Now, if for some reason you’ve missed out on these pitches (Maybe you’ve been out the country? Don’t have a phone? Don’t read your mail?) here’s the gist:  Insurance salesman tells you about this wonderful product that allows you to participate in the stock market’s upside, while not experiencing *any* of the market downside.  In today’s stock market climate, sounds pretty good, huh?

A couple of things come into play that the salesguy doesn’t highlight for you:

First, your “participation” in market upside is limited. Typically there is a cap on the amount of market upside that the account will pay out, and in this market climate, the upside potential is tremendous, which will primarily benefit the insurance company, not you.  In other words, given that the market has experienced a 40% plus drop, there is high potential for double-digit increases in the coming months and years.  If there is a cap on your upside “participation” of say, 8%, the rest of the account’s upswing goes to the insurance company’s bottom line.

Now, you might say – that’s a small price to pay for not having to endure a downswing in the market like we have had for the past several months.  And I would agree with you on that score, however: this is a hindsight statement, because again, the chance is quite small that the market will continue trending continually lower after its performance of late.

And so – the downside protection that you receive comes at the cost of limited upside, which would have throttled back your performance in the bull market periods, leaving you with dismal returns overall.  But that’s not the biggest issue you face with these accounts…

The second issue is the overall cost of these accounts. Annually, there is a fee charged against the value of the account of between 2% and 3%.  Doesn’t seem like much, until you think back to the caps that are placed on your account’s participation in the market.  Suddenly, that 8% cap becomes 5% when you remove the annual fees.  And what about if the market just goes sideways?  You still lose 3% to fees every year.

There are many other “gotchas” to consider with regard to EIAs.  Both the SEC and FINRA have issued alerts about these products. (click the links to go to the alerts)

I just thought I’d give you a brief rundown on these accounts since they’re getting a lot of “push” these days – since the market decline has highlighted their selling points, plus there is a lot of upside potential benefit to the companies pushing them.  Now, it’s possible to set up your IRA to do something similar to the EIA – here’s an article which goes into the details if you’re interested.

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Here’s how it works: After Agent A submits a proposal, ask him/her to take a look at Agent B’s submission. In turn, ask Agent B to examine Agent C’s proposal and evaluate it. Lastly, show Agent C the original recommendation from Agent A.

In this A-B-C triangle, you are not trying to embarrass anyone, but you are taking advantage of a person’s expertise in the very competitive marketplace of insurance coverage.

This strategy works especially well in evaluating disability insurance plans or long-term care plans, because the “fine print” in either type of plan is crucial in determining which proposal best meets your particular needs.

Keep in mind that with many types of insurance, expensive may be better. Shop by benefits offered, not premium price. And if you need a third-party opinion, give me a call. I will evaluate each of the options from a non-involved perspective.

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So far, there has not been a lot of solid information on your options, other than the “gobble-de-gook” of the governmental description of the plan. Expect for the insurers to have much better descriptions and comparable policies that you can review in order to make a good decision.

If you’re confused about all of the options, there are a few good resources on the internet that can help. One in particular that I’ve found quite helpful in researching Part D is Terry Savage’s columns from the Chicago Sun-Times, found at www.suntimes.com.

As always, if you have questions, don’t hesitate to call – I’m certain that I can help you make the right decision when it comes to this complicated plan.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

What is liability? The dictionary defines as follows:

liability (n.) -

1. The state of being liable.
2. Something for which one is liable; an obligation, responsibility, or debt.
3. liabilities – The financial obligations entered in the balance sheet of a business enterprise.
4. Something that holds one back; a handicap.
5. Likelihood.

Well, now, that was helpful, wasn’t it? Let’s try “liable”:

liable (adj.) -

1. Legally obligated; responsible: liable for military service.
2. At risk of or subject to experiencing or suffering something unpleasant. Used with to: liable to criminal charges; liable to diabetes.
3. Likely. Often used with reference to an unfavorable outcome: In a depression banks are liable to fail.

So, liability is the “state of being legally obligated or responsible”. That helps, with regard to understanding liability insurance. This is insurance against the situation where you are personally held as responsible for a loss or injury of some sort. An example might be: a visitor to your home steps off the front porch onto the steps, but the step gives way under his weight. This causes your visitor to fall and break his arm. As the owner of the property, you are liable for your visitor’s injury, and responsible to make him whole again.

Typically, liability insurance is simply a part of your homeowner’s insurance policy. In some cases, the level of coverage is too low with a standard policy, though, and a larger liability policy is purchased. These policies are called “umbrella liability” policies, because they cover your liabilities beyond those covered in your homeowner’s policy. Umbrella liability policies are especially popular for small business owners and other folks who have substantial assets that could be lost to liability litigation, or who may have significant exposure to liabilities.

In general, having an umbrella liability policy is a good idea in today’s litigious society. It doesn’t take long for damages from a lost lawsuit to get up to a million dollars or more, so if you’re at all exposed to liabilities and are concerned about someone suing you for all you’ve got, a one million dollar umbrella policy is pretty cheap peace of mind.

Next time, we’ll discuss homeowners policies. This won’t be an exhaustive review of HO policies, that’s what your State Farm or Allstate agent is for.

Until then -

jb

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Since most states require liability insurance, you have no choice but to purchase it (if you have a car). So, it makes good sense to shop around for the best deal. You’ll have the most flexibility in choosing better rates if you and all drivers that you’re insuring have good driving records. This generally means that you have not had any traffic violations within the past two years, or any accidents within the previous three years.

Another way to reduce your premium cost is to increase your deductible. Many folks carry a very low deductible (like around $100), which is extremely expensive. Increasing this to $250, $500, or even $1,000 can have a dramatic impact on your insurance costs.

Yet another option that one can consider for reducing auto insurance costs is to drop all but your required liability coverage on an older vehicle. If the vehicle has gotten near to the end of its useful life, chances are that an accident would cause more damage than the car is worth.

You may also consider driving a cheaper car – or a car that the insurance industry has determined has a less likely chance to cost a great deal for repairs. There can be a dramatic difference in rates between similar autos – check with your favorite insurance agent for more information.

Lastly, consider your affiliations – such as professional organizations or auto club memberships. These organizations quite often offer discounts on auto insurance to members.

Until next time…

jb

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There are essentially three different kinds of plans: fee-for-service arrangements, Health Maintenance Organizations (HMOs), and Preferred Provider Organizations (PPOs). Each type of plan has its own unique features.

Fee-For-Service or traditional health insurance plans offer the broadest choices of providers of health services. In general, you pay for your healthcare up front, and then submit a claim for reimbursement. You pay a monthly premium, an annual deductible, and generally coinsure yourself up to an annual limit. Most plans have a cap on annual out-of-pocket expenses.

There are two types of coverage available – basic, which pays toward hospital room and care costs, surgery, and some doctor visits; and major medical, which provides coverage only for expensive illnesses or injuries. Major medical is generally the cheaper type of policy to purchase.

HMOs are a prepaid health plan, and are generally the least expensive. They are also the least flexible in terms of providers of health services. You pay a monthly premium, and the HMO provides comprehensive care for you and your family. Included are doctor’s visits, hospital stays, emergency care, surgery, and the like. The choice of providers is very limited, generally. You’ll usually have a copayment fee (around $10 or $20) for each visit. The good news is that there is no claim to file as long as you use the services within the choices given.

PPOs are similar to HMOs in that they are somewhat prepaid, and there is a limited number of choices for healthcare. You’ll also have copayment fees with your doctor office visits. This kind of plan is also similar to the Fee-For-Service plan in that you can choose providers outside the “network” of choices, for a higher cost of service, in terms of copayment and deductibles.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

There are many different varieties of health insurance, but there are similar components to most types of policies. Generally there is a list of covered (as well as non-covered) illnesses and calamities. There will be a description of the deductible, and the co-pay. There will also be two other items – Annual Out-Of-Pocket Limit, and Lifetime Limit. Many policies also include a “Network” of member or accepted doctors and facilities.

This review of health insurance applies to both individual and group coverages.

There are essentially three different kinds of plans: fee-for-service arrangements, Health Maintenance Organizations (HMOs), and Preferred Provider Organizations (PPOs). Each type of plan has its own unique features.

Fee-For-Service or traditional health insurance plans offer the broadest choices of providers of health services. In general, you pay for your healthcare up front, and then submit a claim for reimbursement. You pay a monthly premium, an annual deductible, and generally coinsure yourself up to an annual limit. Most plans have a cap on annual out-of-pocket expenses.

There are two types of coverage available – basic, which pays toward hospital room and care costs, surgery, and some doctor visits; and major medical, which provides coverage only for expensive illnesses or injuries. Major medical is generally the cheaper type of policy to purchase.

HMOs are a prepaid health plan, and are generally the least expensive. They are also the least flexible in terms of providers of health services. You pay a monthly premium, and the HMO provides comprehensive care for you and your family. Included are doctor’s visits, hospital stays, emergency care, surgery, and the like. The choice of providers is very limited, generally. You’ll usually have a copayment fee (around $10 or $20) for each visit. The good news is that there is no claim to file as long as you use the services within the choices given.

PPOs are similar to HMOs in that they are somewhat prepaid, and there is a limited number of choices for healthcare. You’ll also have copayment fees with your doctor office visits. This kind of plan is also similar to the Fee-For-Service plan in that you can choose providers outside the “network” of choices, for a higher cost of service, in terms of copayment and deductibles.

When comparing these types of plans, consider the kinds of events that you’re likely to encounter: if you’re single, with no dependants and relatively healthy, and you don’t have a desire to choose your primary physician, you will choose the plan that best fits those needs. If on the other hand you are married with four kids, and have a long-standing relationship with a specific doctor, and you frequent the emergency room (who doesn’t with little ones?), you may want a plan that is more flexible and comprehensive.

If you have several choices, make a checklist of the services you use in order to compare the choices. Cost shouldn’t be the deciding factor – effective service, providing quality healthcare to your family is the most important. But do your best to keep the costs in check.

Next time, we’ll be looking at Auto insurance.

’til then -

jb

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At any rate, I had alluded to a discussion of insurance as one of our next topics. This will likely take several posts to cover things completely, as there are so many kinds of insurance, and so many issues to address with each kind. In this post, I’ll simply list and describe the various different kinds of insurance, with the more important types (IMHO) listed toward the top of the list.

Health – what’s more important to protect than your and your family’s health? Coverage options here include comprehensive, major medical, and specific treatment plans, like dental or vision coverage.

Auto – another important type of insurance, as most states (including Illinois, where I’m located) require liability and medical expense coverage on your automobile. In addition, depending upon your requirements and the age and value of the vehicle, you may wish to carry collision, comprehensive, and/or some of the other options available.

Liability – in our litigious society, everyone should have coverage for general liability. For many folks, the liability coverage in their HomeOwner’s (HO) policy may be adequate, but we’ll discuss this separately from HO coverage because of the importance.

Homeowners – damage or loss of your house, your posessions, and protection from liability for you is what is provided by a HO policy. Here again, there are many variables to consider, so we’ll discuss it separately.

Disability – this is coverage in the event that you become disabled and are unable to work at your current job. There are several types of disability policy available that we’ll discuss. In my opinion, no one with financial obligations (i.e., bills to pay, family to support), should be without disability coverage.

Life – once again, this type of coverage is a necessity for anyone who has financial obligations. The array of policy types can be confusing, so I’ll try to explain these as clearly as possible.

Long-Term Care – this kind of policy has gotten a lot of attention in the past few years. It is important to consider whether this makes sense for you, and then to consider all of the options within the policy(s) that could make the difference as to whether or not the coverage is adequate. LTC insurance is not for everyone – sometimes it just doesn’t make sense. We’ll discuss this in the LTC section.

So – there you are. Over the course of the next several posts I’ll be taking one type of insurance at a time, explaining the types of policies, options available, and customized coverages that each type of insurance covers.

’til then -

jb

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).