Color of Money Book Club
Thursday, October 26, 2006; 12:00 PM
Michelle Singletary hosted author Kimberly Lankford for a discussion about October's
A transcript follows .
Read Michelle's past Color of Money columns.
Michelle Singletary: Good afternoon everyone. This is definitely a hot topic because we've already have quite a number of questions. So let's get started.
Alexandria, Va.: Not an insurance question, but something about this situation doesn't pass the smell test.
About a week ago, my boyfriend received a message regarding his investment in ABC Company. He did not return the call, but said if they call again they should be referred to his broker. The second time they called, I answered the phone and told them to deal with the broker. They said the broker could vote on some things, but on the matters that he was calling about he needed to speak directly to the investor. As it turns out, BF was in the hospital at the time and never did speak to this person. I have not heard from this caller since.
Last night, I received a message to call about my investment in XYZ Company. (I don't even think I'm invested in that company through my IRA.) In any event, I did not return the call, nor do I intend to do so. I know it's the same thing -- voting on something about which they "need to speak directly to the investor."
If they want us to vote on something, why don't they send out a proxy statement like they've always done in the past? Is this a new way to vote, by calling individual investors? Frankly, this whole thing seems like phishing to me. Is it?
Michelle Singletary: This isn't on topic but something I've heard has been happening to quite a number of investors. If you've gotten a similar call--asking you to vote on a company matter for a stock you own individually or thu a mutual fund company please e-mail me at firstname.lastname@example.org. Put "Company Vote" in the subject line.
I'm looking into this.
Laguna Beach, Calif.: I just had a baby and I am looking for life insurance (term life). My husband and I scuba dive and he paraglides. Both these activities disqualify us from many insurers. Should I sign up through my company's life insurance or call each highly rated insurer to see if they would cover us due to these sports?
By the way, there is a good chance I would get laid off from my job this year as I am in the real estate industry..
Kimberly Lankford: This is the perfect time to shop around for life insurance, now that someone is depending on you financially. The good news is that every life insurance company has very different rules about covering high-risk hobbies -- one insurer may reject you while another may offer a decent price. I recommend shopping online first at Insure.com, which lists each insurer's underwriting criteria (their rules about what qualifies you for each rate, based on your health, hobbies and family history). I'd also recommend calling an agent, like one at accuquote.com, who works with many companies and knows from experience which ones are most likely to cover you. You may get a much better rate on your own than buying extra coverage from your employer.
South Riding, Va.: Thank you for your column, chats and television show. My question has to do with closing credit card accounts. When Federated department stores took over May company stores, I wound up with two Macy's credit cards. I would like to close one of them but don't want to hurt my score. I use one card to get the sale prices and pay off every month. I don't need a second card. Should I keep both accounts open, or close one. Thank you!
Michelle Singletary: Unless you are shopping for major credit soon -- a car, home, etc.-- you can close the duplicate card. Just be sure to keep the card with the longest history on your credit reports.
BUT, unless you pay the balance off EVERY month or just love the way the card looks, you don't need either. Generally department store credit cards carry the highest interest rates.
Closing one or both accounts could hurt your score a tiny bit. How? If you have outstanding balances on other retail accounts and all your revolving accounts it makes you look like you are in more debt than you are. That's why your score goes down. But if you don't have any outstanding balances on retail cards or major credit cards, close the one or two.
Northeast Washington, D.C.: Your column today just goes to show that people will take advantage of anything. Until I read that it never occurred to me that I might enroll someone in my health insurance plan who wasn't my mate or dependent. Is this why my PPO is being cancelled and I have to shift to a consumer-driven (consumer-paid-for) plan? Grrrrrr....
washingtonpost.com: Your Health Plan's Dependent Clauses
Michelle Singletary: Not likely you are being pushed into a CDP because people are sneaking others into the plan. And I might add my sources say most people aren't doing this to cheat. Many just don't know.
Alexandria, Va.: Ick. Insurance. But I know it's important and that's why I am pretty well covered. But am I too weell covered? I'm single and in my late '30's. I have disability coverage with work but only in the event of full retirement due to disability so I purchased a partial disability plan through the open market to the tune of $900 per year. In additon to that, I purchased a long term care plan. Feels good to be better covered given that I am single and would need to take care of myself if anything happened but most literature says I am too young (and healthy) to have this coverage?
Kimberly Lankford: You've done a great job of getting started! Since you're single, it's much more important to have disabiltiy insurance than life insurance. And you're smart to fill in the gaps in your employer's coverage. Many employers only cover total disability, like yours, or only pay 60% of your salary and don't cover bonuses or commissions.
And you're way ahead of the game by buying long-term care insurance now. The younger you are when you buy the policy, the less expensive it will be. You will be paying for it for many more years, but usually the long-term cost evens out. Many people can't afford to buy long-term care insurance at a young age because they have so many other financial responsibilities, but if you can afford it and can continue to keep up the payments, then you won't have to worry about it later.
A lot of families can't afford to buy long-term care insurance until their 50s or so -- generally after their kids have moved out and they've finished with the college bills and they may not need as much life insurance. That's a good time to buy the coverage, too, before the price goes up even further in your 60s.
Vienna, Va.: How many credit cards do your recommend having? I only have one that I regularly use, but I have five others open, all of those retail ones that I used a couple times, paid off, and haven't touched in years. Should I close them or are they ok being open?
Will this hurt or help my credit score having so many open?
Michelle Singletary: See my previous answer. But to answer your first question, you only need one major credit card. And I use the word need loosely. The object of this credit game is to only charge what you can pay off the next month. And even then watch what you charge because you tend to spend more when you use credit. Frankly, I'm seriously considering at least for a year giving up using credit cards altogether. It's an experiment I want to try to see if I can cut even further what I spend. With the new debit cards that can be accepted just about everywhere like a credit card there is little "need" for a credit card.
So gain, if you don't need major credit, close the accounts. But do it over time.
Bowie, Md.: OK, this is the most trivial aspect of the insurance issue, but it's a money question that comes up a lot -- product warranties.
I had always avoided such things under the maxim that "every policy is sold with the expectation of making a profit; so you should never insure against any loss you can absorb yourself."
The problem with this reasoning, as regard product warranties, is that THEIR cost is not the same as MY cost. I would pay $80/hour to repair a computer, while their labor costs are probably half that. Can the margin on repair costs make warranties a mutually profitable trade?
washingtonpost.com: Check out Post reporter Terence O'Hara's story from a few weeks ago about product warranties: Unwarranted , Oct. 1.
Michelle Singletary: Read O'Hara's piece. Generally, there's little reason to get just about any of those policies. I rarely do.
Alexandria, Va.: I have a question regarding the effect of a credit score on insurance. I have had both car and renter's insurance policies from the same company for several years. I have not filed any claims nor have I recently had any tickets, or anything else that should have affected my rates. However, I recently received my renewal letter from the insurance company where they informed me that there were some negative results from when they requested my credit score and now my rates have shot way up. I thought I knew why, but I ordered my credit report to check for anything amiss and there is nothing. The reason my credit score seems to have tanked is that this summer I consolidated my student loans, therefore creating one large and brand new loan - so even though I was trying to do the correct thing for my finances by locking in a lower interest rate, I have now also hurt my credit score and consequently, my financial standing with my insurance company. Is there any way around something like this?
Kimberly Lankford: You've discovered one of the biggest changes in the auto and homeowners insurance business over the past few years: Your credit score now has a big impact on your rates. Insurers discovered that people with low credit scores have a lot more claims than people with high credit scores, and now boost their rate if they have a low score (although a few states limit that practice).
That's one reason why it's essential to check your credit score frequently, even if you don't plan on taking out a loan anytime soon. Go to annualcreditreport.com, where you can order your credit report from each of the three bureaus every 12 months. Your report may be a bit different at each of the three bureaus, so it's important to check all three in a situation like this and make sure there aren't any errors. You can also order your credit score at this site, although you'll have to pay a small fee. Or you could order your score from Myfico.com, which is maintained by Fair Isaac, the comapny that created the most common credit score. That site also has a lot of helpful information about improving your credit score.
It' also a good time to shop around for auto and renters insurance again -- some insurance companies look a lot more carefully at credit scores than others, and one may offer you a better rate than your current insurer.
Laurel, Md.: I work for the Government and have life insurance and my own disability insurance because of health issues...should I get another life insurance policy (I'm single, no kids, elderly parents)?
Michelle Singletary: If you don't have anyone depending on your for income, then I would say you are covered. How much life insurance do you have?
Washington, D.C.: Hi Michelle and Kimberly!
My bank is offering credit cards with 0 percent APR on all balance transfers for the first 12 billing cycles. Would this be a smart way to pay off some credit debt by transferring the balance to a new 0 percent APR card if I am sure that I would be able to payoff the balance within a year? I believe there is a small fee (3 percent?) for the transfer.
Michelle Singletary: How much credit debt do you have and on how many cards? And is the 3 percent charged on the total you transfer?
Washington, D.C.: Hi Michelle and Kim:
Question for you, Kim. I moved to Washington, D.C. from St. Mary's County Maryland to be closer to my job. My car insurance skyrocketed. The only answer I could get from the insurance provider was that insurance is higher in the District because there are more accidents. Which I find harder to believe, because they are fewer people here than the millions in Virginia, Maryland or any other state collectively. Why am I paying tons more for insurance for moving back into the District?
Kimberly Lankford: Auto insurance companies' rates are based on their claims experience with people like you -- your type of car, where you live, your age, etc. And it's not unusual for insurers to charge more for people who live in the city, especially if they park on the street.
But the price difference can vary a lot from company to company, based on their particular experience. That's why it's good to check out auto insurance prices again whenever you move -- the insurer that offered you the best rate beforehand may now be one of the more expensive ones. I'd recommend going to insweb.com, progressive.com, statefarm.com or working with an independent agent who deals with many companies (you can find one in your area at www.iiaba.org).
Columbia, Md.: Since we're on the insurance kick today...Folks, please, please get renter's insurance!!
Also, I moved down from Long Island and my auto insurance was cut in half -- such a treat after all those years of paying high rates thanks to other careless drivers!
Michelle Singletary: Good advice. Thanks.
Northeast Washington, D.C. again: OK, so it may not be affecting my insurance changes, but ummm...how do you -not- know someone is not your mate/partner or dependent? I know I don't have children and I know I ain't married. So, I have no one eligible to be on my elpoyer-sponsored insurance plan. Methinks that's a cop out.
Michelle Singletary: Well, what if your child drops from full-time to part-time and you just "forgot" that's a requirement to be a dependent.
Springfield, Va.: I'm in my thirties, married and a mom. I know I need more life insurance, but I'm constantly confused about how much I should really get. (Right now I only have the life insurance my company offers, which is two times my salary.) I recently received an offer in the mail for a life insurance product that doesn't offer a lump-sum payout. Instead, it says it will pay my beneficiaries my monthly salary until I would have been 65 if I died. Can insurance really be that simple? Have you heard of something like this before?
Kimberly Lankford: That's a very interesting concept, but I'd generally recommend staying with a policy that pays out a lump sum after you die, which gives your heirs more flexibiltiy to decide what to do with it and how to invest it. They may have some big expenses in the first few years that could decrease later on, and it would be best if they could use the money for whatever they need the most at that time. And with the lump sum, they can decide how to invest it themselves based on their financial goals.
And you're very smart to consider buying more life insurance -- I generally recommend buying eight to 10 times your income, which is a lot more than most people have through their employer. In your 30s, you can get $500,000 of coverage for under $400 per year if you're healthy, and you can lock in that low premium for 20 years. You can get some more specific numbers for how much to buy at the life insurance needs calculator at Kiplinger.com. And one thing that a lot of young families forget is to have life insurance coverage on stay-at-home parents, whose child care would be very expensive to replace, even though they don't earn an income.
North Bethesda, Md.: Hi! I'm hoping you can help. My company is switching from a POS/PPO to a Healthfund - where they stick $1000 in an account tell us we can get preventative care for free, and then anything outside of that dips into the fund account until it's gone. I know I can put money into one of those flexible healthcare accounts to help, but what I'm wondering is if I should switch to my other option: an HMO - I've never used an HMO before, and I've heard so many horror stories. My doctor thinks these healthfunds may wind up being worse than the HMOs -- what do you think? (If it matters, I'm generally a healthy person, in my 30s, with no kids)
Michelle Singletary: Read the columns I've been writing of late on this issue.
Woodbridge, Va.: Recently, I've been hearing a lot about life insurance policies that double as saving accounts. I've also been solicited by a person that sells these types of insurance services through some sort of pyramid scheme. The premiums are much higher than the average term life insurance policy, but have higher returns and actually allow you to dip into them. What I want to know is if these life insurance/saving plans are actually legit and if so, is it a good investment or a risky money trap.
Kimberly Lankford: It sounds like you've heard about a cash value life insurance policy, which insurance companies have been selling for years as whole life, variable life or universal life insurance policies. You pay a much higher premium than for term life insurance -- sometimes 10 times as much per year -- but part of your money pays for the insurance while the rest goes into a savings account that you can borrow from or withdraw.
The downside, though, is that you're usually paying high fees for these policies -- the insurance costs within the policy are usually much higher than they are for term coverage and you generally pay high fees for agent commissions and other sales charges. You can usually do better by investing in other tax-advantaged accounts first -- by maxing out your 401(k) and IRA for retirement and saving in a 529 account for college -- which generally have much lower fees.
The biggest reason, however, to buy a cash value life insurance policy is if you need insurance for more than 30 years, which is the longest time period that most term policies last. Most people don't need coverage that long, especially if they're buying the insurance until their kids graduate from college or they pay down a 30-year mortgage. But if you have a special-needs child, or are worried about a big estate-tax bill, or own a business, then you may want to consider a cash-value policy, which you can keep as long as you live -- even if it's way beyond 30 years.
Richmond, Va.: If it's always a bad idea to buy the product warranty, why isn't it also always a bad idea to buy life insurance? Couldn't I protect myself, just like I do with my television?
Michelle Singletary: Sure. You can self-insurance. Just put aside enough money to cover the hundreds of thousands of dollars in expenses your dependents would have if you die.
If you can do that, great!
Northeast Washington, D.C.: In 1993 when I was 23, my mother encouraged me to get term-life insurance. At the time, her argument was I would likely be married and starting a family in a couple of years and better to get it while I was young and healthy. (she also encouraged me to save $25/mth and invest it, her motto "pay yourself first!" I used that money to buy a house in 2002). Well, it's 13 years later and I aint married (I may be next year; beau and I are in negotiations) and I have no children (this may never happen) and I'm still paying for this income replacement insurance. Should I let it go?
Kimberly Lankford: You only need life insurance if someone is depending on you financially, so most people need the coverage if they have young children. But otherwise, you generally don't need the insurance yet. Since it's a term policy, I'd say you could drop it and use the money you're paying for premiums to boost your savings, and you could always buy another policy later on. You're still young enough that a new term policy would still be quite inexpensive, and you'll be able to lock in a longer term period then -- which could give you a good rate for 20 or 30 years.
Michelle Singletary: I definitely agree.
Alexandria, Va.: Hi, Regards your answer ealier: "But to answer your first question, you only need one major credit card."
Many years ago when I was first starting out in business, I was caught at a restaurant needing to buy dinner for a company group and the restaurant didn't accept my Mastercard. They only took Visa. Fortunately, a colleague took the charge on his Visa. Is this sort of thing likely to occur now, or do all processing firms process both Visa and Mastercard now?
Michelle Singletary: I think it's rare that a business now only accepts Visa or MasterCard. But if unsure call ahead.
Savage, Md.: "Would this be a smart way to pay off some credit debt by transferring the balance to a new 0 percent APR card if I am sure that I would be able to payoff the balance within a year? I believe there is a small fee (3 percent?) for the transfer.
Michelle Singletary: How much credit debt do you have and on how many cards? And is the 3 percent charged on the total you transfer? "
I actually paid off a car this way -- transfered $12,000 to a no-interest for a year deal, and succeeded in paying it off.
The key is, they can be very quick with the "penalty rate" (20%+) so you MUST have an automatic deduction for at least the minimum payment set up.
BTW, the 3% is often capped at some dollar amount, so you wouldn't pay 3% of several thousand dollars.
If there's some chance you won't have it paid off at the end, be sure to have some back-up way of paying it, like a HELOC, if the post-zero rate is high.
Michelle Singletary: I think you played a dangerous game transfering a car loan to a credit card. I would NEVER advise anyone to do that. You won this time but let me remind you that the card company can change the rate at ANY for ANY reason, not just if you are late. Shuffling debt from one card can work if you can pay it off during the special rate time. The best thing of course is not to let the debt get to the point where you have to do that.
Virginia: Yes, please get renter's insurance!
One of my friends did not get it and did not properly extinguish a cigarette on her porch. The wind blew the ashtray over and ignited her apartment. Her apartment, as well as two others, were destroyed. She's now being sued by the landlords for over 100K.
Renter's insurance is important for liability as well as protecting your belongings.
Michelle Singletary: Good point again. Thanks
Fairfax, Va.: Why keep store charge cards? Because for many sales, if you use your card you automatically get the discount, and you don't have to cut out and remember to bring along the stupid coupons! Also, I suupose some people like to get the sale flyers in advance. I seldom read them and get them out of the house as fast as I can to get rid of the %$-&$#$ perfumed inserts!
Michelle Singletary: And for many people that 10 percent discount doesn't even cover the extra they pay in interest rate on the card.
I have none and haven't for decades and somehow I manage to save at big department stores when I shop, which isn't very often anyway.
Fredericksburg, Va.: Kim and Michelle,
Good Afternoon. Kim I currently carry about $800,000.00 in life insurance. Your previous suggestion was that a person carry about 10 times their salaries. Do you advise I go up, since I make six figures a year My husband works and our two younger kids are 15 & 10. My oldest is 21. Thanks
Kimberly Lankford: That's a great question about the amount of life insurance. The eight to 10 times your income is just a rule of thumb, but to get a more precise number, it's best to calculate what your family's income needs would be if anything happened to you, subtract sources of income that would continue for your family (spouse's income, Social Security, etc.) and buy enough life insurance to fill in the gap. We have a great calculator to help you with the math at Kiplinger.com and several other sites have good insurance-needs calculators, too.
And it's a good idea to reassess those needs every few years, especially as your kids get older and get out on their own.
Fort Washington, Md.: How do you determine the reconstruction costs of your home? Our insurance company stated less than $150K to rebuild from the ground up. When I think how much it costs to get major renovations, e.g, adding rooms, knocking out walls, adding two car garage,etc., costs, I think the lady on the phone is nuts!! However her oops will be a disaster for us if anything tragically happens.
Kimberly Lankford: That's one of the toughest issues about homeowners insurance. Most people make big mistakes when figuring out how much coverage to buy. It has nothing to do with your home's market value, becuase if your home is totally destroyed, you still have the land. Instead, you do need to figure out how much it would cost to rebuild the home.
There's a new tool that makes it easy to figure out your home's replacement cost. It's at accucoverage.com, costs about $7.95 and lets you input detailed information about your home, its age, materials and special features. Then it uses the same database that insurance companies use and calculates a replacement cost. You're right that there's a lot at stake. It doesn't cost much to boost your insurance coverage, even by $50,000 or $100,000, if that's what you calculate you need -- and provides big protection if your house is totally destroyed.
Alexandria, Va.: My mom bought long-term care insurance years ago after she saw how a nursing home cost my step-father virtually all of his income plus ate into his savings before he died. Now, age 89, she is in a nursing facility, one of the best in her area, and thank God it's mostly paid for by her long-term care insurance. She can live in comfort and dignity and still enjoy life despite being in her wheelchair. The only mistake she made was that she bought a policy that pays for only one year; she will reach that milestone pretty soon and then we're not sure what we'll do. We "kids" are glad she's had at least the year of coverage, though. We'll cross the next bridge when we come to it.
Kimberly Lankford: Thanks for sharing your story. Whenever I research long-term care insurance articles, it's always most helpful to hear from families whose policies covered their parents' nursing home costs (or who didn't have coverage and wish they did). The time period of the coverage is a very important decision to make. The average nursing home stay is only about three years, and that's the amount of coverage that most people get. However, if your family has a history of Alzheimer's or other long-lasting conditions, you may want to boost the coverage term.
It tends to be very expensive to get lifetime coverage, but you can lower your costs by getting a shared-care policy with your spouse, which provides a pool of coverage between the two of you -- say six years, for example, which would leave you with four years if your spouses needed it for two -- and is usually a good way to lower the costs while extending yoru coverage period.
re: higher insurance rates in D.C.: You also have to remember insurance is regulated by states. So, some states (or DC) may require higher coverage and therefore, a higher price (or, sometimes, not at all).
Kimberly Lankford: That's a great point. Some states, like New Jersey and Massachusetts, have much higher auto insurance rates than everyone else because of their state laws. In that case, it's even more important than ever to shop around again.
Ft Lauderdale, Fla.: Living in South Florida lends itself to cancellation of homeowners insurance and fear of filing a claim because of that very reason. Are there any suggestions on how to avoid insurance companies cancelling the policy?
Kimberly Lankford: Raise your deductible to at least $1,000 so you don't make small claims. You could lower your premiums by as much as 25% and will avoid making small claims that could get you dropped. Insurance companies share claims information with each other through the Comprehensive Loss Underwriting Exchange (CLUE) so it can be expensive to get new coverage after getting dropped by one insurer -- especially if you live in a high-risk area like South Florida.
Michelle Singletary: Well, our time with you is over. So sorry if we didn't get to your question. There were so many. But Kimberly has agreed to answer more. I'll print her answers in either my print column or e-letter or both. If you don't subscribe to the e-letter please do.
Thanks again for joining me today.
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