Soldier of Finance (18 page)

2. Investigate the neighborhood.
Begin by simply driving around and seeing what's nearby. How close are schools? Do you want that many kids wandering by your property every day? What is traffic like at different times of day? Are you close to fire stations? That can be good for your insurance costs, but it will also mean hearing sirens at all hours.
    Take the time to visit some of the neighbors. Ask them what they like about the neighborhood and what they don't like. Perhaps there's a crazy person who lives on the corner, or half the neighbors hate the other half and have an ongoing feud that you don't want to be part of. Ideally, you may learn that the neighbors are all friendly and watch out for each other. Investigate zoning for surrounding empty properties; you don't want to move in and then discover that a mall is starting construction a block away. Educate yourself thoroughly about what you're getting into.

3. Don't open and close credit accounts.
Every time you start or close a credit line, it dings your credit score. A few changes like this can drop your score as much as 30 points, sabotaging your mortgage interest rate when you most need your score to be at its highest.

4. Don't buy until you're ready.
As I pointed out at the beginning of this chapter, the American Dream is not owning a home at any cost; the American Dream is living a life of security and fulfillment with your family. If buying a house undermines your financial security, you don't have to do it right away.

For that matter, you don't have to do it at all. J. Money's experience should be a lesson. Ultimately he enjoyed his house, but when I asked him what advice he would give to young people considering buying their first home, he made the following pointed comment:

“Really, REALLY, make sure you understand all the pros and cons about owning a home. Even if you can afford it (or someone says you can afford it), make sure you genuinely want to own a home and have solid reasons for it. It's not always an ‘investment' or the ‘smartest way to live,' because we all want different things out of our lives.”

The bottom line is this: The fact that everyone says homeownership is a big part of the American Dream doesn't mean it has to be
your
dream. It's a great goal to strive for, but make sure you've done the groundwork first. Take the time to do your homework so that when you do buy, it will be an experience to remember and not one that you rather forget.

Go / No Go

• Owning a house is part of the American Dream, but it might not be the best financial move for you at this point in your life. That doesn't mean you will never own one, but your family's financial security is more important than where you live. If your dream is a house, you must approach it with deliberate planning and common sense.
  
• Be realistic about how much house you can afford. Just because the bank says you can have a mortgage for a specific amount doesn't mean you have to use all of it.
  
• As a general rule, when you compare median home prices to your income, the ideal is a ratio of three or below.
  
• There are different types of loans: Fixed rate mortgages lock in the interest rate for the duration of the loan. Variable rate mortgages offer fluctuating interest rates over the duration of the loan. A hybrid mortgage combines a variety of options. Which type is best for you depends on your income, situation, and goals.
  
• When buying a house, don't take anyone else's advice about how much you can afford. Investigate the neighborhood. Do not open and close credit accounts prior to applying for the mortgage, because doing so will lower your credit score. And don't buy until you are ready.
  

Soldiers in the field with their helmets and gear always looked bulky to me. I discovered that the reason behind this was extra body armor. More than a bulletproof vest, it covers the entire upper body. Body armor is standard issue for all military personnel in war zones like Iraq and Afghanistan.

When I was issued an IBA (Interceptor Body Armor), otherwise known as a flak jacket, my knees and lower back started aching as soon as I picked it up. My initial reaction was that I now had an extra sixteen pounds to carry around with all my other gear. I wasn't happy about it.

Of course, body armor has a purpose. It stops projectiles from penetrating your skin; it protects you. You can go into combat with or without it, but given the choice,
with
makes a lot more sense. Your chances of sustaining a fatal injury are greatly reduced. The entire time I was in Iraq, I hated it. It was hot, heavy, and annoying. But I wore it. I saw many lives saved because soldiers had that protection.

I view insurance in much the same way: as protection. It provides the means to take care of specific emergencies that you cannot afford on your own. Above all, insurance protects your family if anything happens to you.

More than 35 million American households have no life insurance, and that number is growing. This represents a 22 percent increase in just the past six years. The economy is largely at fault, but the end result is that one-third of Americans have no life insurance to cover their family's expenses if they die.

Fewer Americans now have homeowners or renters insurance. A surprising number of people also don't have auto insurance, even though it is legally required in most states.

I don't spend a lot of my time getting people into insurance programs, but I do recognize that a certain amount of insurance is absolutely vital. You need to protect yourself in some key areas. Specifically, there are five types of insurance you absolutely must have:

1. Auto insurance
   
2. Homeowners/renters insurance
   
3. Medical insurance
   
4. Life insurance
   
5. Umbrella liability
   

The following gives a basic overview of each. As with any type of investment, you should ask plenty of questions and learn all you can before making a decision.

The most obvious insurance coverage required is auto. It is “obvious” because, in most states, legally, you have to have it. A few considerations, however, could save you a lot of money.

First and foremost is liability. If you are in an accident and anyone is injured, medical expenses can be overwhelming. Make sure you have that covered. In many cases the law requires it, but you cannot afford to ignore it even if it is not legally required.

The amount of coverage you buy depends on your car and how stable your FRAGO Fund is. If you drive an older car that can be replaced for a few thousand dollars, and you have that money in your emergency fund, you might consider dropping collision coverage and saving on the premiums. It is a gamble, but if you have an excellent driving record, it could be worth considering. If you have a poor record, however, or if the replacement value of your car is more than you could take care of without undue hardship, be sure your insurance protects you from accidents.

Shopping around is a good way to find the lowest prices on anything, but know what you're getting. Some companies “save” you money by providing less coverage. Examine the insurance package closely and be sure it includes exactly what you need.

A quick way to save money on premiums is to keep deductibles high. Increasing the deductible from $200 to $500 can save as much as 30 percent on the premium. Of course, if you are in an accident, you will have to pay the deductible. If you have an emergency fund set up, which you should by now, you can self-insure against smaller damages and use the insurance to protect you from major losses.

Ask about discounts. Many insurance companies offer a variety of discounts for specific conditions: Teen drivers can be offered discounts for good grades or participation in certain driver's education programs. If you work close to home and don't drive much, ask if you're eligible for a low-mileage deduction. Some companies offer lower deductibles for each year that passes without a claim. It never hurts to ask a lot of questions. Who knows what you will learn?

Before buying a new vehicle, discuss it with your insurance agent; some cars cost less to insure than others.

If you experience a disaster such as a fire or flood, you want to know that your home and possessions can be replaced. This is true whether you own the home or are renting. Belongings often have great personal and sentimental value, which can never be replaced, but if you experience disaster it will be comforting to know that you'll be able to buy clothes and the necessities for living that we often take for granted.

You can choose either a cash value policy or a replacement cost policy. Cash value pays you the value of the home at the time it was destroyed. A replacement cost policy is more expensive, but it covers whatever rebuilding costs you encounter in bringing the new home to the same quality as the old one. Once you have a homeowners policy, inform your agent of any improvements made on the house. Many homes are underinsured because owners neglect to upgrade the policy following major additions to the home.

One common error is to insure both the house and the land on which it sits for replacement costs in case of a disaster. You won't have to replace the land; you only need to insure the house. This oversight increases premium costs and gives you nothing in return.

Possessions need to be covered. If you are renting, this is the purpose of renters insurance. Valuable items such as jewelry, antiques, or art pieces (paintings, statues, sculptures) often require a specific rider on the policy. Be sure you inquire.

Typically possessions are covered up to 75 percent of their face value. It is important to maintain an inventory of your possessions and keep it at another location. You wouldn't want the inventory list to be destroyed along with the rest of the house. Videotaping your home is an easy way to maintain a record. You can keep recordings and pictures of your home in a safe, or you can videotape a walk-through of your home and upload it to YouTube (using privacy settings, of course, so that no one can view it). That way, a record is available to you no matter what happens to your home. Failure to keep a written or video inventory current could result in only being able to claim a fraction of the value of your possessions if they are stolen or damaged.

As is the case with auto insurance, increasing your deductible will decrease your premiums. In addition, many companies offer loyalty discounts if you stay with them for the long haul. You may also get a discount if you insure your home and auto with the same company. Improving your home's security and disaster resistance often results in further reduction of the premiums. An agent who wants your business will gladly answer your questions. Be sure to ask plenty.

If you are still working, your most important asset is your career. Your ability to earn a living is something that you cannot do without. Medical insurance is far more likely to be used than is life insurance. Your medical insurance needs to cover any disability that interrupts your income. Hospitalization is extremely expensive, as is long-term nursing care if you become disabled.

Most people have medical insurance, to some extent, through their employer. If you do not, explore your options; while expensive, it is vital in the long run. Take a close look at the policy—even if your employer covers you—to check for gaps in coverage that can be covered with a personal policy.

Many people simply can't afford private medical insurance. However, something is better than nothing, so explore alternate options. Many states now offer basic health insurance based on income levels. Call your state offices for more information. As with most types of insurance, raising your deductible will lower the premium. Take the time to compare plans to get the best possible coverage that you can afford. Take advantage of a health savings account, which allows you to put aside money to pay for medical expenses, tax-free.

When I first started my business, we were covered by insurance with my wife's employer. However, when she decided to quit that job, we needed private insurance. Using
www.eHealthinsurance.com
as a source, we spoke to several local agents. After taking reams of notes, and spending what felt like days on the phone, asking lots of questions, we finally found what we were looking for.

The lesson from our experience is that you can find a workable policy if you persevere. When you consider the impact a serious illness requiring hospitalization could have on your financial future, it is worth the effort to make sure you are covered.

There is an old
Wizard of Id
cartoon in which a life insurance salesman pitches his product to the king. The king asks him, “What's life insurance?”

The salesman responds, “That's where we bet that you will give us more money before you die than we have to give you in return.”

The king asks, “What if I die young?”

“Then you win.”

Perhaps a rather cynical approach, it does highlight the essential element behind life insurance. Its purpose is to take care of people after you die.

A few years ago, a recent widow sat in my office, clenching a box of tissues and sharing her story with me. She and her husband had been together for over twenty years; they had two kids and loved each other deeply. He was a hard worker, very health conscious, and took great care of himself. It was a devastating shock when she walked into the kitchen and found the love of her life lying lifeless on the floor.

He had taken the time to provide for his family, however, by taking out a very large life insurance policy. He was the primary breadwinner for the family, so if he hadn't bought insurance, the sudden loss of his income would have left his wife and children destitute. Due to her husband's foresight, the woman never had to work again and the kids were able to continue on to college. The loss of a close family member is tough enough without having to worry about money. “Had he not bought that [life insurance],” she told me, “I have no idea what I would have done.”

Unfortunately, according to a recent survey, more than 35 million U.S. households have no life insurance. Yet the one thing you can be sure of is that you are 100 percent guaranteed to die. Provision for your family is important after you are gone.

Many don't buy life insurance because they believe they can't afford it. The truth is that a healthy 35-year-old man can get $500,000 of term insurance for 20 years for the price of six Double-Doubles per month at In-N-Out Burger. The policy won't taste as good as a Double-Double, but you can rest assured that your family is taken care of. And cutting back on burgers might help you to live longer.

I'm not a huge proponent of insurance as an investment tool. Those varieties include whole life, universal, variable, and indexed. Some are useful for transferring money to your children without incurring heavy tax burdens, so I won't say you should never use permanent insurance, but I do not believe that it is the best investment for most people. The purpose of insurance is to provide death benefits. The cheapest way you can arrange that is usually the best kind of insurance to use. If you live, that's good. If you die and your spouse eventually dies, your descendants benefit. So you do win either way.

Term insurance is literally pennies on the dollar compared to whole life. A policy for $250,000 could be as little as $20 a month. That means a quarter of a million dollars in life insurance could be paid for by the price of two movie tickets every month. That's a pretty good return on your money, should your family need it.

Instead of paying hundreds of dollars each month for something that will only generate face value if you die, why not spend $20 a month for term insurance and put the balance into a more profitable investment? If you use it to start a Roth IRA, you will be light years ahead by the time you retire.