Go replacement route with homeowners insurance

Dear Bruce: We have had a homeowners policy for a number of years with replacement value on our home. My insurance is coming up for renewal, and my broker tells me the only thing he could find was fair market value on my home, not replacement. Through the years, I have read in your column that the only type of homeowners insurance one should carry is replacement. I would like to stay with our insurance broker, but I’m not sure what to do. – S.O., via e-mail

Dear S.O: Your insurance guy sounds like a captive agent. A broker represents many companies from which to choose; an agent only uses one. The difference between replacement and fair-market value is enormous. How much is a used sofa, chair or credenza worth? Very little. If you must replace those things at today’s prices, it can be rather expensive, which is why the only type of acceptable insurance is replacement value. If this fellow can’t provide it, go elsewhere.

Million-dollar coverage

Dear Bruce: I saw my insurance man recently and made a few adjustments to my auto policy. Since I have two drivers under the age of 18, I asked him if I had enough liability insurance. He said I should have an umbrella policy for $1 million. My current liability is $300,000 to $500,000. Is this the policy I should have? – K.L., via e-mail

Dear K.L.: Your insurance agent is doing you a service, but the fact that you went to see him and had to ask makes me wonder about his paying attention to details: $300,000 to $500,000 an automobile is almost like being uninsured. It is certainly underinsured. An umbrella policy, which simply means when your $300,000 or $500,000 is exhausted, the umbrella will pick up an extra million, is an absolute requisite. In fact, I would suggest $2 million or $3 million. The fact that you have kids under 18 who are driving might make the insurance company a little nervous about underwriting such a large umbrella policy. If you can get it, grab it. You can do a million dollars’ worth of damage without working up a sweat. There are so many people who run around with very little insurance and think they’re properly insured, but they are sadly mistaken.

Stick with term-life policy

Dear Bruce: I would like to get your feedback on universal life insurance. I met with representatives from a financial institution, and they were pitching this type of insurance policy for $600 a month. The $500,000 policy has investment options, I can withdraw money without getting taxed until my death and my family gets the insurance money plus whatever value on the investments (tax-free). I am 46 years old. Is this a good investment for me, or should I get a term-life policy for $500,000 with premiums of $50 a month, and invest the $550 ($600 minus $50) in my 401(k) or annuities? I was thinking of refinancing my current fixed-loan mortgage to an interest-only loan and withdrawing some cash to buy another house. I will rent my current house and live in the new house. I am planning to send more money to the interest-only loan to avoid any negative amortization. I would like to buy a few houses using the equity on the houses. What do you think? – V.A., via e-mail

Dear V.A.: Without going into great detail, I think you would be far better off taking the straight term insurance for $500,000 and investing the difference – but not in annuities and not necessarily in your 401(k). Whether the 401(k) is the place to go depends on your taxable income and how much you believe the immediate tax deduction is worth versus paying the taxes now and investing the money elsewhere, for example, in a Roth IRA, where it will be totally tax-free for the next 30 years or more.

As to the mortgage to purchase another home, I have no problem with that if you’re a sophisticated investor. Renting your current house will very likely be a losing proposition. Most single-family homes will not rent for enough to justify the investment. If you’re going to be a serious real-estate investor, you might wish to consider multiple-family homes. Generally, middle-class areas are where real rental income can be developed.

Analyzing annuities

Dear Bruce: My question concerns those annuities that give a steady stream of funds over a lifetime with the principal going to the annuity provider (usually an insurance company) at death. While these instruments are generally disparaged as poor investments for most, there remains one thing I haven’t been able to figure out. Common wisdom says to draw down nonannualized retirement savings at rates no greater than 3 percent or 4 percent to ensure that the savings will last one’s lifetime. However, the annuities pay 5 percent to 6 percent (or more) and, unless the provider goes out of business, are guaranteed to last a lifetime. Therefore, one can use the whole 5 percent to 6 percent with no worries of exhausting the investment. – S.S., via e-mail

Dear S.S.: Your logic is faultless until you consider that many people could not leave the principal untouched. They are dependent not only on the interest the principal withdraws but a reduction of principal to sustain their lifestyle. In the event the principal is left alone, the annuity may make sense. However, one problem is that the annuity pays substantially less than a parallel investment in securities probably would. Annuities certainly have a place, but they are clearly not for everyone.

No need for long-term-care policy

Dear Bruce: I’m 48, single and gainfully employed by a terrific company for 18-plus years. I have no plans of ever leaving this company. My annual salary is $110,000. I have company stock options and a pretty healthy 401(k) and individual retirement package. I contribute 12 percent of my salary to my company’s program, and the company matches 6 percent. I have two homes. My primary residence is valued at $225,000, with a mortgage balance of $40,000. A second vacation home is valued at $300,000, with a mortgage of $90,000. I have no children, no dependents. A salesman wants me to purchase one of two long-term-care insurance plans: coverage of up to $150 per day for an annual premium of $2,237.43, or coverage of up to $120 per day for an annual premium of $1,023.50. – J.M., via e-mail

Dear J.M: To me, it looks like you are in fat city. You’re 48, making a very good salary, you have good habits and a substantial savings. I wouldn’t recommend long-term-care insurance for a healthy person at all. Some years down the line, maybe, yes. In your case, you haven’t indicated your concern about leaving a big estate. At your present rate of earnings, you will be able to pay for any long-term care you may need. I think it would be great for the salesman but not in your best interest. In 15 years, I might give you a different answer.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.[[In-content Ad]]