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Insurance: Never a Good Deal

Insurance. It's one of those things that most of us just see as necessary. In fact, in many cases, carrying sufficient insurance is mandated by law. You can't legally drive a vehicle without insurance, and I think that most of us would agree that it would be stupid to do so, regardless of the law. A single car accident could easily cost in the hundreds of thousands of dollars after property damage and medical care are taken into account. Most of us can't afford to pay hundreds of thousands of dollars on the off chance that such an accident occurs, so we pay our monthly premiums for a service that we rarely, if ever, use.

Insurance is one of those things where we consumers really don't have a whole lot of choice. Insurance companies are VERY good at being profitable, which is to say, taking in more money than they pay out; in other words, over-charging the customer to a large degree. If those profit margins start to slip, they can just raise the premiums. You don't have to be a rocket scientist to make big profits in the insurance industry, but they've got rocket scientist actuaries working there anyway.

Anyway, all of this is to say that the formula used by all insurance companies is like this:

(Sum of all money you pay to the company) < (Sum of all money you receive from the company)

Which in itself is just a complicated way of saying that insurance is never a good deal. At its basic level, you are not paying for a product or service from an insurance company. You are paying for money (actually, the chance at some money). Pure and simple. Yes, there is a bit of service involved, but this is pretty minimal.

In many ways, insurance is like the lottery. You buy a ticket for $1. So do a whole bunch of other people. Then the lottery pays one person a whole lot of money, and a few other people smaller amounts of money.... and most of the people end up with $0. But they still keep pumping their money into the lotto, because there's always that chance that they'll win.

In fact, at least the lotto has something positive for it. People play the lotto because they want to win. People buy insurance because they don't want to lose. At root, insurance is the industry of fear. "How afraid are you of losing $100,000? That's okay, just pay us $X per month and we'll make sure you never lose that $100,000. Only we've looked at the statistics and cooked the numbers so that we'll take in 3 times more than we ever have to pay out."

But of course, we all have fears, and it feels good to put them at ease. Also, bad things DO happen, or else insurance companies wouldn't be around at all. So it makes sense to have at least some sort of insurance. But you have to look at it from a rational, economic perspective.

In a recent post, Foobarista wrote about "cashflow preservation insurance" versus "wealth preservation insurance". I had never heard of this differentiation before, but it struck an immediate chord with me since a similar idea had been developing in my head for a long time (basically my idea was "certain kinds of insurance are a rip-off, but others make sense." I never had a rubric for separating the two other than my gut reaction).

o Wealth preservation insurance. This is a hedge against big, unknown expenses like getting sued or enormous medical bills.
o Cashflow preservation insurance. This is a hedge against "bump in the road" issues like car repairs or replacement of electronics or appliances.

Once it's put into such simple terms, it's easy to see what kind of insurance you should and shouldn't buy. "Wealth preservation" insurance: buy. "Cashflow preservation" insurance: don't buy. So do buy catastrophic medical insurance, malpractice insurance, auto liability insurance, landlord insurance. Don't buy comprehensive auto insurance, renter's insurance, extended warranties of any kind, etc. Things like homeowner's insurance (or maybe auto insurance for a really expensive car) sort of fall in between: get them, but with very high deductibles.

But again, insurance is never a good deal, even the "wealth preservation" kind. The game is still set up to take more money from you than it will ever give back. Really, the demarcation line between cashflow and wealth preservation insurance is simply a matter of your cashflow itself. As you get richer, you can afford to self-insure more and more of your things. For example, if you own 20 rental houses, you have much less need to insure them because you can afford to take a complete loss if one of them burns down (assuming that they're not all located right next to each other!). But if you own just one rental house, it represents a large part of your holdings, and you would be financially devastated by its loss. If your cashflow (aka disposable income) is $2000 a month, you are probably not going to want to insure your car with a $200 deductible. On the other hand, if you usually find yourself with $100 left over at the end of the month, a $200 deductible might seem reasonable.

Sorry for the long delay between posts. And sorry for the somewhat off-topic nature of this post. I'm really finding myself scratching my head to come up with more credit-related topics. I'm welcome to any suggestions. I don't mind covering more general personal-finance topics, but I would like to try to keep up the credit posts, if at all possible. But to be honest, from the beginning, I really saw this as more like a book than a blog. I only know so much about credit scores. I just wanted to take my knowledge and put it out there as sort of a reference. I really don't feel like repeating myself or beating a dead horse just to come up with new posts. So, readers, I ask you: what do you want to see out of this blog in the future?


Credit Cards for People without SS numbers?

Unbelievable, but that's what Bank of America is going to offer soon. I'll refrain from getting into a political discussion here, but I'll just cite this as more evidence that banks are bending over backwards to give people credit. Whether it's a pre-paid credit card, a bank line of credit, or what have you, there is always a way to get credit if you don't already have it.

Yes, it is possible to have credit ruin your life. But fundamentally, that is your choice; you ruin your own life through credit. You can't blame a credit card company or anybody else if you run up a boatload of debt. It isn't hard to take personal responsibility and manage your credit successfully. If you do, you can profit in many ways. From gift certificates to airline miles to lower interest rates on your mortgage. You can work within the system and work it to your benefit. It just takes a little self-discipline and getting over your fears about money.

If you don't have a credit history, get started now. I'm not the only one saying so; there is a new blog out there called CreditPro, run by a professional credit counselor. To my chagrin, the topics are pretty similar to what I've covered here, yet it seems to be much more popular (69 comments on one entry!) despite only being around for about a week. Anyway, enough jealousy; the CreditPro blogger seems to be pretty good, so if you read my blog, you should check out that one too.

Easy First Credit Source: Checking Overdraft Protection

This is a quickie tip that I've mentioned in passing before.

If you're young and credit-less, getting your first credit card may be difficult. One alternative is to get a line of credit at your bank. Usually this will be called something like "Overdraft Protection" or "Checking Plus". This is usually just a $500 or $1000 line of credit that is linked to your checking account; it should go unused, assuming that you manage your checkbook properly. But it should, in most cases, also go on your credit report as a revolving line of credit. The banks that I've had have put it on the credit report; some banks might not, so ask to be sure! If you've got a checking account in good standing, it should be pretty easy to get this.

Remember, Establish credit - now!


A Simple Life Hack: Sort Coins in your Car

If you're like me, you accumulate spare change. I don't get a whole lot of it, but it's enough to overwhelm the little coin-holder tray in my car a couple of times a year. Once it gets full enough that the coins slosh out onto the floor when I take a corner too hard, I know it's time to clean it out.

Mentally, I sort change into two categories: useful (quarters) and non-useful (dimes, nickels, and pennies). (Other pieces such as the half-dollar or dollar coins are sufficiently rare in my life that I usually just put them aside as a curiosity until they can be spent.) Quarters can be used at the laundromat, to pay the toll on toll roads, in vending machines, etc. The rest of it is pretty much useless to me. I usually don't have the time to count out a bunch of coins to pay for something. It's good to have a few nickels and dimes on hand for the odd stuff at the vending machine, but no more than that.

So I periodically go through and sort the quarters from the non-quarters. I happened upon a trick that makes this job very easy to do, even while driving. Your standard plastic drink bottle (I used a 1-liter water bottle; a soda bottle would work just as well, but you'd want to wash it out) has a mouth that is smaller than a quarter but will accommodate any other common U.S. coinage. My procedure is to set the empty (and well-dried-out) bottle between my legs while driving down the highway, and use my right hand (the left stays on the steering wheel) to grab small handfuls of change from the tray, and use my fingers to guide the coins into the mouth of the bottle. Since quarters don't fit, they are easy to sort and put into my special quarter space (inside the center console). The rest of the change lives in the bottle, which I usually keep under the front seat (with the lid on) until it's needed again. Occasionally I'll empty out the bottle and take the coins to my bank. Note: the coins don't come out the mouth of the bottle very easily, so I'd suggest that you simply cut open the bottom of the bottle.

When I'm driving, it's not like my brain doesn't have a little extra processing power that it could put towards something else, but such things are usually pretty unsafe (e.g. I refuse to read while driving, unlike some people I know). This task requires just one hand and does not require you to take your eyes off the road for any appreciable length of time. You can do the whole thing mostly by feel, and once you're done, your coins are sorted and your change tray is clean.

If you like to sort your coins for rolling, you could even take it a step further and use 3 separate bottles (still enough to fit between your legs or maybe squeezed in next to the seat) and use your fingers to feel the difference between the coins and put them into the correct bottle. Obviously this would go much more slowly (as each coin would need to be handled individually), but if you drive a lot, it shouldn't be too onerous.


Credit Score and Payment/Balance Timing

Given that your credit score depends highly on your balance to limit ratio, you will want to do some planning before applying for something big like a mortgage or a car loan (although I recommend against getting car loans). In particular, if you do as I do and put most of your purchases on credit cards that you pay off monthly, you will probably want to stop this behavior for a month or two leading up to the mortgage application. This is because of timing issues with your credit report.

First off, companies are always on a delay when it comes to reporting your credit status. When I last looked at my credit report in late January, the status of most of my accounts was current through December. But a couple of my lenders (a couple of credit cards and both of my student loans) were current only through November. These accounts showed the balances from November. So if you want to show 0 balances on your credit report (and thus your credit/limit ratio would be 0, bumping up your score) you would be best advised not to use your credit cards at all for 2 months leading up to your loan application.

Here is a listing of my credit scores for the past year (this tracking of scores up to a year is one of the benefits of my Wamu Card):

Feb 06 731
Mar 06 746
Apr 06 766
May 06 765
Jun 06 772
Jul 06 748
Aug 06 720
Sep 06 760
Oct 06 743
Nov 06 772
Dec 06 766
Jan 07 764

You can see that there's considerable variation. I can't remember what was going on in February, and in August I put an extra $4000 on one of my cards. (It was paid off within 2 months.) But for all other months, the combined balance on my credit cards was always around $3000 (always paid off monthly). I really don't know the reason for most of this variation, so I attribute it to the vagaries of timing. Eliminating all of my credit card usage would probably lead to a much more stable (and slightly higher) credit score. I may start such an experiment soon. If I do, I will be sure to report the results here.


How I Keep Track of my Credit Score

I have a credit card with Washington Mutual (aka WaMu, formerly Providian) which provides a free monthly credit score. I have not charged anything to the card in about a year now. I use it solely for the free credit score, which I find very handy. The card itself sits at home... somewhere (not sure where.... just went through a move).

It seems as though the credit score is updated at the first of the month, but it is not available on the website until the 20th or so. I am not sure how accurate that first date is. The site says "Updated on: 12/01/2006", but it seems strange to me that the score is pulled on the 1st but I can't access it until the 20th.

In any case, despite the question about the timing of the updates, the service is extremely handy. It shows everything from one reporting agency (in my experience, it has always been TransUnion, although evidently it can be Experian as well). I know that all 3 FICO scores track together, from the couple of times I have checked all 3. As long as I check my credit reports (not credit scores) regularly to make sure that there's no bad info on any of them, I am content just using the Washington Mutual service to check my credit score rather than something else.

I've had my Providian/WaMu card since 2003, which has allowed me to track my FICO through quite a few changes. The biggest monthly rise was when I got a new credit card with a $10k limit (at the time, more than all my other card limits combined) and transferring my balances (which were all skating close to the limits) to that card. Since then, I have paid off that card and never run up a balance on any of my cards.

If you want to sign up for a Washington Mutual card to get this benefit, the website is If not, the best place to get your FICO scores is through . If you decide to use MyFICO, please use that link, as I just signed up to be part of their referrer network and will get a commission based on whatever you buy. The Google ads aren't getting many clicks (not so surprising) so hopefully this will work better.