Free Advice for Financial Security

Many lawyers put a lot of information on their websites, but then add a disclaimer that the information posted is not legal advice. Well, the information we post here is advice – legal, financial or whatever you want to call it. You should consider your particular situation and review carefully any financial product you consider buying, but we generally recommend that you buy or avoid the following:

Uninsured/Underinsured Motorist Coverage
Known generally as UM or UIM coverage, this is the most important type of automobile insurance you can buy, and most people do not have it. It is important because it covers you and your family in the event that you are hurt badly in an accident that is not your fault. Without this coverage, your insurance policy provides little coverage for you, if any at all.

If you have no UM or UIM coverage, you have to depend on the liability coverage of the at-fault party. The problem is that some states (like Florida) do not require liability coverage. Even states that do require it have a low minimum requirement ($20,000 in West Virginia). The fact is that a large percentage of people have no coverage at all or have only the minimum, and these are the same people who cause most accidents. We have seen many cases in which people are hurt so badly that they could receive a settlement of $500,000 or more – if there was any insurance to cover it. Instead, they end up hundreds of thousands of dollars in debt due to medical expenses and lost work – all through no fault of their own.

We are no fans of the insurance industry in general, but this is must-have coverage. Call your insurance agent today and tell him or her you want to add this coverage, preferably in a minimum amount of $100,000/$300,000 (uninsured and underinsured coverage is usually sold together by most insurers but make sure that you are getting both).

Life Insurance
If you have a spouse, children or others who depend upon you, life insurance is a must. Term life insurance is the best choice, and you should generally avoid whole, universal or other types of policies that have a cash value component. Cash value plans are complex, expensive, and are generally poor investments.

You should have term life insurance of at least 15 times your annual salary; more if you can afford it. For people under the age of 50, particularly those who do not use tobacco, it is very inexpensive. Buy it from a reputable company and have the premium automatically deducted from your bank account so you never forget to pay it. We also recommend having your family covered. If your family depends on your spouse’s income, his or her coverage should also be at least 15 times his or her annual salary. The kids can have much less coverage – about $50,000.

Many people do not recommend life insurance for kids because no one depends on their income and, thankfully, it is unlikely your child will die. I recommend it because I have seen the effect on families who have lost a child due to an illness or accident, particularly if the loss is sudden. The parents go into a deep depression and can’t work or adequately care for their other kids. Marital problems, including divorce, often ensue, particularly if one of the parents is in any way responsible for the child’s death. A small life insurance policy allows the family time to heal and address its problems without having to worry about work and financial obligations.

The proceeds of life insurance are paid to the named beneficiary, and do not go through the estate of the deceased person (unless the estate is the beneficiary). This keeps the money from creditors and allows much faster access to it for the beneficiaries. Life insurance proceeds are also generally not taxable. Call an insurance agent today and buy term life insurance if you do not have it. If you do have it, increase the amount if necessary.

Credit Life Insurance
When you borrow money from a bank, finance company, credit card company, etc., the lender will almost certainly try to sell you a credit life and/or disability policy. In fact, during the past two decades or so, the banking industry has successfully lobbied Congress and most state legislatures to allow them to sell these policies and call them “debt protection plans” or something similar. A debt protection plan is the same thing as credit life insurance, but by passing their own legislation, the banks have successfully avoided state insurance laws. This is yet another example of how the lobbyists for the rich have successfully gotten laws enacted that are detrimental to everyone else.

Credit life policies, or debt protection plans, pay your loan payments if you become disabled or cancel your debt if you die. This sounds good except that these policies are very expensive and contain many exclusions (excuses for the bank or insurance company not to pay). Most people could buy a separate term life and disability policy that is much less expensive and contains fewer exclusions.

And of course, you should ask yourself whether you need the coverage at all. A lender cannot force you to buy this insurance, and it cannot deny you a loan if you decline. Also, contrary to popular belief, your heirs or other relatives are not liable for your debts when you die unless they have co-signed the loan (your estate may be liable but most people do not have much value in non-exempt assets in their estates). In general, these products protect the lender – not you.

Life insurance on a mortgage is tempting, particularly the kind that pays off the mortgage if only one spouse dies – leaving the other spouse with the house free and clear of the mortgage. But again, this coverage is expensive and contains many exclusions. Consider it very carefully.

Extended Warranties
You should generally never buy these products. True, you may have terrible luck and your expensive electronic device dies the day after the manufacturer’s warranty expires. But the odds of this happening do not justify the high expense of these warranties, and there are many exclusions and high deductibles in most policies that will result in less-than-expected indemnification. The manufacturer of a product is most familiar with its durability.

The manufacturer’s warranty is usually much shorter than the period the manufacturer believes the product will last to give a lot of “cushion.” Sellers of extended warranties know this, and they rarely pay a claim in the amount the buyer anticipated. Be satisfied with the manufacturer’s warranty and take care of the product you buy.

Cell Phone Insurance
If you have bought insurance on your cell phone, take a look at the language of the policy to review the broad exclusions and high deductible. A waste of money. Take care of your cell phone.

Gap Insurance
Gap Insurance covers the difference between the “actual cash value” of your car and the amount of the lien or loan on that car. Most insurance only pays the actual cash value in the event of a total loss, and this may not be enough to pay off the loan (“actual cash value” takes into account depreciation). Cars depreciate rapidly, and many lenders do not require down payments and even allow car buyers to roll over negative equity in trades. Thus, GAP insurance could be very important.

But take a hard look at the cost and the policy language before you buy, and consider the alternatives. Some automobile insurance companies will sell you a “replacement” policy rather than an “actual cash value” policy, and there is at least one national insurance company that advertises that it will replace your car with a car that is one model year newer. This is usually a better alternative to expensive GAP policies. Doing nothing may be a better alternative since the chances of being in an accident that causes a total loss of your vehicle are slim for most people.

The lenders are the sellers of this insurance. It is a way to protect themselves and make money. Be careful.

Pre-Paid Maintenance for Automobiles
If you lease a new automobile, and sometimes if you buy, the dealer (Finance and Insurance Department) will offer you a pre-paid maintenance plan. On the surface, it sounds good because the cost is less than the regular cost of the services offered. In reality, it always will cost more because few people get all recommended service, and even fewer always go back to their dealer for service. Also, when you do go back for your pre-paid service, the dealer will always find some other repair that you “need” and push hard to sell it to you. These plans are a way to get you back in the door. Bad idea.

Rapid Tax Refunds, Payday Loans, Check Cashing, Etc.
The interest rates on these products are often over 100%. If you file your taxes electronically, you will usually have your refund in two weeks. And few bills are so pressing that you need to get on the merry-go-round of getting advances on your paycheck and paying the associated fees and interest. These types of businesses should be illegal (and are in many states).

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