on the non-disabled person to help cover the cost of care in the event of a death. If the disabled person were to die, it would likely improve our financial situation. But if the non-disabled person were to die, the disabled person could need quite a bit of help.

We Take on Debt That Requires Two Incomes

       The only way this is likely to happen is through a mortgage, but even then it’s highly unlikely. We’re not going to push ourselves to purchase a house that requires a mortgage payment dependent on two incomes. Our plan is to save up a large enough down payment so we won’t need to take on too large of a mortgage. My ideal is actually to build my own house for cash, but we’re not sure if that’s what we’ll end up doing.

What Should You Do?

       My point in sharing our decision is not to tell you that this should be your decision as well if you’re in the same situation as us. The lesson here is that you must look at your own circumstances, ask the right questions, and then determine what you should do. Don’t go buying life insurance just because someone tells you to. Make sure you need it first!

       It seems like a strange question to ask, but it could be important to avoid paying unnecessary taxes or having the money squandered. You’re not required to own the life insurance policy that covers your life, and it may not be a good idea for you to own it. Why does it matter? Because depending on who owns the policy and who the beneficiary is, the insurance proceeds could end up in your estate (possibly incurring estate taxes) or the proceeds could be considered a gift (incurring gift taxes). Here are a few situations to consider:

If You’re Married…

       If your spouse is the beneficiary of your life insurance policy (and they’re still alive when you die), it’s not going to matter if you or your spouse owns the insurance policy. If you own the policy on your life and your spouse is the beneficiary, then the insurance proceeds will be considered part of your estate for tax purposes. However, you get an unlimited marital deduction, which means that you don’t have to pay estate taxes on anything that goes to your spouse. So in this case, it doesn’t really matter (as long as it’s owned by you or your spouse).

       If your spouse’s estate could end up over the estate tax exemption (currently, $3.5 million in 2009) because of the insurance proceeds plus other assets, you may want to consider an irrevocable trust to hold the insurance policy and the proceeds. But if that’s your situation, you should be talking to an attorney or financial planner and not getting free information on the Internet. Your situation is too complex for a do-it-yourself solution.

       For most of us (who don’t have assets plus insurance over $3.5 million) this will never be a problem. It doesn’t really matter if you or your spouse own the policy if your spouse is the beneficiary.

If You’re Single or Widowed…

       If you’re single, it’s generally best for the beneficiary of the policy to be the owner. If you own the policy on your life, then the proceeds will be included in your estate as a taxable asset. Now, if your estate won’t exceed the estate tax exemption (again, $3.5 million in 2009), this doesn’t really matter at all. You won’t owe any estate taxes anyway.

       This logic wouldn’t apply if the beneficiary is a minor because it’s more important to make sure the money will be handled properly. In that case, you’ll want to make the designated guardian the beneficiary and owner of the policy or use an irrevocable trust to own and be the beneficiary of the policy. The trust would then contain provisions for how the proceeds should be distributed to the minor or the minor’s guardian. If that’s your situation, you’ll need to meet with an estate attorney to get advice about your circumstances.

       Finally, you don’t want to have a situation where the owner, insured person, and beneficiary are all different people because of gift tax consequences. For example, if your dad owns the life insurance policy that covers you but your child is the beneficiary, when you die the IRS will consider the insurance proceeds a gift from your dad to your best friend. Your dad would then owe gift taxes on the insurance proceeds. This is not a good thing and these unnecessary taxes can be easily avoided. The solution in this case is to have the child be the owner and the beneficiary. If that child is a minor, read the above paragraph for advice.

       If you have questions about your specific situation, feel free to leave them in the comments and I’ll try to help. But if you have complex circumstances, you should probably meet with an estate attorney to get the help you need. Yes, it will cost money, but it’ll cost much less than a mistake would.