A Not So Important Blog About Nothing

When you go shopping for a loan, specifically a mortgage, re-finance, or a debt consolidation loan, you need to ask the following questions.  If the company wont provide them, leave.  There are companies out there that will do this, many wont.  With out further ado, here it is.

This list is meant to be spoken from a page, not from memory.

Mr. Banker, I’m shopping for a (loan type here) and would like to know if you want to compete for my business.

I understand there are different guidelines for consolidating and know there is more to a loan than rate.

1. What I would like to do is apply for a loan,
2. have you process my application,
3. appraise my home to insure proper value,
4. prepare the title work to be sure everything is in order,
5. have you make me a firm offer on a loan,
6. have you help me establish a Debt Freedom Date that accelerates ALL of my debt, even what is not in this loan, in the shortest time possible,
7. with about the same money I spend now,
8. explain how your bill-paying and elimination service works, and
9. explain what investment options you offer, once my debt is eliminated.

And, Mr. Banker, I’m NOT willing to put up ANY MONEY IN ADVANCE. I don’t want to pay for an appraisal in advance.

And, if I receive a better offer, or do not feel you offer is feasable, I can walk away and owe you NOTHING.

Will you do that for me?

If you banker wont do any of that to earn your business, they don’t deserve.  Take it to someone who will.

Alright, second in a series on life insurance.  We are going to go a bit more in depth on the different kinds of term insurance.  I wish I could say that there was only one kind, but sadly, there are a great number of different kinds.  On the plus side, the break down into 2 main types.  Annually Renewable Term and Decreasing Term.

Annually Renewable Term

This one is by far the most common.  Every renewal, the price goes up.  You don’t have to prove insurability (traditionally) so long as you are willing to pay the premiums.  The premiums can get quite high, to the tune of $20k/month in the MUCH later years (80+).  No, that is not a typo.  As with all life insurance, it is meant to cover loss of income during your income producing years.  Not to cover you during retirement.

Decreasing Term

This one is common for elderly to slowly reduce the face amount as well as being used as mortgage insurance.  It’s purpose is to slowly drop to 0 over a given set of time, thus why it is used as mortgage insurance.

It should be noted that EVERY kind of life insurance out there, is a variety of one of these two.  These are also the purest form of life insurance, just cover.  Before you leave though, there is more.

Level Term

This is ART from above, but the premiums are averaged over a set amount of time.  The shorter the term, the lower the cost.  You have to be careful with who you buy this from though.  Many companies lower their prices just to attract customers and may be unable to pay claims.  Is it better to have lower premiums, of course, but not at the expense of the company not paying claims.

After the set time is up (typically from 10 to 35 years), the policy reverts back to ART with the premiums practically sky-rocketing afterwards.  In addition, most policies, at renewal, will give you 4 options.

1. Drop Coverage
2. Re-qualify Medically for another Term
3. Leave alone and pay the higher premiums
4. Convert to a form of cash value/permanent insurance (will go over this later).

If you have medical issues, #2 probably isn’t possible, #1 and #3 aren’t desirable, and #4 would probably cut your coverage down so that it barely covers even half of what it did before or your current expenses.  That being said, if you have serious medical issues, having a whole life/permanent policy may be the only way to pass on/reduce final expenses if you don’t have a sizable estate.

Return Of Premium

This is generally a rider added onto a policy.  It does cost more.  How this works is, as you pay your policy, the extra premium goes into a separate account to earn some interest.  At the end of the policy, you will get up to 100% of your premiums paid back.  However, if you cancel the policy at any time, you will NOT get all your premiums back.  It works off of a graduated chart.  Typically, the first 5 years, you will get nothing back. In addition, in some states, even if you go till the end of term, you will only get 95% of your premiums back.

When dealing with these policies, you must run the numbers.  Thus far, 9 times out of 10, ROP is a waste of money.  You can generally do better by taking the difference and putting it into a conservative fund or a tin can in your backyard.

With ROP though, you do have one additional option at the end of term (besides getting some of your money back), and that is taking out a paid-up insurance policy.

Credit Life

This is a rip off.  You are basically paying for term insurance for the balance of your credit card and that is it.  When you die, the credit company gets their money.  That is it.  Your family doesn’t get anything, and the money that could be better served helping your surviving family members, is gone.

Mortgage Life

This is also a rip off and is sometimes financed into your mortgage.  This is pure decreasing term insurance.  The face amount drops with the balance of the note.  Same as credit life, you die, it pays the mortgage company.  It generally costs more than just getting level term by it self.  If you have this, replace it.  Your surviving family will think better of you when they can actually pay the bills with the proceeds instead of giving it to the mortgage company.

Accidental Death & Dismemberment

This one, is more of a rip off than the last 2 combined.  Lets break this up into it’s 2 parts shall we.

Accidental Death – If you death is caused by accident, it pays.  What does this mean? Well, you get into a wreck, you die at the scene.  Death by accident.  Same scenario but the paramedics arrive while you have a pulse.  You die en-route or at the hospital.  Death due to complications as a result of an accident. Doesn’t pay.  But wait? Your died because of an accident and it wont pay? It’s splitting hairs, but basically yes.  It all depends on what is on the death certificate.  One wrong word and it wont pay.

Accidental Dismemberment – This has so many crazy restrictions, it’s actually funny.  It changes based on the policy itself.  In some cases, you have to loose 2 appendages (1 leg and 1 arm; 2 legs; 2 arms; 1 eye and a foot).  And in some, you have to actually have to have it in one piece so they can verify that it is yours and you really did loose it.  IE, you can’t show up with your arm chopped off and not have your arm.

I have even heard of cases where they didn’t pay unless you were fully disabled as a result, although, these are rare.

For both of these policies, just get rid of them.  They are dirt cheap because they pay out even LESS than a pure term policy.

Conclusion

Now, many cash value agents like barging that term only pays out 2% of the time in order to sell a permanent/cash value policy that, so long as you live long enough, pays out regardless.  Although this is true, lets put it into perspective shall we.  That 2% also counts all the policies that have lapsed, been replaced, canceled, etc.  It is not an accurate figure to say the least.  Of all policies that are in force at the time of the policy holders death, I’d say (my guess) 95% pay out regardless of which kind of life insurance it is.  Why not 100%? Well, you have a 2 year contestability clause that gets activated sometimes.

Death my suicide, mis-statement of information on the policy, etc can cause that clause to activate and the insurance company to not pay.  There was a recent article about a women whose house was in foreclosure.  She was given a sub-prime loan and the mortgage company refused to help.  She took out a life insurance policy equal to the balance of the note so her family could pay it off and keep the house.  Within a few weeks of it being issued, she committed suicide so the policy would pay out.  She even left a note to that effect.  Upon reading that, my heart went out to the family.  Not only did they loose a loved one, but they also lost the house because the insurance company wouldn’t pay.  They didn’t report that, but I know it happened.

Keep an eye out for upcoming articles on the other types of life insurance as well as more examples of debt killing and various other products to help you better navigate this crazy world.

Howdy howdy. I know it’s been around a month since my last post and I promised this time would be different. Well, I’ve been busy saving families financial lives so this took a bit of a back seat. Anyways, on to the post!!!

This post will be about the bare bones basics. No frills. In later posts, I’ll get into the differences between specifics and will even include graphics demonstrating various concepts. Don’t laugh at them, I’m a programmer/money coach, not a designer.

When dealing with Life Insurance, there are so many different kinds that it becomes easy to get confused. The insurance companies LOVE it that way. The problem is, many of the agents also get confused. Lets see, we have Credit Life, Mortgage Life, Accidental Death and Dismemberment, Level Term, Whole Life, Variable Life, Universal Life, Variable Universal, Return Of Premium, Permanent, Annually Renewable, Decreasing, etc. Actually, I think that is all of them. If I missed one, put it in the comments.

When you break every single one of these down to the bare bones basics, they are all 1 of 2 kinds of policies. Annually Renewable Term or Decreasing Term. What a minute, we have 12 listed policy types and they are all varieties of 2 of them? Yup. So why are there so many different varieties, well, profits. In general, the more complex the policy, the greater the profits.

Annually Renewable Term

This is probably the most common type.  Usually found in group, level term, and most types of cash value policies.  Every year, the policy renews and the price increases based on a schedule in the policy.

Decreasing Term

The face amount of the policy decreases every year but the premium stays the same.  It is typically used as mortgage insurance and in whole life policies.

It’s important to know these 2 policy types since they are the basis for the rest.  I’ll go over the basics of them now and expand on them in later posts.

Credit Life, Mortgage Life, Accidental Death and Dismemberment

You should avoid these types of life policies.  They are pure profit makers for the insurance companies and don’t benefit your family one iota.  Credit Life is usually bought on a monthly basis by the lender (on your behalf, that you pay for) to cover the current balance.  The beneficiary, the lender. Mortgage Life is typically bought and paid for when you get the mortgage.  Many times, it is rolled INTO the note so you don’t have to pay for it out of pocket.  Several issues with this.

1. It’s typically paid up for 30 years based on expected balance.
2. If rolled into the note, you now pay INTEREST on the premium.
3. If the note is paid off early, unless you make an effort for it, you typically don’t get your unearned premiums back.

AD&D is the worst of all.  Many policies have very strict conditions for their death benefits hence why it is the cheapest of all.  General scenario on how most pay out.  You get in a wreck, die BEFORE the paramedics get their, death by accident, policy pays.  If you are alive when the paramedics get there, you get in the ambulance/care flight and die either en route or at the hospital, it typically wont pay.  Why? Simple, you died due to COMPLICATIONS as a result of an accident, not DUE to the accident.  Splitting hairs right? Now you know why it’s so cheap.

Level Term, Return Of Premium

Both of these are variants of ART (annually renewable term).  Level term is exactly as it sounds, ART with a level period.  You die while policy is in force, it pays.  ROP (return of premium) is a variant of Level Term.  It’s a rider added on that allows you to get your premium back at the end of the term.  Typically the first 5 years, you would get $0 back.  After that, it’s a graduated percentage till the policy term is up.  And even then, you still may not get all of the premiums back.

Now, ROP sounds great doesn’t it? You make it to the end of the term and get all/most of your money back? What they don’t tell you is that you actually LOST money in the process.  How? Inflation.  The reality is in year 6 you start seeing a balance.  That balance grows interest.  But the interest and 5 year loss equals out to an actual interest of 0% and an effective interest of -4%!  Yea, that’s a great deal.

Permanent

This is a tricky one.  This can be virtually any kind of policy.  It can be a term policy that expires at age 95, it can also be a cash value type policy . This is now a more universal term than anything.  Basically, any policy that expires/matures between ages 80 and 120 can be technically be classified as one.

Whole Life

This is decreasing term with a savings account.  The policies are designed so that when they mature, the cash value that is built up equals the face amount.

Variable Life

This is an interesting policy.  It has a minimal death benefit, if you pay for it.  With this kind of policy, your face amount changes with the underlying investments.  Assuming you decide to use investments.  When the market is good, your face amount is usually great.  When the market is down (like as of this writing), your face amount is down.  You pay the same premium either way, and may get a rate hike if the cash value drops to $0.

Universal Life/Variable Universal Life

A universal life policy is an evolution of whole life.  Instead of being DT (decreasing term), it’s ART.  You get a minimal death benefit with a cash account that is invested in the market.  You have the flexibility to decide the premiums and the coverage while the policy is in place.  A variable version adds the ability to determine a wider variety of investments for the cash account.  On both of these, you typically have 2 options.  Option A and option B.  Option A, your beneficiaries get the face amount ONLY.  Option B, you pay MORE so your survivors can have both the face amount and the cash.

This is just a rough overview.  I’ll spend more time on each one individually here in the coming days/weeks/months/years.

This is the first post in a series of posts dealing with debt, insurance, investments, etc.    This is slow going due to all my other responsibilities, but more will be on the way.  On to the meat of the article now!

There are several methods of eliminating debt.  Debt consolidation is NOT among them.  That’s a band-aid and as we all know, band-aids only SLOW the bleeding, not STOP it.  Ask a doctor about the best way to stop a bleeding wound, from the inside out.  The first step in doing this is to make a decision.  Decide to get out of debt, that’s the easy part.  Below, you will find several methods of doing this and a few suggestions on how to make it happen.

For the next few definitions, we are going to use the following example.  These are by no means accurate and are just used for demonstration purposes.

• Credit Card – 12% Interest – $3,000 Balance – $40/mo
• Auto Loan – 5% Interest – $15,000 Balance – $500/mo
• 1st Mortgage – 6.5% Interest – $200,000 Balance – $1200/mo
• Credit Card 2 – 25% Interest – $2,000 Balance – $50/mo

Lowest Balance First

This method is for those that need immediate gratification.  You pay all you can on the lowest balance debt you have while still paying your minimal on everything else.  It works, but is not efficient.

• Credit Card 2
• Credit Card 1
• Auto Loan
• 1st Mortgage

Highest Balance First

This is similar to above except in reverse.  This is even less efficient, but will work.  Granted when most people choose this method, they don’t include their house as the highest debt.

• Auto Loan
• Credit Card 1
• Credit Card 2
• 1st Mortgage

Lowest Interest Rate First

Take your card with the lowest rate, and pay all towards it.  Although it will help save on interest, your higher interest debts are increasing at an alarming rate.

• Auto Loan
• Credit Card 1
• Credit Card 2
• 1st Mortgage

Highest Interest Rate First

The reverse of above, but will reduce what you are paying on interest.  Most people focus on the rate which is not the best thing to do.

• Credit Card 2
• Credit Card 1
• Auto Loan
• 1st Mortgage

Debt Stacking / Snowballing / Debt Acceleration

This is usually used with a combination of the above.  What this does is, as you pay off your debts, takes that monthly payment and applies it to the next in line.  Using the Lowest Balance First method above, it might look something like this:

• Credit Card 2 – $50/mo
• Credit Card 1 – $90/mo
• Auto Loan – $590/mo
• 1st Mortgage – $1,90/mo

Those payments are based on the above then adding the previous one to it.  If you were to follow it, it would probably cut about 10 to 15 YEARS off of a 30 year mortgage.  So tell me, how long would it take you to pay off a $200k mortgage paying $1,790 a month?  That is the power of debt stacking!

Debt Snow-flaking

This one is interesting.  I only recently found it in a Dave Ramsey forum post.  Basically, it takes the above Debt Stacking method and applies what ever free change you have at the end of the month to which debt you are focusing on.  That’s a great idea, and one I teach and recommend to my clients.

The best method to use, is the one you will follow.  Mathematically speaking though, none of these are “efficient” by themselves, yet they all work to accomplish the same goal.  If you run the numbers out, sometimes it’s better to pay the highest interest, then the lowest balance, then the highest balance, then the lowest interest, etc.  To figure it out, you will need a spreadsheet program.  You can use Numbers on Mac, Excel on Windows, or use OpenOffice on those and Linux.  You can also use Google Docs.  There are a few formulas below that will help.

I could show you how to do this via a spreadsheet, but in my many attempts to write it down, it became PAINFULLY obvious that I could not put it into words.  Soooo, what I will do is work on an app for you all to use that will take the above methods and figure out the various ways and how much interest is expected to be paid/saved.  No promises on accuracy now.  I am only one man building and working 3 businesses.

In the upcoming posts, I expect to write a bit more on various types of loans, different methods of figuring interest, how sometimes paying twice a month is useless, etc.

Until then, good luck and keep an eye on my twitter page (link to the right) for future posts.