Much of the discussion around The Patient Protection and Affordable Care Act (PPACA) aka Affordable Care Act aka Obamacare has been about politics. But it’s the law, it’s constitutional, and a lot of things are happening soon. For most full-time workers that wish to keep their employer-provided health insurance, little will change. However, things will be very different for the self-employed, unemployed, uninsured, and those seeking semi-retirement or retirement before age 65 and Medicare. You can use it even if you already have employer-provided insurance, although you may become ineligible for certain tax credits. There’s way too much information to cover everything, but here’s my summary of the developments.
Archive for the 'Insurance' Category
It’s already March, and I’ve yet to make a New Year’s resolution. Then along comes this NY Times article about a mother of two who’s young, healthy husband was killed while simply riding his bike:
In the many months of suffering after Mr. Hernando’s death in July 2009, she beat herself up while spending dozens of hours excavating their financial life and slowly reassembling it. But then, she resolved to keep anyone she knew from ever again being in the same situation. The result is a Web site named for the scolding, profane exhortation that her inner voice shouted during those dark days in the intensive care unit. She might have called it Getyouracttogether.org, but she changed just one word.
The site offers some basic financial advice, gives away free templates for a master checklist and provides starter forms to draft a will, living will and power of attorney. There’s also a guide to starting a list of all of the accounts in your life that someone might need to access and shut down in your absence.
Let’s be direct; The site is GetYourShitTogether.org. The site is okay, but I felt the story itself was more powerful.
After his death, this much was clear: The family with the six-figure income and the four-bedroom house that they had bought in the Mount Baker neighborhood one year before had a will with no signature, little emergency savings and an unknown number of accounts with passwords that had been in Mr. Hernando’s head.
I haven’t blogged about this as it brings up bad memories, but a few years ago a family situation resulted in us each hurriedly bought $1,000,000 of term life insurance. We didn’t comparison shop, I just walked into my State Farm agent’s office and asked to get the insurance as soon as possible. State Farm actually has some of the highest financial strength ratings available (AA S&P, A++ AM Best). The final rates we got were probably somewhat higher than I could have gotten with slightly lower-rated company, but I don’t regret the decision.
Having life insurance along with hefty savings gave me adequate peace of mind for a while, but now with a child I worry about the future differently. We have a lot left to do. We contacted a lawyer friend who specializes in estate planning and trusts to help us with our first will. We talked to family members about child custody if something should happen to both of us. We’re looking into long-term disability insurance beyond what is provided at work. I already track most of our passwords using software (1Password), but after reading this article I’ve been filling in the gaps in the database and quizzing my wife every day to make sure she knows the master password.
We are one of those households where one person takes on all the financial duties. I pay the bills, track our monthly budget, and manage our retirement investments. I need to teach her the essentials and lay out a simple plan for managing things if I’m not around one day. I don’t worry about the spending as she is a frugal and smart person, but I have nightmares of some high-cost, low-quality financial salesperson mismanaging her money. Lots of smart people end up trusting the wrong person. I thank Mrs. Reynolds for helping me make my 2013 resolution.
Annual reminder for 2013. The most well known part of the Fair and Accurate Credit Transactions Act (FACT Act) is that you can get a free copy of your credit reports from all three major credit bureaus once every 12 months. However, there are also several other consumer databases that you should check as well which are also available absolutely free once every 12 months, and they can also have a significant financial impact. If you got one last year, you can now get another one and reset the 12 month clock.
ChexSystems Banking History
ChexSystems is a consumer information database used by an estimated 80-90% of all banks to help determine the risk of opening new accounts. Think of it as the bank’s version of a credit bureau. If a person commits check fraud or overdraws their account, it will be listed here. In addition, the simple act of opening or closing a bank account may be recorded in their database. Getting a negative ChexSystems record can leave you blacklisted from opening bank accounts at most major banks.
Get your free ChexSystems consumer report here.
Medical History Used For Insurance Underwriting
MIB (previously known as Medical Information Bureau) is run by 470 insurance companies and has a “primary mission of detecting and deterring fraud that may occur in the course of obtaining life, health, disability income, critical illness, and long-term care insurance.” They record information of “underwriting significance” for those who have applied for life and health insurance with MIB member companies. If you have not applied for individually underwritten life, health, or disability income insurance during the preceding seven year period, then you probably don’t have a record.
Get your free MIB consumer file here.
Insurance Claims History
CLUE stands for Comprehensive Loss Underwriting Exchange, and they collect information that is used to calculate your potential risk of loss and thus your insurance premiums. You can also find out about previous claims on the house you are currently renting or recently bought, even if they weren’t made by you.
The C.L.U.E. ®Personal Property report provides a seven year history of losses associated with an individual and his/her personal property. The following data will be identified for each loss: date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.
The C.L.U.E. ®Auto report provides a seven year history of automobile insurance losses associated with an individual. The following data will be identified for each loss: date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.
In addition, you should also request your free A-PLUS report (Automated Property Loss Underwriting System), which is a smaller database that also contains information about property loss claims.
When a potential employer runs a background check through LexisNexis (formerly known as ChoicePoint), this is the information they see. It doesn’t seem to claim be comprehensive, and they may have only limited or even no data about you, but I would still check for potentially negative data.
LexisNexis Screening Solutions Inc. provides Employment History Reports to employers only with a job applicant’s or employee’s consent. Employers utilize a variety of companies to obtain employment history information. Our files would only contain information on you if LexisNexis provided your Employment History Report to an employer.
This report can be important if you are a renter and someone runs a background check on you at LexisNexis (ChoicePoint).
LexisNexis Screening Solutions provides Resident History Reports to housing providers that have the subject’s consent. Housing Providers utilize a variety of companies to obtain tenant history information. Our files would only contain information on you if LexisNexis provided your Resident History Report to a housing provider.
LexisNexis Full Disclosure File
You may notice that LexisNexis is involved in many different areas above. As one of the largest personal information databases in the US and a for-profit company (part of Reed Elsevier), they should just rename themselves Big Brother, Inc. You can request a “Full File Disclosure” that supposedly includes all of the information that they have on you – including public records, real estate transaction and ownership data, lien, judgment, and bankruptcy records, professional license information, and historical addresses on file.
Request your LexisNexis Full File Disclosure here. You’ll need to fill out a PDF form and snail mail it in.
This is part of my annual checklist at the beginning of each new year.
Like many of you, we have a Flexible Spending Account (FSA) that allows us to pay qualified healthcare expenses using tax-free money. (Did you know that FSA money is also exempt from payroll taxes in addition to income taxes?) I still think the idea of guessing your future healthcare expenses in a use-it-or-lose-it system is illogical at best, but it is what it is. (In 2012, there was talk from the IRS that this policy might be changed.) We recently even got one of those FSA debit cards so at least we don’t have to deal with faxing in receipts when purchasing from approved merchants.
If you didn’t exhaust your funds with insurance copays or deductibles, here’s a quick guide to using up all that cash. First, I should say that some plans allow a grace period until March 15th of the following year as opposed to a December 31st deadline to use your 2012 funds, so confirm with your FSA administrator.
The go-to product used to be buying over-the-counter drugs like cough medicine or painkillers. Effective January 1, 2011, the cost of over-the-counter medications became no longer eligible unless the medication was prescribed by a doctor. Keep this in mind and ask for a prescription for any OTC drugs you buy on a regular basis. Don’t forget, Target and Walmart now offer 30-day supplies for $4 and 90-day supplies for $10 on many generic drugs that are also packaged under over-the-counter labels.
FSA Items Still Available Over-The-Counter Without A Prescription
- Eye care (contact lenses, solution, drops)
- First aid supplies (bandages, gauze, tape) for emergency kits
- Family planning products (birth control, pregnancy tests)
- Home testing aids (blood pressure, diabetes, thermometers)
As a reference, I usually check the well-organized lists from health insurers like Aetna or third-party FSA administrators like Conexis. In addition, just about every online drugstore (Drugstore.com, CVS, Walgreens) now has a special FSA-eligible section, but some still include items which now require a prescription under the the new regulations (look for FSA vs. FSARx).
Health insurance can be a complicated subject. This article is about the specific situation where you recently ended a job and haven’t yet started either a new job with benefits or alternative health coverage. Should you take the COBRA coverage, or not?
COBRA Quick Summary
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1986, which requires the option to extend health insurance coverage for up to 18 months (more in some cases) after a “qualifying event” under a “qualifying employer”. In general, a qualifying employer is one with 20+ full-time employees. A common qualifying event is when you lose your job due to either voluntary or involuntary reasons (things like gross misconduct are excluded). So it applies both if you’re laid off and if you quit on your own. You are required by law to receive a notice about your COBRA options within 14 days after the plan administrator receives notice of a qualifying event.
However, the employee must pay the paying the full cost of the premium (both employer and employee portions), plus up to a 2% administrative charge. This means that it can be expensive. I believe that the last time I quit, my single-person coverage cost over $800 a month. The bill for a family with kids could easily be over $2,000 month.
Continuous Coverage and Retroactive Clause
Due to this high cost, you may consider skipping it and taking your chances. However, if something happens and you have a gap in coverage longer than 63 days, then your next health insurance no longer has to cover any pre-existing conditions. This can be a really big deal, and may scare you into signing up for expensive COBRA benefits right away. But there’s a final wrinkle.
You have 60 days after you lose your benefits to elect to pay for COBRA coverage. However, even if you enroll on Day 60, your coverage is retroactive to Day 1. Of course, you’ll have to pay the retroactive premiums for that period. Thus, you could technically waive your COBRA coverage initially, and then wait to see if you incur any medical bills. If you manage to get on a new health plan on Day 30 or Day 55 with no medical bills, then you’ll still be guaranteed full coverage going forward and you won’t have paid anything during your gap. If you can’t find new coverage within 63 days or rack up medical bills higher than the premiums, then you can rescind your waiver and retroactively activate your COBRA benefits. Effectively, you get a do-over.
Under current law, it is very important to maintain “continuous coverage” in order to guarantee that your future insurance can’t exclude pre-existing conditions. Otherwise, if for example you hurt your back during a gap, you may never be covered by insurance for back problems again. However, if you expect your gap in coverage to be under 60 days, then you can use the retroactive clause under COBRA to try and avoid paying for COBRA during that time. If you are going to use this do-over, be very careful with your dates. You can wait 60 days to elect for coverage, and then you actually have another 45 days to make the payment to cover the period from the date of election to the date of lost coverage. If you send in a premium payment, make sure it is for the correct amount and use certified mail and return receipt to document everything. Legally, payment is considered to be made on the date it is sent to the plan. Don’t cut things too close.
I have read articles that recommend using these extra 45 days on top of the initial 60 days to allow you to wait 105 days before having to commit. Their reasoning is that most insurance companies will not pursue you (sue you, ding your credit, etc.) for the insurance premium if you simply never send it in and tell them you no longer want coverage. I don’t agree with this logic and it seems rather risky, but I think it is okay to use the 45 day period if you are tight on funds and need more time to pay the premium.
Life insurance tends to be one of those things that you know may be good for you, but is so easy to put off. For one, it makes you confront something uncomfortable: possibly untimely death. On top of that, some insurance products are so complicated that even the people selling them often don’t fully understand. Who designs these things anyway?
A life actuary works for an insurance company and analyzes the many factors involved: the likelihood of death in various circumstances, the investment returns generated by premiums charged (minus expected payouts), and pricing decisions that balance profit margin with market competitiveness. They have strong mathematical and analytical backgrounds and passing all the exams for full credentialing usually takes several years. In other words, these people make sure the insurance company makes money in the end no matter what happens.
(Fun fact: Being an actuary consistently ranks as one of the best jobs out there due to the combination of high pay, solid demand, and low stress.)
So I was happy to see a post on an investing blog I read called “What Insurance do Actuaries Buy?“. What beer do brewmasters drink? What toothbrush do dentists use? The author David Merkel is a CFA and also used to be a life actuary. Excerpts from his response below:
Actuaries avoid complexity in insurance products. Why? In general, complex products hide high profit margins. Products that are easy to analyze, like term life insurance, are competitive, and profit margins are low.
Also, they tend to use insurance as catastrophe cover, because they know that having insurance companies pay on a lot of small claims is expensive on average.
There is an exception to all of this. If you are so rich as to need to stiff the taxman, buying cash value insurance policies can make a lot of sense. In that case, wealthy actuaries with clever tax advisors buy cash value life insurance. Death benefits do not pass through the estate.
This aligns with most of the unbiased advice I’ve read on life insurance. If a death in your household would be a financial catastrophe, then you need life insurance. Don’t waste money insuring on your cell phone or laptop that will be outdated next month. Use that money to secure your family.
Term life insurance is the easiest to compare across providers, which results in the slimmest profit margins and affordable costs. Term is best for the vast majority of people. More complicated types of life insurance may have proper application in very limited situations for the very wealthy with estate planning needs. A good place to start is Term4Sale.com which doesn’t include every provider but does provide good info and the same prices that an insurance broker would charge you.
This post is participating in the Life Insurance Movement, organized by Jeff Rose of Good Financial Cents, a group writing project about life insurance.
Recent political debates have brought up comparisons between Social Security and Ponzi schemes. (Have you read the book about the real Ponzi?) Even though seemingly every single economist on Earth has weighed in, this discussion has been around for so long that the Social Security website already has an entire page dedicated to addressing it. To summarize, yes Social Security shares some traits with Ponzi schemes in that money from new participants goes to earlier participants. However, it relies on a rather straightforward transfer and does not depend on an exponential growth of new participants to be sustainable. It is, however, sensitive to demographics.
Social Security is a pay-as-you-go system. What I pay into Social Security today goes straight to a current retiree’s Social Security check. When I retire, my paycheck will be supported by a younger worker’s taxes. It is not an investment. It is not a savings account. The problem is, that the ratio of workers to retirees is getting rather low. In 1950, there were 7.3 working-age people for each person over 65; now, the ratio is 4.7 to 1, and it is scheduled to drop to 2.7 to 1 by 2035. [Source]
Since people are living longer as well, the reality is that for a 30-something like me, the math works out that there is little chance that we will get the same level of relative benefits that current retirees get. However, there will be no sudden Ponzi-like implosion. Now, the government could smooth this transition out even more if they do the hard thing and do some combination of higher taxes, extending retirement ages with higher life expectancy, or lowering benefits. But politicians are usually reactive as opposed to proactive, so don’t count on it. That’s too bad, because people are more dependent on Social Security than ever. 70% of all eligible folks can’t even wait until 65 to start taking benefits, many as early as 62, even though that means lower payments and likely a lower total benefit. This is why in general financial experts say you should wait as late as possible to get a higher payment for the rest of your life.
Of course, Medicare is even worse. Take this analysis via this WaPo article:
Consider an average-wage two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services – including prescriptions and hospital care – worth $355,000, or about three times what they put in. [...] The same hypothetical couple retiring in 2011 will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits.
Like many of you, I am a big fan of having a sizable cash reserves. Having at least six months of expenses provides financial stability, helps you avoid debt with high interest payments, and lowers stress levels. In addition, cash is an asset class where you can increase your return without having to take on additional risk (stay FDIC-insured or equivalent). Even though interest rates are low, consistently earning 1% more over time can be significant. I last shared my emergency fund breakdown in January, so here is a 2nd quarter update. The size of the circles are proportional to the balance I hold in each account.
Rewards Checking Accounts
Usually through smaller credit unions with limited membership areas, these checking accounts pay a higher interest rate if you jump through some hoops each month. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. More details here.
Many now seem to be struggling and lowering rates, but one nationally-open example is the Free Rewards Checking at DanversBank, which amazingly is still paying 3.01% APY on balances up to $25,000, provided you satisfy the following each month.
* perform at least 12 debit card transactions (excluding ATMs);
* receive their monthly statement electronically and log into Online Banking
* sign up for direct deposit or receive a recurring ACH transfer
Find a local rewards checking account by using the filters at the DepositAccounts database. I recently moved my money out of my local account, as they dropped their interest rate to 1%.
Long-Term CDs – Ally Bank
If you have a large cushion, it’s quite likely to just sit there for years or more. Therefore, I think it’s okay to put some of it in longer-term investments. With the Ally Bank certificates of deposit, you can still access your money as long as you pay a early withdrawal penalty of 60 days interest. That’s significantly less than at other banks. I have 5-year CDs paying 3% APY, but the current rate for new deposits is 1.54% APY for a 5-year CD (as of 4/17/13). I’ll show you below why this is both a competitive and flexible rate.
Let’s analyze a CD paying 2.40% APY with an early withdrawal penalty of the last 60 days of interest. (2.40% APY ~= 2.37% rate compounded daily.) Here’s how your actual annualized interest rate would fluctuate given your holding period.
After just 6 months, you’ll already be earning 1.59% even after the penalty. If you hold it a year and withdraw, you are already at 2% APY. Try to find any similar term CD that beats those rates. Basically after just 6 months I have nothing to lose and a lot to gain, so I keep a sizable chunk here.
U.S. Savings Bonds
For inflation-linked Series I Savings Bonds, the total rate earned consists of a fixed rate and a variable rate that adjusts with inflation every 6 months. The new inflation rate officially announced in May is 4.60%. If you bought a bond now, you’d get a 0% fixed rate and 4.60% inflation rate, you would have an opportunity to earn at least 2% over the next 11-14 months. Details here.
My patience with my older I-Bonds is paying off, as some of them have a higher fixed rate of about 1%. Currently, I am only earning 0.94% to 1.94% for six months, but soon I’ll be earning 4.6-5.6% for the next six months. There is an annual purchase limit of $5,000 in paper bonds and $5,000 in online bonds per Social Security Number. For a couple, that’s $20,000 per year.
Online Checking and Savings Accounts
Each day there are more online banks competing with online checking and savings accounts. Last time, I was putting the remainder of my funds at SmartyPig, an online piggy bank that with some tricks could be used an a savings account. They still offer a competitive 1.35% APY, but I discovered that they don’t let you withdraw money when there are “pending” transfers for a few business days, and if you have a regular transfer something always seems to be pending. They are still good for savings goals, but not as much if you want to make regular withdrawals.
Since I already have my CDs there, I’m trying out Ally Bank for my daily banking convenience and emergency fund needs. Their Interest Checking currently pays 0.40%-0.75% APY and their Online Savings is at 0.84% APY (as of 3/11/13). Most other online banks are clustered around 1% APY as well, and I am only going with Ally due to their checking features like no fees, fee rebates for an ATM, and free overdraft transfers from savings. This allows me to keep a minimal balance in checking and more in savings/CDs. Check out my Ally Bank Checking account review for an in-depth rundown.
Alternatively, SalemFiveDirect is was guaranteeing 1.25% APY until April 2012. Everbank has their Yield Pledge Money Market paying 1.26% APY for the first 3 months for new accounts. Alliant CU also offers a good checking account solution at 1.10% APY, though their ATM rebates are more limited.
In a NY Times Op-Ed piece entitled Money Won’t Buy You Health Insurance, Donna Dubinsky shares her troubles with getting individual health insurance coverage, even though she has many millions from co-founding Palm. Based on this article, here are some ways to improve your chances of getting coverage.
- Use an independent insurance broker. By going with an experienced broker that represents several companies instead of a sales agent employed by one single company, you have a better chance of finding a policy that best fits your needs.
- Apply simultaneously to many different companies. Insurers always ask “Have you ever been denied health insurance?”, and you don’t want to have to answer yes. By applying to many at the same time, you won’t have to. Besides, different insurers can also have very different underwriting criteria.
- Instead of applying as a family, apply to each company as individuals. One insurer might have a problem with one person in your family, and then reject everyone as a result. Dubinsky eventually found coverage for everyone in her family by going this route.
- Be smart when filling out your medical history. You don’t want to leave anything important out, because that can invalidate your coverage later on. The insurer will be requesting a copy of your medical records. However, on your end it’s best to provide only exactly what is required with short, direct answers.
- Find a way to join a group plan indirectly. The most obvious is trying to add yourself to a spouse’s group plan. Alternatively, look for potential professional groups and organizations to join in order to qualify for group health insurance plans. In some states, as long as you have a business with at least two total employees (including yourself), you qualify for a group health plan. Consider hiring an employee or even another family member part-time to qualify.
A good resource for learning about the specific health insurance rules for your state is StateHealthFacts.org. Look under “Health Insurance & Managed Care”. Finally, I absolutely agree with the final words of her article:
The new health care reform legislation is not perfect. Nothing that complex could be. But I have no doubt that the system is broken and reform is absolutely essential. If we are not going to have universal coverage but are going to rely on employer plans, then we must offer individuals, self-employed people and small businesses a place to purchase insurance at a reasonable price.
If members of Congress feel so strongly about undoing this important legislation, perhaps we should stop providing them with health insurance. Let’s credit their pay for the amount that has been paid by the taxpayers, and let them try to buy health insurance in the individual market. My bet is that they all would be denied. Health insurance reform might suddenly not seem to them like such a bad idea.
Below is a chart of the median duration of unemployment from July 1967 to December 2010, based on data supplied by the US Department of Labor. Things are bad out there, and remember, this is just the median!
According to this December 2010 report from the Bureau of Labor Statistics, out of the 9.4% unemployment rate, 44.3% of them are considered long-term unemployed (those jobless for 27 weeks or more). That means over 4% of the total US workforce – 6.4 million people – has been unemployed for over 6 months.
Which leads to the poll question of the week. How prepared are you for an extended period without a paycheck? In this case, by emergency fund I am talking about a cash (or similar) cushion that is accessible, not lines of credit.
It’s 2011, so why not a status check on your credit scores? In a previous post, I explained the relationships between credit reports vs. FICO credit scores vs. FAKO credit scores. Give it read if you haven’t already. You can obtain a free copy of your credit report from all three major credit bureaus once every 12 months from AnnualCreditReport.com, as mandated by the government.
As for credit scores, chances are you’ll have to pay up for a FICO Score. But even though I feel that such FAKO scores are only good as a credit score estimate, I’ll still take it if it’s free. Remember, there are three different credit reports out there for you, so there are also three FAKO credit scores you should track. It happens that there are websites that will either provide a free FAKO or a credit score range for all three credit bureaus with no credit card required. Pulling your own credit score doesn’t hurt your score either.
CreditKarma.com is an ad-supported site that offers you a free FAKO as often as you like, called a Transrisk score, based on your Transunion credit report. The score range is the same as FICO, from 300-850. Brave souls!
You don’t get your credit report details, but you do get a few tips on what recent changes to your credit report have impacted your score. CreditKarma recently added two new free scores as well – the VantageScore and Auto Insurance Risk Score, both based on your TransUnion data. VantageScore is basically a challenge to FICO and has a completely different scoring range system, and the other one is used by auto insurers to “assess your riskiness and to assist in pricing your premiums”.
The Equifax Credit Score Card comes directly from Equifax and provides a free credit score range of Low (280-559), Below Average (560-659), Average (660-724), Above Average (725-759), and High (760-850). It’s called the Equifax Risk Score. FICO has a range of 300-850, and this range is 280-850 so you don’t really have to do any scaling.
It doesn’t provide any specific data from your Equifax credit report, but it does include a short summary of any negative factors that you may have on your report.
Quizzle.com is a site owned by Quicken Loans that offers you a free FAKO score every six months, called a “CE Credit Score”, based on your Experian credit report. FICO has a range of 300-850, and this range is 350-850 so you don’t really have to do any scaling. They just seem to alter it just enough so FICO doesn’t sue them.
The site also provides access to the details of your Experian credit report, so this can be handy if you’ve already used up your freebie from government-mandated AnnualCreditReport.com.
One annoying part of the site is that they ask “required” questions about your home and mortgage that seem to imply that the answers are needed to access your credit score, but in fact are not. They just want the data to better target you for things like home equity loans or refinances (remember who runs the site).
FICO Score Estimator
Just for good measure, I filled out the FICO Score Estimator and got the following result:
If you really want your official FICO score, you can still get it with a free trial and immediately cancel with minimal hassle. Here are step-by-step instructions. The FICO is based on your Equifax report.
Note: Unless you’re going directly with a credit bureau (which already has your sensitive data), you’re going to have to give your personal information including Social Security Number to a third-party website. I am not a online security expert, so you’ll have to do your own due diligence as to whether you want to proceed. I have agreed to be the test monkey and have used all these sites, and am showing you real screenshots of my results above.
If you still read newspapers like me, you may have come across an advertisement like this one recently touting an abnormally high 3-month or 6-month CD rate in last Sunday’s issue:
According to Bankrate, the current national average for a 6-month certificate of deposit is 0.37% APY, with their top yield being 1.25% APY. Highly-advertised Ally Bank offers less. So how can a tiny local non-bank that you’ve never heard of beat the rates of even online banks by over 2 whole percentage points?
It turns out that this is the newest version of the “free show tickets for timeshare presentations” marketing ploy. In this case, you must go into the office of an life insurance agent and listen to their sales pitch before getting the bank CD. Allan Roth over at CBS Marketwatch visited one of these offices and wrote about it. These non-bank salespeople are supplementing bank CDs from other FDIC-insured banks with their own money to reach the advertised rate. Questionable? Yes. Scam? Well, maybe not.
How It Works…
- You respond to the newspaper ad, and the terms always require you to physically come over to their office.
- After dealing with varying levels of life insurance and/or annuities salesmanship, you maintain your desire to open the account.
- You write the check for the CD directly to an FDIC-insured bank, with which the sales office is not officially affiliated with. This CD has a realistic rate, say 1% APY or similar.
- After a week or two, enough to make sure your funds cleared, the insurance people will cut you a check which together with the bank’s interest, add up to the advertised APY (assuming they are still in business).
How Much Extra Interest?
But really how much money are they losing on this? If you buy a six-month CD with an annual percentage yield (APY) of 3.35% and commit $25,000, you’ll earn approximately $418. With a APY of 1.25%, that is $156. The difference is $262. That’s basically the “bonus” that they are paying to get you into the door.
The article by Roth was initially published more than 8 months ago, so that would suggest that this marketing ploy is working and the word is spreading amongst insurance salespeople. Now, I’m sure some people will call about the CD and either not have the $25k or otherwise decided not to go for it, so that improves their bottom line. I am pretty certain that their ad targets those with large cash balances looking for income-type investments, so that they can pitch annuities with seemingly safe and high yields.
If you still want to invest in one of these bank CDs + incentives, you should be prepared to be presented with annuities that will actually seem to yield even more that their advertised 3-month CDs. They will be carefully packaged to look like a good deal. They will be described as “insured” and “safe” because they will be backed by an insurance company. The actual yields will be computed by a formula too complex for most math PhDs to fully understand.
Next, you should check if the extra interest is really worth it due to the fact that you’ll have to deal with paper checks. If you are writing a check from a bank account that isn’t earning interest, that is some lost days of interest right there. Since you’ll be receiving the CD funds as a check as well, that’s another few business days of potential lost interest. Use my handy Ultimate Rate Chaser Calculator to see your net interest boost.
Finally, you should be sure to only write the check to an FDIC-insured institution. You should interact with them directly to ensure safe transfer of funds and proper opening of account. Double-check the CD renewal guidelines, so you are not stuck rolling the CD over for another 3 months.
Here’s a list of other companies that I found offering similar ads. Some are pretty shady in my opinion, and pretend to be an elite broker supplying high-yield bank CDs. Others are actually pretty transparent about the fact that they are offering a carrot for you to listen to their pitch. If you know of any others, please leave a comment below, and I’ll add it to the list.
- Sun Cities Financial Group (http://www.scfg.com)
- First Fidelity Tax & Insurance (http://www.firstfidelityamerica.com)
- American First Assurance (http://americanfirstassurance.com)
- Integrifirst USA (http://integrifirstusa.com)
I personally wouldn’t trust any of these guys with a $9.99 cut-n-paste GoDaddy website and a rented office with any of my personal details.