Part 17 (2/2)

- Collision insurance, as you can probably guess, covers damage to your car when it hits (or gets. .h.i.t by) another vehicle or object. But because collisions aren't the only way your car can get banged up, comprehensive insurance covers damage from events other than collisions: floods, fire, theft, and so on. Collision and comprehensive coverage make more sense for newer vehicles, and are generally required if you're still making payments on your car. They're less necessary-and may actually be a waste of money-on older cars.

- Personal injury protection (PIP) insurance is sometimes called ”no-fault” insurance, and is required in certain states. It covers medical costs (and possibly lost wages) if you're injured in an accident. It may also cover pa.s.sengers and pedestrians.

- Uninsured motorist insurance covers you and your pa.s.sengers if you're in an accident caused by a driver who doesn't have insurance. It also covers. .h.i.t-and-run accidents.

TipFor more on the different types of auto insurance coverage, check out this handy page of definitions: tinyurl.com/cins-def.

Every year, you spend hundreds-maybe even thousands-on car insurance, and chances are, you're paying too much. The August 2008 issue of Consumer Reports estimated that the average family could save $65 per month by shopping around for car insurance. Here are some other ways to lower your costs: - Ditch towing coverage. Towing-or ”emergency roadside service,” as it's sometimes called-is an easy cost to self-insure (see General Insurance Tips General Insurance Tips). You likely pay $10$30 a year for towing insurance, and one tow costs $100. (If you're in an accident, towing is usually covered under collision, but check with your insurance company to be sure.) Sometimes your car will break down, but if it's well maintained, that won't happen often.TipIf the value of your car has dropped so low that a major repair would cost the same as replacing it, consider dropping your comprehensive and collision coverage. Then use your savings on premiums to boost your self-insurance fund (see General Insurance Tips General Insurance Tips).

- Plan ahead. Check on insurance before you buy your next car. Insurance costs are based on how likely a vehicle is to be stolen, damaged, or to inflict damage, and how badly occupants tend to get injured in accidents. Repair and replacement costs are also factors. Many insurance companies list cars with lower insurance costs on their websites.

- Watch your credit. As mentioned in Chapter8 Chapter8, most insurance companies now look at parts of your credit report to determine your premiums. They can't adjust rates on your current car if you pay on time and in full, but anytime you add a new vehicle, its premiums are affected by your credit.TipIf your credit has improved since you bought your car, ask your insurance company to re-check your credit score and see if they'll lower your premium.

- Don't pay monthly. Insurance companies charge a few bucks each month for monthly billing. To avoid that fee, pay every 6 months or even once a year, if possible. If you have to pay monthly, use their autopay program, which costs less because they don't have to send you a paper bill unless your premium changes.

Though it'll always cost more to insure a new Corvette than a Corolla, one of the best ways to keep costs low is to keep your driving record clean. Insurance companies charge you based on how likely you are to file a claim-and accidents are the biggest source of claims. Some insurance companies offer discounts for taking safe-driving courses. Others give low-mileage discounts-the less you're on the road, the safer you are. So be sure to ask about all the discounts you qualify for.

Homeowners Insurance Your home is probably the most valuable thing you own. Plus, it's filled with all of your Stuff. If your house burned down or got burgled, that would certainly qualify as a financial catastrophe-which is exactly what insurance is designed to avert. It's impossible to give a specific figure since everyone's situation is different, but you should carry enough insurance on your home to protect you in case of just such a disaster.

Homeowners insurance policies have three main parts: - Dwelling coverage insures your home in case it's damaged or destroyed. You want a guaranteed replacement cost policy, which requires the insurance company to fully rebuild your home. (Other policy types may not offer enough coverage.) But you don't need a policy that covers the full resale value of your property, since that includes your land, which doesn't need to be insured.

- Personal property coverage insures the Stuff inside your house, like clothes and furniture, and usually also insures the personal property you have with you while you're away from home. Your insurance can be for either actual cash value (how much your things are currently worth) or replacement cost (how much it would cost to buy them new). The latter is your best bet: You should carry insurance that would pay you to replace your belongings, not pay you based on what the insurance company thinks they're worth.TipTo help settle claims in case of a disaster, keep a record of the things you own (including receipts for expensive items). Use your digital camera to create a photo (or video) inventory of your Stuff, and keep a written record somewhere safe or use an online tool like KnowYourStuff.org or StuffSafe.com.Some people buy floater policies to cover things like jewelry and antiques. Before doing this, check your personal property coverage-you may already have enough insurance to cover these kinds of items. (In order to be covered, your policy may require you to notify your insurance company if you have over a certain amount.) - Liability coverage protects you if somebody is hurt on your property and sues you. Most policies cover you off your property, as well. You should have at least as much coverage as your net worth, and some experts say you should have twice your net worth. If someone trips on your doorstep and breaks his collarbone, say, he just might follow through on his threat to sue you for everything you own.

Most homeowners policies contain other pieces, like insurance for loss of use (which covers you if you have to live elsewhere while your home is being repaired). It's important to review your policy every year or so to be sure you have the right amount of coverage. (If you want disaster insurance for earthquakes, floods, or hurricanes, you'll have to ask your insurance agent how to get it; it's usually not part of a standard homeowners policy.) To lower the cost of homeowners insurance, follow the general insurance tips on General Insurance Tips General Insurance Tips, and take steps to reduce the risk of fire and theft: Keep fire extinguishers in your home, install modern smoke detectors, and even consider adding an automatic sprinkler system. Put deadbolts on the doors, and, if you can afford it, install a burglar alarm. If you have an older home, modernize your electrical and plumbing systems. Once you've made safety improvements, contact your insurance company and ask them to review your policy.

TipFor more money-saving ideas, check out this advice from the Insurance Information Inst.i.tute: tinyurl.com/homeins.

Life Insurance In Chapter6 Chapter6, you learned that your job is your second most important financial a.s.set right after your health. Your income provides food and shelter for your family, and helps fund future plans. But what would happen to your family financially if you died? If the loss of your income would be a catastrophe for them, you need life insurance.

TipLife-insurance premiums have fallen dramatically over the past decade. If you bought a policy during the 1990s, it's worth checking prices again today. The August 2008 issue of Consumer Reports found the average person could save over $100 per month by ”refinancing” their life insurance-buying a new, cheaper policy. If you do find cheaper insurance, don't cancel your existing policy until the new one is in place.

The two basic types of life insurance are: - Term insurance, which gives you coverage for a set period of time (the term), like 5 years, 25 years, or whatever (you can choose from different terms). As with car or home insurance, you decide how much coverage you want (more on that in a minute), and then pay an annual premium. Unless you buy level term insurance, your premiums start out small and get higher as time pa.s.ses. If you die during the term, the policy's beneficiaries (usually your family) receive an income-tax-free payout.

- Cash-value insurance (officially called permanent insurance), which is similar to term insurance but lasts your entire life, not just for a fixed term. Common types of cash-value insurance include whole life, variable life, and universal life. Each of these adds an investment component to the policy that acc.u.mulates a cash value, which you can borrow against, reclaim if you cancel the policy, or eventually use to pay premiums.

Cash-value insurance sounds like a better deal, right? It lasts your whole life instead of just for a few years, and the insurance company invests some of your premiums so you can use them later. Not so fast. When you purchase permanent insurance, you're most likely committing an insurance sin: buying coverage you don't need. Term life insurance is usually the best choice for a number of reasons.

First, most people don't actually need permanent life insurance. Your need for life insurance tends to fade as you grow older and your family is no longer dependant on your income. So if you take out a permanent policy, you may be paying for life insurance when you no longer need it.

Second, the investment part of a cash-value policy isn't usually a good deal. After all, you don't buy a savings account with your auto insurance policy, so why would you do so with your life insurance? Keep your insurance and investments separate. If you want to invest, there are better ways to do it. (See Chapters Chapter12 Chapter12 and and Chapter13 Chapter13 for investing info.) Don't buy life insurance as an investment. for investing info.) Don't buy life insurance as an investment.

Lastly and most importantly, cash-value insurance is much more expensive than term-five to 20 times more expensive! You could probably buy 30 years' worth of term coverage (which is all you really need) for the same cost as buying 5 years' of a cash-value policy.

TipFor $75, the Consumer Federation of America (tinyurl.com/CF-Linsurance) will evaluate a cash-value policy-one you already own or one you're thinking about buying-to find the ”true” investment returns. This fee may seem high, but it's cheaper than paying for insurance you don't need.

That said, cash-value policies do make sense for some people. If you have a high income, will leave behind a multi-million-dollar estate, or own a small business, cash-value insurance might be worth a look-if you think you'll have it for 20 years or more. Whatever you do, don't ask an insurance salesman for advice; of course he'll tell you to buy it. Instead, find an independent financial adviser and ask her about your options.

The bottom line: For most people, the best choice is guaranteed renewable term life insurance. (Guaranteed renewable means that as long as you keep paying your premiums, the insurance company can't cancel your policy.) TipAny time you make a major life change like getting married or divorced, don't forget to change the beneficiary on important legal doc.u.ments like your life insurance policy, retirement accounts, and will.

How much life insurance do you need?

Not everyone needs life insurance. Like all insurance, it's designed to prevent financial catastrophes. So you only need it if other people-like your spouse and children-depend on your income. You need it less when you're older because your kids will be on their own and you won't have any debts (presumably, anyway).

Specifically, life insurance is valuable if you have kids living at home; have a spouse whose income alone couldn't support your family's lifestyle; have large debts (like a mortgage); are wealthy and might be subject to estate taxes; or own a business. If any of these describe your situation, then life insurance is a good idea. If none of them apply to you, then you don't really need it.

How much life insurance should you buy? Different experts give different answers. Some say your policy should cover five times your annual income, others say 10. And in The Money Book for the Young, Fabulous & Broke, Suze Orman recommends 20 times your annual income. The truth is there's no hard-and-fast rule.

TipFor a little help coming up with a coverage amount, use this handy online calculator from the nonprofit LIFE Foundation: tinyurl.com/lins-calc.

Rather than base your life insurance coverage on your income, it makes more sense to base it on what your survivors will need to pay their expenses. Think about why you want the insurance in the first place: Is it to pay off the mortgage? To fund your spouse's retirement? To send the kids to college? Then get enough insurance to do that. You can comparison shop for insurance at sites like AccuQuote.com, DirectInsuranceServices.com, and SelectQuote.com.

NoteA brief word about disability insurance: You're far more likely to become disabled than to die prematurely, and the loss of income is just as real. Even if you're smart and pay yourself first by saving 10% of your income (see Get in the game Get in the game), just 6 months' of unemployment can wipe out 5 years' of saving. So if you need your salary to live on, you should get disability insurance. This topic is beyond the scope of this book, but you can learn about choosing and buying disability insurance at tinyurl.com/GRS-disability.

What You Need to Know About Taxes There's no way to cover the complexity that is U.S. tax law in just a few pages, and it would be foolish to try. Your accountant has spent years working with the tax code, and even she needs to use reference books. Instead, this section describes the basics of how income tax works and gives you some useful info on how to make smart tax moves.

How Income Tax Works The basic federal income tax structure is pretty simple, but there are layers and layers of laws that make it complicated. At its core, the tax system involves the following steps: 1. At the end of the year, you tally your total income from taxable sources. (Some income, like that from child support, isn't taxable.) 2. You subtract certain allowable sums known as adjustments-like IRA contributions and moving expenses-to find your adjusted gross income, or AGI. (Your AGI, which is shown on line 37 of tax Form 1040, is a key number, and comes up again and again in tax discussions.)TipThe front page of Form 1040 lists adjustments; you can read more about them at e. (The back page of Form 1040 lists deductions and exemptions.) You can claim either the standard deduction (a single number that increases every year to account for inflation-see e, you check to see how much tax you're liable for (the box on Know what you owe Know what you owe explains how tax rates work). explains how tax rates work).

4. You can reduce your tax liability through certain tax credits, which you qualify for by doing things like adopting a child or buying your first home. (The government usually gives tax credits for actions it wants to encourage.) 5. The final step is to calculate how much you owe, if any. Because you pay taxes throughout the year (through paycheck withholding, for instance), you have to subtract what you've already paid from your tax liability. If you've paid more than your liability, you get a refund; if not, you owe the difference.

When you get hired for a job, you fill out a Form W-4, which tells your employer how much tax to withhold from your paychecks. In theory, the money withheld should be enough to cover your income-tax liability, but this isn't always the case.

Maybe you made a mistake on your W-4 or have other sources of income (like a side business or a capital gain from selling stocks). Or say you got a big bonus in one paycheck and your company withheld too much. Whatever the case, it's unlikely that, at the end of the year, you'll find that your employer took out exactly the right amount of taxes. If you paid too much, the government owes you a refund. If you paid too little, you owe the government the difference between what you should have paid and what you've already paid.

n.o.body likes to pay taxes, and some people get upset when they find they have taxes due. But your tax bill shouldn't come as a surprise-you can (and should) keep track of your tax liability throughout the year. If you're blindsided by a big tax bill at the end of the year, it's because you didn't think ahead. Advance planning is the best way to avoid such tax trauma.

Tax-Tr.i.m.m.i.n.g Tips You don't have to like taxes, but you do have to pay them. Fortunately, there are a few ways to legally trim your tax bill. One is to take all the deductions (How Income Tax Works) you're ent.i.tled to. The following sections explain other ways to pay Uncle Sam a little less.

TipThe best way to arm yourself for dealing with taxes is to get educated. That doesn't mean you have to become a tax professional, but try to get a basic understanding of tax laws. Go to the library and borrow a book on preparing your own taxes, and spend a couple of hours reading it. This may be boring, but it'll pay off in the long run.

Know what you owe To many people, taxes are a sort of black box: They don't know how taxes are calculated, so they have too much or too little withheld from their paychecks. Having too much withheld usually isn't a problem-it just means you get a big refund. But people can get awfully get upset when they owe more than they were expecting at the end of the year; they feel like the government is doing something sneaky and is tricking them out of their money.

You don't need to be surprised by what you owe come tax time. Most of the tax info is available at the start of the year-you just have to find it.

For instance, it's worth taking a little time to look at your tax situation at the beginning of the year so you can get your withholding amount right. To figure out how much your employer should withhold from each paycheck, you can use an online calculator like those at tinyurl.com/IRS-calc or or tinyurl.com/PCC-calc. If you discover that your employer is withholding too much or too little, file a revised Form W-4 to adjust the amount.

TipYou can download great, free income-tax planning spreadsheets from /taxes (scroll to the bottom for download links), which help you estimate out how much you'll owe in taxes so you're not surprised at the end of the year. (scroll to the bottom for download links), which help you estimate out how much you'll owe in taxes so you're not surprised at the end of the year.On The Money: Marginal Tax RatesNot all of your income is taxed the same; as you earn more, you pay more taxes. Your marginal tax rate marginal tax rate is what you're taxed on the last dollar you earned. Confused? Here's a concrete example. is what you're taxed on the last dollar you earned. Confused? Here's a concrete example.For the 2009 tax year, these were the tax rates for single filers making up to $171,550: Taxable Income 2009 Tax Rates Up to $8,350 10%.

$8,351$33,950 15%.

$33,951$82,250 25%.

$82,251$171,550 28%.

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