Money Obedience

This is our weekly roundup, where we share some interesting posts written by personal finance bloggers we follow. As always, when we list a post in this roundup we stick with our favorite themes: setting up a budget, household expenses, lower debt, and general personal finance topics that can aid in reaching financial goals. We hope that you enjoy the insights of these blog posts!

Lower Debt

New Rule: Pay Only The Minimum On Your Credit Cards. - This post informs us that Suze Orman apparently also has caught on to the fact that paying off debt and diminishing one’s cash position may not be the best thing to do these days.


Life Insurance

How (and Why) to Buy Life Insurance - Nora wrote a basic guide to life insurance: it covers the two main types of life insurance policies (term and whole-life), the reasons why you should get life insurance, the right amount of coverage, and gives us a way to actually buy a life insurance policy.


Investing

When Your Broker Account Has Problems - This post sheds another light on a technical problem a prominent online brokerage encountered on April 1st. It also tries to answer the question whether it is still okay to open up or maintain an account with that brokerage.

How to Calculate Your Net Worth - This post gives us a step-by-step guide how to calculate our net worth on our own.


Economics

Not Just Another Recession - How This Economic Crisis Stacks Up - Philip of Weakonomics compares the current state of the US economy with how things were in 1920, the start of the decade that ended with the Great Depression. He also gives us hope that we are in a better position now since we have additional tools and institutions that did not exist 80 years ago. (We are also hopeful that the US leadership is as good as we can hope for. For one, Bernanke’s area of expertise is the Great Depression. He is most likely to know what went wrong then and what we can do differently now.)

Unemployment Numbers - If you ever wonder what the unemployment numbers actually measure, read this post. It explains the different types of measures.


Miscellaneous

Finding Balance Between Time and Money - This post points out that there is more to life and happiness than money - like time spent with others. We like this kind of post because it reflects the theme of our own blog, that is, money is simply a means to another end.

Talk to Others About Financial Decisions - Jim of Bargaineering - gives us the very good advice to discuss financial decisions with others. This forces us to delay our decision a little bit, which may prevent us from doing something rash and stupid.

An insurance policy is supposed to protect you against some unfortunate events. It may be mandated by the government, like car insurance is, or it may be bought voluntarily, like life insurance. If you don’t have insurance, misfortune can cause some serious financial problems. Say you don’t have any life insurance coverage and you die. What are the consequences of such an unfortunate event? Your loved ones will not only be emotionally devastated but most likely also financially devastated. When you are dead, earthly matters won’t plague you anymore. So, a lack of life insurance won’t affect you so much but it certainly will affect your loved ones. Is financial disaster for our loved ones the kind of legacy we want to leave behind?

In the case of health insurance things could be rather different. If you don’t have health insurance any health issues could have devastating consequences for you and your loved ones. An unforeseen severe illness or an accident can bring tremendous expenses with it, which you will have to bear yourself if you don’t have health insurance. In the US most people who are fortunate enough to have health insurance get health insurance through their employers. But not all employers provide health insurance.

As the unemployment rate increases steadily more and more people will lose their health insurance that they used to get through the job from which they got laid off. In many cases it is very expensive to replace employer provided health insurance with your own individual policy. It is most likely not affordable on unemployment benefits alone. So, a larger portion of the US population will be without health insurance as the economy deteriorates and the unemployment rate increases. I dread to think how medical expenses will sink a bunch of people who would otherwise be able to hold on to their lives, their houses, the schools for their kids, etc.

Before our two little boys were born, I used to volunteer in various homeless shelters, sleeping the night to help get people settled there and helping them get going the next morning. None of these shelters were ever short of guests. And this was during the good economic times. While many guests did not share their stories about how they became homeless, some did. There was a large percentage of our guests who ended up homeless due to medical expenses. And that included educated people who for one medical reason or another could not even maintain a job and thus, health insurance. They ended up homeless. They ended up becoming a “societal problem” since we as a society cannot leave the homeless completely on their own. Imagine surviving this cold winter in the Northeast U.S. without a home!

The bottom line of this post is that health insurance should be a very important insurance to buy. The risk of not having health insurance is just too great. As long as the government does not provide universal health insurance getting employment with health insurance as a benefit is extremely important. Sure, employment of any kind is scarce right now. There is not much we can do about that. Beggars can’t be choosers. You may not be able to choose among many employers who make you an offer, but even if you take a job without health insurance right now, make sure that you are on the lookout for another job that will provide you health benefits. The risk of not having health insurance is just too great.

Life insurance for a child is a big, fat waste of money. Here is why I think so and why you might want to save the premium when you are setting up a budget.

I’ve had life insurance agents suggest to me that I should buy life insurance for my children. I always dismissed that offer quickly. In my mind there is absolutely no need for such an insurance policy. To be honest, I never thought that life insurance for children was really a product that insurance companies pushed that hard and people bought so often. I guess I believed that an insurance company would not shove these policies down people’s throats if there is no benefit to the customer. Boy, I was wrong. Like most companies, insurance companies are motivated by profit. And child life insurance must be great business for the insurance companies, since insurance companies seem to spend a lot of money advertising these policies. (If you don’t believe me, check out recent issues of parents’ magazines!) During my recent visit to Florida my sister-in-law told me that at her insurance agency the most successful sales people sell, for the most part, child life insurance policies and universal life insurance policies. Neither of these policies are ones I’d recommend! But – surprise, surprise – both types of policies offer the insurance agent high commissions.

Outside of the commission that insurance agents get, why is child life insurance such a waste of money? Let’s look at this problem purely from a financial point of view. The main purpose of life insurance is to replace lost income on which others rely when a death or disability occurs in the family. Most children in well-off countries like ours don’t work for a living! In fact, as every American parent knows, having a child costs a lot of money. To put it crassly – and I’m sorry to do this, but it’s only to make the financial point – the death of a child is a net financial gain because the parents will no longer have to provide for the child. Even taking burial costs into consideration, as well as the money parents save by not having to provide for the child any longer, the death of a child is a financial gain. So, when parents buy a life insurance on a child, they are buying insurance “against” a financial gain, not a loss. That’s the opposite of what any insurance should do.

So, what’s up with universal life insurance? Fast talking insurance agents say that a whole life or universal life insurance policy for a child is a really great idea because part of the higher premiums will be allocated to a savings account, and the “cash value” of the account grows and comes with tax benefits. But the fact is that the largest part of the first premium and a very large part of every other premium goes into the pockets of the insurance agent in the form of commissions. These policies benefit the savings account of the insurance agent far more than they help the savings account of the child. Worse yet, the return on the little money that is accrued is usually significantly lower than the amount someone can get if they use the same money to open a regular savings account. Said another way, the savings account pays far more in dividends than would universal life insurance for a child.

Okay, so why do so many people buy these policies? Well, I can’t say for sure. But I suspect two reasons. One, fast talking insurance agents make you believe that these policies are good and perhaps even necessary. Two, parents look at their children with love and not with a calculator, and since they value their children emotionally, they believe that love translates into financial investment. But, truth be told, the emotional connection with a child does not mean that the purchase of life insurance on that child makes financially sense.

Bottom line: if you are thinking about getting a life insurance policy on your child, I suggest you just say “no”. If you already have one, I suggest you cancel it. Put the premium you are not paying to the insurance company into a high yielding savings account. Either way, over time, you will have saved a nice chunk of money.