Monthly Archives: February 2017

Inexperienced investors should take advantage of ‘auto-pilot investing’

For inexperienced investors with little knowledge about the investment process, it may be important to invest in funds that do not require much maintenance. Now, a researcher at the University of Missouri has found that investors with less investment knowledge are more likely to invest in target-date funds (TDFs). Michael Guillemette, an assistant professor of personal financial planning in the MU College of Human Environmental Sciences, says this is a positive trend which will help inexperienced investors invest safely without risking significant losses based on their lack of knowledge.

‘If a potential investor without experience or knowledge is looking to invest in the stock market in order to build retirement wealth, it is not advisable for them to jump in and start investing in individual stocks, since they will be more likely to make investment mistakes,’ Guillemette said. ‘Target-date funds allow these unsophisticated investors to enter the investment world in a way that minimizes the opportunities for them to make mistakes.’

Target-date funds, which were endorsed by Congress in the Pension Protection Act of 2006, are also known as life-cycle funds. This means that TDFs change their asset mix of stocks and bonds based on the age of the investor. An investor simply begins putting money into the fund at a certain age, and as that person ages, the TDF invests in a greater percentage of bonds to better suit that person’s stage of life as they approach retirement. Guillemette says this is a safe, middle-of-the-road option for people who want to save and invest for retirement but lack knowledge of the investment world.

‘TDFs are sound strategy for unsophisticated investors because they basically put the investing on auto-pilot,’ said Guillemette, who also is a certified financial planner. ‘As a person advances in their career and gets closer to retirement, they will want to begin to take less risk with their retirement funds. TDFs do this automatically so that investors do not have to worry about making those changes themselves.’

For his study, published in The Journal of Retirement, Guillemette, Terrance Martin, an assistant professor at the University of Texas-Pan American, and Philip Gibson, an assistant professor at Winthrop University, examined data from the National Financial Capability Study, which was commissioned by the Financial Industry Regulatory Authority, and found that ‘unsophisticated investors,’ or investors who lack investment knowledge, were 22 percent more likely to invest in TDFs than sophisticated investors.

‘The average investor, who lacks a strong understanding of best practices for investing, is going to make a host of investment mistakes,’ Guillemette said. ‘TDFs help minimize those mistakes by doing the legwork for the investors, so this trend we identified is great news, especially for those who have already been investing in TDFs for several years.’

Guillemette says that TDFs are not optimal in terms of maximizing potential investment returns and recommends that both inexperienced and experienced investors should seek advice from a certified financial planner who is held to a fiduciary standard, in order to protect themselves from behavioral biases. He says the next best alternative is probably TDFs, especially for unsophisticated investors.

Should You Get Credit Insurance When You Buy a Car?

For most of us, buying a car is the second largest financial transaction we’ll make, next to buying a home. And we’re likely to get loans to finance our car purchase. In the fourth quarter of 2014, 84 percent of new cars purchased were financed, according to Experian Automotive.

If you’re financing your car purchase through a dealership, it’s also likely that the finance and insurance manager will offer you warranty and insurance products, such as an extended warranty, gap insurance or tire-and-wheel protection. The F&I manager might also offer credit protection, which is meant to cover your car payments should you be unable to pay them yourself because of layoff, injury, illness or death.

The most venerable of these products, with an almost 100-year history, is credit insurance. Consumer groups have long been leery of credit insurance products, which are offered not just for cars, but also for credit cards and other consumer loans. Often, the consumer groups contend, the products are expensive and unnecessary. Further, there have been instances of lenders forcing the credit insurance on consumers.

Payout rates (the premium dollars paid compared with the amount paid out in claims) are typically low. That’s because the money is going to commissions, he says.

There are some decent providers of credit insurance, such as credit unions, Kukla says, but it’s tough for consumers to know which products are worthwhile and which ones are rip-offs. To protect themselves, potential buyers should look for coverage they can afford that specifically addresses their financial concerns and which comes from a reputable insurer. The insurance department in your state is the place to check in order to see that the company is licensed and legitimate, says automotive expert Lauren Fix.

The three most common types of credit insurance coverage are:

Credit life: This pays off all or some of your loan if you die during the time you’re covered.
Credit disability: Pays on the loan if you become ill or injured and can’t work during the time you’re covered. It’s also sometimes called credit accident and health insurance.
Credit involuntary unemployment: Pays a specified number of monthly loan payments if you lose your job through no fault of your own, such as in a layoff, during the coverage term. It’s also known as “involuntary loss of income” insurance.

None of these coverages is required with a car loan. You can’t be denied credit if you say no to a credit insurance offer, Kukla says.

Payment Protection: A Newer Product
A more recent type of credit protection is called debt protection, which might also go by such names as debt cancellation, debt suspension or payment protection. Federal law allows national banks, most state-chartered banks and credit unions to offer this benefit without involving an insurer. The bank or credit union fills that role.

Debt protection provides benefits that are similar to credit insurance. It’s typically offered when you sign your loan papers.

A New Approach: The Walkaway Program
The Great Recession of 2007-’09 had a devastating impact on consumers and brought car purchasing to a near standstill. Who could feel comfortable buying a new car if there was a good chance you’d lose your job tomorrow? The recession has had “a major impact on the psyche of the car buying public,” says Steve Klees, senior vice president at EFG Companies in Irving, Texas.

In the midst of the recession, EFG partnered with Hyundai to offer the Hyundai Assurance program, introduced to consumers during the 2009 Super Bowl. It offered people the peace of mind to buy that new car. If you lost your job within a year of buying your new Hyundai, the automaker promised, it would take the car back. By the time that program ended in 2011, 350 people had returned their vehicles.

While Hyundai Assurance is gone, EFG makes available a similar product, called Walkaway, which is available through 350-400 dealerships, banks and credit unions across the country. When an involuntary job loss or other triggering event happens, the program releases customers from a car lease or loan obligation. Typically, the dealership, credit union or bank pays for the first year of coverage. After that, customers have the option of purchasing the coverage package for $395. There are no underwriting guidelines or restrictions except that the purchase price of the vehicle must be less than $75,000. “That’s probably 99.9 percent of all cars,” Klees says.

Klees says the “sweet spot” for Walkaway is with customers ages 25-40 — not surprising given that this group is least secure in their job situation, compared with other groups. Klees, a 35-year veteran of selling credit insurance and other add-on products, says purchasers of traditional credit insurance tend to be older.

What To Ask Yourself and the Lender
The popularity of debt protection products has been on the wane over the decades. In a long-term study for the Federal Reserve, the percent of people who said they purchased debt protection coverage in 1977 was 63.9 percent. In 2012, that dropped to 22.7 percent.

If you are interested in a debt protection product, the Center for Responsible Lending suggests that you purchase the products through a credit union or bank, where the rates may be lower. Compare any dealership price quote and terms to ensure you’re getting the best deal for comparable coverage. Also, the National Association of Insurance Commissioners advises you to ask these questions before you buy:

  • What’s the premium? Will it be financed as part of the loan? And will that increase your loan amount so you’ll have to pay additional interest?
  • Can you pay the premium monthly instead of financing the entire premium as part of your loan?
  • What’s the loan payment minus the credit insurance?
  • Will the insurance cover the loan’s full length and amount?
  • What are the limits and exclusions on payment of benefits?
  • Is there a waiting period before the coverage becomes effective? If so, how long?
  • With a co-borrower, what coverage does he or she have? What’s the cost for that coverage?
  • Can you cancel the policy? What kind of refund is available? Are there any penalties?

It’s also wise to see if you have other insurance that might eliminate the need for a credit insurance contract in association with your car purchase. A term life insurance policy would provide benefits in the event of your death. Your employer may make disability coverage available. Check with your insurance agent to see what your current coverage would provide before you buy credit protection.

If at any point you feel pressured to buy credit insurance, it’s best to simply walk away and consider your options in a pressure-free environment. In the words of the National Automobile Dealers Association, “once you sign the contract, you are legally obligated.”

How To Shop for Use-Based Car Insurance

In recent years, nine of 10 top U.S. auto insurance companies have started selling policies based on how motorists drive. At least a handful of pay-as-you-drive policies are offered in every state, covering as many as 3 million U.S. vehicles, according to industry estimates. Switching to use-based insurance (UBI) could help you save a little or a lot over what car owners spend on premiums associated with a more traditional policy.

If you’re considering changing to a UBI plan, it pays to understand what you’re getting.

Carriers set UBI rates by collecting mileage or other information directly from your car, but similarities among policies end there. Some insurers use a small, meterlike electronic device that plugs into a car’s onboard diagnostics port to store or transmit information. Newer versions gather driving data through an app and a smartphone connected to a car’s infotainment or telematics system.

Drivers may happily trade access to their driving habits for lower insurance rates. But privacy advocates worry that insurance companies aren’t always 100 percent transparent about what data they collect, what they do with it and with whom they share it.

“Privacy is a real question,” says J. Robert Hunter, insurance director for the Consumer Federation of America. “What do insurance companies do with that information? If I park at the corner of Main and 14th and on one corner is a bar and another is a gym, will you raise or lower my rate?”

Here are steps to take if you’re shopping for car insurance and considering a use-based policy:

Find out what’s available: Look on the Web site of your state insurance commission or consumer advocacy agency to see which insurance carriers are licensed to operate in your area. Here’s a list of all 50 state insurance departments. Alternatively, visit auto insurers’ Web sites and type in your ZIP code to see if they sell UBI plans where you live.

Understand what types of data insurers collect: Some states restrict the information insurers can collect, which limits the types of UBI policies they offer. In California, for example, insurance companies can track mileage but are barred from monitoring where or when you drive. They also can’t track such behaviors as how fast you drive or how often you slam on the brakes, the activity known in insurance lingo as “hard-braking events.” Visit state insurance regulators’ Web sites for their explanations of the UBI plans they authorize, such as this pay-as-you-go auto insurance pamphlet from the Oregon Department of Consumer and Business Services. You can also read the fine print on UBI policies on insurers’ Web sites to determine what driving data an insurer collects, and how it is gathered.

Try before you buy: Certain insurers give potential customers a chance to take a UBI policy for a test-drive before committing to a policy. In such cases, you may be asked to plug an electronic monitor into your car’s diagnostics port for a month or so, which allows the insurer to collect enough data to set a rate. Other insurers offer UBI policies only to existing customers.

Understand how insurers determine discounts: Insurers may offer an introductory discount of 5 or 10 percent during a try-out period, and adjust the rate as needed after monitoring mileage or driving behaviors for a set time period. Progressive Insurance bases rates for its Snapshot policy on six months of driving data. State Farm customers with Drive Safe & Save policies keep electronic monitors plugged into their cars all the time, so, theoretically, their rates could change at renewal time, if they’ve driven substantially more or less than in the previous period.

Consider a UBI bundle: Some insurers offer UBI as part of a bundle of services tied to a car’s built-in entertainment, safety or maintenance systems. State Farm’s Drive Safe & Save with In-Drive Connect policy, a joint venture with Verizon Wireless, offers mileage-based insurance along with stolen vehicle assistance and hands-free mobile phone service. After a one-year free trial, charges for In-Drive Connect jump to $6.99 a month or more based on what other features a customer chooses.

See how you’re doing: If you sign up, use the Web portal associated with your UBI policy to monitor your driving. Some insurers’ dashboards give customers a grade based on their driving habits. For example, customers of Allstate’s Drivewise UBI policies can download an iPhone or Android app to look up mileage, speed, hard stops and what times of day they drive.