Wednesday, December 30, 2009

Why do so many people have bad credit histories?

A good way to understand why so many people have a bad credit history is to examine the use of credit cards. There are two ways to use a credit card. One is as a convenience. Those who use credit cards solely for convenience tend to not want to carry a lot of cash and find writing checks to be a nuisance. They pay for their purchases with their credit card and each month pay their credit card bill in full.

If this describes you, you have made the credit card a useful tool. You may even get extra benefits, such as cash back or airline miles. However, in the credit card industry, you are called a deadbeat. Using a credit card to your benefit is not what the credit card company had in mind when it issued the card. Some credit card companies will charge you a fee for not making installment payments (paying interest). Even though the credit card company charges a fee to the seller of your purchases, the big money is made on interest paid by the credit card holder. Furthermore, while you have made your credit cards a valuable tool, you are not developing a credit history, as the loan companies mainly look at how you handle making regular payments on a balance so they can determine how you will handle making a thirty-year mortgage payment.

The second way to use a credit card is to pay less than the total monthly bill, thereby costing you an interest payment. You are borrowing money every time you use your credit card, and what that costs you depends on how you use the card. While paying this interest is certainly costing you money, it is giving you a credit history you can later use to borrow greater sums of money, such as what you will need to buy a house. All of this depends on your ability to properly manage your credit cards and your payments.

Friday, December 25, 2009

Recognizing The Red Flags That Lead to Debt

When you’re paying off your student loans, or paying off any debt for that matter, it’s a great idea to know where you stand financially. Specifically, it’s a great idea to recognize any warning signs that might foretell a personal economic plunge that may take years to recover from. For example, in the student loan repayment realm, three unopened invoices from your lender lying in a pile on your desk is a big red f lag that you’re not keeping up with your loan payments. Here are some common financial red f lags to look for in your busy life:

Your bank account is consistently overdrawn.
If you keep getting those thin envelopes in the mail from your bank telling you that your checking account is overdrawn, it’s time to regroup and find out why you’re not keeping up.
Tip: Ask your bank for overdraw protection against your checking account. For a few bucks each month, most banks will be happy to comply.

You are only able to make the minimum monthly payments on your credit cards.
A biggie. If you can’t maintain a clean credit card bill each month then you’re staring at big trouble down the road. At 15 percent or so interest, credit card companies clean up when you pay only the bare minimum of your monthly bill. At those rates, that new jacket you bought for $80 three months ago can cost you $350 in a few months if you don’t pay your credit card bill in full.
Tip: If you have multiple credit cards, cut all of them up save one. And use that only for emergencies.

You and your partner, if you have one, are arguing about money.
Money is an emotional issue, a power struggle sometimes between couples who usually have different ideas of how cash should be handled. If you and your spouse or partner are haggling over bills more than usual, it’s probably because your bills are higher than usual.
Tip: Agree on a budget and a spending allowance, if necessary, then stick to it.

Your savings account is busted.
Money experts agree that a savings reserve of six months of your annual salary is mandatory to ride out rough economic times, like the loss of a job or a serious illness. If you don’t have any money at all in your savings account, it’s time to reexamine your budget and see where your money is going every month.
Tip: When you get paid, pay yourself first; take 10 percent of your check and stash it in a savings or money market account.

You are juggling your monthly bill payments.
If you’re applying selective reasoning to your monthly bill payments (“Hmmm, we’ll pay the phone bill this month, but not the dog walker.”) then you’re in over your head financially.
Tip: Lose the dog walker and any other luxury item on your “to pay” list. In tough times stick to the staples: home, heat, groceries, and electricity. You might not think about it, but 20 years ago, nobody had an Internet bill or a cell phone bill. But you probably do now.

Thursday, December 24, 2009

Should You Apply for Student Loan Consolidation?

Think of consolidating your student loans as reorganizing all your key business contacts and putting them into one Blackberry or one Rolodex. Or think of it as combining your DVD remote, your stereo remote, your VCR remote, and your satellite TV remote all into one easy-to-handle device.

Imagine that? Bundling all your debt into one loan with one bill and one payment—maybe even with a lower interest rate of student loan consolidation. By consolidating, you’re actually lowering your monthly loan payments past the average ten-year student loan limit. The downside is that you’re shelling out more money in interest payments because you will be making loan payments over a greater length of time. That’s a big downside of student loan consolidation.

Should you consolidate your student loans? It depends on what your financial situation is and what your financial goals are.

If your goal is immediate financial liquidity, that is, more money in your pocket for the short term, then student loan consolidation may be a good way to go. But if your goal is to get rid of your student loan debt ASAP and you can manage those regular monthly payments, then it’s not such a great idea, unless you can consolidate your loans with a bargain-basement student loan consolidation rates that’s much lower than the one you have now.

In US, student loan consolidation interest rates are fixed, meaning they can’t and won’t change. The rate you get the day you consolidate your loans is the rate you have the day you pay off your consolidation loan. To make things even sweeter, Congress made sure that the fixed interest rate on student loan consolidation could never exceed 8.25 percent.

So far, It’s look like easy to jump right in and consolidate your student loans without thinking the whole thing through. One loan, one payment, maybe a lower interest rate. What’s not to like, right?

There are, however, reasons not to consolidate your student loans. That’s especially true if you have other, better options available to you. Consider these scenarios:

• I need a lower monthly payment. Most lenders will be happy to discuss different loan repayment options, such as the graduated payment and income-sensitive payment plans.
• I’m having trouble keeping up with my loan payments. You can temporarily stop paying your loans, or at least reduce them, under either a deferment or a forbearance plan.
• I just want all my loans rolled into one. Your lending institution may be willing to purchase all your other student loans and bundle them together under one “roof.” In financial circles, that’s known as loan serialization.

So, student loan consolidation, a good deal or not?

source: Book by Brian O'Connell. "Free Yourself From Student Loan Debt"

Tuesday, December 22, 2009

What is a loan-to-value ratio?

One of the standard procedures before making a loan is to determine the value of the property. This is done by an appraisal, which determines a value for the property for loan purposes. The lender may have its own appraisers (in-house appraisers), or it may use an independent (outside) appraiser.

There are several different types of appraisals, some of which are highly complicated and require the appraiser to complete special education and licensing procedures. Appraising a home, especially a tract house or condominium, is relatively easy. The most common appraisal method used is to compare similar properties that have recently sold. A computer database with this information is available to the appraiser, who physically inspects the subject property to assess its condition. The property is then valued based on the sale prices of similar properties in the area, called comparables or comps. If the comps are not exactly the same model as the subject property, a price adjustment is made for square footage, lot size, and any amenities, such as a swimming pool or room addition.

For certain types of loans in which there is an extremely low loanto- value ratio, the lender may even use a desktop appraisal. With this method, the values of comparable properties are checked on a computer and there is no physical examination of the property beyond a drive by by the appraiser.

The amount of money you ask the bank to lend you compared to the value of the property is the loan-to-value ratio. The lower the ratio, the lower the risk for the lender. For you, the lower the ratio, the lower your credit score can be.

Sunday, December 20, 2009

Control Your Student Loan Bill by Managing Your Lifestyle.

Irish humorist Joseph O’Connor once said, “I feel these days like a very large flamingo. No matter which way I turn, I have this large bill attached to me.” While O’Connor aptly states the emotional condition of the high-debt sufferer, there’s no need to flap your wings over a big student loan bill. No need, that is, if you know how to control your debt.

The idea here is simple. Control your debt by managing your lifestyle. Consequently, the key to controlling debt is to first try to live as inexpensively as possible. If that means renting an apartment with a roommate or bringing a bag lunch, then so much the better. Once you pay off your student loans you can ramp up your lifestyle, because you’ll have more cash at your disposal.

Let’s start with a household budget. Without going through the punishing ordeal of ranking your spending priorities, it is difficult to guarantee you will have anything left over at the end of the month to pay your student loan. If this sounds too taxing, then use the paperless budget method. Start by holding out a reasonable portion of every paycheck to pay down your student loan and other debts and force yourself to live on the balance.

If every now and then you come out ahead, be sure to apply your windfall to eliminate student loan debts before you start to accumulate savings. This makes sense for a number of reasons. Borrowing rates typically exceed savings rates. Interest expense is usually nondeductible, while savings are taxable. Interest charges are a certainty, but investment returns are volatile. Sure, these terms seems dry and boring. But let’s face facts, it’s not your father’s economy anymore. In an era when consumer spending is high and there’s plenty of new goods and services to buy that weren’t available even 20 years ago, knowing how to budget properly is a big key to your financial success.

According to a recent American Express consumer survey on everyday spending, today’s list of typical, day-to-day expenses is still dominated by traditional items such as groceries, fast-food lunches, tolls, and gasoline. But they’ve been joined by certain 21st-century wallet-sappers such as cellular phone service, paging fees, and Internet service costs.

Consequently, as everyday expenses increase, managing a household budget becomes more complicated. The best solution? Get those costs into your budget as soon as possible, because people tend to spend whatever money is left over after paying the fixed expenditures and stop only when either the ATM won’t give them more cash or the bank calls.

One way to keep money from flying out of your pocket is to write down what you’re spending as you spend it. You may not realize it, but that glass of Merlot after work, the dry cleaning you picked up on the way home, and that four-cheese pizza you had delivered to your door for dinner all add up. A record of your daily, weekly, or monthly expenditures makes for some interesting reading in most American households, testing the patience of millions of spouses in the process.

As I’ve mentioned, some consumers like to use a credit card to buy everything (the credit card companies LOVE to push that strategy). That way, at the end of the month, they have a readymade laundry list of expenditures sent to them by their credit card firm. Bad idea. Sure, you get a nice, clean list of what you spent each month. But getting into the habit of using a credit card is never a good ploy. It’s easy to treat that Visa card like cash, but it ain’t. Sooner or later you’ve got to pay for it, with high interest payments to boot if you’re not on time every month.

Besides, in the age of the laptop, it’s easy to sit down at the end of the day and compile your own list. You’ll have your record and you won’t get sticker shock opening your credit card bill every month.

Saturday, December 19, 2009

What is a promissory note?

When you sign all the documents that go along with giving a mortgage, you will sign what is called a promissory note (also referred to simply as a note). This is the document that sets out the terms of the loan, and as the name implies, is your promise to repay the money. The mortgage is the document that puts up your real estate to secure repayment. In other words, the promissory note describes how much you are borrowing and the terms of the loan, while the mortgage is what gives the bank the right to take your home if you do not live up to what you agree to do in the promissory note. It is common for the mortgage to restate all the terms of the note, making the documents sometimes look very similar. However, they have very distinct purposes.

The reason the note is so important is because it is a negotiable instrument. Negotiable instruments are what make the system work. A buyer of a negotiable instrument, as long as the procedure is done properly, becomes a holder in due course. The point behind a holder in due course is that once the loan has been sold, you may be stuck with it—even if you did not fully understand the terms or there were irregularities because of a dishonest original lender.

Negotiable instruments are treated differently from other contractual promises. They must be in a certain form (they are sometimes called form or formal contracts.) When in the proper form, they create rights for those to whom they are transferred (those who buy them) that other contracts do not.

Friday, December 18, 2009

Breaking Your Credit Card Cycle

Managing your personal finances—especially your credit card debt—is job one when it comes to squaring your student loan debt. While credit cards are a necessary evil, when you’re trying to free yourself from student loan debt, they can be more evil than necessary. How so? Well, try paying off your college loans when your monthly Visa statement looks like the annual operating budget for Portugal. In many cases, the interest rate on credit cards is 16 percent or more; the interest you pay is not tax-deductible; and quite often the money you owe is for something you’ve already gotten the most use out of.

Pay it off. But first, make sure the credit card bill is accurate. Analyze the bill. Make sure it matches your receipts. Sometimes when you sign on the dotted line, you don’t double-check the amount of the purchase. For example, amid the rush of holiday shopping, you might not have been charged the sale price for an item; you might have been charged twice for a single item; or you could even have been charged for an item purchased by someone else in line. It happens. If you notice a discrepancy, call your credit card issuer and dispute the charge.

Meanwhile, don’t fall for any season’s greetings from your credit card company offering to lower your minimum payment or saying that because you’re such a good customer, you can skip this month’s payment. That sounds enticing, but remember, the interest rate clock is still ticking.

With all your holiday shopping, in addition to your regular expenses, suppose that your January credit card bill is $2,500, a typical amount. If the annual interest rate is 18 percent, skipping January’s payment could cost you about $38 in finance charges that will show up in next month’s bill. No wonder the credit card company is so nice.

Thursday, December 17, 2009

How are mortgages structured?

There are two general ways that mortgages are structured. The structure affects how the foreclosure procedures are performed should you not make your mortgage payments. In title theory states, the lender owns the property and deeds it back to the borrower when the loan is repaid. In lien theory states, the borrower owns the property and the lender has a lien on it. Title theory states are more commonly found in the eastern part of the country, with more lien theory states in the western United States.

In either a title theory state or lien theory state, the general effect is the same. The lender’s rights in the property are only for the purpose of securing the loan. If the borrower abides by the terms of the note and mortgage, the lender has no right to interfere with the borrower’s use and enjoyment of the property.

The differences in the theories may become important when the borrower fails to abide by the terms of the mortgage loan. The foreclosure process varies from state to state, with some state laws being more favorable to the borrower and some to the lender. Since state laws control the real property located within that state, every person must follow the laws of his or her particular state.

Wednesday, December 16, 2009

Some Responsibilities for Student Loan Borrower

When you accept the terms of a student loan, it means you have to take those loan obligations seriously. Even if you don’t, the lending institution will, and they’ll want their money back. In fact, they’ll want it back so bad that they’ll hound you like a dog, stick to you like a barnacle to the hull of a boat, and be like bubble gum on your shoe until they get their money back—or ruin your financial life if they don’t. Believe me, lending institutions aren’t charitable institutions. They have absolutely no problem making your life miserable if you’re slow or a no-show in paying off your loan.

Also remember that when you take out a student loan, you have certain responsibilities. Primary among those responsibilities is your promise to pay back the money you borrowed. As stated by the U.S. Department of Education in the Student Guide— 1996–1997:
When you sign a promissory note, you’re agreeing to repay the loan according to the terms of the note. The note is a binding legal document and states that, except in cases of loan discharge, you must repay the loan—even if you don’t complete your education (unless you were unable to complete your program of study because the school closed); you aren’t able to get a job after you complete the program; or are dissatisfied with, or don’t receive, the education you paid for.

Some other responsibilities you have as a student loan borrower— and the excuses you cannot use—are as follows:

I never got the bill. Sorry, but not receiving a bill or loan statement in the mail is not grounds for not paying your student loan bill. Lending rules state that loan recipients must make payments on their student loans even if they do not receive bills or repayment notices.

I need more time. Sometimes you hit a rough patch and you
can’t pay your student loan bills perhaps for months at a time. In those instances, it’s a good idea to ask for a deferment or a forbearance— basically a “loan holiday” when you don’t have to pay your student loans until you get your financial act together. If, that is, your lending institution goes along with your request. But, according to the U.S. Department of Education, if you request such a delay you still have to make payments until you are notified that the request has been granted. If you stop paying on your loan anyway, you could be in default. A tip: Keep copies of all deferment request correspondence because they could come in handy if your loan is in question later on.

I thought you had a crystal ball. When you graduate from school, transfer to a new school, or drop out or attend as a parttime student, it’s your responsibility to let your lending institution know about it.

I didn’t think it was that time of the month. Your loan payments are expected each month.

Tuesday, December 15, 2009

What is a mortgage?

In simple terms, a mortgage is putting up real property (real estate) to secure a loan. This means that if you fail to meet the terms of the mortgage—for example, by failing to make your agreed-upon monthly payments—the lender can sell your house through a process called foreclosure to get back the money you borrowed to buy it.

You should familiarize yourself with certain technical terms used in the mortgage industry.

A mortgage is a two-party document—the mortgagor (borrower) gives the mortgage, and the mortgagee (lender) lends the money. Most people incorrectly say that they are going to “buy a mortgage.” The expression has become so common that everyone knows that someone who says it is trying to borrow—not lend—money.

Another term that you should know—which is often used incorrectly— is pledge. To pledge something is to deliver physical possession of it, like if you are getting a loan from a pawnshop. When you do not give up possession, you hypothecate the property—you do not pledge it. Since pledge is a simpler word than hypothecate, it is commonly used—even though not technically correct.

Monday, December 14, 2009

Can I use a gift to pay for my down payment?

Check with your lender to see if all or part of the down payment can be covered by a gift from a third person. If you have a relative who is willing to help you with the down payment, get a gift letter from that relative (along with the gift) stating that you do not have to pay back the money. How much of your own money you will need depends on the type of loan you are seeking and the lender’s policy (which usually contains a minimum credit score requirement).

If you are using a gift as part of your down payment, ask the lender for the form gift letter it wants you to use. There is no standard form used by all lenders.

A gift letter must contain the following items.

• The names of the donor (giver of the gift) and the donee (receiver of the gift).
• Whether the gift has been given or only promised. The lender
may require that it be given before accepting the letter.
• The purpose of the gift (to help purchase the home). The property address is also given in this section.
• A statement that no repayment is required or expected, either in cash or future services. (Although by definition a gift does not have to be repaid, lenders want it emphasized.)
• The relationship of the donor to the donee, such as parent or sibling. The donor may also be a nonprofit organization that helps low-income buyers or those having specific jobs.
• The date and signature of the donor and an acceptance and signature of the donee. Notarizing the signatures is usually not required. If it is, your lender will most likely have a form for you to use.

The lender may also require that the donor disclose the source of the funds, such as the sale of stock, a savings account, etc. There may also be a statement that no party to the sale, such as the seller or real estate agent, is the real source of the gift.

Most lenders want you to have at least 5% of your own money in the deal. You will have to show proof that the money is yours, and not borrowed or a gift. Bank statements showing regular deposits to a savings account or a letter from your employer stating that you were paid a bonus are examples of what you may need to show your lender.

Sunday, December 13, 2009

Credit Card Debt from Your Student Loan Perspective

Not all debts are bad ones. Using a mortgage to buy a home, tackling the rising costs of college with a loan, even borrowing money to buy a car—all are good debts with high return values.

But there are bad debts, too, debts that can limit or even prohibit your cleaning up your student loan debt. Of the bad debts, few are worse than credit card debt.

Simply stated, credit card debt can kill you from a personal finance point of view. Massive credit card debt can choke your ability to deal with all your other financial responsibilities, taking over your life and limiting your ability to grow and prosper.

Sure, eating at a five-star restaurant or buying season tickets to watch the Red Sox are worthwhile pursuits—if you can afford them with what you bring home in your wallet every payday. Using a credit card to finance these endeavors is being a long-term loser, if only because most of the things you buy with credit cards depreciate rather than rise in value. Those high-top Reebok basketball sneakers may look great in the box, but once you slap them on your feet, their value resides only in your mind’s eye, because few others want them anymore. Unlike other depreciable items, like a car that provides vital transportation or a pair of eyeglasses that allows you to see, most things you buy with a credit card don’t offer much to your personal bottom line.

From your student loan perspective, any money that is earmarked toward your credit card debt is money that you can’t use to free yourself from student loan debt. That’s the primary reason why credit card debt is invariably bad debt.

It’s bad from a student loan point of view, as well. In fact, student loan debt and credit card debt are joined at the hip. For decades, credit card companies have targeted college students, offering them their first shiny new plastic card while downplaying the dark side of owning a credit card.

Well, that plan worked. Millions of young Americans who received their first credit cards in college (and millions more who didn’t, but got them right after they graduated and obtained their first job) have developed the nasty habit of using their credit cards with alarming regularity. In the process, younger Americans have put a real dent in their financial health and made it even harder to address their student loan debts.

According to the college-lending agency Nellie Mae, U.S. college students in 2000 racked up an average credit card balance of $2,748. That’s up from an average $1,879 in 1998, the agency reports.

More disturbingly, Nellie Mae also says that a college student who makes the bare minimum credit card monthly payment (with an 18 percent APR interest rate) would need a whopping 15 years to pay off that entire debt. Worse, the cardholder would have to pay as much in interest alone as he or she would the original $2,748 debt. And that’s operating with the dubious assumption that the cardholder would never use the card again.

As if, right?
Then there’s another study published by New York State’s education agency that reports 78 percent of college students carried at least one credit card while 32 percent carried four cards or more. Furthermore, 10 percent of students shouldered a credit card balance of $7,000. Another 14 percent owed between $3,000 and $7,000.

Saturday, December 12, 2009

Know Your Student Loan, One Step to Financial Freedom

Some people treat student debt like the plague and make no special effort to pay bills right away or at all. The good news is that the number of those who elect to ignore their student loan debt is declining. Educators attribute that decline to an improved U.S. economy in the 1990s and an improved awareness on the part of loan recipients of the importance of paying off their student loan debts.

Obviously, student loan borrowers are taking their debt more seriously. And people are beginning to understand that knowledge is power and that the fastest way to pay off student loans is for borrowers to face their loans head on and know what they’re up against.

This is a highly significant occurrence. By knowing your debt and understanding how it impacts your financial life, your chances of eliminating that fiscal albatross around your neck increases exponentially. But what, exactly, does “knowing your debt” mean?

For starters, it means knowing how much you owe on your loan. If you owe $8,000, then, if nothing else, you know where you stand. It seems like a simple concept, but some people can’t be bothered about their debt amounts. They’re too busy starting their careers or tackling other, more appealing, fiscal responsibilities such as buying a new Jeep or grabbing a vacation rental on the beach for the summer. These people are in the highest danger of defaulting on their student loans, simply because, for whatever reason, they stopped paying attention to their loans.

Don’t be like that. Know your loan. Know its terms, its payment schedules, its repayment options. Know that if you make higher monthly payments you can pay the loan off more quickly. Know who your lender is and where you can reach them. Know that if you move, you need to contact your lender and let them know your new address. Hey, young people move all the time. They get jobs in different cities or decide that they want to live in San Francisco or Boston at least one time in their lives and up and do so.

Knowing your debt also means knowing what to do if you can’t make a monthly payment for some reason. Lenders are usually fairly gracious about this, as long as you let them know you won’t be paying and when they can expect the next payment.

Keeping your lender in the loop is a huge part of knowing your debt. Closing them out or ignoring them will only lead to complications and possibly default. And if that happens, good luck landing that new brownstone apartment in Haight-Asbury or Harvard Square.

Above all, knowing your debt means reading and understanding all the correspondence you’ll receive from your lending institution. Yes, the language lenders use in their statements reads like the Dead Sea Scrolls. But read it anyway. Remember that it’s all part of knowing your debt.

And knowing your debt could mean the difference between financial freedom down the road or financial fiasco.

What is Private Mortgage Insurance (PMI)?

Lenders want to make loans at the lowest risk possible. With a 20% down payment, most lenders are comfortable with the risk level of the loan. To cover risks with down payments of less than 20%, private mortgage insurance was developed. Private mortgage insurance (PMI) insures the lender in the event that the foreclosure of a mortgage results in a sale that nets less than the balance owed on the loan. The cost of the insurance is paid by the borrower. For a loan with a down payment of less than 20%, you will have, as part of your monthly mortgage payment, an additional payment for PMI. The insurance does not cover the entire loan amount—only a small percentage. So, if you have only 10% to put down, the lender requires you to buy PMI to cover the other 10%. If the lender takes a loss, the insurer will cover that loss up to 10% of the amount of the loan.

Theoretically, the lender’s risk is the same as if it made an 80% loan. As a practical matter, though, the lender’s risk is greater, since borrowers who put 10% down are more likely to default than borrowers who put 20% down. The more you put down, the better chance you will get the most favorable interest rate for a loan and have to pay less in PMI.

The rates you will pay for PMI vary, based on the percent covered and the borrower’s credit score. Borrowers who put down 5% pay more than those who put down 15%. This makes sense because more insurance is required. It also makes sense that a higher down payment means a lower risk of default.

The lender may have a choice of how much insurance it requires. The lender may buy insurance to cover 30% of the loan, rather than 20%. This will cost more. If you are getting PMI, ask if the lender is getting the minimum insurance. If you have good credit and good income-to-debt ratios, you should question why the extra insurance is necessary. At the time you apply for the loan, you also want to ask about cancellation of the PMI. Once you have paid on the loan to a point that PMI should no longer be required, you should stop paying for it or get a refund if you paid the total up-front. Laws now require a lender to cancel PMI when the loan-to-value ratio reaches 78% of the value of the property at the time when the loan was made if cancellation is not requested by the borrower, and at 80% if the borrower makes a request. Ask about cancellation before taking a loan and always contact your lender when the loan-to-value ratio reaches 80% to have it canceled.

Many people hate having to pay PMI. There are ways to avoid PMI using different types of loans that will be discussed later. One way to increase your down payment and lower or eliminate PMI is through a gift.

Friday, March 13, 2009

Inflation Protection in Long Term Care Insurance

The only way to protect yourself from such skyrocketing costs is to make sure your long-term care policy has good inflation protection built into it. Note the emphasis on good inflation protection—it comes in several different forms, and some are better than others.

Added coverage purchase. This type of provision permits you to purchase added coverage every few years with higher benefits. The problem is that the added coverage will also come with new premiums—based on your increased age plus any other rate increases—that you may not be able to afford. You may find yourself with benefits too low to be useful and no way to buy added coverage, which means you may wind up dropping the insurance just as you reach an age when you might need coverage.

Simple automatic increase. Many policies offer benefits which increase by a fixed percentage—usually 5%—or by each year’s national cost-of-living increase. However, these policies always use the original benefit amount to calculate the percentage increase. These policies are better than the added coverage purchase option because your benefits go up automatically without requiring higher premiums.

Compounded automatic increase. These policies automatically increase benefit amounts each year by a set percentage or by the cost-of-living increase. These policies compound theincreases each year rather than always using the original benefit amount as a base figure. Over ten to 20 years, this compounding might increase your benefits substantially. Of course, because automatic compounded inflation protection is so much better for the insured, the premiums for such coverage are usually considerably higher from the beginning.

Time limited protection. Most policies put a time limit on the yearly inflation benefit increase. The limit is usually ten to 25 years from the date the policy begins, or when the insured reaches a certain age, usually 80 or 85. If you buy the policy when you are in your 50s or 60s, make sure you get the longest possible period of inflation protection.

Good inflation protection may raise the initial cost of a policy by 25% to 50%. But without good inflation protection, the lower premiums may be a total waste of money.

Tuesday, March 10, 2009

Seek long-term home care insurance

If you seek long-term home care insurance, try to get the widest variety of coverage possible.

There are a number of conditions and restrictions of which you should be aware:

• A few policies cover skilled nursing care and physical therapy in the home but not custodial care. Such coverage is far too limited, and you should reject it.

• Most home care policies cover skilled nursing care, other professional medical services, and nonmedical personal care, provided by a licensed home care agency. Personal care includes help with the activities of daily living (ADLs), such as eating, bathing, dressing, using the toilet, and moving around. It may also cover what are sometimes called “instrumental” ADLs, such as monitoring medications, going outside, light shopping, helping with meals and clean-up, laundry, and household telephone calls and paperwork.

• A few policies also provide limited coverage of some homemaker services—such as regular housecleaning, grocery shopping, and meal preparation—if an agency home health aide also does other personal assistance duties.

• Good policies cover care provided not only in the home, but also in licensed community care facilities such as adult day care centers.

• Good home care policies also provide for respite care and hospice care

Wednesday, March 4, 2009

The Performance of Long-Term Care Insurance

The relatively slight chance that an elder will need three or more years of nursing facility care means that the insurance industry has not had to pay out on its policies to nearly the extent that it suggested when they were sold. And when the policies’ conditions, exclusions, and benefit limits are figured in, the performance of these policies—at least in the decade of the 1990s, for which complete statistics are available—has been quite poor.

• About 50% of all policies lapsed before any benefits were paid; people were unable or unwilling to continue paying their premiums.

• Of those people who bought the insurance and later entered a nursing facility, about half never collected a dollar from their LTC policies.

• No benefits were ever paid to the many who bought nursing facility coverage but instead received home care or entered a residential facility, not covered by the insurance.

• When benefits were paid, they were far below the actual cost of care.

• For many of the longest-term residents, benefits were used up before the nursing facility stay ended.

In all of these situations, the LTC insurance failed to live up to its promise to help people avoid using up their savings, or relying on Medicaid, to pay for long-term care. In other words, it was a lousy investment.

Sunday, March 1, 2009

Assess Medical Needs for long-term care

Because a specific physical or mental condition often leads to the need for long-term care, one of the first things you should do is get professional advice both about the need for immediate care and about likely changes in the condition over time. Talk with your primary care physician first; he or she may refer you to a geriatric specialist for further consultation.

An additional resource to help you assess medical and personal care needs is a geriatric screening program. Local hospitals have them, as do community and county health centers. If you have trouble finding a geriatric screening program, check with your county social service agency or local or Area Agency on Aging, or call the senior referral number in the white pages of the phone book.

Some important things to consider when assessing an older person’s need for medical care are:

Specific medical requirements. The doctor or other health screening personnel can discuss the elder’s specific medical needs (such as monitoring and administering drugs or providing physical therapy), explain how they can be met, and let you know who can do it. The doctor or health care worker can also discuss the level of ongoing care that would be required to deliver those medical services: Family members supplemented by occasional visits from home care aides, a more sophisticated home care program, or various levels of residential nursing facility care, for example.

Changes in care over time. The doctor or other health care worker can also discuss the medical prognosis—that is, what the future is likely to hold: Whether to anticipate a short or long recovery period, whether a condition is likely to stabilize over a long period, or whether it will become worse over a short or long period. Knowing of likely developments in the medical condition will help you plan the right level of care and allow for these changes.

Mental impairment. A thorough geriatric screening and evaluation are particularly important when the elder seems to have a mental impairment. An older person’s physical problems may become much more difficult to manage because of added symptoms of forgetfulness, disorientation, or general listlessness.

Thursday, February 26, 2009

Find people to evaluate long-term care needs

If you need care, you may find it a hard topic to raise with others because it seems like a blow to your self-esteem, a subject that means you are really “old.” You may also be reluctant to begin a process of giving up some of your independence or surrendering full control over your life. Remember, the first step in getting necessary care is to overcome your reluctance to talk about it. Once the discussion has begun, you can use the information in this book to organize and choose the right kinds of care.

Here are some of the people you can turn to for help in beginning to evaluate long-term care needs:

• Your personal physician is often a good place to start, not necessarily to moderate discussions but to define your medical needs and refer you to others who may be helpful in making arrangements.

• Traditional word-of-mouth is still one of the best ways to begin tackling any new problem. Friends and neighbors whose opinions you trust, and who may have already faced similar situations, are often a good source of information. The people at your local senior center may know of sources for long‑term care assistance. These word-of-mouth sources often let you know of “unofficial” personal care aides who would not be available through more formal channels.

• A clergy member may be able to help directly or to refer you and your family to professionals who can introduce alternatives and coordinate planning.

• County family service agencies, Area Agencies on Aging, or other senior information and referral services are experienced sources that can provide direct access to specific care providers and help you develop an overall care plan. These agencies can direct you to a counselor or social worker who specializes in long-term care for elders and can help you begin your discussions and planning.

• If residence in a nursing facility is not absolutely necessary, many people make use of the services of a professional geriatric care manager to see what at-home and other supportive services are available and to organize care from different providers.

• If you or your loved one has Alzheimer’s disease or a similar mental impairment, you can turn to organizations that specialize in providing information and referrals to people facing these difficult situations.

Monday, February 23, 2009

Understanding Waiting Period in Long Term Care Insurance

In order for you to understand the relative value of the waiting period in a particular company, you should ask these questions:

How many days during the week do I have to receive at least one day of professional home and community care that will be counted as seven toward completing the elimination period? With some insurers you only have to receive care at least one day to qualify for a seven-day credit.

How long a period do I have for completing my waiting period? If, for example, you chose a 90-day waiting period and you have the type of illness that in the initial stages does not require care every day some companies require that you have at least your 90 days of care during a 180- or 360-day period. If you do not qualify and have the appropriate number of days during that period of time your clock starts all over again and you must sustain treatment during your 90-day period during another 180- or 360-day period. This feature is becoming highly competitive and some companies are about to offer the ability to accumulate your waiting period during a 720-day period.

How often do I have to satisfy an elimination period to access benefits? Some companies provide that any elimination or waiting period longer than 30 days must be satisfied by you only once during your lifetime.

Just how different insurers treat this feature could be a significant factor in determination of the appropriate company to select for your long-term care insurance.

Friday, February 20, 2009

Reimbursement VS Indemnity in Long term care policies

Long-term care policies come in two basic models: reimbursement and indemnity. Choosing between these two types of policies is not nearly so simple.

Consider these questions:

1. How are your benefits paid?

Assume you have a $200 daily benefit. Reimbursement pays for only the covered service. If you spend $70 on a provider, you get $70 in reimbursement. The other $130 remains in your pool of benefits. As long as you have a documented service, indemnity will pay you the full $200 even if you spend only $70.

If you take the indemnity plan’s full $200 every day, you may run out of your money while you still need it. Your pool will run dry. A reimbursement plan keeps the money that you don’t spend in your pool of money, thus effectively stretching out the time limits on your benefits until you spend whatever is left.

The indemnity seller asks the customer, “Why should the insurance company tell you how to spend your money?” The reimbursement seller asks the customer, “Did you actually buy long-term care insurance to pay for airline tickets?” Reimbursement sellers argue that the insurance money was never intended to pay for services that any caring family member or friend would do for love and for free.

2. Who provides the service?

Reimbursement policies insist that you use licensed caregivers, although you may be able to purchase a rider to allow you to pay family members. An indemnity plan may let you pay family members or informal caregivers who cost less than licensed providers. Why buy a reimbursement policy, especially if you think you’ll have trouble finding a licensed caregiver? Because the policy usually allows for these conditions, and besides, the companies have developed networks of providers for practically every area of the country.

3. Which model costs less?

Indemnity sellers say that their claims don’t cost much to process, there is less overhead, and the premiums should be less. Sellers of reimbursement policies make the opposite case, arguing that premiums for reimbursement are lower because the claims costs tend to be lower; indemnity policies may cost more because claims costs are higher for indemnity insurers. In fact, as of this writing, the premium costs are almost the same. But a Life Plans consultant anticipates that this will shift as the indemnity insurers begin to play catch-up as their claims start to come due in 10 years.

Tuesday, February 17, 2009

Mechanics' Liens in Title Insurance

Mechanics' liens present a unique problem for title insurers. A mechanics' lien is established of record by the filing of a Notice of Lien, Claim of Lien or similar document. The priority of the lien, in many states, however, may date from the time of commencement of the work for which the lien is filed. Therefore, if work is commenced before the issuance of a title policy but the lien is filed after the date of policy the title search will not disclose and the policy will not reflect the existence of a lien that is, in fact, prior to the interest insured by the policy.

Many title policies except coverage of this risk with language that excepts to matters not shown in the public records as existing liens at the date of policy. The title insurance company may provide mechanics' lien insurance to the lender by issuance of a loan policy:

- Without exception, based upon priority of the mortgage over subsequently recorded mechanics' liens, because state law requirements are met (state law may provide that the construction mortgage has priority unless a notice of commencement is recorded before the mortgage, or a mechanics' lien is recorded before the mortgage, or visible commencement of construction occurs before the mortgage is recorded).

- With exception to unrecorded mechanics' liens (in many jurisdictions mechanics' liens have priority over or parity with the mortgage, in all or many cases, such as construction loans, or where visible commencement began before recordation of the mortgage).

- With a pending disbursement clause (which may limit priority coverage to authorized disbursements, or construction performed before a specified date). Pending disbursement clauses will vary. They may provide that the coverage increases as disbursements are made in good faith without knowledge of objections or other matters, they may include requirements for waivers and affidavits stating bills have been paid for the last draw, and they may require a continuation of the title examination.

Saturday, February 14, 2009

Gap in Title Insurance

There are a number of circumstances that create a "gap" between the examination of title and Date of Policy coverage. The following are examples of a "gap":

- The recorder's office may delay in recording instruments after they are filed or presented to the recorder. The courthouse examination at time of filing does not include those previously filed instruments not yet recorded. (In many states an instrument is record notice from filing or presentation to the recorder; in some states the instrument is not record notice until later recorded by the recorder). This is "gap."

- The title company's plant may be currently posted several business days prior to date of examination. This is a "gap."

- The title company may close and file for record without down dating, extending or continuing its prior search of the records. This is a "gap."

- The title company may close the real estate transaction and disburse, but fail to file the instruments for several days or weeks. This is a "gap."

- The title company may secure execution of the documents on a loan subject to right of rescission, but may not continue the examination when the mortgage is filed for record after the three day right of rescission expires. This is a "gap."

- In each case, there will be a difference in time between the date through which the last examination of title is made and the date of record notice (by filing or recording) of the insured's deed or mortgage. This is a "gap."

The gap between the date of filing or recording of instruments and the date through which a current examination will be made varies widely. In some locations, the examination customarily is done through time or recording, with no gap in the time between the examination and Date of Policy, or is done to within a few hours of the current filing. Most common is a gap of anywhere from a few days to about two or three weeks, if the title is down dated or continued until time of closing or filing. In a few counties sprinkled throughout the U.S., the gap ranges from two to eight months. For example, in the area around Atlanta the gap can be up to four months. In Minnesota, the switch to imaging has been followed by an increase in the gap to up to four months.

Wednesday, February 11, 2009

Examination of Title Insurance

Generally, an examination or search is not defined by law or regulation, although some states established the period of time that must be covered by a title plant. The period of examination is commonly based upon local custom and upon specific underwriting guidelines. Local custom may be evidenced by State Bar Standards or the period required for the root of title under a marketable record title act (although these acts contain numerous exceptions).

Title insurer guidelines will vary, depending upon the location or state of the land and upon whether the land is residential or other land. Typically, title companies will rely upon "starters," such as prior title policies issued by other title companies. While title policies may be a basis for examining forward, this will not generally be true of a prior short form loan policy, unless the new policy also is a short form loan policy.

Some title insurers will allow title insurance agents to start their title searches with prior commitments, loan policies and owner's policies issued by other title insurers, while other title insurers more commonly allow title insurance agents to start searches only with prior owner's policies and, in some cases, loan policies.

On residential transactions, some title companies will allow a 1-3 bona fide deed search (going back only one to three deeds in the chain), and name check and tax search, together with review of subdivision exceptions shown on a reference file and on the plat.

Some title companies will allow a search beginning with the most recent outstanding "first" bona fide mortgage or start with the first such mortgage before the most recent deed, subject to a general exception to restrictions or minerals. The practices vary among title companies, but short searches are common on residential transactions.

In some transactions, no additional search is merited if some requirements are made or if the product is narrowly designed.

Factual information set forth as exceptions and other specific provisions of commitments and policies of other title insurers that reflect the matters affecting marketable title do not merit copyright protection.

Sunday, February 8, 2009

Other Recent Competing Products with Title Insurance

Title insurance has always competed against warranties of title, title searches and title examinations, with or without abstracts of title. The advantage of title insurance over these alternatives has long been argued: a title insurer's deep pocket generally exists to pay a title insurance claim, but a deep pocket does not necessarily exist in a claim against a warrantor, searcher or examiner, although the warrantor may be financially strong or the searcher or examiner may have malpractice or errors or omissions insurance, subject to deductibles, maximum liability, and term of coverage.

More recently, two products have been offered that have competed with title insurance:

TOP (Title Option Plus). "The TOP program is embodied in three interrelated contractual agreements (furnished to Freddie Mac in lieu of a traditional title policy or attorney's title opinion)

The first contract, the Master Agreement, is a 'warranty' by NMI (Norwest Mortgage, Inc.) to Freddie Mac (and Fannie Mae) that those mortgages NMI sells to Freddie Mac (or Fannie Mae) are secured by a first lien. NMI's contractual undertakings under the Master Agreement protect Freddie Mac against any title claims or problems, including non-record risks, that may affect Freddie Mac's interest in the loan it has purchased. If a defect appears and cannot be cured, NMI agrees to repurchase the loan, if the claim cannot be otherwise resolved. (It is noted that NMI only warrants the title and priority of a lien, when the title search and title report is performed by ATI (American Land Title Company, doing business as ATI Title Company, a wholly owned subsidiary of NMI)).

The second contract is a title condition report prepared by ATI and furnished to NMI to verify that, as a matter of public record, NMI's mortgage is secured by a first lien. ATI remains liable for any on-record defects that are missed in the title search, while NMI assumes the risk of off-record defects. The third contractual arrangement is The Guarantee Agreement from Norwest (Norwest Corporation, the bank holding company which owns NMI) to Freddie Mac under which Norwest guarantees NMI's title-related obligations to Freddie Mac." TOP was generally, but not universally, determined to be title insurance transacted, sold, or marketed in violation of applicable insurance laws in most, but not all, jurisdictions that administratively or judicially considered it. The issue of the specific TOP product has apparently been rendered moot by formation in 1998 of a joint venture between First American Financial Corporation and Norwest Mortgage, Inc., involving ATI Title Company and two other subsidiaries, pursuant to which ATI Title Company will issue title insurance and will no longer offer the TOP product.

Mortgage Impairment Insurance. This type of insurance provided to a lender typically insures the lender against failure by the lender to have sufficient title insurance, not due to the lender's willful fault. Some of these policies also insure matters that may be asserted to be title insurance.

For example, some polices may insure against loss resulting from (1) failure to pay real estate taxes; (2) error, neglect, omission or breach of duty in actual performance or failure to perform activities, including obtaining a tax bill showing ownership, review of credit bureau report showing liens and property address, or owner's affidavit relating to title or impairment by discovery of a previously unknown property interest in the collateral; (3) perfection of a second lien mortgage could not be obtained despite timely filing of the mortgage; (4) loss by reason of defective title, if the insured required title insurance; (5) impairment of lien, due to an unknown interest, if the lender required a tax bill showing ownership, a credit report showing liens and property address, and/or an owner's affidavit of title, and presented the (second) mortgage for recording.

Typically this type of insurance is offered on junior home equity loans. It is sometimes offered on a surplus line basis. Some of the policies are written as master policies with a stated maximum limit of liability. Some policies are called equity or lending activities policies. This coverage should be contrasted with collateral protection insurance, which provides insurance because of a consumer's failure to provide evidence of insurance, and which excludes title insurance.

Thursday, February 5, 2009

Overview of Standard Title Insurance Forms (part 3)

The policies may be modified to provide additional coverages by three methods: (1) Schedule B affirmative insurance, or (2) endorsement, or (3) deletion of printed standard exceptions. Schedule B affirmative language usually consists of a specific insurance provision following and related to a specific exception. It is more a product of East Coast jurisdictions (although promulgated "express insurance" is available in Texas). Endorsements may provide insurance, as to a specific exception, changes in the Exclusions or Conditions and Stipulations, or, more generally, additional insurance.

The policies provide "extended coverage" if the more common standard exceptions are deleted. Those exceptions are typically the following:

(a) Rights or claims of parties in possession not shown by the public records.

(b) Easements, or claims of easements, not shown by the public records.

(c) Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey and inspection of the subject property.

(d) Any lien, or right to a lien, for services, labor, or material hereto or hereafter furnished, imposed by law and not shown by the public records.

(e) Taxes or special assessments which are not shown as existing liens by the public records.

Assignments of rents may be described in a Loan Policy in several ways: in Schedule A with the description of the insured mortgage, in Schedule B-I (generally not acceptable to the insured), in Schedule B-II (as subordinate), or in a "Note." The assignment may be subject of a CLTA Endorsement 104.6.

An attorney may be guilty of negligence in not recommending adequate title review or title insurance. Given this duty, the attorney advising a purchaser is likely guilty of malpractice if the attorney does not recommend:

(1) a title insurance policy, and

(2) extended coverage.

If the more extensive coverages of the ALTA Homeowner's Policy of Title Insurance are reasonably available, it would seemingly be negligent if the attorney failed to recommend the advantages of this policy.

Monday, February 2, 2009

Overview of Standard Title Insurance Forms (part 2)

The 1970 Owner's Policy (Form A), which did not insure as to unmarketability, is no longer issued. The 1970 Owner's Policy (Form B), which insures as to unmarketability of title, and the 1970 Loan Policy replaced earlier versions and are still available in most states. These forms were revised in 1984 to modify the governmental regulation exclusion, by providing that the exclusion did not apply if a notice of defect, lien or encumbrance was recorded in the local real property records.

The most current ALTA forms are the ALTA Owner's Policy (10-17-92) and ALTA Loan Policy (10-17-92). These forms replaced the recent "1990" ALTA policies and narrowed the creditors' rights exclusion by substitution of the "New York"creditors' rights language. The earlier ''1987" policies contained no express creditor's rights exclusion. Effective October 3, 1991, the "pre 1990 policies" (e.g., 1970 policies and 1970 revised 1984 policies) are no longer official ALTA forms (except for the Residential Owner's Policy), although they remain widely available upon request.

The 1992 policies are available throughout most of the United States; they are issued in modified form in some states. In Arkansas, Florida, Kansas, Missouri, New Jersey, and South Dakota (and in Alabama a notice is required, and in Kentucky and some other locations, arbitration is not enforceable) the arbitration clause is modified or deleted to remove compulsory arbitration; in Florida the coinsurance clause in the Owner's Policy is deleted; and in Texas a number of changes are made (e.g., modified mechanic's lien insuring provision; insurance of good and indefeasible title instead of marketable title; definition of access; slightly modified claims, creditor's rights, and arbitration provisions).

The 1970 policies remain available in most jurisdictions, but are not available in Michigan, New Jersey, New Mexico, New York, Pennsylvania, and Texas.

Friday, January 30, 2009

Overview of Standard Title Insurance Forms (part 1)

The predominant title insurance forms are the American Land Title Association (ALTA) policies. The American Land Title Association has developed standardized title insurance policies since 1929. Standardization of forms occurred because of lender demand for predictable forms that would not need to be read and negotiated. In 1929 the association developed a loan policy. In 1959 the ALTA adopted an owner's policy. The ALTA adopted new uniform title insurance policies in 1962:

The ALTA Owner's Policy Standard Form A 1962. This policy included insurance against a lack of right of access but did not insure against unmarketability of the title and excluded refusal of any person to purchase lease or lend money. The policy included a coinsurance provision.

The ALTA Owner's Policy Standard Form B 1962. This policy also insured against unmarketability of the title.

The ALTA Standard Loan Policy, Revised Coverage 1962. This policy included insurance against unmarketability of the title, lack of right of access and "any statutory lien for labor or material which has now gained or hereafter may gain priority over the lien of said mortgage upon said estate." The policy excluded coverage of mechanic's liens arising from construction on the land contracted for and commenced after Date of Policy and not financed in whole or in part by mortgage proceeds which the insured had advanced or was presently obligated to advance.

The ALTA Loan Policy, Additional Coverage 1962. This policy also insured against assessments for street improvements under construction or completed at the Date of Policy which have "now gained on hereafter may gain" priority over the mortgage. This coverage is now offered by ALTA Endorsement No. 2 and is a standard provision in the CLTA filing of the ALTA Loan Policy.

Tuesday, January 27, 2009

Single Risk Limits of Title Insurance

Statutory single risk limitations also vary, but frequently are approximately one-half of surplus and reserves, a large amount in comparison to other lines of insurance. The justification for this approach lies in the small amount of capital invested in the industry and the sparse "likelihood" of a complete loss. The likelihood that loss and defense costs will equal or exceed policy limits is considered very small, since claims on policies probably occur between one in 500 to 1000 policies issued (typically closer to the latter) and loss and expense equal or exceeding policy limits probably occurs in about 1-3% of those claims.

Given the additional review by various counsel on commercial transactions, this likelihood should be lower on those transactions. The aggregate capacity of the title insurance industry to insure a single risk frequently is less than $1,000,000,000, although both the industry surplus and the industry statutory premium reserves exceed this amount. Net liquid assets available to pay claims do not always justify the large title policy retention limits by title insurers.

Because of the disparity between available net liquid assets and statutory limits on risk retention, some insureds will impose their own formulas or checklists to determine the allowable risk retention by a title insurer.

Monday, January 26, 2009

Overview of Title Insurance

Title insurance typically is defined as insurance against defects in, or liens or encumbrances on the title. In many jurisdictions, title insurers may insure title to real estate, while in some, they also may insure title to personal property, or proper execution of notes or other obligations. Most states prohibit title insurers from guaranteeing debts or other obligations, or prohibit title insurers from undertaking other types of insurance. These prohibitions were enacted in response to the failures in the 1930s of title insurance companies because they guaranteed mortgage loans.

Viewed from one perspective, title insurance may be considered a misnomer: the policy is an attempt to reconcile abstracting information and an insurance product but does not, by its express terms, represent the status of title. The most commonly used title insurance contracts, the American Land Title Association (ALTA) policies, do not purport to represent the condition of title. Rather, they are indemnity contracts against actual monetary loss because of title matters, such as defects, liens, and encumbrances. Nevertheless, there has been a widespread conflict over the issue of whether the contract terms of indemnity generally prevail, or whether extra contractual liability for negligence will be recognized.

This issue may be restated: shall the contractual limitation on damages (including the stated limit of insurance) prevail based on the contract, charge of premium for stated insurance, and dedication of statutory premium reserve; or shall the "expectation" of the insured result in liability for consequential damages, without an absolute limit on loss. In approximately one-half of the states no recognized answer (statutory or case law) exists; in the remaining jurisdictions, opinion is roughly split in half, with some states rejecting liability for negligence under the policy and/or commitment (or binder or preliminary report) and other states allowing the cause of action.

Whatever the result of that debate, title insurance is often described as "unique." It constitutes an attempt at risk avoidance, with a substantial part of title insurance cost generally allocated to search, evaluation/examination, or clearing underwriting objections. Consequently, losses and attorney's fees incurred by the major title insurers have recently been between 3% and 7% of their total operating income. State law often codifies this risk avoidance approach: A title examination of some sort is required by statute in a number of states; similarly, many states require application of sound underwriting practices as a condition to issuance of the policy.

Sunday, January 25, 2009

Insuring against Independent Contractor Exposure

The hiring of an independent contractor carries with it unique risks of legal liability. If the contractor's employee is injured on the job, he or she is entitled to workers' compensation from the contractor but may also bring a common law claim against the principal (the party who hired the contractor). This claim against the principal may be premised on three theories: The principal itself was at fault; the contractor's fault implicates the principal's liability (the principal is vicariously liable); or the principal is strictly liable under a safe workplace statute.

A fault-based theory of liability may include allegations that the principal directed the contractor to perform work in a certain manner, with disastrous results. However, much of the principal's exposure arising out of its employment of the contractor is vicarious in the broad sense based on a theory of inherently dangerous work or violation of a safe workplace statute. Many times the distinction between fault-based and vicarious liability is fuzzy at best, as in claims of negligent hiring or negligent supervision.

While these exposures are covered by general liability insurance, the principal would rather not deplete its own liability coverage for risks ultimately premised on the contractor's own negligence. The principal may attempt to shift the cost of these risks back onto the contractor through use of broad indemnity or hold harmless agreements. These agreements have two fundamental weaknesses: (1) The contractor may become bankrupt or otherwise lack the financial means to pay, and (2) enforcement of the agreement may be limited by statute or judicial decision.

Accordingly, the principal may wish to back up the promises contained in the indemnity agreement with insurance coverage. The principal has a variety of ways to shift the insurance coverage for independent contractor exposure from itself to the contractor.

Saturday, January 24, 2009

Structure of Commercial General Liability CGL Policy

The general structure of a CGL policy is that it begins with a broad grant of coverage in a clause called the "insuring agreement." The insuring agreement lists the types of losses covered by the policy and may define those losses.

The insuring agreement is immediately followed by a list of exclusions. Exclusions negate coverage otherwise granted under the insuring agreement. There are two reasons for exclusions. First, the loss may not be insurable because coverage would be either contrary to the principles of insurance, illegal, or in violation of public policy. All three objections would apply to providing insurance coverage for an insured murderer. Similarly, a simple breach of contract action by a subcontractor seeking to get paid for work it had performed may not be the type of claim for which a contractor may expect coverage (unless the breach of contract action arose out of property damage or bodily injury).

Second, and of more importance, exclusions preclude the CGL policya general liability form of insurancefrom providing coverage for types of losses that are covered by other, narrower forms of insurance policies. This second purpose of exclusions, then, is to preclude redundant coverage and to compel the insured to purchase the type of policy intended to cover the specific kind of loss.

Some exclusions contain exceptions. The purpose of exceptions is to return coverage to a subset of losses otherwise excluded by the exclusion. One must remember, however, that an exception, in and of itself, does not create coverage unless that coverage would otherwise first exist by means of the insuring agreement.

An important point to understand about exceptions and the coverage they generate relates to the concept of "ambiguity." The function of an exception is to narrow the scope of an exclusion. Exceptions are read seriatim and do not modify any other exclusion. Thus, an exception in one exclusion may not be read together with another exclusion to generate an ambiguity in the contract.

The analysis of a coverage issue, then, follows the following format:

Is the type of loss included within the insuring agreement? If yes,

Is the type of loss covered by an exclusion? If yes,
Does that exclusion contain an applicable exception?

If the answer to the final question is "yes," then there is coverage for that type of loss.

Note that this three-step analysis determines only whether the type of loss is covered. All sorts of "generic" reasons may exist for denying coverage, even if there is coverage for the type of loss; for example, the claimant is not an "insured," or the insured failed to give timely notice of the claim to the insurance company. As a general rule, these generic reasons for denial of coverage apply to any insurance claim and do not raise questions unique to the issue of insurance of construction worksite personal injury claims. Accordingly, these generic reasons for denial of coverage will not be discussed in this book.

Friday, January 23, 2009

The Function and Mechanics of Insurance

The function of insurance is to transfer, in exchange for the payment of a premium, the risk of a financial loss occurring on the project. Insurance covers losses that are predictable but also unexpected (or fortuitous) and unintentional. Construction projects as a general rule engender two types of insurable risks: bodily injury (including death) and property damage. Only bodily injury coverage will be discussed.

Insurance coverage, otherwise applicable, will be denied if the insured failed to provide the insurer with timely notice. Notice should be provided twice: once when the accident occurs and then again when a lawsuit is filed against the insured. Notice must be provided as soon as practicable. The insurer then evaluates whether to provide coverage. In deciding whether it has a "duty to defend," the insurer must examine the complaint and the surrounding circumstances to see whether any potential covered loss is included therein (regardless of what the insurer views as the ultimate merits of the claim).

If the insurer concludes that the claim is covered, it will assume the insured's defense. If it has doubts as to coverage, it may assume the insured's defense but reserve the right to contest coverage at a later date. Finally, the insurer may refuse to defend against the lawsuit on the ground that the claim does not allege a covered loss. At this point, the insured will sue the insurer for breach of contract and seek a "declaratory judgment" from the court that the lawsuit is, in fact, within the insurer's duty to defend. Alternatively, the insurer may be the one seeking a declaration of its duty under the policy.

Thursday, January 22, 2009

Interaction between Insurance and Law

Insurance developed and spread as a result of society’s needs and demands. For example, marine insurance was followed by life insurance and shortly afterwards in the seventeenth century by fire insurance. Since then, human progress has been marked by developments in the insurance field and a variety of branches in the following classes of insurance sprang up, each forming a subject of its own: property insurance, machinery, loss of profits, engineering, motor, liability, aviation, credit, electronic equipment, off-shore structures and, most recently, space equipment. Each of these branches of insurance represents a milestone in the history of mankind.

However, the fact that insurance was itself available has influenced developments in other facets of society, forming dialogue between insurance and, for example, law or finance. This can be seen very clearly in the development of the law of negligence. The following extract, concluding a chapter on negligence, from The Discipline of Law by the great jurist and writer of the twentieth century Lord Denning, illustrates this point:

During this discussion I have tried to show you how much the law of negligence has been extended; especially in regard to the negligence of professional men. This extension would have been intolerable for all concerned—had it not been for insurance. The only way in which professional men can safeguard themselves—against ruinous liability—is by insurance…. The policy behind it all is that, when severe loss is suffered by any one singly, it should be borne, not by him alone, but be spread throughout the community at large. Nevertheless, the moral element does come in. The sufferer will not recover any damages from anyone except when it is that person’s fault. It is only by retaining that moral element that society can be kept solvent.

It is doubtful if developments in the laws of contract and negligence would have occurred in this complicated and intensely commercial world of ours without the help of insurance, which has truly shaped some of the relationships in society.

In contrast, it is important to note that there is the view that insurance against tortious liability should be considered unacceptable because it permits the individual to escape from the financial responsibility of negligent acts.

Wednesday, January 21, 2009

Who Pays for Falling Trees?

During a ferocious hurricane, one of the trees on Joan Fletcher's property came crashing down on the house of neighbor, Mark Tyson. Whose home insurance pays for the damage?

The answer may surprise you: Mark's Generally, the rule is that the property owner whose house has been damaged by a tree is the one who files the claim with the insurance company. As long as the tree was in good health, and no one could have predicted its fall, then Joan is off the hook. Since in this case, the tree fell down on Mark's house because of a hurricanean uncontrollable natural disasterJoan can't be held responsible.

But what happens when a tree falls down because it was damaged of diseased? Then the situation becomes a lot more complicated. In this case, the property owner can try to hold the tree owner liable for the damages. If the property owner does sue he tree owner, then the tree owner's insurance policy will pay for the defense and the damages, up to the policy limit.

So what should you do if you suspect that your neighbor's tree is damaged and is in danger of falling on your house? The best plan is to have qualified person inspect the tree. If your expert determines that there is a problem, then he or she should write a letter to the tree owner, return receipt requested. This way, if the tree owner doesn't do anything to take care of the problem, and the tree does fall on your house, you're in the best shape to win a case against the tree owner.

If you're the one with the potentially problematic trees, then you should do everything possible to protect yourself against an expensive lawsuit from your neighbor. Have your trees maintained or examined each year, and consider taking them down if the expert finds a problem. If you don't want to take them down, then protect yourself with an umbrella policy that provides secondary coverage for legal liability, well above the homeowner's policy. This way, if worse comes to worsethe tree falls, and your neighbor suesyour insurance company will be covering the damages.

Tuesday, January 20, 2009

Tips for Taking Inventory

Set aside one day to go through your home and list everything you might want to insure. Think about what you would need if a fire consumed everything you had. What would you have to replace to restart your life? If you can't set aside a full day, do it in a couple of evenings. Take your inventory room by room. Don't forget what's in the closets, drawers, and under the bed.

Here are some tips for taking inventory

* Take pictures of each room. You might want to photograph specific items that are valuable. Consider using a video camera for taking inventory. (Don't forget to include the camera in the inventory!)

* List the things in your closets and drawers, and items stuck under the bed or inside linen cheats. Make special note of jewelry and expensive gear you might use for skiing or other special occasions.

* List as many specifics about the items possible. Include serial numbers, the size and make of appliances. and any special features.

* List how much you paid for the item and when you bought it. If you have receipts, attach them to your inventory.

* Update your inventory list every year. Better still, when you purchase something, just add it and the receipt to the inventory list.

* Keep your inventory list in a safe place such as a fireproof container or in a safe deposit box. Your paper list does you no good if it is reduced to ashes in a fire, or if the thief steals the strongbox along with your other possessions.

Monday, January 19, 2009

Don't Overinsure for Your Home

Keep in mind that when you purchase full value replacement cost insurance, your premium is based on the insurance company's appraisal of the value of your house. If you think that their appraisal is too high, you can dispute that. For example, if you purchase a home for $200,000, the insurance company is going to want to sell you $200,000 in homeowner's insurance. The reality is that you've really paid for the house and the property that the house sits on. If the house came along with two acres of property, then you may have actually paid $125,000 for the house and $75,000 for the property. In that case, your house may only cost $125,000 to rebuild and you should only have to pay for a $125,000 replacement cost policy.

If you think you are being asked to pay for more coverage than is necessary to replace your home, check the terms of your mortgage before attempting to dispute it banks usually require a minimum amount of coverage. If you still believe less insurance will be adequate, point this out to the bank and get it confirmed by an appraiser for the insurance company writing the policy. You have reality on your side. That's because the insurance company will not insure your home for more than it would cost to replace. So get the insurance company to provide the appraisal. If you still are not satisfied, ask two more appraisers to value your home. Ultimately, it is not you or the bank who decides the value of your home. It is an appraiser.

Sunday, January 18, 2009

Protecting Your Things in House

A typical homeowner's policy covers only some of the value of your belongings. Normally, coverage is equal to 50 to 70 percent of the value of the house. For example, if you insure your house for $100,000, your belongings will be insured for $50,000 to $70,000, depending upon your insurance company. You can always add to the coverage for your belongings if you pay a higher premium. So, if you own a lot of valuable things that are worth more than $70,000, you will want to consider increasing your belongings coverage proportionately.

The next step is to decide whether you want a policy that covers actual cash value or one for the replacement value of your belongings. Just as with your house, you'll probably be better off with replacement value, although it does cost a little more.

Typical homeowner's policies cover actual cash value. Unfortunately, you may be in for a big surprise when you file a claim because the payout will probably be significantly less than the cost of replacing the item.

Let's say a windstorm lifts a tree from your front yard, blows it through your living room window, and destroys the sofa you bought five years ago for $2,500. You're not worried, though, because you have homeowner's insurance. But if your belongings are covered for cash value, the insurance company values your five-year-old couch at whatever it's worth today, or rather, what you could have sold it for just prior to it being damaged. This is called depreciation.

Depreciation is the decrease in the value of something caused by the object's use. After a certain number of years, the thing may have no value according to the insurance company even though it would cost you a considerable amount to replace it.

Look at that $2,500 sofa. The insurance company may say that your sofa had a "useful life" of five years. So each year, it is worth one-fifth (or $500) less than the year before. After three years, the sofa is deemed to be worth only $1,000. They arrived at this value after doing this simple calculation:

$2,500 minus the depreciation (which is $500 times three years or $1,500) equals $1,000. So all you'd get for that couch is $1,000.

However, if your couch were covered by a full replacement policy, the insurance company would have to buy you a new couch that is comparable in value to the couch you lost when it was brand new. Actually, they have a choice. The insurance company can cut you a check, but they also have the right to repair or replace the couch instead. A policy that pays to replace your belongings costs about 10 to 15 percent more than an actual cash value policy. Seriously consider going the replacement cost route. It may save you a lot of money when you have a claim.

Saturday, January 17, 2009

The Basics of Homeowner's Insurance

The key to understanding homeowner's insurance is to cut through the jargon and answer the questions: "Just what am I insured for and for how much?" But first, let's look at some of the terms you need to learn.

· Replacement value refers to the amount it would cost to replace an insured item today. For example, if you insure your home for the full replacement value and it burns down, the insurance company needs to replace it. Period. So even if you've insured your house for $100,000 but construction costs have risen 25 percent since you purchased your policy, the insurance company will need to cough up $125,000 to rebuild your house.

· Market or cash value means the amount an insured item is worth on the market today. If you insure your house for market value, you need to periodically reassess this amount and adjust your insurance policy accordingly. The reason is that if your house burns down, the insurance company will give you the amount of cash specified in the policy. Take the house in the previous example. If the $100,000 insurance policy had been a cash value policy instead of a full replacement policy, the owner would only have received a check for $100,000 even though it would cost $125,000 to rebuild.

· Liability is the last concept you need to understand before building the residential portion of your insurance structure. Residential insurance covers your legal liability if someone is injured either on or off your property or in your residence. Liability is one of the most important protections you get with residential insurance. If your neighbor slips on your wet kitchen floor and sues you for negligence, or if you accidentally hit someone with a golf ball after a great tee-off, the liability portion of your residential insurance will cover your legal fees and any damages you must pay up to the amount specified in your policy. More on that later.

Friday, January 16, 2009

Cut Your Homeowner's Insurance Bill

In addition to shopping for the best rate for your homeowner's insurance and raising the deductible, there are a number of other ways you can lower the cost:

* Multiple policies. If you purchase your homeowner's, umbrella, and auto coverage from the same company, you may be eligible for a 5 to 15 percent discount on your premiums.

* Add home security. You can usually get at least a 5 percent discount for installing smoke detectors. Beware of overdoing the security thing, though. Some insurance firms will give up to a 15 to 20 percent discount for sophisticated sprinkler systems and burglar alarms connected to a local police, fire, or private security station. But these systems are not cheap. Compare the cost of installing and maintaining such systems with how much they will save. Often, you may find it's cheaper to raise the level of your coverage than to buy a $1,000 security system. But there are other reasons to install a security systemlike safety and peace of mindreasons that can't be measured in dollars,

* Stop smoking. Some companies offer small discounts, but remember everyone in the household must be nonsmokers. Some health insurance policies will cover the cost of quitting; some HMOs even offer a cash bonus if you quit!

* Home improvements. If you replace the old electrical wiring in your home or overhaul the plumbing, you may be entitled to a discount because your house has become more fireproof. But if you add a new room, you may have to boost your coverage because that will increase the replacement cost of the entire house.

* Age has its privileges. Some companies provide discounts to people who are over 55 years old and retired. Their reason is that retired people stay in their houses more than working people and can thus spot fires more quickly.

Thursday, January 15, 2009

The Insurance Contract in Plain English

An insurance policy is a legal contract, and every contract contains four basic components:

1. One person (or party, in legal parlance) must make an offer, and the other must accept it.

2. Both parties must be of legal signing age and mentally competent.

3. The subject matter or activity covered in the contract must be legal.

4. Each party must assume some obligation toward the other or give something of value like money or a promise to the other.

So how does this work with an insurance contract? The insurance company makes an offer to provide auto insurance, for instance to you. Let's say you sign the insurance policy. Now, assuming you are old enough and not insane, you must follow the rules and procedures in the policy. You must also pay the company some money a premium for the insurance. In return, the company must pay you for certain costs if you have an auto accident and if those costs were spelled out in the contract.

Title Insurance

The bank requires that you buy title insurance when you borrow money from the bank to buy a piece of property The title insurance makes sure that whoever sells you the property has the legal right to do so. The bank wants to protect its equity in the poverty while you are paying down the mortgage.

Thus, when you close on a house typically must buy title insurance from a title insurance company for about for every $1,000 of coverage. The minimum the bank requires is equal to the amount of equity the bank has in your property. That covers bank's risk.

But what about your financial risk, which is equal to the equity you have in the property? For this you can purchase owner's title insurance for about $3.50 per $1,000 of coverage. If a flaw in the title comes to light some 20 years after you've bought your home. the title insurance company forks over the money, even if the value of your property has risen ten times.

Since you only buy this insurance one time when you purchase your propertyit can be very good deal for a lot of protection over a lot of years. On a $120,000 home, you would spend $420 only once for private title insurance that covers your spouse as long as you own it.

Wednesday, January 14, 2009

Stock VS Mutual Insurance Companies

Insurance sales people love to tell you why the insurance companies they represent are the best. Some agents will extol the virtues of being a publicly-held-a.k.a. stock-company. Others will tell you how lucky you will be to have your insurance with a mutual insurance company.

The reality is that the financial health of the company and its operating record in the state where you live are far more important guideposts than whether it's a stock or mutual company. There are small nuances, though. Here are the differences.

* Stock insurance firms. These companies are owned by one or more investors. When the company makes money, the investors may receive a portion of the profits in the form of a dividend. The company's stock may be traded on a stock exchange. As a policyholder, you do not get to share in the profits.

* Mutual insurance companies. These companies are owned by the policyholders. Thus, when you purchase auto insurance from a mutual company, you become a shareholder of that company. You get to share the profits when there are profits.

Most insurance companies are stock firms. Examples are: Allstate, CNA, and Zurich American.

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