The fall is, without a doubt, my favorite time of year. And a not-so-insignificant element of that is the joy that fills my heart when huddled around my parents’ television on a Sunday afternoon with my family, a belly full of “linner” (a lunch big enough to be dinner) and the smell of apple pie wafting over a group of adults and children yelling in unison at the images of modern day gladiators chasing around an odd-shaped leather ball. Football is philosophy… and some of that philosophy translates especially well in our personal finances.
Below is a guest post from my friend, mentor, boss and truly one of the great technicians in the realm of personal finance, Drew Tignanelli, on a topic that caused an immediate reaction in me–a phone call to my homeowner's insurance agent to make a change on my policy!
By now, most of us have seen the pictures of devastation in New Zealand from the 7.2 magnitude
earthquake. The message was very clear…When an earthquake hits, it's devastating! Houses can collapse, foundations can be destroyed, interiors can be cracked, and homes still standing can be too dangerous to inhabit. Many times the likely loss is a total of the insured value of the home. This is the result in a place that is accustomed to earthquakes, like New Zealand, that has building requirements to minimize the earthquake property damage.
Now consider the same degree of earthquake in a land with no building codes for earthquake damage control. The likely result may be the equivalent of the devastation from Hurricane Katrina. The East Coast of the United States is the perfect example of an area that has no building code requirements to protect from land movement. A magnitude 7.0 earthquake on the East Coast could be beyond our understanding of devastation, since nothing built in this region was designed to withstand land movement. Do some internet searches of U.S. fault lines on the East Coast and you will find out we are clearly at risk. These faults have just been less active than those out west.
Now here is the point of this article. Your homeowners insurance policy completely EXCLUDES coverage for the movement of land. So, if there is an earthquake and your house is destroyed, you will lose everything. I am a financial professional and even I did not realize that my policy excludes land movement coverage. Of course you can get coverage, because West Coast residents have it. But you have to ask for it from your property casualty agent who has incentives to NOT suggest that you consider adding earthquake coverage. Here is the best news of all… The cost to add the rider for land movement may be no more than $100/year.
Call your agent and consider the cost of coverage versus the risk of an earthquake on your homeowners' policy. No matter where you live–East Coast, West Coast, or any coast at all–call your agent and consider the coverage. One way to add the coverage without increasing your policy cost is to raise your deductible and self-insure the first dollars of loss. I would rather pay a $1,000 or $1,500 for a few small claims than to lose everything.
I was awake on July 17, 2010 at 5 a.m. when a relatively small 3.6 magnitude earthquake hit in Germantown, MD and I live 45 miles north in Reisterstown, MD. After what I experienced, and now what I have learned about my policy, I gladly added the $85/year cost of the coverage. You should be calling your agent NOW to look into adding earthquake coverage to your policy. Remember, if your agent tries to talk you out of it, it is because they have an economic incentive for you not to carry it.
Hopefully your area will always remain earthquake free and the coverage proves to be a waste of money!
Andrew V. Tignanelli, CPA, CFP(r)
For those working as financial planners, that we will eventually be humbled by the recognition of a faulty thought process is not just likely, but a foregone conclusion. One of the financial products that I was trained on intensely was annuities—fixed annuities, variable annuities, equity indexed annuities and immediate annuities. And it wasn’t until I was in the industry over seven years that my continued research began to reveal that the benefits of annuities to consumers were exaggerated and the drawbacks, downplayed. As that truth began to settle in, I had to acknowledge that I was wrong. That was humbling, but I wouldn’t trade my initially faulty thought process for anything, because learning “the hard way” has helped me grow through experience and it makes me a better planner today. Here’s my confession, which kicks off Chapter Twelve in The Financial Crossroads:
From Chapter Twelve, The “A” Word:
There is not an outcry on the part of consumers demanding annuity products. The reason for the continued vibrancy of annuity products and sales is that they pay a big honkin’ commission to the selling broker or agent. (There, I’ve said it.) And, as most of the financial sales tactics exposed in this book, I’m especially qualified to make such a statement, because I have sold them myself. I wasn’t a bad person in those days, conniving to separate prospects from their hard-earned money for my own selfish benefit. Conversely, every time in years past when I sold an investment product to a client for a commission, I did so thinking it was best for the client. My recommendations met all the legal requirements of suitability that are required of a broker, but I declare to you now that in hindsight there is no question that my judgment was partly influenced by the amount of money that I could make (or not make) in the sale.
And how could it not be? Let’s say you, as a salesperson, had three different products to sell with the following characteristics: one would pay you 1% for every year that the investment continued to be held by the client, one would pay you 5.75% up front followed by .25% each additional year, and another would pay you 12%—all up front. Which one would you be likely to pick, all things being considered equal? Hmmmm. Let’s add to the scenario the assumption that you were selling in the midst of an economic downturn which had resulted in a significant loss of revenue for you and your family. Is it possible that in that circumstance you may be inclined to favor the product that pays 12% up front over the one that pays 5.75% up front? And forget about the one that pays 1%, because in tough times, that simply isn’t going to butter the bread. These aren’t imaginary numbers that I’m using. One percent is a slightly below average amount that a financial advisor may charge for discretionary management of your investment assets; 5.75% is the average commission paid to a broker who sells a mutual fund (A share); and annuity products pay up to—and in some cases over—12%!
The sale of annuities is justified entirely too often because of the massive commissions that go to the broker or agent selling the product. Powerful organizations have made it their lives’ work to decry this very notion and have built elaborate systems designed to convince themselves, their brokers and agents, and the consuming public to believe in the justness of their actions. I was a part of one such group and was encouraged—along with a room full of other financial folks who had been invited to San Diego for an all-expense paid trip to hear what this organization had to say—to join the ranks of the “Safe Money Specialists.” Other people were selling products. We were selling peace of mind and getting paid 10 times as much!
I repeat: people who sell annuities aren’t bad people. But, they are sales people. You expect timeshare salespeople to have an economic bias to sell you a timeshare. You expect a phone solicitor who interrupts your dinner to keep you on the phone to convince you to buy something before you hang up the phone. You don’t, however, expect someone who refers to themselves as a financial planner or advisor or professional to have the primary aim to sell you something. Unfortunately, many of them do. Your broker or agent may have drank the company Kool-Aid and genuinely believe that he or she is doing the best thing for you, so treat them with respect when you tell them you’ll be moving your business. As I learned growing up in the Baptist church, we should, “Hate the sin, not the sinner.” We will be discussing in much greater detail the ways that financial services employees and financial advisors are compensated and what you should look for in Chapter Seventeen.
Just this past Thursday, we dove into the topic of life insurance with the not-so-existential question—WHY? What is the case for life insurance at all? If you didn’t take (a little over) 90 seconds to watch that one, you can do so by clicking HERE to see my list of life insurance “NEEDS” (those things that would be required to keep anyone you leave behind on track financially) and “WANTS” (those things that could better be described as “bells & whistles” in life insurance planning).
Today, we provide you with a primer on HOW you can begin to calculate an appropriate amount of life insurance for you as well as the type of insurance that would best suit your needs. We hope you both learn from and enjoy “Life Insurance—HOW? (in 90 seconds).”
Life insurance is a heavy topic with all sorts of emotional baggage and economic bias surrounding it. While some over-simplify the process (suggesting a mere multiple of one’s salary as a recommendation), many over-complicate it on a quest to make a big commission through the sale of a bells-and-whistles life insurance policy.
It’s a challenge to summarize this topic at all, but that didn’t stop me from trying… This 90 Second Finance video is Life Insurance, Part I: WHY? and I’ll be following that with Part II:HOW? this coming Monday. So how about dedicating 180 seconds to better understand the role of life insurance in your financial realm?
Do you know what the 100/300 actually means in your auto insurance policy? I find that one of the least addressed areas in financial planning is home and auto insurance. Is it because we’re more enamored with auto insurance commercials than the coverage pitched? Or is it because most of us are legally bound to carry this insurance and thereby have a tendency to commoditize it and take whatever’s cheapest? I think so. Indeed, that’s how I treated it for many years. But mistakes are made that cause anything from a costly inconvenience to monumental problems—even financial devastation—for too many every year.
For this post, I’d like to share the opening of Chapter 8: “15 Minutes Could Cost You a Fortune,” from The Financial Crossroads designed to grab your attention regarding home and auto insurance and steer you onto the right path.
From Chapter 8: 15 Minutes Could Cost You a Fortune:
You’re involved in a car accident. It’s your fault. The person driving the car you hit is injured. He visits with an attorney who runs late night commercials in between People’s Court re-runs. They decide to sue you. They win and are awarded $950,000. Who pays that bill? The insurance company? Hopefully. You? Possibly. If insurance, which one of those different types of coverage tells you how much they’ll pay? “Gee, I hope that when I saved 15% in 15 minutes I didn’t reduce that particular coverage.”
You’ve seen that commercial that claims to save you 15% on your auto insurance cost if you’re willing to spend 15 minutes. I’ve talked to several people who liked that idea, spent their 15 minutes, and, indeed, saved 15% or more on the premiums that they paid for their car insurance. What is not promised by the unnamed insurance company, which incidentally is also represented by an over-sized lizard and a couple of prehistoric humans, is whether new converts could be guaranteed to maintain or improve upon their auto insurance pricing and still have good coverage. In other words, they may be spending less…for less.
It is not my intent to demonize the above-referenced company. You may very well have your auto insurance with them and be properly insured for a reasonable rate. But it is inside the insurance realm that economic bias is so ever present that we must be very careful to understand what coverage we own for the stated price. Too many have spent 15 to save 15, or followed through on some other tempting sales pitch, only to find that their auto coverage would leave them financially exposed in the case that it was needed. Another “forward thinking” company has recently invited television viewers to choose the price that they would like to pay for their car insurance and allow the company to build a customized policy around the spending restrictions. I’m going to make another suggestion specific to your home, auto, and liability insurance: determine the coverage that you need, and then shop around for apples-to-apples quotes to see who will offer you the best price.