Archive for the ‘Life Insurance’ Category

Indexed Universal Life Insurance: A Rip-Off with a Fancy Name

Thursday, April 16th, 2015

How would you like to put money into a financial product that lets you benefit from market gains, but never feel the pain of its losses? The money and growth inside the policy will be 100 percent tax-free for life. That’s the seductive pitch often used to tout an investment called indexed universal life insurance.

Based on that sales pitch, it would be no wonder if your response were, “Sign me up for that right away!” Unfortunately, all that glitters is not gold. The sales materials for your IUL policy will almost always be illustrated with unrealistic compounded rates of return. But as we all know, stock market growth does not simply compound over time. Sure, you can measure an “average rate of return,” but in the real world, prices oscillate, and performance can be a creature of timing much more than investing.

In fact, an indexed universal life insurance policy will almost always leave you holding the bag.

Let me clarify first that these are entirely different investments than the “properly designed whole life policies” that I wrote about back in March. When you invest money inside an IUL policy, you’re setting up a life insurance policy with an annual renewable term cost of insurance. The extra money placed in the policy goes into sub accounts, and those funds will generally follow an index (or indices) in some form when that index increases in value. This structure will cause the cost of insurance to rise every year, which is why most people let these policies lapse in later years.

One Man’s $50,000 Premium

A retired neurosurgeon at one of my seminars told me about his IUL nightmare. He invested substantial money in an indexed universal life insurance policy when he was 49. He funded this policy for 20 years, and the projected profits never seem to materialize. Among the reasons why: •The projections that were illustrated for him were not realistic.
•The expenses of the insurance and many other hidden fees come out daily.
•The guaranteed growth of 3 percent was only payable at policy cancellation.
Much worse was the bill when he turned 70. This policy was structured with a 20-year guaranteed term policy for the death benefit, and his premium hit almost $50,000 — and not one nickel was going into any cash value.

Surely, something must be wrong, you say? He assumed it was clerical error until he called the carrier and was told that is how those types of policies are built. In the 21st year of the policy, the premium was supposed to be almost 100 times the first year’s premium, and it was only going to rise further, since term insurance gets more expensive as people age. This man closed the policy down, which meant he no longer would receive the death benefit, and even the pitiful gains his investment had realized were now taxable because he’d lost the umbrella of the insurance policy tax structure.

Lousy Ideas, Without Clear Numbers

Welcome to the wonderful world of indexed universal life insurance. I can’t wait to see in this articles comments that somehow, one of you knows about a “special product” that has a “no lapse” guarantee or some other new (and yet old) wrinkle that allegedly makes these lousy policies better. These dogs with fleas are generally sold to those with high incomes, such as doctors, as a way to put loads of money away in a tax-free environment instead of the limitations of an individual retirement account or 401(k). The illustrations are not realistic and fail to speak plain English as to what is going to happen with these policies.

If you have been sold one of these policies, examine the illustration you were shown and notice the cost of insurance cannibalizing the cash value in the later years of the policy. Study the cost of insurance, which will never be plainly spelled out in dollars and cents (your first clue something is amiss) but rather in decimal points. Watch how that number grows in the later years.

If you have the misfortune of having one of these policies, you might still have an option to roll into a 1035 tax-free exchange. It would allow you (assuming you qualify health-wise) to exchange your cash value in your IUL policy into a properly designed whole policy with solid guarantees and fixed costs all disclosed up front.

5 Life Insurance Policies You Really Need to Cancel

Thursday, April 16th, 2015

Life insurance is sold based on one thing: fear. Fear of dying, of being injured. Fear of a catastrophe befalling you or your family. If worrying about death isn’t enough of an inducement, there’s the financial fear of not being able to replace a breadwinner’s salary once they’re gone.

Insurance companies know this, and they use those levers. And they should: Financial peace of mind in the face of loss is exactly what they’re selling.

But some types of life insurance just aren’t worth buying, because the policies aren’t used often and don’t provide much of a return on the premium. You’re better off putting that money aside in an emergency fund for that rainy day, if it ever happens. Here are five life insurance policies you probably want to think about canceling if you have them:

1. Life Insurance for a Child

Term life policies are meant to replace an income if someone dies. Unless your child is a model or actor and is bringing in a major share of the family’s cash, your offspring doesn’t need life insurance.

Gerber Life Insurance Co. advertises a $10,000 policy for “pennies a day” that could be used to cover funeral expenses. The chances that a baby born in the United States will die in childhood, however, are extremely low.

“Child life insurance policies are sold to parents and grandparents by preying on their emotions,” says Eric Stauffer, president of

If you really want to have coverage in case you need to pay funeral expenses for a child, add a cheap rider to your term policy that would cover them for $10,000 or $15,000, but don’t have them on a separate policy, says Liran Hirschkorn, an independent life insurance agent.

“Most Americans don’t have enough life insurance themselves and should not be buying life insurance on their children,” Hirschkorn says. “This is especially true if you have some savings and have the funds to pay for funeral costs should the worst happen.”

2. Whole Life Insurance

Unlike a term life insurance policy, which only runs for a specified number of years, whole life insurance covers the policyholder’s entire life. The policies are more expensive than term life insurance because the risk is for a person’s whole lifetime. But they also have a cash value, which grows over time, and which the policyholder can use or borrow against. This makes them an investment, though not a generally high performing one. It’s especially not a good deal for young people, says Matt Becker, a financial planner who has written about the subject.

“Life insurance is great when used properly. Whole life insurance is usually just expensive and burdensome,” Becker says.

Stauffer says he had a 28-year-old client ask him if he should keep the $10,000 whole life insurance policy his parents have been paying on for his entire life, or take the cash out. They did the math, Stauffer says, and found that his parents had paid close to the entire death benefit in premiums, but the cash value was only worth $2,000. He cashed it out and invested the money.

3. Industrial Life Insurance

Also called accidental-death insurance, these policies often have low values and cover you in the event of mishaps such as losing an eye or limb at work, or dying in a car wreck or fire at work.

“It all sounds good, but [this type of policy] is riddled with exclusions,’ says lawyer Mark Hankins. “The policy was once sold door-to-door to laborers with weekly payments and known as the ‘Little Giant.’ Its creator boasted on his deathbed he had never paid a claim.”

4. Guaranteed Issue Policies

These are life insurance policies that don’t have any exam requirements — they don’t even make you answer any questions about your health — so they can be quick and easy to get, says Hirschkorn, the insurance agent.

“The issue is that these policies are expensive, and also don’t pay out the full death benefit in the first two years,” he says. “This type of policy should only be considered as a last possible resort for someone with major health issues that can’t get approved for a regular policy, not for anyone else where it would be a waste of money.”

5. Final Expense Insurance

With a typical death benefit of $10,000 to $25,000 for people 65 and older, the policies are meant to cover a funeral and other expenses after someone dies. TV ads promise coverage for a “few dollars a day,” but even at that low price, it isn’t worthwhile, says Justin M. Follmer, a wealth adviser and insurance professional in Charleston, South Carolina, Someone 65 or older can often buy a much larger policy for the same costs, Follmer says.

To Succeed in Life (and Beyond), Master 4 Phases of Wealth

Thursday, April 16th, 2015

The baby boomers are retiring and preparing to retire by the millions: According to the AARP, 8,000 people turn 65 every day in America. But even if boomers are ready to retire physically, psychologically and chronologically, many are not ready financially.

I’m not talking about the usual question of whether or not you have enough money to retire. This discussion is about the proper use of that money. I work with clients from all over the country to map out their own financial strategies, and the first step is educating them about four phases of wealth.


The accumulation phase usually begins about age 25 or when you begin your full-time profession. This is when you start putting money away in retirement vehicles, such as 401(k) plans, Individual Retirement Accounts and other alternatives.

During this phase, you can take losses more easily since you have time to recover. Dollar cost averaging is your friend. You can take reasonable risks and might consider more aggressive funds, stocks and bonds. You should also consider solid real estate investments. You can use a self-directed IRA to own real estate and other non-traditional assets inside your retirement accounts. This phase will last until 10 years before your desired retirement age.

Pre-Retirement (aka Retirement Danger Zone)

Pre-retirement is when you begin to reassess your risk tolerance and start to realize that any losses you take now might dramatically affect your ability to retire at your scheduled age. Its when you begin to shift the bulk of your retirement money to very safe, stable, low-risk assets. No more than 30 percent of your portfolio should be left in the market, and that should be in low-risk, blue chip stocks. You also might consider selling off your real estate holdings or paying off mortgages and loans, giving you great cash flow and removing most of your downside risk. If real estate values drop dramatically, it hurts much more if you are leveraged with big mortgages. When you own properties free and clear, they are still great cash-flow machines even if the values drop. You should also consider using a portion of your cash to purchase a solid, low-fee, fixed-indexed annuity.


Once you leave your profession — and your paycheck — risk and loss are your most dangerous enemy. At this point, most of your funds should be in guaranteed products. There is a myth that guarantees and low risk mean lousy rates of return. Seek out low- or no-risk alternatives to mutual funds. If you keep most of your money in mutual funds now, you are subject to the ravages of reverse dollar cost averaging, which that can gobble up retirement money in a hurry.

Retirement is all about hands-off income that you should be able to draw from several sources. These can include Social Security, pensions, 401(k)s, IRAs, cash value life insurance, free and clear real estate, fixed indexed annuities with lifetime income riders attached, certificates of deposit and standard savings. You could also be receiving payments from businesses or assets you sold when you retired. Creating income from these assets will make sure you can live in style for the next 30 years and beyond. During this time, you should also plan a long-term care or home health care strategy.


The legacy phase represents what you would like to leave behind for family, charities, foundations and other causes near and dear to your heart. Ask yourself this question: What do I want to accomplish after I am gone? Then set up a legacy plan with an estate attorney to make sure your wishes are carried out with your money.

People have widely varied opinions on this phase. Most want to leave a nice nest egg to their children and grandchildren to help with education and other expenses. But other people say they started with nothing and want to leave little to nothing behind after they are gone. One way to leave behind a fantastic legacy is to set up a properly designed life insurance policy while you’re still relatively young. It will be a tax-free retirement asset during your lifetime and leave behind tax-free cash for your heirs.

If you master these four wealth stages, you will be assured a life of financial abundance.

How to Figure Out How Much Life Insurance You Really Need

Thursday, April 16th, 2015

Protecting the financial security of your kids is just as vital as keeping them healthy and making sure they get an education. Yet for many families, the pressure of keeping up with current expenses pushes one strong tool for doing that — buying life insurance — to the bottom of the to-do list.

A 2013 survey by life insurance and financial services association LIMRA found that 30 percent of U.S. households have no life insurance at all, and 50 percent think they need more life insurance.

The LIMRA survey found that among consumers who say they need to buy life insurance, 86 percent say they haven’t purchased it because it’s too expensive. And more than half of those surveyed said that everyday expenses like food, clothing, transportation, and energy costs limit their ability to save for the future, or to buy life insurance even when they know they need it.

Keeping Your Household Afloat

What would it cost to keep your household running if your income suddenly went away? That’s the basic question you need to ask when trying to figure out your life insurance needs.

“The financial contributions you make to your household are critical to the security of your loved ones, and extend well beyond your income,” says Damon Bates, vice president of MassMutual’s U.S. Insurance Group. “However, many people are uncertain about how to measure their financial contributions, which makes it difficult to determine an appropriate amount of life insurance.”

There are some broad rules of thumb when it comes to figuring out how much life insurance you need. According to the CUNA Mutual Group, a company that provides financial services to credit unions, one of those guidelines is that you should buy life insurance equal to five to seven times your income.

But the key is getting the right coverage for you and your family — not some generic family unit.
There are helpful online tools that can help you get more customized answers: •The life insurance calculator, like many others, compares potential expenses and your savings, such as the need to cover final expenses for a funeral and for ongoing income to take care of your family. The calculator looks at your outstanding debt including your mortgage; the need for college savings; and how much your family needs for living expenses measured against your current savings, investments, and retirement funds.
•CUNA has a calculator on its website to help you get a more individualized estimate of your life insurance needs.
•MassMutual’s Lifetime Economic Value tool measures all of the economic contributions you’ll make to your family over the course of your career. Via a simple calculation — requiring just your age and income — it generates a broad life insurance estimate. (For example, a 40-year-old making $60,000 and planning to retire at 65 would need an estimated $1,151,761 to protect his or her family.)
The more information you provide for any of these tools, the more accurate its estimate will be. Coverage should include more than simply replacing earned income, says MassMutual’s Bates: “It [should] also include other items of financial value that are vital to maintaining your family’s standard of living, like benefits that your employer provides, retirement plans, and personal service that you provide for your loved ones. These benefits and services, less the value of what you would personally consume, are meaningful and measurable components of your lifetime economic value.”

Unfortunately, there’s no actual magic formula that simply tells you how much you need to buy, but these online calculators can help you match what you need with what you can afford to pay for life insurance.

A Pension Strategy That Could Backfire

Thursday, April 16th, 2015

Couples who qualify for an employer pension need to make a big decision before they retire. Should a retiree take a life-only annuity, which provides the highest monthly payout but ends when the pensioner dies? Or choose a joint-and-survivor benefit, which offers a lower payout but one that continues after the retiree dies for as long as the spouse is alive?

If the employee due the pension is likely to die first, the joint pension is usually the best route. But some insurance agents may try to steer you to a strategy known as “pension maximization.” It works like this: Take the higher life-only payout and use all or part of the extra income to buy life insurance. If you die first, your pension ends but your spouse will get a death benefit that supposedly will be enough to generate at least the same income she would have received under the joint pension. If she dies first, you cancel the insurance and continue to take the higher payout.

However, this strategy may not work out as planned. It’s essential to examine the numbers closely before you sign away your rights to a joint pension. “If the goal is to have steady income for life, why jump through all these hoops?” says Rebecca Davis, legal director of the Pension Rights Center.

Mark Maurer, president of Low Load Insurance Services in Tampa, Fla., develops “pension max” strategies for clients of fee-only certified financial planners. He says that just 20 percent of the clients he reviews do better with pension max than with the joint-pension option.

Maurer offers an illustration of one plan he developed for a 61-year-old man and his 59-year-old wife. The husband’s pension offered a choice of a monthly $4,356 life-only payout or a 100 percent joint benefit, which would pay $3,557 as long as one of the spouses lived.

Under pension max, the worker chooses the life-only benefit with its extra $799 a month. He uses $660 a month to pay premiums on three life insurance policies — a 10-year $200,000 term policy, a 20-year $200,000 term policy and a $370,000 universal life policy. He qualifies for low rates because he is healthy. “This won’t work unless the client is a better-than-average healthy non-smoker,” Maurer says.

Protecting the Surviving Spouse

A big issue for pension max plans: If the husband dies, will the death benefit be big enough? “You really want to see if the wife would be able to use the death benefit to buy a guaranteed fixed annuity that is greater than what she would get with the joint pension,” says Steve Vernon, president of Rest-of-Life Communications, a consulting firm in Oxnard, Calif. He says he’s “skeptical” that these plans work in the survivor’s favor.

In Maurer’s example, if the husband dies after 22 years, the 81-year-old wife could use the tax-free $370,000 death benefit to buy a fixed-payout annuity. At today’s rates, the annuity would pay out $3,388 a month, according to That’s lower than the joint pension’s $3,557.

But Maurer notes that with the pension, payments would be fully taxable and, at the 15 percent rate, would leave the widow with just $3,023 of after-tax spending money.

With the annuity, most of each payout would be tax-free return of investment so, according to Maurer, the widow would have more spendable cash.

However, Vernon says that pension max plans are often based on assumptions that may not pan out. He has seen plans that provide just a 20-year term life insurance policy on the worker’s life. If the husband lives longer, “he will have to buy term life insurance in his 80s, and that will be phenomenally expensive,” he says. Some strategies use insurance with death benefits that grow based on market assumptions. If the market grows at a lower rate, the death benefit could be too low to cover the survivor’s expenses.

Also, pension max plans often don’t account for taxes. In Maurer’s example, the couple must pay tax on the $4,356 payout, squeezing the after-tax cash on hand to cover the insurance premiums.

4 Personal Financial Planning Musts for Dads

Thursday, April 16th, 2015

Hey, dads: You know that “World’s Greatest Dad” T-shirt you sport every Father’s Day? Well, you deserve it! You not only work hard from 9 to 5 to provide your family with a good life, but also dutifully slog through your honey-do list and coach the Little League team.

In return for the love your kids will show you this Father’s Day, give back to your family by implementing these four financial planning musts.

1. Review Your Insurance.

It’s important that you maintain an appropriate amount of life insurance. That way if something happens to you, your family’s future financial needs — like living expenses and college costs — will be adequately covered.

Your employer may offer you life insurance as part of a group plan. Typically, the coverage you’re granted is either a flat dollar amount (like a $50,000 death benefit) or a multiple of your salary (say, three times your annual base salary). But that amount of coverage may not be enough for your family. If it isn’t, be sure to supplement with either a term or whole life policy.

Also, consider disability insurance. Again, your employer likely offers coverage up to a certain amount. But make sure it’s enough to fund your family’s needs in the event you can’t work for a while.

2. Designate a Guardian for Your Children.

Lots of parents get stuck when it comes to designating a guardian for their children should the worst happen and you become unable to raise them yourself. Parents often disagree about who would be best, and no one likes to think about someone else raising their kids.

But if you haven’t made your wishes clear, the court will appoint someone without any guidance from you. Most commonly, the courts choose a member of the family. But maybe you don’t want certain family members raising your children.

The best way to prevent this from happening is by sitting down with your spouse, hashing it out, and getting the paperwork done.

3. Review Your Beneficiary Designations.

Check your beneficiary designations annually. That might seem like overkill, but it’s a good habit to get into. You may have been so busy changing diapers that your sleep-deprived self forgot to add your 6-month-old’s name to your accounts.

Review your current designations and make sure they’re up-to-date. Remember to do so for all of your IRA accounts, 401(k) plans, and life insurance policies.

4. Save for College.

It’s never too soon to start saving for your kids’ college. With the average annual cost of an out-of-state public university education standing close to $34,000, it takes discipline and sacrifice to scrape together enough cash.

The best way to amass that money is with a tax-free 529 college savings plan. Withdrawals used for qualified higher-education expenses like tuition, books, and room and board are tax-free.

Some states allow you to deduct part of your contribution annually on your tax return. And 529 plans also give you the flexibility to switch beneficiaries, which is great if you find out one kid isn’t college material yet the other is Harvard bound.

Thanks, Dad

Take time this Father’s Day weekend to kick back and relax with your family. But once the workweek rolls around, implement these personal financial planning essentials. You and your loved ones will be better off for it.

4 Common Pieces of Money Advice You Can’t Afford to Follow

Thursday, April 16th, 2015

Few of us feel like financial experts, so when it comes to money matters, we generally welcome advice. The trouble, though, is that not all the financial advice the professionals dish out is sound, despite often seeming so. Below you’ll find several examples of bad financial advice. There are plenty of others, though, so carefully assess any guidance you run across.

1. Save 10 Percent for Retirement. It’s a common piece of financial advice, and for many people, socking away 10 percent of their income will get them to a comfy retirement. But this guidance isn’t one-size-fits-all.

If your needs in retirement will be greater, saving 10 percent may not be enough. Likewise, if you’ve gotten your retirement planning wake-up call a bit late and no longer have many decades before you stop working, you may need to be stashing away far more than just 10 percent.

Everyone’s situation is different. Some of us can expect a little or a lot of pension income. Others can expect small or relatively large benefits from Social Security. Some of us need to try to build up a million dollar portfolio. Others will be fine with much less. And for many people, a million dollars won’t be enough. You need to assess your particular circumstances (perhaps with help), make a plan, and then sock away the right percentage of your income –- for you.

2. Don’t use credit cards. This bit of advice may sound difficult but reasonable. And for many people it is. If you have trouble with impulse control and tend to rack up debt due to the handiness of plastic in your pocket, perhaps credit cards are not for you.

But for many people, credit cards can be very convenient, with they offer other benefits, too. Many cards offer some kind of reward, for example, for using them. If you use a card responsibly, only charging what you can afford, you may be able to collect hundreds of dollars in cash back each year, or you might rack up other rewards, such as airline miles. By using plastic for much of your spending, you can also avoid carrying around lots of cash.

Some cards also offer end-of-year summaries of your spending, which can deliver some insights on where your money is going and how you might best budget your money.

3. Everybody needs life insurance. Most of us need all kinds of insurance, for our health, our homes, our cars, and even our pets. Life insurance is critical for many people, too — but not for everyone.

Remember what life insurance is really for: to protect a vital income stream. It’s a must-buy for most parents, for instance, if they provide income on which their family depends. But if you’re a single person, or a child, or you just have no one depending on you for support, then someone urging you to buy life insurance is probably offering bad financial advice. Your unexpected demise would be a very sad event, but no one would end up on the street because of it.

Life insurance shouldn’t be thought of as an eventual lottery-ticket-like payout if someone dies, and it shouldn’t really be thought of as an investment, either. Some policies are sold as investment products (this is typically the case with whole life policies, for example), but there are better ways to invest. For those who need life insurance, a good piece of financial advice is to consider term life policies.

4. Tap your 401(k) to pay off credit card debt. Finally, think twice before raiding your 401(k) account to pay for any frivolous or non-frivolous thing, such as credit card debt. Go ahead and consider a 401(K) loan as a last resort if you must, but there are usually other ways to tackle debt — ones that won’t shortchange your retirement. Remember that when you remove money from your retirement account, it can lose years of growth there, years you can’t get back.

What’s the Worst Money Advice You’ve Gotten?

Questioning guidance you’re given and spotting bad financial advice can do wonders for your fiscal future. If you have some examples of bad financial advice you’ve received, share them with others by commenting below.

How to Pick the Right Life Insurance Policy

Thursday, April 16th, 2015

I’m 24 years old, and I have a wife and child. We’ve been following your plan, and I’m about to buy life insurance. Should I get a 20- or 30-year term policy?


Dear Derek,

I think the big question is how long will you need this life insurance. If you and your wife are planning on having more kids in the next 10 years, I’d suggest a 30-year policy. That could put you in a situation of being 34 years old with a new baby. That’s not old by any means, but your wife will need 20 years’ worth of coverage if this happens, because you’d want the kids grown and out of the house before the insurance term runs out.

But that’s just one of your financial goals at this point. You also want to be debt-free.

And you need to ask yourself some other questions. Are you going to have your house paid for 15 years from now? I sure hope you didn’t take out more than a 15-year mortgage. Are your kids going to be grown and gone by then? Are you going to have a big pile of money in the bank by then? In other words, where are you going to be at the end of the term?

If 15 years from now you have $700,000 in your retirement account, your house is paid for, and the kids are out on their own, then, if you die, your wife will be fine, financially speaking. But at that time, if you still have kids in the house and your home isn’t paid off, then you’d probably need a 20-year policy.

That’s how I would look at it. How much longer are you going to need life insurance?


Dear Dave,

Should I take advantage of a 403(b) withdrawal in order to buy a house?


Dear Bryan,

I wouldn’t do that because it really doesn’t accomplish anything. The only money you can take out is what you’ve put in, and any growth you’ve experienced has to stay in there. Basically, it’s a retirement plan, and I wouldn’t monkey around with retirement money to buy a home.

My advice is to make sure you’re debt-free and you have three to six months of expenses set aside in an emergency fund. Once you’ve taken care of those issues, you can pile up a bunch of cash in a money market account toward the purchase of a home. You won’t earn a lot of money, but it’s a safe place to park your cash when you’re saving up for a big purchase.

When it comes to saving and investing, I’m a big fan of mutual funds. The problem in this scenario is that if you start sticking money in mutual funds, then the market is down when you’re ready to buy, you could’ve lost some money. That’s not the route I’d want to go if I’m in your shoes, Bryan. I’d forgo the opportunity to make money in order to keep it safe for this goal.

Why Your Insurance Premiums Just Went Up (and What to Do About It)

Thursday, April 16th, 2015

Have you noticed that your insurance premiums are going up lately? Going up a lot?

You’re not alone. According to a new report out from, more than one-third of U.S. consumers say their insurance costs grew in 2012. In a few cases, this was because people had more things to insure — they bought a new house, or a second car, or perhaps brought home a new baby, who needed some health insurance. But in the majority of cases — 62 percent — consumers say they’re paying more simply because their insurance company is charging more.

Insurance professionals estimate the average homeowner’s insurance premium has risen 10 percent per year every year since 2008.

What’s Behind the Hikes

But is this a case of insurers price-gouging their customers? Or are there legitimate reasons for the rising rates? Actually, it’s the latter.

Insurance Information Institute spokesman Michael Barry points out that between “Hurricane Irene, the Joplin tornado that was the single biggest insurance event in Missouri history, and widespread winter storms, tornadoes and flooding in interior states like Minnesota,” the past decade has been one of the costliest in terms of natural disasters in U.S. history. And because insurance companies bear a large portion of that cost, it only makes sense that they might need to charge higher premiums to pay for all the claims they’ve been receiving.

Health care costs, too, are on the rise — leading to higher premiums for that flavor of insurance as well. Consumer Federation of America insurance director J. Robert Hunter blames health insurance for much of the inflation indicated in the Bankrate survey.

But the real reason is bigger than either of these explanations.

The Float is Sinking

On one hand, yes, insurance companies of all stripes are spending more to satisfy customer claims. The increased costs these companies face drive them to raise their rates to recoup their expenditures. But that’s only half of the problem.

To understand the other half, you need to understand how insurance companies work — how they make their money. This basically consists of three steps:

Step 1 is, of course, to collect premiums.

Step 2 is to invest the money from those premiums until it comes time to pay out on a claim. An insurance company doesn’t just put the money under a mattress after cashing your premium check. Rather, it takes this money — called “float” in industry parlance — and invests it in the corporate bond market, in federal savings bonds, and in the stock market.

Here’s where the problem begins: The interest rates insurers have been getting on their bond investments have been frightfully low these past few years. Similarly, the stock market is in a funk. It’s been doing well these past few weeks, true. But the bigger picture shows that the Dow Jones Industrial Average, for example, still hasn’t regained its highs of October 2007. That means that for more than five straight years, insurers haven’t earned anything on their stock holdings.

And this brings us to Step 3, which is the real problem. Insurance companies were counting on profits from the stock market (and the interest on those bonds) to help cover their costs when it finally came time to pay out cash to satisfy insurance claims. Those profits simply haven’t materialized, and as a result, insurers need to find money somewhere else in order to make good on insurance claims from their customers.

Guess where they found it?

That’s right. They found it in your wallet. In order to make up the difference between the money they thought they would have, and the amount they actually wound up with, insurers are raising prices. It’s really the only solution for them — and even then, insurance professionals say that there’s been little or no profit for insurance companies in homeowners insurance since about 2008.

What Can You Do?

Of course, that’s small consolation for those of us footing the bill for the insurers’ miscalculation. So what’s the solution?

Bankrate offers several ideas for cutting costs, ranging from raising the deductible on your homeowners and auto insurance policies, to dropping collision coverage on an old car, to buying home and auto insurance from the same company. (When you “bundle,” insurers will often give you a discount.)

Probably the best thing you can do to mitigate rising insurance costs, though, is shop around for a better deal. Bankrate notes that in some cases, an hour spent on the phone calling insurers and comparing rates can save you in excess of $200 a year. Even if you don’t have an hour to spare, though, you can still shop around by asking an insurance broker to do the comparisons for you.

It could “save you 15 percent or more on your car insurance,” as one famous lizard famously promised. With any luck, it could even get you back to the prices you were paying before the lizard — and everyone else — began raising their rates.

Motley Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has no position in any of the stocks mentioned.

Insurance Review: Are Your Policies Protecting You at the Right Price?

Thursday, April 16th, 2015

Having the right insurance policies in place can soften the blows from unexpected events that would otherwise mean financial catastrophe for you and your family. But if you’re like many people, you may not fully understand all the policies you have, let alone whether they’re adequate to meet your needs.

As part of your annual financial checkup, here are some tips to help you assess your current coverage and decide whether you need to make any changes.

Home Is Where the Risk Is

Homeowners insurance may protect you financially in the event of everything from natural disasters to household mishaps. But as millions of homeowners affected by Hurricane Sandy found out the hard way, standard homeowners insurance doesn’t protect you against every type of danger.

One of the most common mistakes people make about homeowners insurance is thinking that it covers flood damage. But typical policies specifically exclude flood damage from their coverage. To get flood protection, you have to obtain additional insurance from the National Flood Insurance Program. Similarly, in earthquake-prone areas, you may need to get special earthquake coverage added to your policy, or else it won’t necessarily cover damage from a quake.

Even if you have good homeowners insurance, it may not cover all of your belongings. Often, insurers will only cover up to a certain amount for high-value items like jewelry, cash, and artwork as part of their base policies. You’ll need to add special provisions for protection above that amount. So if you’ve obtained any particularly valuable items in the past year, talk to your insurance company about what you need to do to get them covered.

A Matter of Life and Death

The reason we need life insurance is something no one likes to think about, but a policy can be invaluable in providing for your family if something happens to you. Even if you already have coverage, though, doing an annual insurance checkup can lead to cost savings.

As life expectancy has risen over the years, prices of term life insurance policies have generally fallen. So for instance, if you bought a 20-year term life policy 10 years ago, you may find that rates have fallen enough that obtaining a new 10-year policy could actually be cheaper than continuing to pay to retain your existing coverage.

The major area where people make insurance adjustments is in how much coverage to have. Family events like getting married or having a child can boost your insurance needs, so talk to your agent about whether your current policies provide enough benefits to overcome the financial burden your family would face if something happened to you.

Taking a Healthy Interest

Another area where a beginning-of-the-year review makes sense is in health insurance. By now, you should have most of your 2012 medical bills in, and looking at what you spent on health care over the past 12 months can give you valuable information about what type of health insurance is best for you.

Many people pay for expensive insurance plans even when they never use the vast majority of the benefits they provide. By looking at your expenses now, you’ll be ready the next time open enrollment season comes around to make smart decisions about your health insurance choices — potentially saving you a boatload in insurance premium savings while still getting the same benefits you currently use.

What Are Your Wheels Worth?

Auto insurance is expensive, but it’s vital to protect you from liability and injury in an accident. Still, you can produce substantial savings by making regular adjustments to your coverage.

One of the easiest ways to save big comes from dropping collision and comprehensive coverage from your policy. Typically, when you have a new car, having collision and comprehensive coverage is smart to protect you from a major loss. Yet as your vehicle ages, the value of collision and comprehensive coverage goes down. Giving that coverage up once your vehicle’s value drops below a certain point will produce noticeable monthly savings that you can apply toward a new vehicle or other savings goals.