Tuesday, June 21, 2011

Check your insurance!

8 home issues your insurer doesn’t cover

By John F. Wasik (Reuters)
You won’t believe this, but my house was hit by lightning — twice.

I know this isn’t supposed to happen. Fortunately nobody was hurt and the house didn’t burn down. Yet I think a deity (maybe Thor or Zeus) was reminding me to check my insurance coverage and install lightning rods.

Checking your homeowner’s insurance is a matter of seeing 1) what they won’t cover and 2) your out-of-pocket expenses, based on your deductibles.

Since I carry a $1,000 deductible on my homeowner’s policy, which reduces my premium, I know anything under that threshold is on me.

It could have been worse. In the case of my dual lightning strikes, I only had to pay to replace (2) circuit boards from my garage-door opener, a sump pump and computer board in my stove. Those expenses totaled about $900. The garage-door opener repair service generously offered to send in a claim directly to my insurer, which was helpful, but it still wouldn’t exceed the threshold of my deductible.

I discovered in researching this subject that even if my lightning-related expenses had exceeded $1,000, my insurer may not have reimbursed me anyway since power-surge damages typically aren’t covered. I had bought a cheap surge protector to protect my garage door opener, which didn’t do much good against a million volts. (I noticed in the hardware store, though, that more expensive surge strips carried insurance in case any appliance got fried, so that was some reassurance).

Since I live in the Midwest, I’m most concerned with water and wind damage. In the winter, we get these gremlins called ice dams that back up on frozen gutters and leak into the house. Roof vents have also leaked in the past, which have caused extensive ceiling damage upstairs. Insurance covered that.

What gets tricky is that insurance rarely pays for water that accumulates from burst pipes, broken sump pumps or sewers. Tornadoes and hurricanes? Sure, but not minor floods and seepage.

Here are some other problem areas when it comes to homeowner’s insurance:

Roof damage
As I mentioned above, big storm damage is generally covered. If you’re hit by a hailstorm, then claim payment depends on the size of the hail and what it did to your roof and vehicles.

Termites and rodents
It’s amazing how much damage a critter can do, but insurance generally doesn’t cover pest destruction. Exterminators aren’t covered, either. You’ll need a trapper for skunks and other varmints.

Home office equipment
Most home policies don’t cover computers, copiers and fax machines, especially when it involves power surges. You may need a separate rider or business equipment policy. Surge protectors and uninterrupted power systems usually protect your key equipment.

What if someone is injured on your property and they sue you? Most policies have liability protection, but check on the limits. Generally $1 million is common, but you can always buy more coverage.

As I mentioned above, this is generally not covered. If you live on a flood plain, buy low-cost government flood insurance separately.

Normal wear and tear
Don’t expect your insurer to pay to replace a 20-year-old roof that hasn’t been damaged by a storm, old siding or other items that just wear out.

Since this became a huge problem a few years ago, many insurers stopped covering this and added exemptions, except in rare cases. Check your policy “endorsements” to see if your insurer covers this. In insurance jargon, an endorsement or “rider” is a clause insurers add to your policy that says they will or won’t cover a certain kind of claim.

Like flooding, this may require a special policy or coverage, depending upon where you live.

Keep in mind that, depending upon how much you want to spend, you can always buy more insurance. You can even get coverage to protect against identity theft. Generally, though, you can save the most amount of money by keeping deductibles high, which lowers premiums.

No matter what kind of policy you get, make sure you have inflation protection and replacement cost coverage. Even though the value of the contents of your home or apartment may have declined, the cost of replacing them hasn’t.

Monday, June 6, 2011

College Costs too Much

Is college worth the investment?

By John F. Wasik (Reuters)

Is a college education worth it? In the free market of ideas, maybe. In a labor market that can’t be sustained by wage growth or job creation, probably not. Another bubble may be bursting.

The college degree payback may be long and may not materialize for decades. A six-figure education may not be a guarantee to higher real wages in the near future and it may not be worth going into debt to finance it.

I’m not alone in this sentiment. A widespread public skepticism is fueled by poor short-term job prospects. It’s not surprising that 57 percent of those surveyed by the Pew Research Center said that higher education doesn’t provide a good value and 75 percent said it’s just too expensive for most people.

As young people attempt to enter the workforce and face an unemployment rate twice that of the majority of the general population, you have to take pause and examine what’s happened to create this bleak situation.

After World War Two, employment was plentiful. People who wanted a decent job in manufacturing or the white-collar sector could find one and stay there for 30 years. About one-third of private-sector workers were guaranteed union benefits, healthcare (even in retirement) and defined-benefit pensions. Productivity was on the rise and consumers drove the economy because they had plenty of disposable income and little debt.

That era, called the “Great Prosperity” by former Labor Secretary Robert Reich, ended in roughly 1977. Over the past 30 years, collective bargaining, decent manufacturing jobs and guaranteed benefits began to disappear. I remember that time because I was just getting out of college in the middle of a nasty recession and took a low-paying job myself.

Because high-paying manufacturing jobs were offshored over the past generation, workforce preparation increasingly focused on services and the white-collar sector. While office-oriented employers mostly demanded workers have college degrees, there were no extra payments for overtime. Guaranteed pensions were thrown into the maw of the stock and bond markets in the form of 401(k)s. Healthcare was also eroded.

Real wages, that is, what you earned after you subtracted inflation and taxes, entered a freefall in the past two decades. “Rather than be out of work, most Americans quietly settled for lower real wages,” Reich recently told Congress, “or wages that have risen more slowly than the overall growth of the economy per person.”

That brings us back to the value of a college degree. If the price of college had tracked real wages, net job growth or just inflation, then college tuition should have fallen dramatically in recent years relative to the outgoing economic tide of the middle class.

Yet the depletion of household wealth and earnings in recent years has made the gap between college bills and incomes even wider. While consumer inflation has soared some 107 percent since 1986 (through late 2010), college tuition has ballooned 467 percent.

Why the huge disparity between consumer prices and higher education bills?

Colleges benefited from a huge influx of students — the children of baby boomers — so they didn’t see their enrollment numbers decline significantly. The opposite was true; leading them to believe that there was a robust demand for their services. Universities kept investing in bricks and mortar and hiring professors while raising their prices to pay for it all. At the same time, states dialed back on their funding for public universities.

Then the catastrophic meltdown of 2008 skewered the economics of paying for college. Those who lost home equity had less collateral for home-equity loans or cash-outs. Bond returns were dismal and stocks had a bum decade.

Responding to this massive wealth evaporation, roughly about the time the U.S. housing market (and then stock market) collapsed, private non-profit colleges started a wave of tuition discounting, according to the National Association of College and University Business Officers.

Discounting reached an all-time high of 42 percent last year, the group reported, with 88 percent of freshmen receiving institutional grants. I expect this trend to continue as more and more families pull out of four-year colleges.
In the interim, if more students attend community colleges, eschew loans and encourage their children to take advanced-placement courses in high school — and demand tuition discounts — the paradigm will continue to shift and prices for bachelor’s degrees will fall across the board.

When the bubble bursts, though, it won’t be for the expectations that Americans have for their children after college. After all, even the Pew study shows that college graduates will likely have a $20,000 annual earning advantage over high-school grads.

A college education is a value relative to future earnings, vocational success and its ability to lift you above the economic burdens of underemployment and stagnant earnings. Right now, that equation just doesn’t measure up for most families.

Thursday, June 2, 2011

Warnings on structured products

I wrote about these products in a Demos/Nation Institute study and pieces in Morningstar.com, The New York Times and AARP Magazine.

While the SEC and FINRA are now issuing warnings about these products, they stopped short of saying there would be future or ongoing probes. Tell the agencies you want a full investigation.

Here's the SEC notice:

SEC logo FINRA logo

SEC, FINRA Warn Retail Investors About Investing in Structured Notes with Principal Protection


Washington, D.C., June 2, 2011 — The Securities and Exchange Commission’s Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) have issued an investor alert called Structured Notes with Principal Protection: Note the Terms of Your Investment to educate investors about the risks of structured notes with principal protection, and to help them understand how these complex financial products work. The retail market for these notes has grown in recent years, and while these structured products have reassuring names, they are not risk-free.

Structured notes with principal protection typically combine a zero-coupon bond – which pays no interest until the bond matures — with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark. The underlying asset, index or benchmark can vary widely, from commonly cited market benchmarks to currencies, commodities and spreads between interest rates. The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. However, investors should know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Investors who hold these notes until maturity will typically get back at least some of their investment, even if the underlying asset, index or benchmark declines. But protection levels vary, with some of these products guaranteeing as little as 10 percent — and any guarantee is only as good as the financial strength of the company that makes that promise.

“Structured notes with principal protection contain risks that may surprise many investors and can have payout structures that are difficult to understand,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “This alert is a ‘must read’ for investors considering these products, especially those with the mistaken belief that these investments offer complete downside protection.”

“The current low interest rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors,” said FINRA Senior Vice President for Investor Education John Gannon. “But retail investors should realize that chasing a higher yield by investing in these products could mean winding up with an expensive, risky, complex and illiquid investment.”

FINRA and the SEC’s Office of Investor Education and Advocacy are advising investors that structured notes with principal protection can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth. Additionally, investors considering these notes should be aware that they could tie up their principal for upwards of a decade with the possibility of no profit on their initial investment. Structured Notes with Principal Protection: Note the Terms of Your Investment also includes a list of questions investors should ask before investing in these products.

For additional information regarding the SEC and FINRA’s educational outreach and program, please visit www.investor.gov or www.sec.gov/investor or www.finra.org.