MONEY Insurance

4 Insurance Policies That Are Worth It and 1 That’s Not

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Jonathan Knowles 2009

The smart way to protect yourself.

Hackers stealing your identity. A freak storm on your wedding day. Fido swallowing his squeaky toy.

These unexpected events can wreak havoc on your life—and your money.

And while they don’t happen often, when they do, you can find yourself having to do triage on your finances.

So is it worth it to get a bonus insurance policy to protect yourself from such infrequent—but potentially financially crippling—Murphy’s Law moments?

We rounded up five types of insurance that aren’t must-haves—but could be nice-to-haves—to help you determine whether they could be dollars well spent.

To Protect Your Identity …

From the attacks on Anthem to the I.R.S., it’s safe to say that companies and government agencies have had some difficulty keeping hackers at bay.

In fact, the Federal Trade Commission reports that identity theft has been the top consumer complaint for 15 years in a row, while a 2015 study from Javelin Strategy and Research estimates there’s a new identity fraud victim every two seconds.

So it’s no surprise that insurers are responding with identity theft policies, which can cost $25 to $60 per year for coverage ranging from $10,000 to $15,000.

Most policies offer account and credit monitoring, and will cover the administrative costs of restoring your stolen accounts. They won’t, however, compensate for financial losses resulting from the identity theft.

Is It Worth It? Yes—if you don’t have time to monitor your identity yourself.

That’s because identity theft protection does little to prevent the theft from occurring, says Steve Weisman, a lawyer and author of “Identity Theft Alert: 10 Rules You Must Follow to Protect Yourself from America’s #1 Crime.”

“Many of these services merely enable you to learn sooner that you’ve become a victim,” he explains. “Generally, these policies don’t do anything you can’t do yourself. However, if you don’t mind paying for the convenience of having your credit monitored, then identity theft insurance may be for you.”

How to Get Better Bang for Your Insurance Buck: Read the fine print carefully, Weisman says. For example, high deductibles—commonly up to $500—could negate the value of a policy.

And be sure to confirm what services are included: Will the insurer actually assist you in doing the legwork necessary to restore your identity, or just cut you a check for the fees you incur to untangle the mess yourself? The former may be more worth it.

A bonus tip from Weisman? Review your homeowner’s insurance policy, which might offer an identity-theft benefit at little or no extra cost.

To Protect Your Wedding

With the average price of a wedding now clocking in at a whopping $31,213, why wouldn’t you want to protect your “I do’s” from disaster?

A typical wedding insurance policy might cover cancellation or postponement, weather-related losses, vendors backing out, and illness or injury to members of the wedding party. Additional coverage can include your rings, gifts, and damage to your wedding attire.

Policies usually cost about 1% of your wedding budget, which means $500 could reimburse up to $50,000 worth of expenses, says Kristen Ley Green, cofounder of wedding public relations and marketing firm Something New for I Do.

Is It Worth It? If you’re planning a far-off ceremony, there are too many variables you can’t account for—and we’re not just talking El Niño grounding flights.

According to data from Travelers Insurance, the main reason 44% of people filed wedding claims last year was due to vendor-related problems.

“What happens when your venue burns down, or a snowstorm postpones your wedding? Most brides think the odds of this happening are slim—but we’ve witnessed both,” Ley Green says. “Wedding insurance can make a difference. It covers lost deposits due to catastrophes, and if you have to postpone, it covers nonreimbursable expenses.”

How to Get Better Bang for Your Insurance Buck: To help determine how much coverage you may need, look closely at all of your vendor contracts, including the venue, caterer, photographers, videographers, musicians, DJs and planners.

“Most agreements typically include a force majeure clause, which means that if an act of God occurs, vendors have the right to cancel your wedding,” Ley Green says. “So make sure you know what this entails: Do you get to move your date? Do you lose your deposit?”

Bottom line: The less flexible your vendors are, the more important wedding insurance becomes.

To Protect Your Pets

Americans sure do love their four-legged family members. According to the American Pet Products Association, pet owners in the U.S. are expected to spend nearly $16 billion on vet care alone this year.

And based on newly released findings from a Country Financial Security Index survey, 37% of pet owners would dip into their savings to pay for unexpected high veterinary costs.

To help offset some of these hefty out-of-pocket medical expenses, some people are opting for pet insurance, which can range from about $50 to more than $100 per month, depending on the breed and whether you’re insuring a cat or dog.

But just like human health insurance, pet insurance is offered at varying levels of coverage, deductibles and exclusions—so owners have to do some digging to see if a policy provides real value.

Is It Worth It? Yes, if you’re willing to take on debt for the sake of your pet.

“If you’d be willing to spend tens of thousands to save a pet, then it’s worth it,” says Patricia Born, a professor of risk management and insurance at Florida State University.

“And if you pick a policy in which most regular vet visits are covered, then I think it’s worth it for most pet owners,” she adds. “There have been a lot of health care advances for pets, so there’s a market [for pet insurance] and enough providers that people can get quotes [to comparison-shop].”

How to Get Better Bang for Your Insurance Buck: Pet insurance policies tend to have a lot of exclusions, so understand what they are before you buy.

For instance, preexisting conditions—including those common to certain breeds, like hip dysplasia—aren’t covered, says Adam Karp, an animal law attorney in Bellingham, Wash. Certain policies may also put a cap on the age of eligible pets.

Insurers can also impose annual, lifetime or per-incident dollar limits on treatment. Once you’ve reached the lifetime cap, in particular, “you may as well scrap the policy,” Karp says.

Before you sign up, it’s also worth checking with your vet’s office to see if they offer a wellness plan, in which such basic services as vaccinations and deworming are bundled for a monthly fee.

To Protect Your Family From Funeral Costs

The death of a loved one is stressful enough—and receiving an astronomical funeral-home tab doesn’t exactly help those stress levels.

According to the National Funeral Directors Association, the median cost of a funeral with a casket was $7,045 in 2012, the last year for which data is available.

To help foot the bill, you may be tempted to look into burial/funeral insurance, also known as final-expense insurance, which typically pays $10,000 or less, says J. Robert Hunter, director of insurance at the Consumer Federation of America.

However, the policies usually come with high premiums—by some estimates, up to 10 times more than what you’d pay for a term life insurance policy.

Is It Worth It? No. Burial insurance is basically whole life insurance that offers a lower level of coverage at a higher premium.

“The cost is very high compared to regular life insurance,” Hunter says. “And dependents need much, much more than [what those policies offer].”

How to Get Better Bang for Your Insurance Buck: Instead of burial insurance, consider simply tacking $10,000 worth of coverage onto a current term life insurance policy, which should come at minimal extra cost to you, suggests Hunter.

“Regular life insurance should cover everything the dependents need after the death of a financial provider,” he says, “including the relatively minor costs of a funeral.”

To Protect Your Valuables

Do you own a prized painting or an heirloom necklace that’s been passed down through the generations? Chances are, your homeowner’s policy doesn’t cover them for their full value.

Enter scheduled personal property insurance, which provides additional coverage above your homeowner’s policy for high-value items, like collectibles, jewelry, musical instruments and art.

The insurer agrees to a value on the item, weighs the likelihood it could get damaged or stolen, and then sets the premium—which can vary greatly, but could be about 1% to 2% of its value.

Is It Worth It? Depends on how much the item is worth to you.

“It comes down to how risk-averse a person is,” Born says. “You may be willing to pay $1,000 to insure a ring, instead of replacing it for $10,000, but [someone else might not be].”

Plus, it can be hard to determine whether you’re getting a decent premium because “there’s not a lot of data for special items to know whether what you are being offered is fair,” she adds.

How to Get Better Bang for Your Insurance Buck: You could just up your homeowner’s policy, especially if your items have a value you can prove, like an expensive TV, a computer or jewelry.

“Ask yourself, ‘If the house burned down, what would it cost to replace all the items in the house?’ ” Born says.

However, if we’re talking about, say, antique furniture with a subjective value, ask an independent insurance agent to give you quotes.

“In that case, insurers are less likely to overcharge because they know you can go somewhere else to get covered,” Born says.

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Unless specifically identified as such, the individuals interviewed or quoted in this piece are neither clients, employees nor affiliates of LearnVest Planning Services, and the views expressed are their own. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

More From LearnVest:

TIME Macau

A Wave of Guest Kidnappings Spurs Macau Casinos to Take Out Abductions Insurance

Visitors from mainland China wait outside a casino in Macau
Bobby Yip—Reuters Visitors from mainland China wait outside a casino in Macau on July 20, 2015

The trend is linked to harsher economic times on the Chinese mainland

Macau’s glitzy hotels and casinos are taking out insurance policies to protect themselves against a new threat to the house — the abduction of wealthy guests over unpaid gambling debts.

The risk of kidnapping has increased significantly in recent months as fewer numbers flock to the Chinese Special Administrative Region that also serves as the world’s largest gambling hub, reports the South China Morning Post.

This partly due to China’s slowing economy, meaning falling revenues for moneylenders that rely heavily on tourists from the mainland. As Beijing limits the amount of cash visitors can legally take to Macau, many high-stakes gamblers use local loan sharks for ready cash, which can be perilous if the cards and dice prove unfriendly.

As most kidnappings occur in guests’ rooms, hotels could face lawsuits from victims and their families. The insurance policies mitigate this risk with coverage for legal liability and crisis responders.

The Macau government reports that as many as 170 people were held against their will during the first six months of this year — more than double the figure for the same period of 2014. However, these are only the cases the authorities know about, with experts saying the true total is likely much higher.

According to Ashley Coles, an assistant director of credit, political and security risks at Jardine Lloyd Thompson, this has lent to a climate of fear.

“Word of mouth can lead to a trend of an interest in the policy, security and the protection,” he told the SCMP. “All the major casino and hotel chains will have looked into this.”

[SCMP]

MONEY Insurance

How Hurricane Katrina Changed Your Finances Forever

Walls and ceiling of house blown away, exposing living room, aftermath of Hurricane Katrina, Sulphur
Sian Kennedy—Getty Images Walls and ceiling of house blown away, exposing living room, aftermath of Hurricane Katrina, Port Sulphur, Louisiana

If you want to brave the storm, you'll first have to brave the insurance market.

Ten years ago this week, a storm gathered spin over the Gulf of Mexico and then let loose onto a city nicknamed the “Big Easy.” Hurricane Katrina was by far the most expensive storm in U.S. history: more than $150 billion in damages; hundreds of thousands of Gulf Coast residents displaced; the city of New Orleans broken down in floodwater and churned like bile. Levees that shouldn’t have broken did. Fences floated away. Living room walls took on water to the ceiling—if they remained standing at all.

Institutional structures proved similarly weak against the strength of the storm, most notably the insurance that was supposed to protect homeowners. Private insurance companies balked on payments: Two years after the storm, the New York Times reported that insurers had paid out an estimated $900 million less in coverage to the approximately 160,000 families who lost their homes in Katrina than the state of Louisiana believed those families were owed.

Anticipating that Katrina would not be the last storm of its kind, insurance companies began to restrict coverage, boost deductibles, refuse policy renewals, and raise premiums. By September 2007, many homeowners along the Gulf Coast and Eastern Seaboard had seen their premiums triple; over the past decade some New Orleans residents have faced fivefold increases. Meanwhile, the National Flood Insurance Program, having taken on the risk that private insurance companies shunned, incurred debts to the tune of $18 billion.

Fast-forward to October 2012. That’s when Hurricane Sandy, the largest Atlantic hurricane on record, made landfall in New Jersey. Sandy was about a third as costly as Katrina, but many of the storm’s victims fared no better with their insurance companies. In May of this year, evidence that fraudulent damage assessment reports may have been used to lowball insurance payouts prompted FEMA to announce that all of the 140,000 families who filed flood insurance claims in the aftermath of Sandy would be given the opportunity to have their files reviewed. The announcement comes after a three-year period in which, even with the passing of the Flood Insurance Affordability Act in 2014, homeowners have seen flood insurance premiums soar. And increases are only going to keep coming: as of April 2015, premiums may rise as much as 25% per year for those in the riskiest flood zones, thanks to a congressional act aimed at alleviating NFIP’s now $24 billion debt.

The bottom line: For homeowners, navigating the insurance market is ever more challenging—and expensive. Between 2003 and 2013, the average premium climbed 69%, to more than $1,000 a year. But with the increasingly unpredictable weather that comes with climate change, and the number of catastrophic storms on the rise, such protection is also more necessary than ever. Here’s what you need to do.

Don’t skimp on flood insurance. If you own a home in a high-risk zone, Congress has mandated that you must have flood insurance to obtain an insured or federally backed mortgage. If it’s not required, you may be tempted to skip it. That’s a bad idea; homeowners who live near water should have both building property and personal property flood insurance, recommends the Insurance Information Institute.

If you do live in a high-risk zone, you may actually want to opt for excess flood insurance. Coverage by the NFIP maxes out at $250,000 for your home and $100,000 for your personal property. Excess insurance can boost that up another $500,000—coverage you will need if it would cost you more than $250,000 to replace your home.

Read the fine print. It’s always been crucial to know the details of your policy, but insurers’ narrowing of coverage in recent years has only made it more so. For example, does your policy cover “actual cash value coverage” or “replacement cost coverage”? Actual cash value takes into account depreciation when reimbursing you for losses; replacement coverage, though it costs about 10% more on average, goes all the way.

What are the caps and limitations on your coverage? The age of your roof may affect how much you’ll get toward replacing it, or your screened-in patio may not be covered.

Are there filing rules that you need to follow to get your insurance checks? Your policy may require that you notify your insurer of your intent to replace within six months—or, stricter yet, complete the work within six months, which may be a struggle following a major disaster. You can ask for an extension, and if denied, file a complaint with your state insurance department, but if both fail you could be out thousands of dollars.

And finally, in the event of disaster, will your coverage pay for a replacement house that meets modern building codes? If your home is more than 10 years old, you’ll need to allot as much as 20% of your dwelling coverage toward expenses associated with keeping up to code.

Pay attention to deductibles. Most homeowners’ policy deductibles are flat-rate deductibles, usually ranging from $500 to $2,500 (some advocate for much higher). There are exceptions though. Hurricane deductibles—which became more common after Katrina and are now available in 19 states and D.C.—are calculated as a percentage of the home’s value, usually from 1% to 5%.

On a $300,000 home, a 5% deductible means you’d be responsible for $15,000 out of pocket. That’s a lot more cash than the average policy deductible requires you to have on hand, so it’s important to have a plan for where that will deductible will come from if you end up needing it.

Document, document, document! The best way to make sure you get the coverage you’ve paid for in the event of a weather disaster is to obsessively document.

First and foremost, you’ll need a full inventory of the contents of your home, including anything and everything of value. A written list is helpful (for major items, include receipts and serial numbers, if you can), but a list with pictures or video footage is even better. You can even download a free app like KnowYourStuff to help you organize and store the list.

And if you find yourself having to make an insurance claim, keep meticulous records of each step of the process. You may need to provide a rebuilding timeline to your insurer, for example, in which case you’ll need to keep track of meetings with contractors and when you apply for permits. The fraudulent engineering reports that seem to have been used to undercompensate Sandy victims would never have been discovered had homeowners not taken the initiative to keep original reports and follow up when their payments looked insufficient.

Be realistic about where you’re buying. As frustrating as the spike in insurance rates—or, in some storm-prone areas, insurers’ refusals to write sufficient policies altogether—may be, it also sends a message. High premiums signal that an area can be a high-risk place to dwell. If you’re considering buying property in a coastal zone or a “disaster prone” region, you may want to weigh your safety—and your future finances—against that ocean view.

MONEY Credit

Homeowners With Bad Credit Will Pay Double for This Required Expense

The difference could be thousands of dollars.

It’s common knowledge that, in most states, one of the data points insurance carriers use to determine your premium is your credit score. The companies say lower scores are correlated with higher risk, which justifies charging higher rates; consumer advocates like the Consumer Federation of America contend that the practice is unfair and inflicts an onerous burden on low-income Americans.

What many people might not know, though, is that a similar link between credit and pricing exists in the homeowners’ insurance market—and if your credit is poor, you could take a serious financial hit.

A new survey from InsuranceQuotes.com finds that, on average, people with poor credit pay double what people with good credit pay for their homeowners’ insurance. That’s bad news, but what’s worse is that insurance companies in most states are relying even more heavily on credit scores today than they did in the past.

As in the car insurance market, only the states of California, Massachusetts and Maryland prohibit carriers from factoring in credit when they develop their underwriting formulas. (And Florida residents luck out; although the practice is allowed there, InsuranceQuotes finds that insurers there don’t really use it.)

In other states, it’s pretty much a crapshoot. While residents of New York with poor credit only pay 37% more, West Virginia homeowners with poor credit pay an eye-popping 202% more. In Washington, D.C., poor credit earns you a 185% premium hike, on average, which adds up to nearly $3,150 a year. By contrast, D.C. homeowners with good credit pay an average of $1,100 a year. In terms of dollar amounts, Texans with bad credit pay the most: more than $4,350 a year, on average.

Even the discrepancy among people with great and just-OK credit can be significant. While the average across the country is a 32% premium for mid-tier credit, that can climb to as high as 66% for Montana residents.

“They’ve done studies and found that consumers with low credit file more claims, so there is a statistical relationship,” says Laura Adams, InsuranceQuotes’s senior analyst. She acknowledges, though, that many people find the practice controversial, especially as insurance companies are weighting credit more heavily today. The survey found that 29 states, plus Washington, D.C., place more emphasis on credit now than they did a year ago.

Homeowners are caught in a bind, since mortgage lenders typically require homeowners to carry insurance, even though filing a claim can also increase the likelihood that your rate will rise, regardless of your credit.

“I think the takeaway here with consumers is to just get familiar with it, and do everything you can to improve your credit,” Adams says. If your credit has improved, ask your insurance carrier to re-rate you, she suggests. A higher score could mean a lower rate.

Get answers to your questions about credit and debt:
What Is My Credit Score and How Is It Calculated?
How Can I Improve My Credit Score?
Which Debts Should I Pay Off First?

MONEY Workplace

Why Your Paycheck Is So Much Smaller Than Your Salary

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Ian Jeffery—Getty Images

Count the deductions.

Gross salary? Net salary? FICA? You may notice when you add up a years’ worth of paychecks, the sum doesn’t match your promised salary. Check out some of the reasons these numbers aren’t equal below.

1. Income Tax

Income in the U.S. is taxed at the federal, state and local government levels. The IRS administers federal income tax progressively, meaning rates are determined by income level. Your first income dollar is taxed differently than your highest-income dollar. (You can see which tax bracket you fall into here.) The W-4 form you filed when you were first hired dictates how much is taken out for the federal government and it is deducted incrementally from each paycheck. (You may owe more or less than this estimate and thus may get a tax bill or refund come tax time.) State and local taxes vary based on location but also can be deducted from your paycheck.

2. Social Security

To help you cope with loss of regular income in retirement, the federal government requires employers to withhold a certain percentage (currently 6.2% from both employee and employer) of employee paychecks for Social Security benefits. The Social Security Administration takes the average of your highest-earning 35 years of covered wages, indexes for inflation and provides you with some income in the form of benefits.

3. Medicare

Similar to Social Security, Medicare withholdings are mandatory. These taxes go toward the Medicare insurance that you will qualify for once you are 65. Both employer and employee pay 1.45% of gross income into the system on the employee’s behalf and it provides coverage for major medical expenses. As of 2013, there is an additional tax for those with $200,000 of annual income or more.

4. Retirement Contributions

Plans like 401(k)s and 403(b)s are tax-deferred through your employer. These contributions can be taken directly out of your regular paychecks and go toward your retirement savings. The more you assign toward these accounts, the lower your federal income tax withholding will be.

5. Insurance Deductions

Health care (like medical and dental) and life insurance premiums paid through your employer are taken out at payroll as a deduction. Your health insurance premiums are not subject to FICA or Medicare taxes.

Even though your net income may not be all you hoped for when you got your salary statement, it is important to know where that money is going and how it may help you in the future.

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TIME driverless cars

Can the Car Insurance Business Survive Driverless Cars?

Gov. Brown Signs Legislation At Google HQ That Allows Testing Of Autonomous Vehicles
Justin Sullivan—Getty Images

As car safety becomes more sophisticated, fewer drivers will need coverage

As technology inevitably advances, cars are becoming much safer. It started with airbags and antilock brakes, and soon driverless cars will become commonplace. As safety features become more sophisticated, the number of accidents on the road will significantly decrease. This is, no doubt, good news, but insurance giants are nervous about what it will mean for their companies, since drivers will need less coverage. As Warren Buffett, who owns Geico, puts it: “If you could come up with anything involved in driving that cut accidents by 30 percent, 40 percent, 50 percent, that would be wonderful. But we would not be holding a party at our insurance company.”

Donald Light, head of the North America property and casualty practice for research firm Celent, says that in the next 15 years, as driverless cars start hitting the roads, premiums can drop as much as 60%. He tells insurers: “You have to be prepared to see that part of your business shrink, probably considerably.”

Insurance companies have already had a taste of what that will look like with the introduction of sensors that warn you if another car is too close and other similar features. According to the Highway Loss Data Institute’s 2014 study of insurance claims, bodily injury liability losses dropped by 40%, and medical payments saw a 27% drop. This will only keep getting worse for insurance companies (and better for the rest of us) as self-driving cars become the popular choice. Boston Consulting Group estimates that by 2035, self-driving cars will make up about 25% of all auto sales worldwide.

Insurance companies will be forced to seek out alternate sources of revenue. Tom Wilson, CEO of Allstate, is thinking about selling coverage for other products, such as mobile phones. He’s also considering using data that the company is already collecting about its customers. For example, they track their customers’ driving behaviors so they can offer rewards for safe driving; they could also potentially use that information to send customers coupons as they drive by retailers.

Although this advancement in car safety decreases the need for driver coverage, it also opens up a market for covering the carmakers. If one of their automated features fails, they will want to be insured to cover any liability costs.

MONEY homeowners insurance

Home Inventory Apps Help Protect You in Case of Disaster

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Leren Lu—Getty Images

Making an inventory of everything in your home helps verify your losses and speed insurance claims.

Home inventories are one of those things everyone knows they should compile but few people actually end up completing. Creating a home inventory can be a very long and tiresome process, which is why so many people avoid them.

Having an accurate inventory allows you to have some peace of mind should anything terrible ever happen to your home or belongings, like a hurricane, flood or fire. Luckily, apps can help speed up the home inventory process while keeping your information in a safe and accessible place. Some of these apps were developed by individual insurance companies, while others are independent of any particular insurer.

Non-Branded Apps

The Know Your Stuff® – Home Inventory app was developed by the Insurance Information Institute and anyone can use it for free. This app is accessible on Apple or Android devices, or on your computer.

Know Your Stuff allows you to record all of the relevant information you should need if you ever have to make an insurance claim. For each item, you can attach an image of the item, a copy of your receipt, an image of an appraisal (if you have one), the name of the item, which room the item is located in, what category the item fits in, how many of the item you have, the purchase price, the replacement cost or appraised value, the date and place you purchased the item as well as the make, model, serial number and description of the item. It will take a good bit of time to record all of this information, but the app organizes it all in one location where you will not lose it.

When you need to access your list of items, the app allows you to view your items by room or by category. Additionally, you can view a complete list of all of your items. This allows you to determine easily if you need to remove any discarded items or add any newly purchased items.

The Know Your Stuff – Home Inventory app even allows you to keep inventories of multiple locations, which can be extremely helpful if you have a rental property or vacation home. While this is the most comprehensive home inventory app we could find, the user interface is not as polished as some of the branded apps below. Remember, it is the information you record and how can you access it, not how pretty the app looks, that matters.

Branded Apps

Many insurance companies offer their own version of home inventory apps. In general, insurance companies do not require you to be a customer in order to download and use the apps they have created. Insurers provide these apps free of charge in hopes that you will consider awarding them your insurance business in the future.

Some popular branded home inventory apps include Allstate’s Digital Locker and Liberty Mutual’s Home Gallery. Be careful what you enter into these apps as insurance companies may have access to this information should you need to file a claim. If you accidently enter incorrect information into the app, it could hurt you. Additionally, these apps may not allow you to enter as much information as the Know Your Stuff – Home Inventory app.

Make Sure You Use The App You Download

No matter which app you choose to create your home inventory, make sure to actually complete the process and document every piece of information you think you may need. Make sure your app allows you to record the essential information needed by your insurance company to file a proper claim. You can always contact your insurer if you are not sure of their requirements.

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MONEY Insurance

Bad Credit Can Be Worse Than a DUI for Raising Auto Insurance Rates

Highway sign with DUI crossed out saying "You Can't Afford It"
Richard Klotz—Getty Images/iStockphoto

Insurers swear their rates make total sense.

Your credit score is a number that indicates how likely you are to pay off debts, from credit card bills to mortgages and beyond. The number is based on one’s credit history, and understandably, these scores are used regularly by banks and landlords as a way of determining whether it’s a good idea to give an individual a loan, or an apartment lease.

Increasingly, and somewhat puzzlingly, credit scores are also being consulted by employers to help them figure out who to hire, and by insurers that set premium rates based partially on the scores. Auto insurance companies began using the scores in the mid-1990s, and it’s now commonplace for them to help determine rates. Only California, Hawaii, and Massachusetts have laws banning the use of credit scores as a factor for establishing car insurance rates.

What in the world does one’s credit history have to do with the likelihood of, say, getting into a car accident? The web insurer esurance admits on its site that using credit scores to determine auto insurance is “controversial.” But it claims that doing so is legitimate nonetheless:

While the reasons why are less than crystal clear, research shows that credit scores can accurately predict accident potential. Statistical analysis shows that those with higher credit scores tend to get into fewer accidents and cost insurance companies less than their lower-scoring counterparts.

While insurers acknowledge that credit scores play a role in whether premium rates are high, low, or somewhere in between, it’s largely impossible to tell how big the impact is. That’s why Consumer Reports decided it was worthwhile to launch an investigation and try to get to the bottom of this. “Over the past 15 years, insurers have made pricing considerably more complicated and confusing,” the report states. Because insurers aren’t exactly forthcoming in explaining how they come up with rates (shocking!), Consumer Reports researchers analyzed more than two billion auto insurance price quotes from 700 companies for hypothetical drivers all over the country.

The results, published in the September 2015 issue, are particularly alarming for drivers with poor credit scores—and even for those with scores that are good rather than excellent. “Our single drivers who had merely good scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home,” the report states. Nationwide, drivers with good scores paid an average of $214 more annually than their neighbors with the best credit scores.

The impact of one’s driving and credit history on insurance varies widely from state to state. In Florida, for instance, a single adult driver with a clean record pays $3,826 annually for auto insruance, on average, if he has poor credit, or $2,417 more than a driver with a clean record with excellent credit ($1,409). Meanwhile, a driver with merely good credit would pay $1,721 annually, or $312 more than his counterpart with a top credit score.

Astonishingly, at times a poor credit score seems to have a larger influence on auto insurance rates than a drunk-driving conviction—which, one would think, is surely a strong indicator of the likelihood of getting into car accidents. In Florida, a driver with excellent credit and a DUI would pay an average of $2,274 per year for auto insurance, or $1,552 more than the driver with a clean record but a bad credit score.

Apparently, in the eyes of some insurers, the failure to pay off credit card bills is a worse offense than drunk driving.

MONEY

Think Health Care is Pricey? Get Ready to Spend Even More

pile of prescription medicine pills and tablets
Jan Mika—Shutterstock

Soon one out of every five dollars Americans spend will to go healthcare.

For the past six years Americans have gotten a respite from fast-rising health care costs. No more.

With millions of baby boomers entering retirement and pricey new drugs hitting the market, U.S. health care spending, which had increased at relatively moderate 4% rate since the financial crisis, grew 5.5% last year, according to a new government study reported on Tuesday by The Wall Street Journal.

You can expect more too. The actuaries who calculated the figures, project that spending will average 5.8% between 2014 and 2024. By then, health care as a share of the nation’s overall economy will have grown to 19.4% from 17.4% in 2013. In other words, our nation’s medical bills will account for one out of every five dollars we spend.

The changes aren’t totally unexpected. A big part of the extra costs are tied to the fact that baby boomers — many now in their 60s — are requiring more care. Important but expensive new drugs, like one that helps treat Hepatitis C, are also a factor, according the Journal.

Still, the rising costs aren’t good news, especially considering a key promise of the Affordable Care Act, which brought access to health insurance to millions of Americans, was to get the growth in health care spending under control, a goal known as “bending the curve.”

For people who get their health insurance coverage at work, rising costs are likely to mean a continued push by employers toward high-deductible plans, which can have steep out-of-pocket costs. Read here for more on tools for keeping medical bills under control.

MONEY Insurance

Why Your Auto Insurance Rate Could Go Up If Your Spouse Dies

couple holding hands in automobile
Marius Hepp—Getty Images

Critics are calling it the "widow penalty."

It’s hardly news that unmarried drivers tend to pay more for auto insurance than married ones. In today’s auto insurance industry, complex pricing algorithms take into account an ever-growing number of factors like driver credit score, gender, and age—factors that seemingly have very little to do with, well, actually turning the steering wheel.

But according to a new study by the Consumer Federation of America, a change in marital status from married to unmarried (through divorce or the death of a spouse) can cause a woman’s auto insurance premiums to rise as much as 226%—suggesting a “widow penalty” that CFA director of insurance Bob Hunter said in a press teleconference Monday with executive director Stephen Brobeck is “immoral and should be stopped at once.”

Using the stock profile of a 30-year-old female with a perfect driving record and holding all variables (from income to car model) constant except for marital status, the CFA study surveyed quotes from six auto insurance giants—State Farm, GEICO, Farmers, Progressive, Nationwide, and Liberty—across ten different U.S. cities. Of the six, State Farm was the only provider to never change its prices according to driver marital status; the remaining five routinely quoted higher prices to single—never married, divorced, or widowed—female drivers. Of those five, only Nationwide sometimes made exceptions for widows by not raising their rates. The “widow penalty” overall averaged to an approximately 14% increase.

The logic of the “widow penalty,” according to insurance companies, is simple: unmarried drivers are, allegedly, statistically riskier drivers. According to James Lynch, who serves as chief actuary and director of information services at the Insurance Information Institute, this is hardly immoral. Rather, it’s “very much the way that insurance works.”

“Rates aren’t supposed to be based upon what makes you feel good,” Lynch said of the CFA study. “Insurance companies are not in the business of creating favored classes of people.”

The CFA questions whether insurance companies’ risk information about unmarried drivers is even actuarially sound, claiming it comes primarily from a 2004 New Zealand-based study, which admits to including too few instances of accidents among divorced, separated, and widowed drivers to make any conclusive statements about them. Lynch counters that insurance providers are basing their rates on significant correlations in their claims data.

Yet it’s hard not to object to the notion of an insurance “widow penalty,” which seems to compound personal loss with financial loss, raising the question of how far insurance classification plans should be allowed to go. We wouldn’t, after all, accept a race-based insurance system; and under the Affordable Care Act, gender-based rating for health insurance is out.

The CFA argues that “widow penalties” are part of a trend in the auto insurance industry of charging higher premiums to those least likely to be able to afford them. Drawing a parallel to the practice of charging higher insurance premiums to customers with bad credit scores, Hunter and Brobeck noted during the teleconference that unmarried women tend to be less well-off than married women. “[Insurance companies] are just not that interested in selling liability coverage on an older car to a younger or lower income person, and they price it accordingly,” they said.

It’s an insurance landscape not unlike that which has provoked efforts to overhaul the American healthcare system—and that in December 2013 caused the Federal Insurance Office to issue a report entitled “How to Modernize and Improve the System of Insurance Regulation in the United States,” including the suggestion that states revisit the question of “whether or in what manner marital status is an appropriate underwriting or rating consideration.” The report pointed to same-sex couples in states where it was then illegal for them to get married as one key population discriminated against by marital status ratings.

But what to do for the single consumer here, now, and not looking to get hitched?

Shop around. Get as many quotes from as many providers as you can. And take into consideration all of the factors (and not just your single status) that might jack up your insurance rates. Most importantly, don’t feel tied to the same insurance provider you’ve been using for years. Should your marital status suddenly change, get back out there and shop some more.

Read next: 23 Tricks to Save Thousands on Your Car

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