MONEY Ask the Expert

Home Insurance Policies to Skip

For Sale sign illustration
Robert A. Di Ieso, Jr.

Q: I just bought an $89-per-year insurance policy for our sewer pipe. My wife says these kinds of policies (of which I have quite a few) are a waste of money. What do you say?

A: Well, if your sewer pipe cracks over the next 12 months, that’s money well spent. With tens of thousands in excavation, repair, and cleanup bills, you’ll be glad you get paid back for whatever portion of the expense the policy covers (perhaps $5,000).

Of course, it’s unlikely that the pipe under your front lawn will crack this year, in which case you won’t collect anything on your policy except perhaps some peace of mind. Now, $89 certainly isn’t a big outlay if it helps you sleep at night, but consider all of the similar insurance plans and extended warranties you can buy for just about every appliance, electronic gadget, and piece of home equipment you ever purchase.

Those can add up to many hundreds of dollars spent annually on policies that, frankly, have dubious value because of likely coverage restrictions in the fine print, because you may not remember exactly what policies you’ve bought or where the paperwork is if something does happen to a covered product, and because if the company providing the policy goes belly-up, your insurance goes with it.

“As a general rule, I’d advise against buying any sort of extended warranty or product insurance policy,” says Linda Sherry, a director at Consumer Action, a national nonprofit advocacy group based in San Francisco. Those plans are huge profit centers for the retailers, which often pay large commissions to the salesmen who pressure you so hard to buy them.

Most products come with a one-year warranty anyway—and that’s often doubled by the credit card you buy it with (check your card policy). So the extended warranty you buy from an appliance retailer, for example, could be duplicative.

Besides, the point of insurance should be to protect you from financially catastrophic expenses like a house fire, car accident, or health emergency. Smaller emergency costs, such as replacing a section of sewer pipe, a water heater, or a big screen TV, are hopefully the sorts of expenses that you could cover by other means, such as shifting funds from your contingency savings.

If you’re still tempted to pay for certain extended warranty coverage, perhaps because it includes an annual maintenance visit (as with oil-furnace coverage) or free tech help (as with some computer plans), just make sure the price of the annual policy is no more than 10% of the purchase price of the covered product, says Sherry. “Anything higher is overpriced.”

MONEY Health Care

5 Things You Need to Know for Today’s Health Care Coverage Deadline

Today is the deadline to buy individual health insurance if you want to have coverage on Jan. 1.

Since open enrollment began on Nov. 15, almost 1.4 million people have signed up for health coverage through the federal insurance exchange, and another 183,000 through state exchanges. With nearly 7 million people already participating, signups are on pace to meet the government’s projection of 9 million enrollees in 2015, according to the Kaiser Family Foundation.

If you’re one of the many who still need to enroll for 2015 coverage, here are five keys things you need to know before you visit your state’s health exchange website.

1. If you want health insurance on Jan. 1, you must enroll today. You still have until Feb. 15 to buy a 2015 plan, but you will have a gap in coverage if you enroll after today’s deadline. Coverage begins on Feb. 1 for people who enroll between Jan. 1 and Jan. 15. Sign up between Jan. 16 and the end of the month, and coverage won’t begin until March 1.

2. Some states are giving you more time and extending the deadline to get coverage by Jan. 1. For example, New York and Idaho’s exchanges will allow users to sign up until Dec. 20. To find out whether you’re eligible for an extension, visit your state’s marketplace exchange website through healthcare.gov.

3. You’ll be automatically re-enrolled if you bought on an exchange last year and do not renew coverage by today. If the health plan you signed up for is no longer offered, insurers can automatically enroll you in another policy similar to the one you have now. But you can opt out of any plan you’re automatically enrolled in and choose another up until Feb. 15.

4. Skip automatic enrollment and shop again, even if you liked your 2014 policy. The Department of Health and Human Services found that more than 70% of people who currently have insurance through the health law’s federal online marketplace could pay less for comparable coverage if they are willing to switch plans.

5. Costs have changed. Many plans will have out-of-pocket spending limits that are lower than the maximums allowed under the health law, according to an analysis by Avalere Health. But the tradeoff for those lower maximums may be a higher deductible, so be sure to pay attention to both figures when choosing your plan. You can also expect to see your premium change. Depending on where you live, that may be a good or bad thing. The premium for the second-lowest-cost silver plan in Nashville jumped 8.7%, while it dropped 15.6% in Denver, according to a study by the Kaiser Family Foundation.

MONEY Shopping

Why You Should Skip That Extended Warranty

Broken TV
Jeffrey Coolidge/Getty Images (TV)—Oliver Childs/Getty Images (screen)

Buying an extended warranty is almost always a waste of money. But people do it anyway because they misunderstand the true purpose of insurance.

It’s holiday shopping season, and anyone who has recently bought a TV, smartphone, or other expensive piece of equipment has likely been on the receiving end of a hard sell for an extended warranty: That’s a nice television you’ve got there. Would be a shame if something happened to it. And wouldn’t you know it? For a mere $59.99, the salesman can offer a little piece of mind in the form of (overpriced) insurance.

It’s a pitch that works, even on those who should know better. Sure, the TV costs $750, meaning you’re paying 8% extra to protect your purchase. But that’s a good deal when the alternative is paying another seven hundred fifty if the machine ever croaks, right?

As the New York Times’ Damon Darlin points out, this kind of faulty logic comes from our collective inability to price risk correctly. Realistically, the TV you just purchased probably has a very low failure rate—Darlin cites data suggesting only 2%-4% of brand-name TVs turn out to be lemons. So you should really be multiplying the cost of your purchase by the likelihood it will break. In the case of a $750 TV with a 4% failure rate, he suggests an appropriately priced insurance policy would be $30.

But even Darlin is giving extended warranties too much credit. The real reason most people pay too much for product protection isn’t because they don’t understand risk (although that’s probably also true), it’s because they don’t understand the economics of insurance in the first place.

The fact is, all insurance policies are overpriced. That’s the nature of insurance. Whenever you buy a policy, whether it’s for your car, your health, or your television, the company selling it to you is betting you will pay more in premiums than your car repairs or health care will ever actually cost. And these companies employ thousands of very smart people to make sure they’re likely to win that wager.

“Even if you do all these calculations, you don’t think insurance companies haven’t also done the same calculations and for some reason believe they’re going to make money nonetheless?” asks Drew Tignanelli, president of the Financial Consulate website. “The way I look at insurance is that it is not designed to save me from every nickel and dime I will lose. If I try that, I will definitely cost myself more than what I’m putting out.”

So if insurance coverage is intrinsically overpriced, why do we buy it at all? “Insurance is meant to prevent me from running into a financial catastrophe or devastation,” Tignanelli explains. An astronomical medical expense, repair bill, or legal fee is unlikely, but it could mean complete financial ruin. Those outcomes are so terrible that they’re worth paying a premium to avoid.

But no matter how much you love Scandal or Game of Thrones, a broken TV is not a catastrophe—financial or otherwise. Most purchases are cheap enough, and their failure rate low enough, for you to safely bet that the product you bought will work for the foreseeable future.

If you’re right—and in the case of TVs there’s a 96% chance you are—you’ll save money. And in the unlikely event it does break, you’ll either be able to afford a new one, or at the very least go without for a while. There’s also a good chance your credit card provides some amount of warranty protection, or that the cost of repairs will be roughly the same price as an extended warranty anyway.

If you play the odds over time, you’re all but guaranteed to come out on top. After all, the entire insurance industry is built on that very assumption.

Do you have the insurance you really need? Check out these articles to find out:
Homeowner’s Insurance: Covered? Don’t Be So Sure
Here’s a New Reason to Think Twice Before Buying Long-Term Care Insurance
How to Do an Insurance Inventory
You Can Now Buy Health Insurance at Walmart—but Should You?

TIME

HealthCare.gov Average Premiums Going Up in 2015

Premiums for the most popular type of plan will go up an average of 5 percent

(WASHINGTON) — Many HealthCare.gov customers will face higher costs next year, the Obama administration acknowledged Thursday in a report that shows average premiums rising modestly.

However, officials said millions of consumers who are currently enrolled can mitigate the financial consequences if they are willing to shop around for another plan in a marketplace that’s becoming more competitive.

Premiums for the most popular type of plan will go up an average of 5 percent in the 35 states where the federal government is running the health insurance exchanges, said a report from the Health and Human Services Department.

However, the administration says about two-thirds of current customers can still find coverage comparable to what they have now for $100 a month or less if they shop around. That estimate takes into account the tax credits that most consumers are entitled to, which cover about three-fourths of the cost of premiums on average.

Double-digit premium increases were common for people buying their own insurance before the passage of President Barack Obama’s health care law.

The modest average increases the administration reported Thursday mask bigger price swings from state to state, and even within regions of a state. Some are still seeing double-digit hikes. But others are seeing decreases. And most are somewhere in the middle.

On the whole, administration officials say the market is more stable.

“In today’s marketplace, (insurers) are competing for business,” Health and Human Services Secretary Sylvia M. Burwell said in a statement. “Returning customers may find an even better deal if they shop and save.”

The report said about 90 percent of customers will have a choice of three or more insurers this year, with each company usually offering a range of plans. That’s a notable improvement from last year, when 74 percent of customers had similar options.

The most popular coverage is known as the lowest cost silver plan and will go up 5 percent next year.

Another key plan, the second-lowest cost silver, will go up an average of 2 percent.

Obama’s health care law offers subsidized private health insurance to those who don’t have coverage on the job. Online markets called exchanges provide different options in each state.

MONEY Health Care

Why 1 in 3 Americans Is Scared to Go to the Doctor

surgeon removing money from wallet
Paul Tillinghast—Getty Images

More insured Americans are skipping out on health treatments that they need because of cost, a new Gallup poll finds.

The Affordable Care Act kicked into gear over a year ago. And more than 86% of Americans now have health insurance, up from 82% in mid-2013.

Even so, according to a new Gallup poll, a third of Americans say they aren’t getting the medical care they need because of cost.

In fact, more Americans are putting off medical care than ever before in the 14-year history of the poll.

Source: Gallup

Uninsured Americans aren’t the only ones delaying medical treatment. Some 34% of Americans with private health insurance say they’ve skipped out on care because it was too expensive, up from 25% last year. Additionally, 28% of households that earn $75,000 or more report that family members have delayed care, up from just 17% last year.

One likely culprit? Rising out-of-pocket costs. Americans who get healthcare coverage through their employers have seen deductibles more than double in the past eight years.

image (10)
Source: Kaiser Family Foundation, Employer Health Benefits 2014 Annual Survey. Note: Data is for covered workers with a general annual health plan deductible for single coverage.

It’s part of a movement towards what’s come to be termed “consumer-driven health care.”

The thinking is, when patients are more aware of healthcare costs and more discerning about what care they really need, they will also be more discerning in their usage—which in theory would lower costs for everyone involved. Two-thirds of large employers think consumer-driven healthcare is one of the most effective tactics to reduce costs, according to the National Business Group on Health.

But Gallup found that more Americans are skimping on care that they think they really do need. According to the survey, 22% of Americans say they’ve put off treatment for a serious condition, vs. 19% last year. The percentage of Americans who say they put off care for a non-serious condition stayed flat at 11%.

Previous studies have found that when consumers are asked to share more of the costs, they put off both necessary and unnecessary care.

For example, one study found that people on high-deductible plans are less likely to buy expensive, brand-name drugs (which may be sensible), but they’re also less likely to buy generic drugs they need to treat chronic conditions (likely not sensible).

When forced to pay more out-of-pocket, men in particular are more likely to skip care for serious problems like irregular heartbeats and kidney stones.

What’s especially frightening about these findings is that delaying needed care to save money in the short term may result in more costly complications and more difficult-to- treat health issues in the longer term. Skipping the cholesterol screening now, for example, could mean racking up a $100,000 tab for a heart attack later.

Are you avoiding treatment you need because you’re afraid of the bill? Try these strategies to get the same healthcare for a quarter of the price. If you’re on a high-deductible plan, use your Health Savings Account to budget for your expected—and unexpected—costs.

MONEY Ask the Expert

Do You Really Need Medigap Insurance If You’re in Good Health?

140603_FF_QA_Obamacare_illo_1
Robert A. Di Ieso, Jr.

Q: We are in good health and have a Medigap Plan N for 2014. With same expected health in 2015, do we need anything more than Medicare A, B, and D plans? —Norbert & Sue

A: Medigap, a private insurance policy that supplements Medicare, picks up where Medicare leaves off, helping you cover co-payments, coinsurance, and deductibles. Some policies also pay for services Medicare doesn’t touch, like medical care outside the U.S.

This additional insurance is not necessary, but, says Fred Riccardi, client services director at the Medicare Rights Center, “if you can afford to, have a Medigap policy. It provides protection for high out-of-pocket costs, especially if you become ill or need to receive more care as you age.” (If you already have some supplemental retiree health insurance through a former employer or union, you may be able to skip Medigap; you also don’t need a Medigap policy if you chose a Medicare Advantage Plan, or Medicare Part C.)

If you purchase Medigap, you’ll owe a monthly premium on top of what you pay for Medicare Part B. The cost ranges from a median annual premium of $936 for Medigap Plan K coverage to $1,952 for Plan F coverage, according to a survey of insurers by Weiss Ratings. The median cost for your plan N was $1,332 a year.

Even if you didn’t end up needing your Medicap policy this year, however, think twice before you drop it.

If you skip signing up when you’re first eligible, or if you buy a Medigap plan and later drop it, you might not be able to get another policy down the road, or you may have to pay far more for the coverage.

Under federal law, you’re guaranteed the right to buy a Medigap policy during a six-month open enrollment period that begins the month you turn 65 and join Medicare, says Riccardi. (To avoid a gap in coverage, you can apply earlier.) During this time, insurance companies cannot deny you coverage, and they must offer you the best available rates regardless of your health. You can compare the types of Medigap plans at Medicare.gov.

You also have a guaranteed right to buy most Medigap policies within 63 days of losing certain types of health coverage, including private group health insurance and a Medigap policy or Medicare Advantage plan that ends its coverage. You also have this fresh window if you joined a Medicare Advantage plan when you first became eligible for Medicare and dropped out within the first 12 months.

Most states follow the federal rules, but some, such as New York and Connecticut, allow you to buy a policy any time, says Riccardi. Call your State Health Insurance Assistance Program to learn more.

Outside of one of these federally or state-protected windows, you’ll be able to buy a policy only if you find a company willing to sell you one.And they can charge you a higher premium based on your health status, and you may have to wait six months before the policy will cover pre-existing conditions.

TIME Health Care

Obamacare Support Drops to 37%, Survey Says

U.S. President Barack Obama listens to a question at a news conference at the end of the G20 summit in Brisbane
U.S. President Barack Obama listens to a question at a news conference at the end of the G20 summit in Brisbane, Australia on Nov. 16, 2014. Jason Reed—Reuters

Even as 100,000 people spent the weekend signing up for insurance

Americans’ approval of the Affordable Care Act has fallen to a new low, according to a new poll, even as 100,000 people spent the weekend signing up for health insurance under the program.

A Gallup survey conducted Nov. 6-9, in the days after Republicans won control of Congress in the midterm elections, finds only 37% of Americans approve of President Barack Obama’s signature health care law, for which the second open-enrollment period began on Nov. 15. Lower approval was noted among independents and non-whites, at 33% and 56%, respectively.

Support for the law has been consistently low since November 2013, around the time the first open-enrollment period began. In January, support reached its previous low of 38%. Gallup notes that “approval of the law has remained low throughout the year even as it has had obvious success in reducing the uninsured rate.”

Many Republicans have called for an all-out repeal of the law, which is unlikely, though Obama could still agree to modify parts of it.

MONEY buying a home

7 Tips For Buying a Vacation Home

Beach house
Astronaut Images—Getty Images

You may be tempted to finally buy that vacation place now that the housing market has healed. Here's what to consider before you start house hunting.

Many Americans contemplating a vacation home abandoned that dream when the housing market collapsed. But now that home values have climbed month after month, with the median price up about 20% since its bottom nearly three years ago, you may once again be toying with the idea of that lakefront, ski or beach getaway place. About 13% of homes purchased last year were intended as vacation homes, up from 11% in 2012, according to the National Association of Realtors.

Yet you shouldn’t let the fact that the market has stabilized drive your buying decisions. Instead follow these seven steps to take to make sure a vacation home is right for you, and won’t turn out to be an expensive headache.

1. Choose the Location Carefully

This may sound obvious, but before you start shopping you need to be able to specify why exactly you want this second home. The answer should shape where you look. For example, 87% of vacation home purchasers in 2013 planned to use the property primarily to getaway with their families, according to the NAR. Thus the typical home purchased was an average 180 miles from the buyers’ primary residence.

If the main purpose is for you and your loved ones to gather together and enjoy the house as a family, you’ll need it to be in an area that is easily accessible for everyone, and that offers plenty of activities for different age groups. While you may think jumping on a flight to Florida isn’t a big deal, elderly grandparents or parents of small children may disagree.

Buyers who plan to rent the home to others- as 25% of purchasers do- may want to choose a location with numerous seasons of rental demand, so you aren’t limited to income only, say, three months of the year (likely when you want to use the home too). When you’re viewing the home as an investment property you’ll also care more about projected growth rates of the communities you’re considering, as well as the health of the local economy.

Related: 6 Amenities to Ensure Repeat Business in Your Vacation Rental

2. Rent Before You Purchase

Before you lock yourself in, rent a place (more than once is best) in the area you’re considering to be certain you’ll actually enjoy it. Stay for at least two weeks to make sure you don’t grow bored on extended stays.

Try to visit in different seasons to understand weather and crowd patterns. For example, you may realize that you hate needing to book a dinner reservation well in advance during the summer busy season, when you’re there to relax.

Or if you plan to eventually move to the home full-time, as one-third of buyers do, you may decide a house outside of town is actually too lonely and inconvenient. Only 32% of vacation homes purchased last year were in a small town or rural locale.

You’ll also learn what part of town you prefer. For example, in Orlando vacation homes are spread out throughout the city, but you may prefer the shops and restaurants in Kissimmee over Davenport.

3. Buy Under Your Budget

Don’t fall into the trap of purchasing a property that is a stretch to afford. Buying a house with too high of monthly carrying costs causes stress, and most people go on vacation to getaway from troubles. It also means that if you eventually decide you want to hire someone to manage the place, or care for the yard, there won’t be any wiggle room in your budget to afford it.

Keep in mind that you can always upgrade to a bigger house down the road.

4. Be Realistic About How Often You’ll Use It

My wife and I have three kids. When they were young we bought a vacation home near our house. We used it all the time. As the kids got older, though, we visited the house less and less. Weekend sports games, friends sleeping over, and church and school activities left too little time to get there.

Be realistic when you make assumptions about how often you’ll actually be able to use the place. You may be better off working out a rental agreement with an owner in the area to use his or her place two or three times a year- and forget about the place when you’re not there.

5. Understand the Tax Implications

Don’t assume you know what the tax consequences of owning that property will be, based on your experience with your primary residence. Second homes can be more complicated.

If you are going to rent out the property, you will need to pay income taxes on the rental income you receive. Your property taxes may also run higher than what you pay now, either because the tax rate in the vacation area is higher than where you live, or because its a second home and not a primary residence. For example, the taxes on second homes in Florida are usually much higher than for primary residences.

A qualified real estate agent should be able to provide details about taxes in the area, and possibly even tips on ways to save, such as buying just outside the city limits.

6. Make a Conservative Estimate of Rental Income

Most buyers tend to be overly optimistic about how often they’ll rent out the place. Talk to a local vacation rental agency about how many weeks of the year you can realistically expect demand. For example, even in a winter and summer destination such as Lake Tahoe you can’t expect to fill the place every month of the year.

You also need a realistic estimate of how much expenses will eat into that income. Presume repairs will cost about 1.5% of the value of the house. So for a $100,000 place budget for at least $1500 a year in repairs. Each year the tab might be higher or lower than the estimate, but this rule of thumb will give you some flexibility from year to year.

Similarly, find out ahead of time what your home insurance tab will run, since second homes are often in hurricane or flood areas and thus pricey to insure, and also may cost more simply because they are empty more often.

7. Don’t Get Caught Up in the Moment

If a friend, family member or another investor brings you an opportunity to buy a vacation home, or to acquire land with aspirations of building a grand home, don’t let yourself be easily persuaded. The proposal can sound romantic but quickly turn into a horror story. Sometimes people have alternative motives. Other times they haven’t actually done their homework to uncover that the so-called deal isn’t really a good one.

Related: How to Market Your Vacation Rental to Ensure Maximum Bookings

So slow down, take your time — and do your research. Move forward only after you have thoroughly run the numbers yourself. An opportunity that turns sour will eat up your money- as well as your precious vacation days.

 

More from BiggerPockets:

10 Things Only Personal Finance Nerds Would Understand

5 Tenant Characteristics Its Wise to Discriminate Against

5 Ways to Reduce Booking Cancellations On Your Vacation Home

 

Another version of this article originally appeared on BiggerPockets, the real estate investing social network. © 2014 BiggerPockets Inc.

MONEY retirement income

The Creepy Truth About Life Settlements

Actress Betty White presents the late producer Bob Stewart with a posthumous Lifetime Achievement Award during the 40th annual Daytime Emmy Awards in Beverly Hills, California June 16, 2013.
Actress Betty White has pitched life settlements to seniors. Danny Moloshok—Reuters

A new novel revolves around a murderous life settlements investor. That's fiction. But these products have very real risks for buyers and sellers.

Selling your life insurance policy is right up there with taking out a reverse mortgage when it comes to retirement income sources that most people would be better off not tapping. But folks do it anyway, while paying little attention to the costs and, as a new novel points out, the risks of a policy landing in the wrong hands.

Selling a life policy for a relatively large sum—known as a life settlement—has gotten easier over the last decade. Hedge funds, private equity funds, insurers and pension funds dominate the market, which totals around $35 billion, up from $2 billion in 2002. Individuals are investing in them too, through securities that represent a fraction of a bundle of life settlements, sometimes called death bonds.

How Life Settlements Work

Those most likely to be offered a life settlement, formerly known as a viatical, are individuals with a universal life insurance policy they no longer need or can’t afford—or who simply don’t want to pay the premiums. A term life policy that converts to a universal policy may also have value. Policyholders sell their insurance for more than they’d get by surrendering the policy to their insurer. If you have a death benefit of $1 million, you might have $100,000 cash surrender value but manage to get $250,000 from a third-party investor. The investor assumes future premium payments and collects $1 million at your death.

Not a bad deal, assuming you’re comfortable with the fact that someone out there has a financial interest in your demise. You get a bigger payout for a policy you were going to give up anyway. Life policies with total face value in the tens of billions of dollars lapse every year, according to industry estimates. Many of those policies have value in the secondary market.

As part of their ad campaign, the life settlement industry has enlisted actress Betty White, who pitches these deals for “savvy senior citizens needing cash.” Heck, she’s more persuasive than Fred Thompson is about reverse mortgages. But don’t be easily swayed. Aging celebrities from Henry Winkler to Sally Field are pitching all sorts of elder products these days in what amounts to an encore career—not a genuine endorsement.

The Privacy Risk

Okay, so what are the downsides to life settlements? For policyholders seeking to raise money, the creepiest risk by far is that you sell your policy to Tony Soprano, who understands that the quicker you die, the greater his rate of return. This is the extreme case explored in a new novel by Ben Lieberman, The Carnage Account. The lead character is a Wall Street high roller who buys up life settlements and dispatches the people with the biggest policies. “Very few products on Wall Street have been immune to exploitation,” says Lieberman, noting the wave of subprime mortgages that blew up in the financial crisis. “The abuse can now hurt more than your property. Instead of losing your house you can lose your life.”

Of course, Lieberman is a novelist with an active imagination. Life settlements have been around since the AIDS crisis, and there has never been a known case of murder for quick payoff, says Darwin Bayston, CEO and president of the Life Insurance Settlement Association. There have been only three formal complaints of any kind about life settlements to national regulators in the last three years, he says.

Yet Lieberman, who has a long Wall Street background, finds the entry of cutthroat hedge fund managers more than a little unsettling. Policies with insurers or held by pension funds remain largely anonymous inside huge portfolios. Institutions base their settlement offers on average life expectancies, knowing some policies will pay early and some will pay late.

But in smaller and more actively managed pools investors may pick and choose life policies that promise a quicker payoff, based on things like depression and mental illness, or clues from medical staff as to the most “valuable” policies. Life settlement investors are also targeting an estimated $40 billion of death benefits that policyholders might sell to fund long-term care needs, spinning it as socially conscious investing. How else will these seniors pay for end-of-life care? “Instead of credit risk or prepayment risk we now evaluate longevity risk,” Lieberman says. “This began as a way to help terminally ill patients. Now it incorporates perfectly healthy people and presents a way to bet against human life.”

One former life settlements investor told me he has seen third-party portfolios of life policies fully disclosing the names of the insured parties, which is the basis for the success of Lieberman’s fictional Carnage Account. In his novel, a murderous hedge fund manager gets this information and speeds up the whole process. Again, that’s fiction. But even Bayston concedes that a determined life settlements investor could get the identities of the insured people whose long lives are bad for investment returns.

The Financial Risks

Now, let’s look at the non-fiction risks with life settlements. For sellers, they are considerable, and include giving up your policy too cheaply and paying dearly for the transaction, and possibly becoming ineligible to buy another policy. Always check the cash surrender value first. Do not be swayed by brokers putting on a hard sale. They stand to collect commissions of up to 30% of the settlement. If you are determined to quit paying premiums, rather than sell the policy consider letting the cash value fund future premiums until the cash is exhausted. That’s a much better deal for heirs if you pass away in the interim. You can sell the policy when the cash value has been depleted—and get more for it then.

For buyers, settlements are complex and illiquid, and they may not pay out for many years. Given these hidden risks, they generally do not make sense for individual investors. Wall Street, meanwhile, benefits from their huge fees and expected long-run annual returns of 12% or more. Perhaps more important, settlements offer returns with no correlation to the financial market, which can be attractive to sophisticated investors and institutions, such as pension funds.

The life settlements industry has leveled off since the financial crisis, in large part because policies are taking longer to pay, thanks to increasing longevity. That drives down returns. Underscoring this risk to investors: the Society of Actuaries recently published revised mortality rates showing that a 65-year-old can now expect to live two years longer than someone that age just 14 years ago. But investors have been edging back into the market the last couple years, drawn by more realistic return assumptions and an anticipated flood of life policies held by boomers who will need cash to pay for assisted living.

Only in a novel do life settlements investors manage longevity risk with a hit man. But there are good reasons to be careful nonetheless.

MONEY homeowners insurance

Why You Soon May Have to Pick Up More Home Repair Costs

measuring tape with money
Bart Sadowski—Getty Images

Insurers are moving from flat deductibles to higher ones based on the value of your home. Here's what you need to know about this change.

Two years after Superstorm Sandy, State Farm agent Jen Dunn is busy explaining new insurance math to her customers in upstate New York. Instead of the dollar-amount deductibles they have been used to for years, she is now writing their policies based on percentages.

For many, it means turning the typical $500 deductible into 1% of the insured value—for a $250,000 house, that means a gasp-producing $2,500.

“My clients who have been offered this initially say, ‘I don’t like this,'” Dunn says. But then she explains that the higher amount is usually offset by a lower annual premium. If they go years without a claim, they can save in the meantime.

Jason Corbett, 39, who lives in central Georgia, is using a 1% deductible. Because Corbett’s rural home is valued at slightly less than $200,000, it was a better deal than a flat $1,000 deductible. The difference between the two deductibles was only a couple of hundred dollars. However, he saved money by lowering his premium, so over time the difference in his out-of-pocket costs will be negligible.

If he had a $300,000 home and the deductible was double what he pays now, “that would be a different decision,” says Corbett, who writes a personal finance blog.

State Farm, the largest U.S. property and casualty insurance company by market share, says a “significant” number of its policies now have percentage deductibles. Other carriers, like Allstate Corp, USAA, and Nationwide, also offer the option to consumers in certain states, but the prevalence is not yet tracked nationwide. The practice is near-universal in Texas at this point, according to that state’s insurance office.

With a percentage deductible policy, things are a little different than the old-fashioned flat rate. Here are seven things you need to know:

1. Do not be afraid of high deductibles

You might be used to $500, but a higher deductible could actually be better for you.

“It’s a very smart move to buy high deductibles if you can afford it,” advises J. Robert Hunter, director of insurance for the Consumer Federation of America.

The main reason? Every claim you make against your homeowners insurance can raise your rates. One claim pushes it up an average of 9% and two claims will raise it by 20%, according to a recent study by insuranceQuotes.com. So you want to pay out of pocket for small claims anyway.

2. The 1% deductible is not a percentage of your loss

The new terminology makes people think of health insurance, but homeowner claims do not work that way, says Jim Gavin, director of insurance information services for the Independent Insurance Agents of Texas trade group.

Rather, the out-of-pocket deductible you have to pay before the company will cover any claims is based on a percentage of the insured value of your home—which is not the market value or the appraised value, but the cost of replacing your home should it burn to the ground and need to be rebuilt.

For example: If a kitchen fire damaged your $250,000 home with a 1% deductible, and it cost $5,000 to repair the damage, you would receive a check from the insurance company for $2,500 after paying the other half yourself.

3. Your out-of-pocket costs will regularly increase

Your $500 deductible stays flat forever, but a percentage deductible will go up incrementally over time as the insured value of your home rises.

Some homeowners may not even notice this, like Will Harvey, 34, of Tyler, Texas, who is five years into a 1% policy on his home. “If it went up, it wasn’t enough for me to remember it,” he says.

4. You will still have other deductibles on top of the basic rate

Many homeowners have add-on clauses like a 5% hurricane deductible that is common in coastal areas, or 2% for wind and hail damage. Many states require separate coverage for earthquakes and floods.

Those all still apply on top of the basic coverage for fire and theft, says Amy Danise, editorial director of Insure.com. So if you have any damage that is caused by a specified risk, you will have to pay out of pocket first for that.

5. Your might be able to pay down your percentile

If 1% is too much for you, you may have the option to accept a higher premium to lower out-of-pocket costs—going from 1% to half a percent or some other fraction. The value to you depends on how much your house is worth and how much you can afford to pay out of your savings if something goes wrong, says State Farm’s Dunn.

6. You can still shop around

Even in Texas, where almost every company offers a deductible of at least 1%, or sometimes up to 1.5% or 2%, some carriers still do things the traditional way. Texas insurance agent Criss Sudduth says the customers who might benefit more from a flat-fee policy are those whose premiums do not actually go down despite the percentage policy—either because the weather risks are too high or because their personal credit is bad.

7. You should still figure out your dollar amount

After years of hearing complaints from consumers who are confused, the Texas legislature passed a bill recently requiring carriers to explain what the percentage deductible translates into, in dollars.

In other states, if your carrier does not do this, you should find out the information yourself and write it on your declarations page, says Deeia Beck, public counsel and executive director of the Texas Office of Public Insurance Counsel.

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