Insurance 
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4 Types of Life Insurance: Term, Whole, Universal, Variable

Who wouldn’t want to insure their life? It’s quite possibly one of the most valuable things I own and I would certainly like to be protected in the event I lose or misplace it right? Well, if you’ve gotten over the morbidity of the idea of buying life insurance and “shopped” around, you probably did exactly what I did – gotten thoroughly confused. What the heck is term life insurance and whole life insurance? What’s the difference between variable and universal? The worst part is that none of them are named in a way that makes it clear what exactly you’re getting. So, since one of my goals for 2008 was to figure out all these insurances and makes sure I’m covered, I’m forced to research it and try to decipher this complicated and likely very lucrative business.

Term Life Insurance

Term life insurance is claimed to be the easiest of the life insurances to understand and is named “term” because you are protected for a certain period of time – a term. The idea behind this insurance is that you can cover a small period of time with a lot of coverage and little cost. The idea is that you could use this insurance to protect yourself if you take on a large debt, such as a mortgage. For example, let’s say you just signed up for a 30 year mortgage and you are the sole source of income for your family. You could use term life insurance to cover the balance of the loan for a set period of time so that your family wouldn’t be in trouble if something were to happen to you.

Whole Life Insurance

Whole life insurance means coverage for your entire life, as long as you continue to pay the premiums on time. Sometimes you can convert a term life insurance policy into a whole life insurance policy, so that’s always an option if you want to. As for the premiums, this is where the companies try to get you in early so that the payments stay pretty level as you grow older. Since you are less riskier when you’re young, the earlier payments essentially offset your later payments as you become older and riskier. The other main difference is that there is a guaranteed cash value for the policy that you can actually borrow from. As you pay premiums, a portion of that goes into the guaranteed cash value bucket that is available to you if you decide to surrender the policy later. How much and how quickly that accrues depends on the type of policy you have and other factors.

Universal Life Insurance

Another name for this is Flexible Premium Adjustable Life Insurance (universal life just sounds better). This is a flexible version of whole life insurance where you get the savings element of whole life. The insurance company will invest your savings, offer a guaranteed minimum, and you get those funds tax deferred. What’s flexible is that there are two death benefit options. The first is that they pay out the policy’s cash value. The second option is that they pay out the face amount of the contract plus any cash value you accumulated. The first option is cheaper because the company pays out less insurance and the second is more expensive because they pay out more. I’ll be entirely honest, I don’t fully understand this and this article is designed as a brief overview.

Variable Life Insurance

This is also called Variable Appreciable Life Insurance and it is basically part life insurance and part investment account. The variable refers to the idea that you can specify a percentage of your premium to go towards a separate investment account that can appreciate (or depreciate). While some places will claim there’s a minimum, since it is partly an investment, it is governed by the SEC and you get a prospectus with the policy. What’s nice about it is that you can get tax-free appreciation, until you end the policy, and the appreciation can go towards your premiums. The risk is that there is always a risk when it comes to investing (as you probably are feeling if you’re currently in the market, this month has been brutal).

There are a ton more types of insurances out there but these are the big four categories and I believe I’ve gotten their basics correct. If any of you have any expertise in this, please add clarification or corrections in the comments.


 Personal Finance 
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PFBlogger Spotlight: Jeremy at GenXFinance

I’ve been a fan of Jeremy’s blog at GenXFinance for quite some time because I’m Generation X (or Y or whatever the heck I am), the exact target audience he’s trying to reach (and that he is). He’s an INTJ, loves long walks on the beach (*I made this up), and actually answers quite a bit of questions about himself on his About page (some of which are repeated below). With nearly 1700 1900 RSS subscribers (subscribe!) and an average of a thousand unique visitors a day, he can be considered among the more popular bloggers out there. He also has more experience in the professional personal finance realm than most bloggers, writes for About.com’s Financial Planning section and was really interested to talk to for this interview. We’ve swapped several emails back and forth on this and other topics and in general he responds pretty quickly and with a lot of information. If you ever have a question for the guy, don’t hesitate to ask him.

jim: Hi Jeremy, could you tell us a little about yourself?
Jeremy: As you probably know, my name is Jeremy. I’ve always been a bit of a technology junkie and I actually went to college expecting to become a programmer. In high school I taught myself some Pascal and C/C++ while dabbling in Assembly. Well, it only took one semester to realize I hated all of the advanced math courses required, so I did a complete 180 and went into landscape architecture. I always had a bit of an artistic side, and I thought I would enjoy designing golf courses, so I figured why not. I did get my degree in that, but I failed to realize how few jobs there were out there in the field, and the ones that were out there rarely paid more than $30,000 per year. So I did what any 22 year old would do, and I decided to completely change career paths again and began to pursue an MBA and finance everything with student loans. Long story short, I am still a few credits short of earning that degree, but stopped going to school because I had found my love of finance early on in that curriculum, and after a few job offers I haven’t looked back since.
I was a financial planner or advisor or whatever you want to call it for a few years, but the commission-only sales wasn’t for me. I had a very hard time being able to bring home a paycheck while trying to do what was best for the clients (i.e. not sticking them into 5% front-load funds, trying to push life insurance, etc.) What I wanted to do was to simply help people. Well, unfortunately you can’t make much of a living as a commissioned financial planner by educating lower to middle-income families who are just getting started. Thankfully I was able to get out of the sales aspect of financial planning and found a position with a company that strictly deals with retirement plans and pays salary. Now, I have no incentive to try and sell anyone anything, and I strictly provide an educational and service role where I can work with people to help them make better financial decisions. This type of role reflects the very thing I’m trying to accomplish with my blog and the financial planning site at About.com.


(Click to continue reading…)


 Personal Finance 
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What Assets Aren’t Covered By A Will

If you thought, as I did, that your will would cover the transfer of all your assets, you’d probably be surprised to find out that you’re not entirely correct. While you can spell out who you want to get what, there are many cases in which other contracts or agreements trump the will. I erroneously thought that what you said in your will goes, but in many cases, you don’t actually have any say in how possessions are transferred. Let me use a prime example and you’ll probably understand what I mean.

Your Home

Let’s say you pass away and decide to will your house to your son John Doe, to make up for a lifetime of ridicule because of your poor naming skills. Unfortunately, despite what your will might say, if you co-owned your house in a “joint tenancy with rights of survivorship,” then the other joint owner gets the home. The existing contract you have with the joint owner supersedes your will. This is typically what happens if you own a house with your spouse and in this case the surviving partner gets the home. Now, if you owned the home as “tenants in common,” then you can determine who gets your piece of the house. Again, this makes sense because your will can’t supersede an existing contract, it just wouldn’t be fair. See how simple it is? Here’s another example.

Investment and banking accounts

In most states, your investment and banking accounts (including retirement accounts) go straight to your designated beneficiary, underscoring the importance of specifying one on record with the financial institution. If you were to specify a different person in your will, the laws of the state will specify which takes precedence.

Ultimately, you can specify anything you want but if there’s an existing contract or an easier mechanism for specifying beneficiaries, then you should defer to them instead. While specifying it in the will doesn’t hurt, just know that in some cases the will won’t be able to enforce your desires.


 Personal Finance 
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Personal Finance Users Guide

In my listing of goals for 2008, I wrote that I’d develop a Financial Users Manual based on an idea by Five Cent Nickel. Well, first things first, I’m renaming it to “Personal Finance Users Guide,” which I think is a more descriptive name for it. Here’s what I intend to put into it.

Chapter 1: Bank Accounts

Every bank in which we hold an account along with the login username, account number, and bank contact information. We won’t put the password in the document since most online places have a Forgot Password? feature we can leverage. There will also be a note as to the general purpose of the account so we can quickly remember why we have it in the first place. Notes could be something like “emergency funds savings” or “balance transfer arbitrage funds,” so nothing terribly fancy, just something that will refresh our brains. Also, if there are any atypical things, such as safe deposit boxes (we don’t have any but it’s worth noting that we don’t have any), it’s good to note those as well.

Chapter 2: Credit Cards

It’s crucial to have a good list of all of your credit cards, the last 4 digits (you won’t need more than that written down), card contact information, your online account access login username, and a little note about the general purpose of the card. If you’re adventurous, you could expand the information to include the benefits of the card (% cashback, etc.). This would also be an excellent time for you to do a credit card audit, closing or consolidating credit card accounts you no longer use (thought closing an account may affect your credit score). Having a list like this is valuable not only from a planning perspective but in the event you lose your card, you have a good list of what you had along with the card contact information so you can act quickly to report the cards as lost or stolen.

Chapter 3: Brokerage & Retirement Accounts

Again, every brokerage and retirement account along with the login username and account number. It’s important to get this on paper because it’s easy to forget these accounts because they’re very much on auto-pilot. For example, I have two Sharebuilder accounts when I took advantage of their free money promotional offers – I didn’t remember that until I was writing this article, so imagine how hard that would be in 40 years! Again, each one of these will have a note indicating the general purpose or origin.

Chapter 4: Insurances

The basics are homeowner’s, auto, medical, vision, and dental insurances. Beyond that you start talking the various flavors of life insurance, disability, etc. You’ll want to list all of them along with any general bits of information you might find useful in a crunch such as phone numbers, account/plan ID numbers, etc. The key here is to give a snapshot without having to do the work of digging it all up so putting that together is important. Also, if you do anything like a home inventory for your homeowners insurance (or have photos of your car, etc.), you’ll want to reference those documents and their location so you can locate them in a bind.

Chapter 5: Debts

Who we owe, roughly how much we owe, the monthly payments, the general duration of the loan, the contact information, the login username, and a general note as to the purpose of the loan. For us this will be pretty easy because we only have my student loans and the mortgage and both are fixed and easy to understand. By putting it down on paper, it also forces us to understand the importance of this debt and how it affects our overall financial picture. It also allows us to contact them easily and quickly should the need every arise. I think that if you start putting credit card debts and ones that vary in terms of monthly payments, duration, etc. it will start to get trickier but having general figures here to give you the overall picture is still valuable.

I have no idea how I completely forgot this huge category, much thanks to Fred at One Project Closer for reminding me (see! the power of blogging!).

Electronic Transfer Map

Now that we have all the accounts in one place, another crucial piece of the puzzle is knowing, at a glance, which accounts are connected to which accounts via electronic transfer. For example, my Emigrant Direct account is connected to my main local checking/savings account pair and my former employer’s credit union. My E*Trade account is only connected to my local checking/savings account pair. If I want to transfer funds from Emigrant to E*Trade, the only way I can do that now is by going through my local checking/savings account. Why not link everything together? Sometimes you simply haven’t gotten around to it and doing this sort of audit will inform you of that. Sometimes you don’t feel comfortable having everything link to everything, a little obfuscation never hurt anyone! Finally, sometimes accounts won’t let you link to other accounts without a voided check. In those cases, you have no choice but to go the roundabout route.

Next Best Alternatives

In the case of insurances, it’s always good to list not only the active #1 but the details of Alternative #1 or Alternative #2 if you have the information. For example, when I played around with finding out how my age affected my car insurance premiums, I had some good information about alternative insurances. All I would do is list Alternative #1 (and maybe even an Alternative #2) underneath my current active insurance along with the date of the quote. Perhaps in a year or two it’s worth revisiting, but at least I have good information on what was competitive the last time around.

Annual Reviews

A guide is only valuable if it’s current and so, at a minimum, annual reviews are a must. I think that I will update it as things change but annually the whole guide has to be looked at to ensure it’s current. This is also a great time to request a federally mandated free credit report and see if your guide matches up with the records the credit bureaus keep. If they don’t, you are now well enough informed to notify them of the corrections they need to make.

I’ll be doing this comprehensive user’s guide over the next few days (or weeks) and afterwards I will have a template I will share with you all and ask for your feedback.

Does anyone see a “section” that I should include but missed?


 The Home 
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Considering Replacing A Hot Water Heater

A little while ago I talked about how my hot water heater was old and I didn’t know when the bad boy was going to go out. Perhaps it would go this year, perhaps next year, or perhaps after I’ve sold the home. That’s when someone suggested that I preempt the water heater and replace it early so I wouldn’t have to deal with the headaches. While I’m not ready to replace it just yet, I did begin researching my options so in case it does go, say tomorrow, I’m prepared for it.

Cost?

I called up BGE and they gave me a quote of $755 for installation of a Rheem 50-gallon electric water heater with a 12 year warranty. It’s only $655 for the same heater and a 8 year warranty, $605 for a 6 year warranty. Comparatively, the water heater itself sells retail for $249.99 for the 6 year warranty version ($349.99 for the 9 year warranty). $355 for installation on the six year warranty version? Seems a little pricey.

Why Should I Replace Early?

To answer those who would say replacing a hot water heater early would be somewhat of a waste, I think that in this case it’s not that bad of a decision because of the possible consequences. At best, we are without hot water for a couple days until someone can come out to repair or replace it. At worst, one of the metal fittings (or something else) bursts, flooding my basement with water. The worst is pretty bad because we just installed carpeting outside the undeveloped room that houses the heater, preempting a burst like that would be good if I could see the future.

Another case for replacing is that newer water heater models are more energy efficient than older models. I read off the Energy Star label that the unit takes about 6450 kWh of power a year, which costs $129 at 2 cents a kWh (I had to throw that in there because that’s what the label said!). We pay approximately 10 cents per kWh so our annual cost to keep that baby running is $645. The estimated annual operating cost of the 50 gallon Rheem electric water heater, according to the Rheem brochure, is a little lower at $402. I could drill down and get an estimated kWh figure (maybe I was too lazy) but based on the brochure and the EnergyStar label on my water heater, it appears the difference is approximately $243. That means that the replacement would pay for itself in under three years of use.

Tankless Water Heaters

A tankless water heater would’ve been a great option if it were available for us via BG&E (they only do gas tankless). Tankless water heaters are generally more expensive fixed/up-front but have lower operating costs since they have to keep a huge container of water hot for instant use. I didn’t do much research into this area, and I may in the future, because BG&E didn’t offer it. Electric tankless water heaters do exist though, so if you have experience with them or have done the analysis yourself, please do share because I’d be very interested to see it.


 Credit 
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comments

Top 15 Reward Credit Cards

Liz Pulliam Weston of MSN Money asked five credit card industry experts (basically representatives of companies that run credit card websites) and a frequent flier guru for their favorite cards in one of three categories: travel programs, cash-back programs, and savings programs. Travel programs are those cards that offer miles and upgrades and perfect for those with a lot of travel each year. The cash-back programs are, as you would expect, those cards that offer the best cash-back rebate. Finally, the savings programs are those cards that give you savings towards something, instead of straight cash, such as for a house, a car, or even directly into a brokerage account.

One trend you’ll see is that all of the winning cards are American Express! Is this some kind of conspiracy? Hardly. American Express is less widely accepted because they have higher merchant fees. The higher fees means that they’re able to offer higher reward earn rates because their profits are better. So, in each category you’ll see an American Express card winning out.

(Click to continue reading…)


 Government 
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Wholesale Inflation vs. Consumer Inflation

You may have seen today’s article on how wholesale inflation increased 6.3% in 2008, the largest in 28 years, and remarked how your salary hadn’t increased by that much. Well, part of that reason is because wages aren’t so closely linked to inflation (they’re linked to how much your employer thinks you should be paid!) and part of that is because wholesale inflation is a little different from consumer inflation. In fact, the concept of inflation is so nebulous that there are about a million (okay, maybe only a dozen) different ways to measure and analyze it. You really need to be careful what you’re looking at before jumping to conclusions. The inflation that most people refer to at the consumer side is consumer inflation and that’s measured by the Consumer Price Index (CPI). Wholesale inflation is measured by the Producer Price Index (PPI). Wholesale inflation is most important to investors, than consumers, because it gives you an idea of how prices have increased for producers of products, i.e. companies.

Why do the two values differ? The PPI includes intermediate goods and fuel/energy prices, two pieces that aren’t included in the core CPI. (fuel is included in the total CPI) So, when the statement is made that wholesale inflation increased 6.3%, you can’t accurately compare that to the CPI because it includes one measure that is entirely ignored by the CPI and one that isn’t included in the core.

The CPI is a measure of averages prices for consumer goods and services purchased by the typical household. The CPI is used to index many things that you deal with from wages to retirement plans, it’s a measure of how much you can expect to spend compared to other years. In the US, the CPI is broken up into several measures, as if it weren’t confusing enough. There is a CPI-W for urban consumers and clerical workers plus a C-CPI-U (chained CPI) for all urban consumers. The interesting feature of the CPI calculation, regardless of the type, is that you have the total CPI and the core CPI. The core CPI does not include energy and food. As you probably recognize, that energy piece is what has been fluctuating the most lately (if rocketing skyward counts as fluctuating)

Why isn’t food and fuel counted in core CPI? It’s because of that volatility, it’s hard to get a good year to year comparison if you include food and fuel, which makes sense to me. The increases in fuel and food are in part a component of the other measures because they are a subcomponent of life in general. For example, transportation is a component of core CPI and it clearly will use fuel. Medical care is a component of CPI and clearly those dispensing medical care (and the massive health care industry) will require food and fuel to operate.

I’m by no means an economics expert but I think it’s important to note that wholesale inflation is not the same as consumer inflation, though similar, and that to make an accurate apples to apples comparison you need be sure you’re looking at the right figures.


 Retirement 
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Jump-Start Your Retirement Plan Days: Today!

Today is one of the two “Jump-Start Your Retirement Plan Days” that Kiplinger’s Personal Finance and the National Association of Personal Finance Advisors (NAPFA) has scheduled (the second is January 25th). So today and the 25th, you can get retirement planning advice from a fee-only advisor from the NAPFA absolutely free. It’s a great opportunity to ask a fee-only advisor some of your burning retirement questions and pay absolutely nothing for it (it’s like the Free Money Advice from a CFP that I suggested earlier, except this time there’s really no implied strings attached!).

Here’s a blurb from their press release (emphasis mine):

For the seventh time, NAPFA has joined with Kiplinger’s Personal Finance Magazine to offer “Kiplinger’s Jump-Start Your Retirement Plan Days” from 9:00 a.m. to 6:00 p.m. Eastern on Tuesday, January 15th, and Friday, January 28th. NAPFA members from across the U.S. will be standing by to answer your retirement questions. In 2006, more than 12,000 consumers received help during last year’s Jump-Start Days.


Just dial 1-888-919-2345 on these dates and a NAPFA member will respond to your questions. Or if you prefer, you may go to www.kiplinger.com/yourretirement/jumpstart/ to submit your questions.


There is no charge for this service—not even the phone call. To make the most of your financial checkup, please gather together any relevant documents that you need—such as mutual fund statements or your 401(k) choices before the call. If your questions are too complex to be answered on the spot, you may be directed to the NAPFA “Find an Advisor” search to locate a NAPFA-Registered Financial Advisor in your area.


Our retirement hotline is a public service that is offered to all, not just Kiplinger’s subscribers. “Volunteer advisers from across the country are prepared to help as many people as possible,” says NAPFA CEO Ellen Turf. “It is incredibly satisfying for them to have such a positive impact on so many lives.”

I personally have never used it but have heard plenty of good things about it. If you use them, please share your experiences below.


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