Tuesday, February 1, 2011
New Website and Bog Home!
If you have stumbled across my old blog, please redirect your browser to the new home for my website and blog at www.vhfinancialmanagement.com . I hope you enjoy the new website. As always, I am happy to hear thoughts and comments.
Tuesday, January 11, 2011
Ever Been Caught in the Rain?
We’ve all been caught out in the rain, and as an avid golfer, I can honestly say I have played golf in weather bad enough to make passersby shoot me strange looks from inside their dry cars. While an all-weather suit is a plus, a good umbrella is a must to stay dry. Just as an umbrella is a necessity in any die-hard golfer’s bag, a financial umbrella policy is a wonderful tool to protect your family.
An excess liability coverage policy (A.K.A. umbrella policy) covers additional liabilities beyond the coverages of the underlying policies. An umbrella policy is a broad form of coverage that covers both automotive and general liabilities when purchased in addition to basic liability plans (home and auto). When the limits of the underlying policies max out, the umbrella policy kicks in.
Let’s go back to golf. If while playing golf in the rain a golf club slips out of my hands and injures a person, the underlying coverages of my homeowner’s policy will kick in first. If the damages were severe and beyond the limits of my homeowner’s policy, my umbrella policy will jump in and cover the excess up to the limit of the umbrella, which range from $1M to $5M plus.
The good news is the costs of umbrella policies are inexpensive: usually roughly $200for a $1,000,000 policy…..if you don’t have teenage drivers. Purchasing an umbrella policy will most often require an increase in underlying limits. This is most often seen in auto policies. While each state has its own minimum liability requirements for auto policies, most umbrella insurers require limits much higher than the minimum state limits. For example, the state of TN requires drivers to carry at least $25,000/$50,000/$10,000 in coverage. To learn more what these numbers mean check out my article about the importance of limits: http://bit.ly/dTMey3 . To obtain an umbrella policy the insurance company mayrequire the insured to carry limits somewhere in the $250,000/$500,000/$100,000 range. While this is a ten-fold increase in liability limits, it doesn’t mean the cost will increase by ten. The increase will be fairly small. Remember, we don’t want to risk a lot for a little! The purpose of insurance is for protection.
We also must understand the distinction between personal liabilities and commercial liabilities. A personal umbrella policy will not cover a liability created by a business liability. Commercial ventures require a separate business umbrella policy. Also, it’s important to make sure the underlying policies and limits are in place. For example, if a parent decides to reduce the limits on a teenage driver to the state minimums in an effort to save money, the underlying requirements of the umbrella policy will not be met. Therefore, if the teenage driver is involved in an at-fault accident, the umbrella policy will not pay out. The parents would be ripe for a law suit.
So just as I won’t risk playing a round of golf in the rain without an umbrella, it’s important to have proper liability protections in place to protect your financial assets. While not everyone requires an umbrella policy, most people do. Umbrella policies are an inexpensive way to give yourself peace of mind and help you sleep a little better at night. While my liability protection concerns are not something that will keep me awake at night, the weather forecast for my next round of golf might.
An excess liability coverage policy (A.K.A. umbrella policy) covers additional liabilities beyond the coverages of the underlying policies. An umbrella policy is a broad form of coverage that covers both automotive and general liabilities when purchased in addition to basic liability plans (home and auto). When the limits of the underlying policies max out, the umbrella policy kicks in.
Let’s go back to golf. If while playing golf in the rain a golf club slips out of my hands and injures a person, the underlying coverages of my homeowner’s policy will kick in first. If the damages were severe and beyond the limits of my homeowner’s policy, my umbrella policy will jump in and cover the excess up to the limit of the umbrella, which range from $1M to $5M plus.
The good news is the costs of umbrella policies are inexpensive: usually roughly $200for a $1,000,000 policy…..if you don’t have teenage drivers. Purchasing an umbrella policy will most often require an increase in underlying limits. This is most often seen in auto policies. While each state has its own minimum liability requirements for auto policies, most umbrella insurers require limits much higher than the minimum state limits. For example, the state of TN requires drivers to carry at least $25,000/$50,000/$10,000 in coverage. To learn more what these numbers mean check out my article about the importance of limits: http://bit.ly/dTMey3 . To obtain an umbrella policy the insurance company mayrequire the insured to carry limits somewhere in the $250,000/$500,000/$100,000 range. While this is a ten-fold increase in liability limits, it doesn’t mean the cost will increase by ten. The increase will be fairly small. Remember, we don’t want to risk a lot for a little! The purpose of insurance is for protection.
We also must understand the distinction between personal liabilities and commercial liabilities. A personal umbrella policy will not cover a liability created by a business liability. Commercial ventures require a separate business umbrella policy. Also, it’s important to make sure the underlying policies and limits are in place. For example, if a parent decides to reduce the limits on a teenage driver to the state minimums in an effort to save money, the underlying requirements of the umbrella policy will not be met. Therefore, if the teenage driver is involved in an at-fault accident, the umbrella policy will not pay out. The parents would be ripe for a law suit.
So just as I won’t risk playing a round of golf in the rain without an umbrella, it’s important to have proper liability protections in place to protect your financial assets. While not everyone requires an umbrella policy, most people do. Umbrella policies are an inexpensive way to give yourself peace of mind and help you sleep a little better at night. While my liability protection concerns are not something that will keep me awake at night, the weather forecast for my next round of golf might.
Thursday, January 6, 2011
A Financial Resolution!
With the start of the New Year, many people set out their New Year’s resolutions. Financial planning resolutions should not be forgotten.
Financial planning is a broad process of decisions that collectively lead to forward financial progress. Or at least that’s the way it should be. Often I find that the forest is missed because of the trees. The small details get over-looked, and it’s the small details that matter.
One of the details that seem to get left behind is the designation of beneficiaries. Beneficiary designations are extremely important in the big picture. Assets that pass via beneficiary designation pass by operation of law. What does this mean, and why is it important? After the death of the owner of an asset, the asset will pass in one of two forms: via the will of the estate owner or via beneficiary designation (operation of law). If the asset has a beneficiary, the asset will pass to the beneficiary regardless of what the will of the decedent states because operation of law supersedes the language and wishes outlined in the will. It’s imperative that beneficiaries are up-to-date and reflect the wishes of the owner of the asset.
Life events should always be an impetuous to review designations. Marriage, divorce, death, and births, are all examples of life events that would trigger a review. The key is to have the asset pass as the owner wishes. For example, if an ex-spouse is still listed as the primary beneficiary, the asset will probably not pass as the owner wishes.
There is another reason to utilize beneficiary designations: cost! Assets that pass via the will of the owner must go through a legal process called probate. The probate process carries administrative cost, such as court costs and legal (attorney) fees. These costs reduce the overall value of the asset. For this reason, naming the estate of the owner as the beneficiary is usually not a wise choice because the asset will then have to flow through the probate process.
The most common example of accounts that pass per operation of law by the designation of a beneficiary is retirement accounts, such as 410k, 403b, and IRAs. Since these accounts typically hold a large portion of the average investor’s assets, it’s important to have the beneficiary designation appropriately assigned to avoid unnecessary probate. It’s also important to include a contingency beneficiary or secondary beneficiary, as well. Most accounts have this capability available for the account owners.
While the physical act of updating a beneficiary designation is not a difficult chore, it is something that often gets overlooked. It’s important to take the time to keep the designation of beneficiaries up to date and reflecting your wishes. If this process seems confusing or overwhelming, it would be wise to discuss the topic with a fee-only financial advisor. If you are searching for a financial advisor, www.acaadvisors.org is a great place to start.
Financial planning is a broad process of decisions that collectively lead to forward financial progress. Or at least that’s the way it should be. Often I find that the forest is missed because of the trees. The small details get over-looked, and it’s the small details that matter.
One of the details that seem to get left behind is the designation of beneficiaries. Beneficiary designations are extremely important in the big picture. Assets that pass via beneficiary designation pass by operation of law. What does this mean, and why is it important? After the death of the owner of an asset, the asset will pass in one of two forms: via the will of the estate owner or via beneficiary designation (operation of law). If the asset has a beneficiary, the asset will pass to the beneficiary regardless of what the will of the decedent states because operation of law supersedes the language and wishes outlined in the will. It’s imperative that beneficiaries are up-to-date and reflect the wishes of the owner of the asset.
Life events should always be an impetuous to review designations. Marriage, divorce, death, and births, are all examples of life events that would trigger a review. The key is to have the asset pass as the owner wishes. For example, if an ex-spouse is still listed as the primary beneficiary, the asset will probably not pass as the owner wishes.
There is another reason to utilize beneficiary designations: cost! Assets that pass via the will of the owner must go through a legal process called probate. The probate process carries administrative cost, such as court costs and legal (attorney) fees. These costs reduce the overall value of the asset. For this reason, naming the estate of the owner as the beneficiary is usually not a wise choice because the asset will then have to flow through the probate process.
The most common example of accounts that pass per operation of law by the designation of a beneficiary is retirement accounts, such as 410k, 403b, and IRAs. Since these accounts typically hold a large portion of the average investor’s assets, it’s important to have the beneficiary designation appropriately assigned to avoid unnecessary probate. It’s also important to include a contingency beneficiary or secondary beneficiary, as well. Most accounts have this capability available for the account owners.
While the physical act of updating a beneficiary designation is not a difficult chore, it is something that often gets overlooked. It’s important to take the time to keep the designation of beneficiaries up to date and reflecting your wishes. If this process seems confusing or overwhelming, it would be wise to discuss the topic with a fee-only financial advisor. If you are searching for a financial advisor, www.acaadvisors.org is a great place to start.
Tuesday, January 4, 2011
Hello 2011!
As we say goodbye to 2010, we look ahead to 2011. We hope for global economic stabilization and an improving job market, but we need to pause and give thanks. We should be thankful for a wonderful couple of years in the stock market. Yes, that’s right….I said we should be thankful for the last two years. Did you know that the total combined return of the S&P 500 for the last two years is almost 42%....26.47% in 2009 and 15.46% in 2010. Those are impressive returns.
The most impressive fact about these numbers is that most people have no idea how strong the market has been. Where are the trumpets announcing the close of another successful year? Where are the media leaders shouting the good news? Unfortunately, you won’t find it. Good news doesn’t sell like bad news. Remember the close of 2008? The S&P 500 closed down 37%. Ouch, it was painful for all of us, and we certainly knew because everywhere we turned we heard, quite loudly, the bad news.
We can’t control what is touted to the general public, but we can control what we filter and what we ingest from an informational standpoint. This is good news! We should stick it in our back pockets and hold onto it. How long did we walk around with our chins down living in fear that the sky was falling during late 2008? Well now’s the time to shine. Pick your heads up and be thankful for participating in the stock market.
There is a point to my commentary, and the point is the markets work. The stock market is a great tool when used correctly. Some folks feel they are smarter than the market and try to time buys and sells. These folks usually get whipsawed and end up on the bad side of market returns. Those who chose to follow sage advice and stay committed to the market were rewarded for their patience. Those who took things even further and made the decision to continue to dollar cost average (buy consistent amounts at regular intervals) where rewarded even further.
With two great years behind us, how does this position the markets for 2011? Unfortunately (or fortunately if you are wise) ,you won’t find a prognostication here. I have no idea which way the market will travel through this New Year. I am certain of this: investors should stay committed to prudent investment philosophies, such as diversification, rebalancing, dollar cost averaging, and tax efficient investing. These strategies win in the long run. Simple math proves this to be true. The returns of the S&P 500 over the last 16 years (1995-2010) produced an average return of 10.66% a year. Pull out any one year individually and you will find a high to low range from 37.58% (1995) to -37.00% (2008), but it’s not about the outliers. It’s not a sprint: It’s a marathon. It’s the commitment to the long term approach that wins in the end.
We have said our goodbyes to 2010. We sang, “Should old acquaintance be forgot and never brought to mind.” But I say we don’t forget. I say we learn from the past and be thankful for financial wisdom that served us well.
The most impressive fact about these numbers is that most people have no idea how strong the market has been. Where are the trumpets announcing the close of another successful year? Where are the media leaders shouting the good news? Unfortunately, you won’t find it. Good news doesn’t sell like bad news. Remember the close of 2008? The S&P 500 closed down 37%. Ouch, it was painful for all of us, and we certainly knew because everywhere we turned we heard, quite loudly, the bad news.
We can’t control what is touted to the general public, but we can control what we filter and what we ingest from an informational standpoint. This is good news! We should stick it in our back pockets and hold onto it. How long did we walk around with our chins down living in fear that the sky was falling during late 2008? Well now’s the time to shine. Pick your heads up and be thankful for participating in the stock market.
There is a point to my commentary, and the point is the markets work. The stock market is a great tool when used correctly. Some folks feel they are smarter than the market and try to time buys and sells. These folks usually get whipsawed and end up on the bad side of market returns. Those who chose to follow sage advice and stay committed to the market were rewarded for their patience. Those who took things even further and made the decision to continue to dollar cost average (buy consistent amounts at regular intervals) where rewarded even further.
With two great years behind us, how does this position the markets for 2011? Unfortunately (or fortunately if you are wise) ,you won’t find a prognostication here. I have no idea which way the market will travel through this New Year. I am certain of this: investors should stay committed to prudent investment philosophies, such as diversification, rebalancing, dollar cost averaging, and tax efficient investing. These strategies win in the long run. Simple math proves this to be true. The returns of the S&P 500 over the last 16 years (1995-2010) produced an average return of 10.66% a year. Pull out any one year individually and you will find a high to low range from 37.58% (1995) to -37.00% (2008), but it’s not about the outliers. It’s not a sprint: It’s a marathon. It’s the commitment to the long term approach that wins in the end.
We have said our goodbyes to 2010. We sang, “Should old acquaintance be forgot and never brought to mind.” But I say we don’t forget. I say we learn from the past and be thankful for financial wisdom that served us well.
Wednesday, December 15, 2010
Auto Gap Insurance: Why you may need it!
It seems that almost every other TV commercial during the holidays has a gesticulating car salesman telling why you need a new car. Of course, these dealers are trying to move stock by year end. “Hurry before the best deals of the year end,” is an often stated selling point. If you find yourself driving a new car, you may need to think about an auto gap policy for your new car. Gap policies are a useful policy addition that may save you money.
What is a Gap Policy?
A gap policy is a feature that can be added to the policy of a new car. The gap coverage will cover the difference between the auto’s value and the balance of the loan. While I am not an advocate for consumer debt (car loans), those who have new car loans need to be protected. New cars depreciate so rapidly the value of the car may be lower than the payoff of the loan.
Why does this matter?
If a new car owner is involved in an at-fault accident where the automobile is totaled, the insurance company will make payment to the owner. The problem occurs when the automobile is valued at a lower amount than the payoff of the loan. The owner will then be on the hook for the difference without the gap coverage.
Here’s an example: Let’s say Sam buys a $30,000 car and 3 months later is involved in an at-fault accident where his car is totaled. Sam has full coverage and expects to receive payment to cover the pay-off of his note, but, unfortunately, this may not be the case. New cars can depreciate as much a 20% immediately after purchase, so the value of Sam’s car may be as little as $24,000. Even if Sam put down 10% ($3000), his loan pay-off may be roughly $25,500. Sam may have to pay out of pocket to pay off the note, even after being paid by the insurance company.
Gap policies are inexpensive and should be discussed with you insurance carrier if you are a new car owner and have a highly leveraged auto loan. Remember the old insurance axiom: don’t risk a lot for a little. Without the gap policy you could have a potential liability of thousands of dollars.
What is a Gap Policy?
A gap policy is a feature that can be added to the policy of a new car. The gap coverage will cover the difference between the auto’s value and the balance of the loan. While I am not an advocate for consumer debt (car loans), those who have new car loans need to be protected. New cars depreciate so rapidly the value of the car may be lower than the payoff of the loan.
Why does this matter?
If a new car owner is involved in an at-fault accident where the automobile is totaled, the insurance company will make payment to the owner. The problem occurs when the automobile is valued at a lower amount than the payoff of the loan. The owner will then be on the hook for the difference without the gap coverage.
Here’s an example: Let’s say Sam buys a $30,000 car and 3 months later is involved in an at-fault accident where his car is totaled. Sam has full coverage and expects to receive payment to cover the pay-off of his note, but, unfortunately, this may not be the case. New cars can depreciate as much a 20% immediately after purchase, so the value of Sam’s car may be as little as $24,000. Even if Sam put down 10% ($3000), his loan pay-off may be roughly $25,500. Sam may have to pay out of pocket to pay off the note, even after being paid by the insurance company.
Gap policies are inexpensive and should be discussed with you insurance carrier if you are a new car owner and have a highly leveraged auto loan. Remember the old insurance axiom: don’t risk a lot for a little. Without the gap policy you could have a potential liability of thousands of dollars.
Friday, December 10, 2010
The Theory and Reality of Emergency Funds
Many times planners talk in terms of financial theory or possibilities, and while clients often heed the advice of their planner they implement the guidance based on theory. A good example of this is in regards to emergency funds. I feel most people understand the theory and importance of having a solid emergency fund, but until a true need for emergency funding is faced the peace of mind liquidity provides may not be fully appreciated.
I recently met with a client who told me a great story. My client had an ah-ha moment. My client had built a solid emergency fund. She understood, in theory, the importance of liquidity (cash), but she had not experienced firsthand the power of a sturdy safety net.
My client was struck with a spell of tough luck….she fell and injured her leg, her mother was in the hospital, and on top of that, her car’s transmission died. Between hobbling around on an injured leg and visits to the hospital, she found time to get her car repaired. The price tag for the transmission repair was lofty.
In the past, financial setbacks for my client would have been dealt with simply by pulling out the credit card and racking up debt, but this time was different. After a couple years of hard work, she had reached solid financial footing and was able to absorb the unexpected cost.
The best part of the story was not so much that my client was able to cover an unexpected expense. The golden moment came when she learned, first hand, the benefit of a fully funded emergency fund. Theory became reality for her.
The moral of the story is financial theories are only theories, but the wisdom behind the theory and advice is sage. When it comes to emergency funds and building a safety net, it’s not whether or not the need will arise to utilize the funds. It’s just a matter of time before Murphy’s law will come knocking on your door. A solid emergency fund is the foundational footing to a solid financial plan and one of the best ways to increase peace of mind. If a good night’s sleep is what you are seeking, propping up the emergency fund may be just what the doctor ordered.
I recently met with a client who told me a great story. My client had an ah-ha moment. My client had built a solid emergency fund. She understood, in theory, the importance of liquidity (cash), but she had not experienced firsthand the power of a sturdy safety net.
My client was struck with a spell of tough luck….she fell and injured her leg, her mother was in the hospital, and on top of that, her car’s transmission died. Between hobbling around on an injured leg and visits to the hospital, she found time to get her car repaired. The price tag for the transmission repair was lofty.
In the past, financial setbacks for my client would have been dealt with simply by pulling out the credit card and racking up debt, but this time was different. After a couple years of hard work, she had reached solid financial footing and was able to absorb the unexpected cost.
The best part of the story was not so much that my client was able to cover an unexpected expense. The golden moment came when she learned, first hand, the benefit of a fully funded emergency fund. Theory became reality for her.
The moral of the story is financial theories are only theories, but the wisdom behind the theory and advice is sage. When it comes to emergency funds and building a safety net, it’s not whether or not the need will arise to utilize the funds. It’s just a matter of time before Murphy’s law will come knocking on your door. A solid emergency fund is the foundational footing to a solid financial plan and one of the best ways to increase peace of mind. If a good night’s sleep is what you are seeking, propping up the emergency fund may be just what the doctor ordered.
Thursday, December 2, 2010
What is a Diminished Value Claim?
Recently, my wife was involved in a little fender bender in a parking lot. She was hit by a young driver who just wasn’t paying attention. The damage was not dramatic and no one was hurt. After gathering all the vital information and contacting our insurance company on the spot, both parties went on with their day.
With almost everything financially related, I strive to seek a nugget of education, and this insurance claim process was no different. The at-fault driver had coverage, and the insurance company was quick into action to set us up with a repair plan and a rental car. Within a little more than a week, we where made whole…..or as they say in the insurance industry: indemnified. But wait, were we really back to where we started? What about the true value or our automobile?
In today’s world of information sharing, insurance companies realize the picture is a bit broader. Even though our automobile was repaired to pre-accident standards, the true value of this asset had diminished. This can now be seen in a Carfax report that will show our car was involved in an accident. If a buyer is deciding between two similar vehicles with the exact same sales price, but one has a clean Carfax report and one shows involvement in an accident, the decision is clear. The buyer will always buy the vehicle with the clean Carfax report. Insurance companies now realize this and offer diminished value claims.
A diminished value claim is an effort to fully indemnify the claimant. In essence, cash is paid to the claimant to fill the gap between what the car was worth pre accident and post accident. Let’s go back to the example of the buyer looking at two similar cars. If the buyer decided the accident was minor and the damage was repaired properly, the buyer may make an offer commiserate to the diminished value…..say $500 less than the car with clean Carfax report. If the owner of the car received $500 from the insurance company as a diminished value claim, the owner was made whole.
The key to a diminished value claim is it must be requested. While the at-fault driver’s insurance was really great to work with, they didn’t offer this without my asking. On another note, the diminished value claim is a negotiable amount. I did not accept their initial offer and asked for what I felt was fair. They agreed.
If you find yourself in an auto accident, remember the true value of your auto may decline more than you realize due to access to information via Carfax reports. Speak to the insurance company about the claim, be patient and courteous, and don’t forget to request a diminished value claim.
With almost everything financially related, I strive to seek a nugget of education, and this insurance claim process was no different. The at-fault driver had coverage, and the insurance company was quick into action to set us up with a repair plan and a rental car. Within a little more than a week, we where made whole…..or as they say in the insurance industry: indemnified. But wait, were we really back to where we started? What about the true value or our automobile?
In today’s world of information sharing, insurance companies realize the picture is a bit broader. Even though our automobile was repaired to pre-accident standards, the true value of this asset had diminished. This can now be seen in a Carfax report that will show our car was involved in an accident. If a buyer is deciding between two similar vehicles with the exact same sales price, but one has a clean Carfax report and one shows involvement in an accident, the decision is clear. The buyer will always buy the vehicle with the clean Carfax report. Insurance companies now realize this and offer diminished value claims.
A diminished value claim is an effort to fully indemnify the claimant. In essence, cash is paid to the claimant to fill the gap between what the car was worth pre accident and post accident. Let’s go back to the example of the buyer looking at two similar cars. If the buyer decided the accident was minor and the damage was repaired properly, the buyer may make an offer commiserate to the diminished value…..say $500 less than the car with clean Carfax report. If the owner of the car received $500 from the insurance company as a diminished value claim, the owner was made whole.
The key to a diminished value claim is it must be requested. While the at-fault driver’s insurance was really great to work with, they didn’t offer this without my asking. On another note, the diminished value claim is a negotiable amount. I did not accept their initial offer and asked for what I felt was fair. They agreed.
If you find yourself in an auto accident, remember the true value of your auto may decline more than you realize due to access to information via Carfax reports. Speak to the insurance company about the claim, be patient and courteous, and don’t forget to request a diminished value claim.
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