Car Insurance Quote Shopping and Credit Checks

After doing a car insurance quote comparison test, I wanted to clear up any confusion regarding applying for car insurance and your credit history. Here’s why you should be able to get quotes from as many insurers as you like without worrying about your credit score.

Will auto insurance companies check my credit?

Probably. According to recent surveys, over 90% of insurance companies (including the top 5 auto insurers) use credit information in their underwriting process. It’s not the only thing, just one of the many things that gets considered like your driving record or accident history. There is a historical correlation between certain behaviors like high credit limit utilization and filing an insurance claim. Insurance scores weigh various factors differently than in standard FICO scores.

However, certain states including California, Hawaii, and Massachusetts do not allow the use of credit information in the underwriting or rating of car insurance. Texas had a similar bill proposed in 2013, but I don’t think it was passed.

When will they check my credit?

Either during the premium quote process, or when you actually pick one and apply for insurance. (Some will also check your credit upon premium renewal.) Out of the four insurance companies that I got quotes from, only Progressive asked for a Social Security number and it was optional (I declined to provide it). However, all of them get permission from you to run a credit check in the fine print when you apply for a quote.

For some companies, the initial quote provided assumes you have acceptable credit, and during the application process they check your credit and may adjust the quote based on any negative information. For example, your report may show a high utilization percentage of available credit.

Will it affect my credit score? Hard vs. soft pulls

[Read more...]

Auto Insurance Quote Comparison Results: State Farm vs. GEICO vs. Allstate vs. Progressive vs. Liberty Mutual

Inspired by reader experiences, I set aside an hour today to obtain auto insurance quotes from the major providers in my area. Insurance companies provide different quotes for “new customers” and “renewals”. Guess which one is usually lower? Also, many insurers choose to focus on specific types of customers such young, high-risk, or low-risk. Finally, I’ve also moved around a lot so I’ve noticed that my quotes change significantly based on where I live. The bottom line is that insurance prices vary for a lot of different reasons, and the only way to know which one is cheapest for you is to compare quotes directly.

It will help to gather the following information first:

  • Personal information. Full name, birthdate, occupation, education level, accident history. None required Social Security Number, but others might.
  • Car information. Many pull this from DMV records automatically. Year, model, date of purchase, own/lease/finance, and security system details.
  • Driving patterns. Is the car primarily used for work/commute/pleasure? How many miles driver per year?
  • Insurance details. Have your current bill handy to know your specific coverages, limits, and deductibles.

The Results!

The totals shown are 6-month premiums for two cars and include liability, personal injury, collision, and comprehensive coverage. Exact same limits and deductibles for all insurers.

  • State Farm (existing) – $665 per 6-month period. This includes various discounts like accident-free, multiple-cars, etc.
  • GEICO – $479. The cheapest quote by far, beating State Farm by $186 per 6 months, or $372 a year. This follows anecdotal evidence that GEICO is pricing their insurance very aggressively for new customers.
  • Allstate – $693. Slightly more expensive than State Farm. I noticed that they have a lot of optional “bells and whistles” features like accident forgiveness. They also offer a discount for electronic bills and auto-pay from bank account. The price shown includes these discounts.
  • Progressive – $849. Way higher than State Farm. Their claim to also provide quotes from other car insurance companies was also very disappointing. They couldn’t provide any other quotes at all. After changing my existing insurer, they said State Farm’s rate would be between $696 – $5,922. Not helpful.
  • Liberty Mutual – $568. Cheaper than State Farm by $194 a year. Not bad but higher than GEICO for me.
  • USAA – ???. I tried as I’ve heard good things about USAA, but I do not have the proper military affiliation to be eligible for their car insurance.

$372 a year is pretty significant. I’m definitely intrigued by this cheap GEICO quote, but I have to do some more research as I also have homeowner’s and umbrella insurance from State Farm and I’m not sure how the total package price would differ.

State Farm Insurance Payment Plan (SFPP) Review

Ever since we started cutting back our work hours in order to share childcare duties, Mrs. MMB and I have kept a closer eye on our monthly spending patterns. One of the headaches for budgeters is dealing with large lump-sum payments like those for home/car repairs, healthcare bills (human repairs), and home/car/life insurance. Our homeowner’s insurance is due annually (we don’t use mortgage escrow anymore), life insurance is due annually, and auto insurance is due semi-annually.

We use State Farm for all of these insurances due to our positive claim experiences in the past and their multi-line discount. When I asked about payment options, they told me about the State Farm Payment Plan (SFPP). I’m sure that most other major insurers have a similar program.

Pros

  • Steady monthly bill. With this plan, all your insurance bills get averaged into equal monthly, quarterly, or semi-annual payments. We chose monthly as that is how we visualize our spending.
  • Float. Let’s say your total bill is usually $1,200 once a year. If your policy is renewing today, then instead of paying $1,200 upfront now, with SFPP you pay $100 per month spaced out over the next 12 months. So you’re gaining some additional float time on your money. If you’re already paid up then you have to wait until renewal to start an SFPP.
  • Pay with credit card. You can use a credit to pay most bills already, but some auto-pay plans require a linked checking account. SFPP allows you to pay with a recurring charge on any Visa/Mastercard (no American Express). This is good news for those earning credit card rewards.
  • Chose payment due date. I don’t use this, but if you find it convenient you can select your specific payment due date each month (any day except 29th, 30th, or 31st).

Cons

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Affordable Care Act Summary for Self-Employed, Unemployed, and Early Retirees

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.

[Read more...]

2013 New Year’s Resolution: Get Our Crap Together

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.

Flexible Spending Account Ideas: Use It Or Lose It!

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).

COBRA and Retroactive Health Insurance Coverage

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.

Bottom Line

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, those back problems may be excluded from your future insurance provider for 12 months. That could be a lot of uncovered bills. 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.

Sources: Wikipedia, Department of Labor COBRA FAQ, DoL Employee Brochure (PDF), DoL HIPAA FAQ.

Life Insurance Advice From a Life Actuary

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.

Social Security, Ponzi Schemes, and Realistic Expectations

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.

Cash Reserves & Emergency Fund Update: Q2 2011

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

Ally Bank LogoIf 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 1.60% APY for a 5-year CD (as of 10/25/13). 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 0.85% APY (as of 11/12/13). 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 1.10% APY for the first 6 months for new accounts. Alliant CU also offers a good checking account solution at 1.10% APY, though their ATM rebates are more limited.

Application Tips For Individual Health Insurance

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Yes!

Poll: How Big Is Your Emergency Fund?

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.

How Big Is Your Emergency Fund?

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