Personal Finance

Case Study (5):

Personal Credit Report Review

Look at the Personal Financial Plan sheet #33. Use this and the suggested web sites of:

www.insure.com

www.kiplinger.com/tools/

to calculate your life insurance needs. Go online and shop for term insurance for both you and your spouse. What are the results? Given your personal life situation, what would be a good decision for you?

Life insurance was a must several years ago when I started traveling with my job. My agent quickly ran me through an analysis and made a recommendation according the the off the cuff answers I could provide him while sitting in my car at the local grocery store. Things have changed since I got my policy, a different house more debt (college, mostly) and higher expectations and salary. Sitting down to review the needs was the first step. Guessing what my family may need after I die is pretty complex at first glance, but can be simplified and quite accurate. “Many experts say the best way to calculate the amount of life insurance you need is through a needs analysis, which can be broken down into a simple formula: Short-term needs + long-term needs - resources = how much life insurance you need” (insure.com, 2005). I have a term life policy but my wife does not. This experience has caused me to place a higher priority on getting one for her.

Using Kiplinger.com (2008) calculator I found the need for life insurance if my wife or I died. Short term needs included eliminating my college loans, car payments, (the evil) credit cards and an emergency fund. Long term needs were the living expenses, eliminating the mortgages and creating a savings account for my family's college needs as well as child care expenses. The first time through I was pretty generous and ended up finding that I and my wife needed about $5 million each. After running some numbers and realizing almost half of the living expenses had already been eliminated, the numbers dropped by 1/2 to 1/3. This is still considerably higher than had anticipated, but it was based on the assumption that income would not increase over time. The other assumption made was that the insurance needed to take the family through the next 60 years.

My policy included four additional years of schooling for my wife to finish her masters. It showed that she would not make any money for those years and need child care for the next 10 years. Her final income was also about 40% lower than my predicted income because of her field of interest. Education has significantly lower income than engineering careers. Other than these small changes the needs for my wifes policy were identical.

Insure.com (2008) gave quotes for a $2.5 million and $1.75 million policy for 20 years at $85.32 and $53.38 each month for a total of $138.70 each month. That is assuming that my wife and I are at peak physical condition and have no other history related issues (my wife is much healthier than I, she actually exercises). The values of the policy still seem to be high, but making some comparisons and discussing the assumptions with a knowledgeable person is the next step.

At this time my family will take the next steps in purchasing a life policy for my wife. Then we will evaluate adding extra insurance to get us to a comfortable level. Term life definitely seems like the way to go for a young family (smartmoney.com, 2008). My current policy is ten year term and if it were not for this class I may not have looked at it again until the policy was a bout to expire. Making a life insurance policy review a part of our yearly financial planning will ensure that it is updated when life situations change.

Resources:

Insure.com (2005). How much life insurance do you need? Retrieved August 8, 2008 from: http://www.insure.com/articles/lifeinsurance/coverage.html

Smartmoney.com (2008). Term or whole life? Retrieved August 8, 2008 from: http://www.smartmoney.com/insurance/life/index.cfm?story=lifeterm

Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.

Kiplinger.com (2008). How much insurance do I need? (Calculator). Used August 8, 2008 at: http://partners.leadfusion.com/tools/kiplinger/lifeins01/tool.fcs

Personal Finance

Case Study (4):

Auto Insurance Policy

Pull out your personal auto insurance policy. What can you do to lower the premium or have better coverage? Review pages 259-260. Contact your agent and discuss some changes. Find out what is the highest you can raise your deductibles and what are the premium savings. Discuss increasing some areas that might be low. You might be surprised at how little it would cost to double or triple you coverage in certain areas. Should you make some changes?

Finally, go online and get a quote from http://www.progressive.com . Make sure you use the same coverage/deductibles that you now have with your current policy. You can use the Personal Financial Plan sheet #30 at the end of the chapter to help with the format. What are the results?

It was interesting to review the Auto Insurance policy that we have been using for several years. Insurance seems to be one of the items that matches the cliché “out of sight, out of mind”. Once it was decided on, reviewing it was not on the high priorities list. After digging though the insurance policies for the current revision, it was positive to see that it is still meeting our needs.

In looking at what modification could be made to decrease my premiums or increase my coverage, I found two potentials. First, my current policy deductibles are $500 for collision and $100 for comprehensive. I have the option of increasing both to $1000. This change would reduce my premiums by $52 each year. The problem I see with increasing the deductible, is keeping the extra $500-900 in a savings account somewhere waiting for the accident to happen. The only way that this change would pay off is if any deductible payment were not needed for nine and a half years; never more frequent than that. Past experience has shown that my family will avoid paying even the $500 deductible if possible (which explains why we have so many dents and dings on our vehicle).

The second opportunity to make modifications to the policy for added benefit was to increase coverage amounts. Currently the policy has the maximum available for Personal Injury Protection, Uninsured and Underinsured Motorists at $100,000. The only category where there was a potential fro improvement was for Liability. The current limits are 100/300 ($100,000/person and $300,000/occurrence), I have the option to increase that to 250/500. Adding this coverage would add approximately $25 or going with a single sum $500,000 each occurrence total which would add $43 to my current yearly premium. The added coverage seems like a good investment, but I would like to research the real benefit of having the extra coverage. According to the Oregon Insurance Division (2008) the benefits of having higher coverage will be needed if many vehicles, people and property are damaged.

Another addition that I looked into was getting Rental coverage. We have previously not taken rental coverage because we have had two or three vehicles, but recently we have downsized to only one minivan. My commute to work is only a five minute walk from my front door, so having a car sitting in the driveway just doesn't pay. Adding the Rental coverage was only $19, so it seems to make sense if anything does happen.

Looking at Progressive was the next task. I was previously a Progressive customer and had great experience with the company. They gave great rates and had excellent service, however they did not carry homeowners or life insurance. When we purchased Life and homeowners insurance though Country Insurance, we were offered additional discounts if we purchased our Auto policy through them as well, so when the policy came up for renewal we moved over to Country for all of our insurance needs. I was pleased to find that we are still saving money five years later using Country. Our current policy premiums are $308.85 for one vehicle and Progressive quoted $348.

I am very happy with the configuration of our current policy but plan on adding the Rental insurance. This will increase my policy slightly, but with only a single day of renting a vehicle I would spend almost two times the added cost. Most repairs take more than a day and I have experienced a repair job taking almost five weeks so it is worth it.

Resources:

Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.

Oregon Insurance Division (2008). Consumer guide to auto insurance. Department of consumer and business services, State of Oregon. Retrieved August 8, 2008 from: http://www.cbs.state.or.us/external/ins/publications/consumer/2085.pdf

Progressive.com (2008). Get a quote. Retrieved August 9, 2008 from: https://autoins1.progressivedirect.com/AutoDisplayPage.aspx?Page=RateCoveragePage&ST=OR