What makes my Homeowner’s Insurance go up?

You know, everyone asks why their insurance goes up in price and there is not a simple answer. Like most pricing issues there are several factors, and while some are in your control others are not.

The average price of gas at the pumps here in the Midwest is currently $2.64 and this time last year the average for the Midwest was $2.52. Why did it go up 12 cents in a year? The average cost for electricity in Indiana went up about a half cent per kilowatt of power in the last 12 months. Chocolate chip cookies cost an average of 5 cents more this July than they did in July of 2009. Cherries are up 77 cents a pound over their price last July.

In general there are some big reasons for the price increases listed above but in most cases … the price just went up. Homeowners insurance is just like any other product and as the cost of doing business raises the price offered to the public raises. But there are ways that you can control that increase or lessen its impact on your policy.

To begin with, it’s important to understand that homeowners insurance is a business and the only reason that companies get in to the business is to make money. That being said, homeowners insurance like all other insurance policies are contracts and the company is bound by the terms of the contract, and it is very much a one sided contract. The insurance company must provide the coverage that the policy dictates as long as the policy is in force. However, the customer can stop paying premium or cancel the contract anytime they want. So, what makes the company raise premiums? There are four basic events that increase the cost of your homeowners insurance.

First, if you have several claims in a three year period no matter what size those claims are you will see an increase in premium. Each claim, no matter how small has a fixed cost. The company has to pay someone to take the claim and enter it in the system, they have to pay another person to review the claim and determine if it is cover and what the liability is to the company. The amount paid to the client may be just a small portion of the overall cost to the company and so over time a client that has many small claims will be unprofitable.

Second, if you experience a single large loss you will see an increase in premium. If a client has a fire that causes say 20 thousand dollars in damages, and lets say they pay one thousand dollars a year in homeowners premium, the company may increase their premium by a couple hundred dollars a year for three to five years. This means the client will pay extra until the loss is old enough to be ignored then the client can request to be put back in a lower rate category.

Third, if an area that an insurance company has a lot of business in experiences a huge loss in a single year they will raise everyone’s premium to cover the losses in that area. Just like many companies involved in insuring homes in Florida during hurricane season lost a great deal of money rebuilding those homes, so they spread those loses on to clients around the country making everyone’s go up a little bit.

Finally, if the cost of labor, paper, postage or any other business expenses increases the cost of doing business to a point that it impacts the company’s bottom line, all their customers will receive an increase in premium. Just like at the local burger joint the cost of a burger now reflects the higher wages that the help gets paid and the increased cost of the beef used to make those burgers. My dad tells me about buying a burger for something like a nickel, you won’t see that price again just because the cost of materials and labor continues to go up.

So, what do you do if your premium goes up on your homeowner’s insurance? Well, first off realize that price increases happen and if you have had losses like what is described above you will be able to request to have your rate reevaluated after three to five years. If the increase was just an across the board increase do to rising cost of business, or losses elsewhere then everyone is getting those higher premiums and you should discuss with your agent ways to control your cost.

One way to control your premium is to raise the deductable. Your deductable is the amount of money you will pay out of pocket before the insurance company is responsible. As a general rule of thumb, the higher your deductable the lower the premium. Many folks who took out policies twenty years ago had $250 deductibles because that was a reasonable amount to pay out of pocket. Today, most home repairs cost three or four times what they cost in the late eighties, so your deductable should reflect that increase as well.

Nobody likes paying more for anything, but your agent can talk to you about what is the best strategy for controlling your premium while keeping you protected from total loss. Schedule a meeting with your agent and discuss what coverage you need as well as how you can best manage your asset protection. Communication with your agent will answer a lot of your questions and help you achieve the goals that you have for protecting your home and controlling your bills.

J

Social Security's Dirty Little Secret

We all know that Social Security has some major flaws but most folks don't know about the widow blackout period.  This is a slap in the face for the surviving spouses of life long contributors to the Social Security system, but it's also the government's dirty little secret.

Let's say that you are a woman, and your husband works as the sole bread winner while you raise the children.  You get married at 23 have 3 kids over the next 6 years and when your youngest turns 16 your husband dies from a surprise heart attack.

After grieving for the loss you apply for survivor's benefits from social security (because he paid in for 22 years and made a good living during those years) but instead of a check you get told that you have to wait 15 years until you are 60 to draw out his your benefits. 

So there you are with 2 kids in college and one in high school little or no work experience and no income coming in from your husbands lifetime of contributions!  I don't know about you, but I would say that sucks!  This system increases a woman's chance of living in poverty from 5% to 20% just because of the death of her husband.

What do you do?  Well, the only thing you can do is to plan a head and make sure that you have something in place to bridge the gap.  One plan that can be put in place is to take out a life insurance policy that will fill that gap until social security survivor benefits would kick in.  You will need to decide how much coverage you need by taking the average Social Security payment that the working spouse would receive at full retirement age and multiple it by the number of years until surviving spouse turns age 60.  For Example a man that earns $4,000 a month dies when his wife is 50 and they have no children under the age of 18, his Social Security payment at full retirement age would have been $1721 a month or $20,652 a year.   His widow would need $206,520 to make up for the loss of Social Security benefits during the next 10 years until she reaches age 60 and can begin drawing survivor benefits.

If you don't know what your working spouse's Social Security benefits would be you can go to the SSA's website and use their quick calculator to find that amount out.  Here is a link to their basic calculator http://www.ssa.gov/OACT/quickcalc/index.html  Once you have that amount you can multiple it by the number of years until your 60th birthday ... then call your insurance agent for a quote on an inexpensive term policy that will protect you until then.

J

Love what you do!

Love what you do! My dad tells me this every week. You know, he’s right, and reinforcing that lesson each week that we talk, shows his real wisdom. Most of us work 40 or more hours each week to make a living that only leaves 128 hours a week to sleep. If you get only 5 hours a night that leaves just 6 hours a day and the weekends to enjoy our family and eat. So, we had better love what we do.
I have always loved my occupation, for 10 years I was in the Army, and OMG what a cool way to make a living. I would still be doing that if it were not for my disability. After leaving the Army I started a career in sales (selling natural products wholesale to health food stores across the Midwest) that was great, the travel and the information gave me a great since of satisfaction.

Now my job is to insure that my clients have the appropriate amount of insurance at the time of loss. Not easy, because most people think I am just out to make some money. But I want to show my clients the best way to use the funds they have available for their insurance needs … and honestly, most insurance agents want the same thing.

We want to be there for you when your world has turned upside down and we want to help you get through it. That’s not how we make money … we make more if you pay the highest premium for the longest time with no claims. But we live in your communities and struggle like you do, so we often do what’s best for you and not what’s best for our bottom line.

This Father’s Day I went to the local stripper pits to fish with my dad and I know you folks did the same because that’s what we do in the Midwest, we spend our time with family and friends, and we protect those same people as best we can.

Insurance is like that, car insurance protects our family from law suits, home owner’s insurance protects our family from fire, and life insurance protects our loved ones from fate or someone else’s actions.

Yep, I love what I do because it makes a difference in the lives of each and every client I have. I spend more of my time than most folks promoting and working in my business because I LOVE what I do. Dad is right, you have to love what you do!

Call your insurance agent today and tell them that you appreciate what they do … if you don’t appreciate them then do both of you a favor and switch!

Giving More ... Charity Planning

We all reach a point in life where we see the need to give back. Whether it is our local church, the Humane Society, or some cancer research center, we see the need to help out in some way and to financially support the cause.

So we give a little each week or each month knowing that a little at a time over a long period adds up. But have you ever considered how much you will be giving over the next 20 or 30 years. It really adds up, for example if a 30 year old woman gave $10 a week to her church for 35 years (until she retires) she would have given the church $18,200 over that time. But what happens if she dies in an accident before age 65? The church will lose that income and have to make it up elsewhere. Not a huge monthly amount but if that happens a few times the church will be without thousands of dollars in income that it needs to maintain the building and continue the programs that cost more and more each year.

There is a way to insure that the charity (in this case her local church) will receive all that she planed to give over her lifetime regardless of how long (or short) that life is. If the same 30 year old woman (in good health and a non tobacco user) bought a traditional life insurance policy for the whole amount that she plans on giving to the church ($18,200) and she made the church the beneficiary, it would cost her about $4.20* each week (premiums would need to be paid for about 20 years until the cash value was high enough to allow for off set) ... if she then gave the church the remaining $6 a week her total gift to the church during the 35 years would be $14,040 but the church would get the death benefit of $18,200 even if something happened to her after her first payment on the life policy. If she lives to age 65 the church would have gotten her tithe of $14,040 from the previous 35 years and a death benefit of over $20,000* when she passes.

Life insurance can make sure that the amount of money you want to leave to a charity is a sure thing, and if you make the charity the owner of your policy and you just pay the premiums then your premiums can be tax deductable. This is the most common use for life insurance, that is to protect someone or some group from the financial loss associated with the premature death of a supporter. But there are other ways to use life insurance to increase your charitable gift after you pass away.

Let's say that a 65 year old woman loses her husband after they both had worked for a lifetime. His retirement was $1900 a month but she was living comfortably on her own retirement and decided to give that amount to the Humane Society to help fund the programs her husband supported for nearly 70 years. If she were to pass away in the first year the Humane Society would only get $22,800 ($1900 times 12 months) but if she were to use the $1900 a month to purchase a life insurance policy the Humane society would get nearly 3/4 of a million dollars* to continue the work her husband supported all his life.

Another example of using life insurance to expand your gifting to the charities you love is the Single Premium life policy. If you have a lump sum of money that you do not need for your income and you want to pass along to fund future building needs for your church a great option is to use it to buy a single premium life insurance policy. Let's say that a widower age 72 wants make sure his $50,000 CD is used for the church's future building projects he could greatly expand the benefit by purchasing a single premium life policy worth about $75,000* when he passes away.

The one thing to remember is that anyone that wants to use life insurance as a way to support their favorite charity must be insurable and if they have conditions that are ongoing such as diabetes you may get less for your money or you may not qualify for a policy at all. Your best bet is to talk to an Agent that you trust and let them know what you want to do ... they will be able to design a program that meets your needs and gets the money to your charity regardless of how much longer you live.

This is a really cool idea that deserves an extra look ... it is a great way to guarantee your gift or greatly expand it.

J

* all figures are general examples and are based on a person in good health that does not use tobacco and are only accurate for certain companies at the time of publication.

The Goose that Lays the Golden Eggs!

You insure you home because it is worth $100,000 or more ... you insure new cars because they are worth $10,000 or $20,000 ... so if something happens to these investments you would lose a lot of money. So you insure things that help you live like you want to and things that are worth a lot of money.

Lets imagine that you have a goose in the basement of your house that lays golden eggs. Everyday you go to the goose and get an egg worth hundreds of dollars. Year in and year out that goose is popping out golden eggs just for you and your family.

What would you insure that goose for? $100,000, $250,000, a million dollars? Would you say that a golden egg laying goose is nearly priceless and it's loss would hurt your family's standard of living? Of course it's priceless, it's worth more than the house you house it in ... you can always get another house but money everyday, that's priceless.

Okay, so the goose is "YOU"! You bring home a paycheck that your family depends on and you do that everyday month after month, year after year. You are priceless to your family so what do you have in life insurance? Is it enough to replace all the income you would have brought home during your working years? No one wants to think about it but if you died tonight how would your family live? Would they be able to stay in the house they know as home? Would they be able to maintain the same standard of living? Would your spouse have to get a second job and send the children to daycare while they struggled to make ends meet?

Think about that ... then tell me what you think is the most important type of insurance. Life insurance is the difference between a sad day and an unbearable lifetime of loss. If your family loses one of the most important people in their lives it is devastating, but if they lose their income in the same day it would be horrific. So don't EVER go without life insurance. It is more important than any other form of insurance.

Now having said that, the question is how much insurance and what type should you have, and that is a very personal question. I'll give you a quick overview of how to figure what you need and what type would work best for you but, you need to see a professional that you trust and talk through your needs.

Okay ... much do you need? Well, the basic formula is based on 4 basic needs;

1. Final expenses (which is about $10,000 average).

2. Pay off debt (home, autos, credit cards).

3. Provide for the children's higher education (some folks want to pay for it all and some say they need to pay for it themselves and still others say they want to pay half).

4. Provide for the lose of income (some experts say 10 years some say 5 years but this is the big one).

The first two are easy, ten grand for the final expenses unless you have a more extravagant funeral planned for yourself. Cremation can be a little cheaper but will still run you $7,000 in our neck of the woods. Of course if you have a huge memorial made from imported Indian marble or a deluxe plot next to your favorite movie star you'll need to add that to the cost. Debt is a personal question but it has a definite answer as well, how much do you owe? Add that amount to the final expense. The average family in America owes $8,400 in credit card debt, $14,000 in car loans or educational loans, and $85,000 in mortgage debt. So most families will put somewhere in the neighbor hood of $108,000 in total debt.

Number three is a huge question mark for most families, if you have more than one child and you are in the middle to upper middle class you may have plans to pay for their school 100% but more than one or a lower income may indicate that you need to plan to plan only part of their college costs. Or perhaps you paid for your own education and you feel that they should too ... there is no right or wrong answer here only a choice that reflects your personal values and needs. On average a bachelor degree will take 5 years to complete and tuition will cost about $12,000 a year so lets say the average household would want to pay half of their two children's' education so we'll put $60,000 in this example.

Finally, how much income do you need to replace? I like the five year rule. No science here I just think that it is an easy number to come up with and easy to wrap your head around. Five years of income is enough to support the family while your spouse returns to school to get new training and a better job, or it is a big enough stake to invest and draw a reduced income for a longer period of time, supplementing the family income until the children leave the house and are on their own. The average income for an individual in the US regardless of age, education or gender is (depending on who you ask) about $37,000, so that is what we will assume for our example. Which means we will plug $185,000 in the formula.

1. Final Expense = $10,000

2. Debt = $108,000

3. Child's Education = $60,000

4. Income replacement = $185,000

Total = $363,000 in needed death benefit

Most people have some life insurance at work is two times your salary so you can subtract $74,000 from the total need, which leaves $289,000 that our imaginary family provider needs to protect his family.

So, what type does he (or she) need? Term? Level Term? Return of Premium Term? Whole life? Universal Life? Again, I have some ideas but you have to discuss your situation with a professional you trust, to decide which you need.

Quickly ... here is my opinion, "coverage is the most important thing!" Some of these types of insurance have great benefits over the others but first and foremost you need to secure the amount that you need.

Term is the cheapest but if you stop paying on it before you die, you get nothing, plus the price is based on your current age so it will increase in cost each year that you own it.

Level Term is more expensive but it doesn't increase for 10, 20 or 30 years ... at the end of the 10, 20, or 30 years, the cost will increase dramatically. If you stop paying on this before you die you get nothing.

Return of Premium Term is more expensive still and is just like the Level Term except that you get all the premium back at the end of the 10, 20, or 30 year term if you don't die.

Universal Life is a whole life policy based on interest rates the cost never increases and the value is tied to the interest rates of the day. So the cash value available at retirement age will be great if interest rates where high during the time you held this product or not so great if they were low during the time you held it. It is generally more expensive than the Return of Premium Term, but the values are not guaranteed.

Whole life is the most expensive type of life insurance but it gains value based on dividends and that is the most consistent and rapid way to gain cash value in a life insurance policy. Values are not guaranteed but, you can judge the likely hood of success by the longevity of the company in your community.

This is important stuff so call your agent today to talk about it.

J

How Insurance Works

Insurance is purchased to safe guard something from total loss. When you buy insurance from a company, they are taking the risk that many people share and pooling the money to be paid out to the statistical loser as it were.

Okay for example Let's say that a tomato plant costs $10, if statistically one in ten tomato plants die and you, along with 9 other tomato plant owners pay the Tomato Insurance Company $1.10 a year for tomato plant insurance, then the insurance company knows that it will probably pay out $10 in claims and draw in $1 in profit. The tomato plant owners are paying a little more for the plants but they are now safe from losing their whole investment.

But what happens if one tomato plant owner is careless and kills 2 plants. Now the insurance company loses $9 (they take in $11 in premium and pay out $20 in claims), so next year they will need to charge more to break even. They can do one of two things, raise the premium for the careless grower or raise the premium for everyone.

Lets say that the insurance company decides to raise every one's premium to cover the losses and break even. The second year everyone will pay $2 for their insurance and one plant will die so the company will bring in $20 and pay out $10 which will give them a net of $10 profit this year and -$9 last year so for the two years they made $1.

Okay, but now remember that the grower was careless so why should the other insureds and the insurance company pay for the carelessness of one grower? Lets see what happens if the insurance company just raises the premium of the careless grower. So instead of raising every one's premium by 90 cents the company raises the one grower's by $1.50. So year two the insurance company gets $11.40 in premium and pays out $10 in claims and is $1.40 to the good for this year but still has the $9 loss last year to contend with and so is at a net of -$7.60 so the careless grower will have to pay the higher premium for 5 more years to correct the profit loss from that one year of extra loss. But when you take the $1.50 increase that the careless grower in paying and multiple it by the 6 years that he is paying it ... yep that's right, even though the insurance company paid out $20 in the first year for him ... his total increased premium amounts to $9 more than the other insureds.

So even if the insurance company raises your rates you will still come out ahead with the higher premium in most cases. Now if that is all there is to it why do some people get canceled by their insurance companies?

Well, sometimes it is too costly to insure someone, even if you can charge them an enormous premium. Insurance companies make a profit with their premium and they deserve it because they take the risk of statistical loss, but their profit will quickly evaporate with a few big storms or careless growers. If that happens they will sometimes withdraw from a market (like some national carriers have done in Florida) or cancel a customer that has cost them more than they can recover with the possibility of greater loss in the future.

Insurance companies have a lot of cash ... they are mandated by law to maintain enough to pay the claims that occur during the year. They will often have enough cash reserves to invest and improve their profit but not at the expense of claims that are due.

Insurance is a good thing but it is a contract and it has limitations. Be sure to read the limitations of any policy that you buy. The contract is not flexible so you need to know what is covered and what is not ... and if it is not covered you need to accept that and don't expect them to break the contract to "help you out" ... in the same way don't let the insurance company break the contract by not paying you what is due if you have a covered claim.

That's all I have to say about that ...

J