Like a sort of trilogy to my previous two posts ‘Home owners insurance, explained’ and ‘Are you financially ready to welcome your new baby’ this blog on life insurance deals with the importance of providing financial security to the family in these uncertain times.

During my student days I worked part time as an insurance agent. The experience was an eyeopener for me. Had to undergo a lot of ‘doors-slammed-on-my-face’ and friends and acquaintances trying to avoid my gaze while crossing each other, just for the fear that I might coax them to buy a new policy. Even those customers who lend me an ear to know about the latest life insurance products would retort back with questions like, ‘ Are you trying to say I will die soon?’, or ‘How does it matter on who spends my money after I die?’.

I have only one question to ask those who always view life insurance with a negative perception. Do you get upset that the airbags in your car never came of use, despite you spending so much on it? Or do you worry that the helmet that you use for your weekend country side bike rides, never actually came of use because there was no accident? Life insurance is similar to that. A safety measure. Just that you would not be able to see and enjoy the fruits of it.

Who requires a life insurance policy? – Anybody with dependants like young children or a spouse should ideally have a life insurance policy. People usually buy life insurance policies after marriage or the birth of a child to ensure that in case of the untimely death, their dependents do not suffer financially. Having a policy becomes even more important if the spouse is non-working or if the child is too young and financially dependent on the parents.

Why take a policy when you are young? – We all get older as the years pass by and also get more susceptible to ailments like diabetes and high blood pressure, which in turn may lead to other health complications. By taking a policy when young we get to pay a smaller amount as premium for a longer period of time.

Types of policies – There are two types of policies,

1. Whole Life – This is for the entire life of the policy holder and will be valid as long as the premium is paid. In addition to the death benefit, there is also an ‘account’ that earns interest that however starts accumulating only in the 10th year or so of paying the premium. The premium paid is slightly higher than term policies.

2. Term Insurance – As the name suggests, it is for a specific term, say 3, 5 or 10 years and expires after that. The premium is fixed for a number of years and the older the policy holder is, higher will be the premium. So at the end of the term, if the policy holder wants to extend the tenure the premium to be paid will become higher. It is pure coverage, in the sense that it pays only upon the death of the policy holder. There are no other cash benefits. The premium paid is lower than that for whole life policies.

Types of death that a life insurance policy covers? – Life insurance policies usually cover death by natural causes. One can add an ‘accidental death benefit rider’ to the life insurance policy, to cover death of the policy holder due to an accident. The premium will be higher accordingly. In case of death due to suicide, the premium amount paid till date is returned. Death due to chronic illnesses like cancer and AIDS are also covered by such policies provided the policy holder has paid the premium for a minimum number of years. The number of years varies from one insurer to another. To cover critical illnesses like HIV/AIDS, cancer and paralysis, one can go in for critical illness insurance which fellow blogger HillsPersonalFinance explains.

How much can you insure yourself for? – It all depends on your income levels, the sum that you feel would be adequate to provide your dependents after your demise and how much you can spare on a monthly, quarterly or yearly basis. Insurance4USA provides an insurance calculator that helps you calculate the amount of life insurance that you need.

 

Most of us will buy a house at some point in our lives. It is a dream for many and also the single largest investment that we make in our lives. Having spent so much it is wise to have it safeguarded too, isn’t it. I was speaking to an insurance agent the other day to have my house covered. There is so much to do with housing insurance that many of us might not know or may have ignored. Here is what I gathered from the discussion.

If you have bought a new house on mortgage you do not have a choice but to insure your house because the lender will insist so. Homeowner insurance policies usually cover house structure, personal belongings, additional living expenses, liability protection and medical payments. The premium rates differ depending on what you want to be covered. These are some of the important aspects of home owner insurance.

1.   A housing structure cover will protect your house from damage due to fire, theft, ice and snow, while the personal belongings cover will offer protection for the valuables in your house. What you should remember here is that damage due to floods and earthquakes is not covered in housing policies.
2.   If there is a large repair job required in your house which requires you to move out of the house for a while, the additional living expenses incurred, will be covered.
3.   Assuming that a tree in garden of your house fell due to a storm last night and damaged the neighbor’s compound wall, then the liability protection cover will help compensate your neighbor for the damage caused. It will also pay for the cost of defending you in court in case of a law suit.
4.   If there is a medical expense incurred by your neighbor as a result of this accident, then the insurance company will also compensate for the expenses. What you should note here is however is that, you and your family members will not be covered in this.

We have seen what the insurance company does for a homeowner’s policy. Here is what you should do. You have to make a list of all the valuables in your house and along with their value. This will be required even while you apply for an insurance cover. Valuables may include things like your expensive jewelery, TV, PC, laptop, sofa, cot and so on. If you can shoot pictures of these, still better, as it will make your claim process much easier. Do not think that you are smart by under-estimating the value of your goods so that you can pay a lower premium. When there is a claim, you will be the loser. Also remember to keep updating the list as you add stuff in your house like blogger fivecentnickel suggests here. Having done all this, make 2-3 copies of the list and photographs and store them in any safe place outside your house.

There is however a flipside to all this. The insurance agents for homeowner’s policy are known to be extremely picky when selling a policy or fixing the premium rate. You will be asked to fix even the smallest nut and bolt in your house before getting the policy because when there is a claim the outgo is really huge from the insurer. So be prepared to repaint your house, install fire alarms, fix a leaky pipe or repair the garage shutter. After all it is for your good.

Think of it as a protective measure to safeguard your house which is the abode of your fond memories and dreams.

Last evening I was talking with a friend, her plans to buy a new car. While we were discussing models, features, prices, I asked her what her credit score looked like? She stopped and thought about it and realized she didn’t know! I didn’t need to say anything else.  She knew right away that she’d be going into the car dealership at a big disadvantage if she didn’t know what her credit score looked like.

That conversation got me thinking about the importance of maintaining good credit scores and being informed about what is on your credit report.  Here’s a short FAQ about credit scores.

What is a credit score? – A credit score represents a person’s creditworthiness. It is a score calculated by taking into account a person’s credit history, promptness of payment, repayment of debts and loan defaults.

Why is it important? – A credit score becomes immensely important when trying to secure a loan; home mortgage, car loan, credit card or an insurance policy. Credit score not only determines your eligibility for credit, but also the interest rate that you have to pay. The higher your credit rating the less interest you’ll pay.

Who calculates my credit score? – There are three major credit bureaus in the US, Experian, TransUnion and Equifax.  All three secure consumer credit reporting information from the nation’s banks and financial institutions and apply a score based on the FICO score developed by Fair Isaac Corporation and their own VantageScore. FICO scores range between 300 and 850, while VantageScore ranges from 501-990. As an example, a FICO score of 720 and above is usually considered excellent and will qualify for the best interest rates available.

Can I know my credit score? – Yes you can, but at a price. You are entitled to a free credit report from each of the three rating agencies once in a year. Beyond that, you’ll have to pay in the neighborhood of $15 or more for your scores. Many large loan providers calculate the average of the three credit scores before sanctioning a loan. So it is advised that you get your credit scores from all the three agencies before applying for a large loan.

How do I improve my credit score? – While there are many ways to increase your credit score, it all boils down to these four basic rules of thumb.

1. Make your payments on time, even if it means paying only the minimum due amount.
2. Keep your credit account balances below 50% of your total credit limit for each account.
3. Avoid too many credit inquiries in a short period of time.
4. Never default on a loan.

 

 After the subprime crisis, it is the credit card debt crisis that many financial analysts and economists are predicting to hit the country. Many average Americans seems to be using their credit cards for all the wrong reasons, falling prey to fancy deals and getting into debts.    

In case you are one among those trying to get out of a messy credit card debt trap, here are some tips that might help:

1.    Try balance transfer to consolidating debts to 1 or 2 cards If your debts are spread across different cards try consolidating those into one or two cards. Most credit card companies allow balance transfer and offer incentives for the same. Assuming your credit card issuers A and B charge 16% interest and a Card B offers you the balance transfer option at a rate of 8% and an introductory period of 4 months. It means you can transfer the debt of say $2,000 in Card A to Card B. The sum of $2,000 will attract an interest rate of 8% between say October-January. You can use this period to manage your debts better. If you still haven’t settled the debt, then February onwards the balance amount to be paid will attract an interest of 16%. Card companies allow balance transfer of up to 80% of the credit limit. So if you have a credit limit of $10,000 in your credit card A, then you can transfer up to $8,000 to your card B.

2.    Restrict the number of credit cards If you have credit cards with varying interest rates, then after settling all the debts, cancel those cards which have a higher interest rate. A maximum of two credit cards are sufficient to meet more than your basic needs. It is also advisable to avoid using your credit card until you have settled your debts spread across your cards.

3.    Try breaking your savings account to repay If you have some money in your savings accounts, you can try breaking that to settle the debts. Of course it hurts to break the savings, which you have planned to use for your wedding or your child’s education. But instead of having to live with mounting debts, harassing creditors, bad credit ratings and stress, it is better to forego the interest on your savings account and repay your credit card debt.

4.    Get a home equity loanIf the roof above the head is the entire asset you have, you can try considering a home equity loan to pay off your card dues. The debt on your house may attract an interest rate of 6-7%, which would be way lower than an 18% charged by your credit card issuer.  Two things to note here: ·         If you haven’t paid your mortgage fully then you cannot take a loan on your house. ·         Once you have paid off the credit card dues, finish off the loan on your home equity loan as soon as possible. Else you will end up with both home loan and credit card dues to be paid.

5.    Confront your creditor with your problem Okay, you neither have savings to speak about or a house to bail you out. The next best option would be to talk to your creditor and explain the situation. Tell him that you lack resources to repay the huge debt and the mounting interest. Ask for renegotiation of interest rates or extension of repayment period. Apprise them of your situation honestly and let the creditors believe that you are serious about repaying your debts. Chances are that your creditors will lend an ear to your pleas and help you settle your debts.

6.    File for bankruptcy This is the last resort, if you have exhausted all options to settle your debts. When a customer files for bankruptcy, the credit card companies are required to write off all or most of the debt. But before you jump to the option think of the consequences. First you should qualify for bankruptcy. The rules for declaring bankruptcy have become tougher over the years. The filing of bankruptcy will remain in your credit record for 10 years impeding almost all chances of acquiring credit, loans and mortgages of all kinds in that period. In addition you have to cough up a hundreds of lot of dollars to filing for bankruptcy, your attorney fees and so on.