Create Your Personal Protection Plan

Saving safeguards: How to avert financial disaster

By John F. Wasik (Reuters)

The Japanese tsunami and nuclear disaster has triggered a lot of serious thinking about personal disaster planning.

While my hopes and prayers are with the Japanese people as they attend to their needs and recover, it’s an ongoing reminder that we have to consider and plan for worst-case scenarios in our own lives.

Protecting against a disaster requires financial triage. Most of us never think about the need to do this until faced with a life-changing event. The single-best “first responder” safeguard against all kinds of catastrophes is a combination of adequate savings and insurance.

You need a protection plan in case a Black Swan (rare but troubling) event hits your life. In one year, my family experienced serious illness, major loss of income and lightning hit our house. What are the odds of that happening?

Fortunately, I was doubling our normal monthly savings two years prior to our annus horribilus. Although the rate of return was practically zero, I kept cash in a liquid but safe money-market mutual fund. That way I could cover at least a year’s worth of mortgage, property taxes and the basic deductible for our health insurance plan (almost $6,000 at the time). I also had enough to cover the out-of-pocket amount for our home insurance policy ($1,000).

A brief note on insurance: Don’t sweat the small stuff. You want to cover huge bills like serious illnesses and accidents along with catastrophic losses like house fires. Several of my neighbors have been scorched after lightning strikes (one couple had no home insurance and had to spend all of their savings).

Higher deductibles will lower your premiums, but make sure to cover major losses that are annually adjusted to inflation.

One policy that I was tempted to cancel but glad I have is disability insurance. This covers you in the event that a severe disability prevents you from earning income. If your employer offers this coverage, take it. There are two kinds: short-term (for a temporary disability), and long-term (permanent).

I’ve known far too many people who’ve been disabled by strokes, heart attacks, surgery and cancer. If your household would suffer greatly from loss of income due to disability, you need to buy this policy before life insurance. While pricing disability coverage on your own is expensive, look for group plans. I found a policy through my college alumni association that was reasonably priced. It was a deal compared to buying individual plans through brokers.

My catastrophic savings plan is multi-tiered. I have a short-term cash account (money-market fund) for monthly bills, a mid-term fund and a long-range plan. The mid-term account I keep in a short-maturity bond fund. It’s designed as a back-up to my short-term kitty.

As I discovered during our health emergency, out-of-pocket costs are usually more than your deductible — expensive drugs were not covered. Then we had ordinary living expenses such as taxes, home repairs (our washer died), dental work and day-to-day bills that had to be paid along with medical bills.

We also had a family stock investment club account — that we invested in over the past decade for fun — although we had to cash that in as well to cover medical bills. This was another welcome back-up, though.

The third leg of our protection plan is long-range savings. We have 401(k)s, 529 college savings plans, Roths and individual retirement accounts (IRAs). We were fortunate that we didn’t have to tap any of these funds, although we didn’t contribute to them, either. They are an absolute last resort for cash since the tax hit on withdrawals would only net around 60 cents on the dollar.

I regard my “ready money” savings strategy as a faithful friend in the way that Ben Franklin saw it. It may not provide as much comfort as a great spouse or partner, wonderful children or a dog (I’m counting these blessings), but it sure can pay some bills and allow one to rebound in the worst of times.

Why US Home Market Still Reeling

Home market isn’t on rebound yet

By John F. Wasik

Are we there yet? Is the U.S. home market on the upswing?

As Alan Greenspan would say, “there are shoots,” although a true spring in housing is still hampered by a chilly economic climate throughout most of the country.

One positive sign came from new mortgage applications, which jumped to the highest level in three months last week, according to the Mortgage Bankers Association.

As Congress and state attorneys general wrangle with a number of reforms to seed a housing rescue, most of the country is not out of the woods. Yale Economist Robert Shiller warned recently that housing prices could “slip another 15 to 25 percent”.

Foreclosures and defaults are continuing unabated. Most of the news concerning housing is still frosty. The S&P Case-Shiller Index (for the fourth quarter of last year), showed prices in 19 out of 20 markets surveyed down for December over November. Washington, D.C. was the only major market that rose.

Cities gob-smacked by the bust — Las Vegas, Miami, Phoenix and Tampa — all hit new lows in December. Even markets that weren’t inflated as much in the bubble saw new lows (Atlanta, Charlotte, Seattle and Portland, Oregon).

Although the percentage of distressed sales is still alarmingly high at more than one-third of all sales, according to CoreLogic, they are down from their peak in January of 2009.

Why would I be remotely optimistic that we’re not in a sustained double-dip housing recession? Unemployment has been improving of late. That’s always a plus for housing and figured in the meager spurt in mortgage applications.

The other hopeful sign is that Congress slowly seems to be moving to fix what’s broken in the housing market. The Obama’s Administration main housing aid program, known as “HAMP,” is targeted for elimination.

Good riddance. HAMP has been so ineffective that Elizabeth Warren, the new consumer financial bureau adviser, likened it “bailing out the boat with a teaspoon as it takes on gallons of water.”

An even more aggressive — and potentially helpful — proposal is being discussed by major banks and state attorneys general trying to settle over alleged “robo-signing” mortgage abuses.

The states’ proposal would allow homeowners to write down principal balances while renegotiating mortgage terms. Although it’s too early to tell, this one measure could prevent a large number of foreclosures. It’s only fair since homeowners attempting to refinance were unable to negotiate lower payments based on home values that crashed. Congress has failed to allow mortgage holders to write down balances in bankruptcy court, so this could provide some buoyancy for the ever-sinking housing market.

There are millions of foreclosures in the pipeline that create a shadow inventory of homes. Banks can still dump these properties on the market, which will further depress housing prices.

Only keeping people in their homes and stimulating sales could forestall a full double dip. Back in Washington, policymakers are sluggishly attempting to restructure the debt-besotted mortgage insurers Fannie Mae and Freddie Mac, which were seized by the Treasury Department in late 2008. The companies now account for more than 80 percent of the U.S. mortgage market.

One item that the Fannie/Freddie reconstructive surgery team needs to consider: Softening the rule that credit scores be nearly perfect for home buyers.

In recent years, the mortgage insurers have raised the standards so high that only a few qualify for loans now. One mortgage broker friend of mine says her business is so dismal (citing the credit score problem) that she’s getting out of it.

If the states and Feds can get on the same page, maybe they’ll figure out that keeping people in their homes is still a good idea — and one way to buoy the market. Otherwise, expect the long winter in U.S. housing to continue. Better to be a hedgehog than a groundhog.

Health Reform Still Makes Sense

How health reform de-funding will cost you

By John F. Wasik, Author The Cul-de-Sac Syndrome

Although corporate and conservative interests have done a stellar job of demonizing “Obama Care,” it makes no economic sense whatsoever to de-fund this landmark legislation.

In a major concession triggered by pending state lawsuits challenging the health reform law, President Obama recently signaled he was flexible on the law’s insurance mandate. Yet that would require Congress to shift the major building blocks of the plan back to the states, many of which are ill-prepared to design their own plans.

We’re back to a cagey political poker game. Obama has called to see the cards of his opponents. They either come up with a winning hand or fold. Being martyrs to the cause proves nothing, though.

Tea-partying House GOP members who want to kill health reform, and (in some cases) refused to sign up for federal health benefits, are paying the price and experiencing first-hand the cruelty of individual insurance markets.

My own Congressman (Joe Walsh, R-Illinois), eschewed federal coverage at the expense of endangering his own wife, who has a pre-existing condition. Although I didn’t vote for this fellow, I can tell him from my own experience that he’s going to pay sky-high premiums, not get any real discounts from providers with his meager health-savings account and may not even get private coverage for his spouse.

Misguided principles are trumping sound politics. Health reform is one of the best consumer laws in a generation. Not only would the health reform law over time create employment, it’s good for small and large businesses alike.

According to a Center for American Progress study, the health law would create up to 4 million jobs. That’s in addition to saving lives by expanding health access for all, eliminating the inhuman denial of coverage for those with pre-existing conditions and reducing costs for businesses.

Starving the law of funding — which is what the House GOP said it plans to do — will immediately raise taxes for small businesses. Currently they receive a 25- to 35-percent tax credit for paying for health insurance for employees. It will also trigger a cascade of roadblocks that will prevent some 30 million Americans from saving on insurance through widely-available exchanges in three years.

One of the keystones to health reform has been an attempt to move insurance marketing toward free-market principles. Today’s system is upside down. Instead of creating one large pool to include both the sickest and healthiest Americans, those with pre-existing or chronic conditions are “underwritten” out of most private non-group coverage.

Individual buyers (under age 65) can’t shop for themselves across state lines for the best rates or get into any federal program. They are restricted to their own states, which are typically controlled by a handful of large insurers who can keep competition low and rates high. Instead of an ability to pick the best insurer, it’s the companies who select their clients.

In theory, the insurance exchanges that will go into effect in 2014 will end the apartheid of the sick and chronically ill. Should Congress do anything constructive with health reform enhancement, it should put exchanges and consumer protections on the books next year or create an option to buy-in to Medicare.

Ironically, the health insurance industry, which lobbied vigorously against reform, has the most to gain from the law going forward. Mandatory purchase requirements will deliver them some 32 million new customers.

Yet by pouring millions into GOP coffers and indirectly encouraging Republican governors and attorneys general to battle the individual mandate in federal courts, they should be chary of what they initially desired.

I asked Wendell Potter, a former health insurance company executive with a conscience, what he thought of the industry’s perverse death wish. Potter, who authored “Deadly Spin,” a brilliant insight into corporate public relations, told me “they [the industry] need the revenue stream” from the potential new customers. “Their business practices were not sustainable for the long haul. Without the individual mandate, their costs will explode.”

Granted, the health reform law is loaded with flaws. It won’t ensure universal coverage for all Americans and may not reduce costs all that much. We will need a single-payer system to better address many of these shortcomings.
As an economic booster, though, the health act is still potent and should be enhanced. The Congressional Budget Office predicts it will shave $124 billion from the federal deficit by 2019 and $1 trillion in the subsequent decade.

The best kind of economic growth comes from a confident populace that’s willing to take risks to succeed. They can’t do anything if they are still at risk of bankruptcy from simply getting sick.