Insurance

USAA and membership growth

March 25, 2013 by Doug Nordman · 10 Comments

I received a great comment on an older post about USAA. As I answered it I realized that I’d written an entire new post in the subject, so I’ll just put up the answer here and link back to the other post. I’ll also add in feedback from USAA’s staff.

Here’s the entire comment before I break it down to answer individual points:

I’ve been a member for almost 40 years and I’m becoming increasingly dismayed by USAA’s push to expand without considering whether this provides any value to traditional members. In short, I am concerned with the drive to add ever more numbers to USAA’s membership with only tangential relations with the military. As an auto, home and umbrella insurance purchaser, I feel the pool is being diluted. I also think advertising should be limited to attract NCO and commissioned officers, not bought on network broadcasts. I think the value of USAA’s financial services are, in general, not any better than credit unions and stock/mutual fund companies. I’ve never gotten a home loan from USAA because their rates are not competitive, and my banking is with Navy and another Credit Union. The cost advantage of USAA insurance over its competitors, even factoring in the refund check, is narrowing–and USAA is beginning to be out competed in markets it should have a natural lock on. As for claims services, USAA is slipping there according to friends’ reports–I haven’t had the displeasure of having to file one.

I loved the USAA of the 70s and 80s, was OK with the expansion in the 90s and now detest the trends this century. My loyalty is waning.

Thanks for your comment!

I’ve only been a member for 32 years, but these questions have been asked of USAA before and their staff have put numbers on the issue. I’ve filed my notes from their last two blogger conferences, and here’s what they’ve told us.

I’m becoming increasingly dismayed by USAA’s push to expand without considering whether this provides any value to traditional members. In short, I am concerned with the drive to add ever more numbers to USAA’s membership with only tangential relations with the military.

Over 20 years ago, USAA’s membership was not growing enough to support the fixed cost of running the insurance business. The military had greatly expanded in the 1980s to finish the Cold War. However starting in 1991 after the First Gulf War, the U.S. military drew down by over 25%. (In my own blunt assessment, not the words of USAA’s staff: the veterans of the larger WWII and Cold War military were dying of old age faster than young members of the smaller drawdown military were signing up.) By opening up the membership in 1996, USAA hoped to spread their fixed costs across a larger membership. That would hold down premiums while helping to defray the costs of new services.

After the initial surge of new members, other problems emerged. At USAA’s 2011 conference, one of the staff told me that the new membership qualifications (and exceptions and loopholes) made the decision more complicated than it needed to be. Even their own staff had trouble parsing the various categories and questions. Growth still wasn’t rising fast enough to support the expanded services that a larger association could support. To cut through the confusion, membership was clarified to “Former officers and enlisted who separated and were honorably discharged.” That later expanded even more to “All military and veterans who have honorably served and their families.” It’s simpler and it saves employee labor to process new membership applications. Even better, it expanded the eligible membership to about 60 million people.

Growth still didn’t happen as quickly as they projected, so USAA has spent most of the last decade on an extensive marketing campaign to spread the word about their expanded membership criteria. Growth has happened more quickly up through 2010. One USAA staff supervisor said that since membership has reached nine million, USAA is throttling back the expansion campaign to allow growth to proceed at a more measured pace.

I also think advertising should be limited to attract NCO and commissioned officers, not bought on network broadcasts.

In the late 1990s, most of the membership campaign was by direct mail and print advertising. Over the last few years, USAA has moved to TV, Internet ads, and social media. The overall cost of the latter marketing campaign has actually been lower because the ads were funded by cutting back on the printing & postage. (When’s the last time you received a USAA letter in the postal mail?) It’s not only cheaper than print but it’s reaching a wider audience. In 2011 the audience awareness of USAA was up 40%, awareness of services and other programs was up 20%, and awareness through their website and social media is up 80%. USAA’s recent partnerships with sporting events (the NFL, the Army-Navy game) and affiliations with veteran’s organizations are also paying off. These have helped spread the word to USAA-eligible veterans at minimal marketing cost to USAA.

As an auto, home and umbrella insurance purchaser, I feel the pool is being diluted.

Here’s the interesting result: in general, the newer members have been better than the older ones. The new members of our Boomer generation have about the same expenses as existing members, but USAA’s fixed costs are spread out over a larger population. Everybody wins.

The younger members have been an even better deal. Young drivers might pay higher premiums, but their accidents are actually costing less because they’re driving cheaper vehicles. They have smaller homes and less personal property to repair after a natural disaster. Surprisingly, they even have lower default rates on credit cards– especially when compared to the rest of the Millennial demographic. USAA’s revenue is up while their expenses and their claims are down.

One interesting aspect of the new younger members is the value they place on membership. The “Mine Was Earned” ads are promoting a sense of honor and legacy (and better member behavior) that’s dropping right down to USAA’s bottom line.

In short, USAA doesn’t need more members like you and me. They want more members like our kids. In my opinion, USAA might be impatiently waiting for our kids to inherit our assets so that our heirs can expand their lifestyles, buy more USAA products, and raise even more future USAA members.

I think the value of USAA’s financial services are, in general, not any better than credit unions and stock/mutual fund companies. I’ve never gotten a home loan from USAA because their rates are not competitive, and my banking is with Navy and another Credit Union.

I hear you. I only carry USAA’s auto insurance and a credit card. Our home, rental property, & liability insurance is with another (smaller, more financially fragile) military insurance company. Other brokerage firms hold our investments. USAA actually stopped insuring Hawaii homes for a number of years due to concentration risk. Other banks and credit unions offer more products (like business checking). Vanguard and Fidelity certainly have cheaper mutual funds and brokerage commissions.

USAA’s Scott Halliwell explained why. (At the 2011 conference, I talked one-on-one with him for over an hour.) He cheerfully acknowledges that USAA won’t compete on the price of their investing or mortgage products. More importantly, they don’t want to. They’re offering consolidated financial services with a company that understands the military and its families. They’re supporting people who move every few years, who call way outside of business hours from countries with unpronounceable names, whose spouses deployed before having the chance to complete exactly the right paperwork required by the letter of the law, whose pay might be messed up, and who just want a company that they can trust. USAA has learned that its members (especially those on active duty) want to do all of their business with USAA instead of with a patchwork of a half-dozen other financial service providers. They want the convenience of one-stop shopping with a company that they trust.

Scott says that USAA’s services are priced accordingly. Members pay rock-bottom rates for the vehicle & property insurance (and the customer service) that remains the core of USAA’s business. The rest of USAA’s products and services are literally open to anybody, not just USAA members! The banking & investment fixed business costs (and their rising regulatory costs) are spread out over an even larger population. This keeps their prices lower than the majority of the actively-managed investment industry– which, sadly, isn’t saying much about the rest of the industry. While it’s not as cheap as the giants like Fidelity or Vanguard or Schwab, it’s certainly a cost-effective way to consolidate their banking & investment services.

Over the last decade, my spouse and I have refinanced our home and our rental property nine times. We used Navy Federal Credit Union, Pentagon Federal Credit Union, USAA, Bank of America, and a local bank. PenFed was by far the cheapest interest rate and the lowest closing costs. However their service was so bad that I could not believe that they were licensed to do business in Hawaii. I easily spent twice as much time processing their paperwork (and dealing with their mistakes) than any of the others. (Bank of America was no prize-winner either.) USAA didn’t offer the lowest interest rates or the cheapest closing costs, but they were by far the best on customer service.

During the last year I compared USAA’s CD rates (and customer service) to NFCU and PenFed. My father has Alzheimer’s, and I’m the conservator for his finances. I have my own accounts with all three organizations, so I expected it to be easy to open accounts for my Dad and then put some of his assets into CDs.

The worst company was his own bank. He’d been with them for 25 years and yet they still wanted “know your customer” documentation. Each CD required a multi-page paper form, and I won’t go into the details of the conservator paperwork that they expected. Their rates were 0.5%-1% below the competition. It was a horrible, protracted, and unsympathetic experience.

PenFed was almost as bad, maybe because I had higher expectations. While their website is a fast and easy way to buy a CD, it was almost impossible to open an account for my Dad. They did not respect the probate court’s appointment letter and PenFed didn’t even understand basic conservator vocabulary. I made two attempts with two different supervisors and gave up in disgust.

By the time I got to USAA I had greatly lowered expectations. However they did the whole process over the phone (backed up by secure e-mail scans of my documentation) and they processed the funds transfer from Dad’s brokerage account in real time. Later they even fixed one of my mistakes to update the CDs as “transfer on death” to Dad’s beneficiaries. USAA’s CD rates are slightly lower than PenFed, but PenFed clearly didn’t want Dad’s money. USAA’s customer service was far above & beyond any other banking company, and their CD rates were only second to PenFed.

The cost advantage of USAA insurance over its competitors, even factoring in the refund check, is narrowing– and USAA is beginning to be out competed in markets it should have a natural lock on.

In 2008 when my teen daughter started her driver education classes, I verified that USAA was far ahead on pricing. She learned the same thing when she insured her own car last year. Maybe the cost advantage for older members is narrowing because we’re less desirable than younger members.

But your comment raises a good point about where to compete. I had an interesting discussion with their banking VP about business checking. In general, the financial industry’s regulatory costs have nearly tripled over the last decade. The rest of the banking industry is making up for the higher costs with a staggering array of customer fees and penalties. In addition, the industry has chosen to offer some products as “loss leaders” in the hopes of locking customers in to other products with much higher profit margins. USAA has avoided as much of that as possible by simply not attempting to compete unless there’s a membership demand. They’d rather keep low pricing on their core member services than attempt to enter other banking areas that may or may not support their expenses.

It’s been nearly two years since I became aware of the membership demand for USAA business checking, and the company has finally figured out a way to offer it to the members who want it without asking the rest of the members to subsidize it. They’ve made great strides in other member services, too, such as Auto Circle and Home Circle. I suspect that all of their member services (not just the ones which you and I happen to use) are more robust than the rest of the industry.

As for claims services, USAA is slipping there according to friends’ reports–I haven’t had the displeasure of having to file one.

USAA’s mistakes have annoyed me plenty of times over the last three decades. A friend recently required medical treatment after a vehicle accident, and USAA certainly spent a lot of member money on HIPAA paperwork & postage while tracking her progress. I’m also seeing frequent complaints about the estimates of claim damages and the choice of repair services.

I wonder if my perception is a reflection of our own human tendencies to pay more attention to problems than to “business as usual”. There are certainly more members, so there are more opportunities to complain. Bad news also spreads much faster these days, which could raise the visibility on formerly hidden problems.

I won’t attempt to defend USAA’s record on claims services– they can always do better. However they’re doing pretty well with J.D. Power’s independent ratings. While they could improve, I suspect that their customer satisfaction is ahead of the pack of the other insurance companies.

Since we haven’t had to file a claim in decades, either, we may not see the customer service benefits of being able to rapidly process claims or offer new technology for more tailored service. I know that USAA’s mobile claims processing paid off for property owners during last year’s natural disasters. Today USAA can literally send out a payment for a vehicle insurance claim before the owner gets back home from the scene of the accident.

However when I look at the good things that USAA has done for me and my family over the years, they’re ahead on points. I’m certainly not willing to spend more money with other insurance companies in the hope of improved claims services. I’d rather save money on the cost of business as usual.

I loved the USAA of the 70s and 80s, was OK with the expansion in the 90s and now detest the trends this century. My loyalty is waning.

I think that USAA values our customer loyalty as much as any large corporation is capable of that behavior. Again, they have one of the Fortune 500′s highest rankings on employee satisfaction and very high customer-service ratings. At least 25% of their newer employees are military veterans, and USAA actually puts their new staff through a mini “boot camp” to help them understand the challenges that their active-duty members have to contend with every day. When it comes to understanding my issues, I think USAA already shares a common culture with its members.

However instead of despairing over USAA’s service, I’d suggest that you should investigate other companies. With apologies to the old Lee Iacocca commercial, “If you can find a better insurance product: buy it.”

FTC disclosure: USAA has paid for a portion of my transportation, food, and lodging costs at two blogger conferences. You might wonder whether that would affect the objectivity of a financially independent retired Navy nuclear engineer. Instead it’s subjected their staff to hours of brutal interrogation, raised cynical questions about their math skills, and inspired outright skepticism of their high employee satisfaction. As a geezer long-time member I’ve been especially inquisitive about their retirement calculators and their financial products. At least one executive was ambushed with hostile questions about providing business checking to USAA members, and I’ve stalked several more execs through followup phone interviews. We bloggers also drank all of their coffee, ate all of their breakfast burritos, abused their WiFi bandwidth, and made fun of their underwear vending machine. I’ve attempted to balance the scales by distributing omiyage of Kona coffee and chocolate-covered macadamia nuts, which may only call into question the objectivity of their employees. But I enjoyed the conferences so much that I’m hoping to repeat the experience!

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Filed Under: Finances · Tagged With: banking, financial independence, Insurance, military, USAA

More lessons learned on insurance (part 2 of 2)

September 20, 2012 by Doug Nordman · Leave a Comment

Last week’s post covered the basic insurance issues when you’re just starting out. You’ll insure your personal property and your vehicle for the financial catastrophes that you can’t cover on your own, and you’ll control the costs by using high deductibles. Insurance expenses make it even more risky to own a home while you’re on active duty, so try to rent until you’re confident that you’ll be in one place for at least five years. And finally, spouses should insure each other to gain the security of knowing that they’ll have financial support to get through the trauma.

Our next couple of tours were in Hawaii, and we learned a lot more about insurance. In 1992 we started a family, and once again life got complicated. This time we maxed out our SGLI policies and added an uninsured/underinsured motorist rider to our auto policies. The idea was that if our daughter was disabled by a car accident and needed lifetime care, we’d have enough of an insurance settlement to fund a special-needs trust. We’re continuing the UM/UIM until our daughter starts her active duty and gets all of her own insurance.

Our daughter’s medical insurance is still covered by my Tricare while she’s in college, of course, but dental insurance was a different decision. We bought her dental insurance while we were on active duty because the premiums were very low, but when we retired they became much more expensive. It turned out to be cheaper to go uninsured and to pay out-of-pocket for all of our dental care. My spouse and I are blessed with good genes (and a lot of dental floss) so we only visit the dentist every 2-3 years. (A decade later, so far so good.) Our daughter’s pediatric dentist immediately gave us a 20% discount for cash at her semi-annual visits. Very little orthodontia is covered by dental insurance, and again we negotiated a significant cash discount. From what I’ve read over the last decade, the quality & materials of dental treatment have improved while the cost seems to have dropped. Even if spouse or I developed a sudden vulnerability to root canals & crowns, we’d probably still self-insure.

In 1994 the Navy transferred us back to the Mainland. By this time we knew that we were going to come back to Hawaii someday, so we chose to rent out our property. (The real estate market sucked, too– bad time to sell. Never saw that coming!) We chose to insure our rental for “named perils” (also known as Basic Form HO-1) instead of “all risks”. This is a cheaper version of a property policy that does not cover damage from snow/sleet/ice, electrical surges/short circuits, or problems caused by plumbing, heating, air conditioning, or appliances. We kept our hurricane insurance (with a very high deductible) and added more liability insurance. At this point we felt that we had enough assets to self-insure for smaller repairs, and we knew that “smaller” claims (under $5000) were more likely to raise our premiums or even cause our insurer to decline a renewal.

Hawaii also taught us about “adjusted rebuilding costs”. This rider attempts to cover the higher cost of materials after a natural disaster (greater demand for lumber and windows!) and the local requirements to rebuild to a higher code standard. We review this every few years against our property appraisals and tax assessments. Again, we had no clue about this coverage when we owned our first two homes, and we would have been tempted to skip the added expense. It would have hammered us just as hard as a hurricane or an earthquake.

We eventually returned to our Hawaii home and lived in it for a few more years, but in 2000 we discovered a bigger property in a better school system. Best of all, it was filthy and in horrible material condition! We immediately bought it (at a huge discount) and moved our daughter to the new school system. We also started pouring in the sweat equity while we once again rented out our other home. As Hawaii property values resumed their upward march, we boosted our umbrella liability policy (again with Armed Forces). Our properties were both heavily mortgaged, but we wanted to make sure that we had enough liability coverage to cover the value of our assets (gross worth) and not just our net worth. We spent hours on the phone with USAA and Armed Forces Insurance to make sure we had all the right levels of home/auto coverage under the umbrella liability policy. Today one of my most hated chores is comparing the various limits and features between the two companies to make sure that we’re getting the best insurance and prices.

One of the reasons we bought the new home is that we were approaching retirement and knew that we’d spend many more years in Hawaii. Landlording is much easier when the rental property is only five miles away (instead of five time zones) and we’ve spent much of the last decade on home improvement projects. Each year we’ve reviewed our coverage (for example, adding our photovoltaic array) and asked for discounts (retirees are home more often than working families). In general, we carry the highest deductible offered and self-insure for as much as a $25K loss.

We still don’t carry flood insurance. Both properties sit on a rise with huge natural drainage (not just the storm drains) and landscaping to divert the storm surge. We have a concrete slab, no basements. We’ve spent extra money for leak-stop water connections to toilets, the dishwasher, and the washing machine. The washing machines are in the garage, in a catch basin, and drain away from the house. (Unfortunately we had an opportunity to test that in each house.) We can let sewage back up in the garage and drain to the street. We have tile floors and wall-to-wall carpets. We can handle our own drywall & carpet replacement if necessary. We’re miles away from (and hundreds of feet above) the tsunami inundation zones. I still worry about flooding, and we can still make a few improvements, but I’m happier than if I was paying for flood insurance. If our homes had basements or freezing weather then we’d probably clench our jaws and buy flood insurance.

We don’t carry earthquake insurance either, and in 2006 we almost regretted it. However it turns out that our hurricane strapping kept things together through a frightening 6.6 temblor with only minor drywall cracks. Earthquake insurance is still prohibitively expensive and we’re still self-insured, but we’re more confident that we can recover from the damage.

When I retired from active duty, spouse made a decision that dramatically changed our quality of life: she declined Survivor Benefit Plan coverage. Neither one of us wanted to pay 6.5% premiums for 30 years. More importantly, we didn’t need the coverage. She was already close to her own pension, we have income from rental property, and we have enough assets to cover the mortgages plus either survivor’s living expenses. Our only child was 10 years old so childcare was a much cheaper prospect. We decided that we could buy cheap term insurance (we’re in good health) to cover the gap between military retirement and age 62 (Social Security), but that hasn’t been necessary. At first it was tight for a few years due to the mortgage payments, but serial refinancings have freed up room in the budget. When spouse retired from the Reserves, I didn’t even sign up for the Reserve Component SBP. Our spreadsheets show that we’d still have enough income from our own pensions and we don’t need to insure each other’s pensions. As commenter Spokane Al and other military retirees have decided, SBP is not always the best insurance for their situation.

More importantly to us, today that extra 6.5% works out to over $200/month in our budget. By the time spouse retired from the Reserves, we knew that our retirement budget was flexible enough and that we had enough income streams & assets to make it for the rest of our lives. I’m also tremendously relieved to know that I’m worth more alive (with my pension) than dead.

A few years ago we made a somewhat controversial decision that still has Armed Forces Insurance wringing their hands with anxiety: we canceled our personal property policy. Although all of our personal property has sentimental value and decent quality, our most expensive item on the list was spouse’s wedding ring. We don’t own much jewelry or military equipment and the vast majority of our possessions have very little actual cash value. Our furniture is easily replaced from Craigslist at a fraction of the retail price, and we have time to patiently shop for the bargains. When we realized that we could refurnish the entire house (and all of the closets) for less than $30K, we canceled the coverage.

One remaining insurance decision is long-term care. We still don’t have any, and we won’t make the decision until we’re in our 60s. Unfortunately I’ve learned a tremendous amount on the subject due to my father’s Alzheimer’s and my appointment as his conservator. In 1992 he purchased an incredible inflation-protected policy that today is paying back over 25:1, and John Hancock’s losses will just get worse as their clients get older. With what I know about my genetic heritage, it probably makes sense to buy a high-deductible Federal Long-Term Care Insurance Program policy with a long exclusion period. However today’s policies seem unaffordable to both the clients and the insurance companies, so I hope the situation gets better over the next decade. My spouse and I have saved enough in SBP premiums over the years to be able to pay for long-term care insurance, and our pensions could even make us able to afford to self-insure.

I hope I can avoid the expenses for as long as possible. Long-term care insurance has scared me straight, and this time it might be permanent: I’ve cleaned up my act on diet, exercise, and even alcohol– and this time I really mean it.

What insurance lessons did we learn?

1. When you start a family, carry extra vehicle insurance for uninsured/underinsured motorists. If your kids are severely injured or disabled, you’ll have more financial support.

2. Understand the different types of homeowner insurance (HO-1, -2, -3) and when to use them.

3. Insure your home for higher rebuilding costs and more expensive structural codes.

4. As you accumulate more assets, insure your gross worth with an umbrella liability policy.

5. Carefully consider flooding and earthquake insurance. If you choose to go without then have a plan to mitigate the risks and save the assets to self-insure for major damage.

6. If you’re a military retiree, carefully consider your Survivor Benefits Program.

7. When you retire then reassess your insurance on your home, vehicles, and personal property. You may be eligible for discounts and you may even decide to reduce or eliminate coverage.

8. Delay your decision on long-term care insurance until at least age 60. Expenses are still rising rapidly while insurers are losing money and leaving the business. Consider high deductibles and long exclusion periods.

I hope our experience & mistakes help you make better decisions for your insurance situation!

What have you learned about insurance? What advice do you have for us?

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Filed Under: Finances, Military · Tagged With: early retirement, financial independence, Insurance, military, military retirement, PostAWeek, USAA

Lessons learned on insurance

September 13, 2012 by Doug Nordman · 1 Comment

After Jeff Rose’s life insurance awareness movement, a reader asked:

“Nords, what insurance do you carry?”

Hunh. I’ve never thought of myself as an insurance role model, unless you’re part of a dual-military retiree couple with just one kid. Technology has certainly brought down the price of the insurance decision, so in some situations it’s more affordable than even a decade ago. We’ve also made a number of mistakes over the years that, with today’s knowledge and experience, we wouldn’t make again.

Let me share what we’ve learned over the last three decades.

Last millennium when I left home to join the military, I didn’t carry any insurance. I didn’t need to– I was young, invulnerable, immortal, unmarried, and childless. My parents had their own financial independence so they didn’t need anything from me.

I didn’t see any reason to carry insurance for myself, either. The Navy was taking care of all my medical & dental needs. My personal property had negligible value. Most of my military gear was bought used and had little value. My net worth was probably under $500.

That’s probably typical for most teens leaving home. There’s no need to insure a life or property. Health insurance is coming from parents, school, or an employer.

In 1981, instead of getting a “midshipman car career starter” loan from one of the military-friendly insurance agencies, I borrowed $6000 from my grandparents. While many of my classmates were paying for life insurance (and loans) that they didn’t really need, I was paying back $100/month to the world’s best lenders. I’d borrowed enough to make sure that I could afford car insurance, too. (I’ve been with USAA for over 30 years.) This turned out to be the only time in my life that I’ve bought a new car, and the last time in my life that I carried collision & comprehensive insurance. That midshipmobile traveled around the world with me (until I was an O-4!) so at first the insurance was worth the price. After five years, though, I canceled the comprehensive & collision parts of the policy and just carried the minimum state requirement plus liability. (Today we haven’t had comprehensive/collision insurance for over 25 years.) By then I’d learned that I’d rather own investments instead of shiny new cars, and I didn’t put any more money into the car than the minimum to keep it running. The uglier it looked, the less chance it had of being stolen. Other drivers stayed clear of my dinged-up fenders, too, so my collision risk probably dropped.

For the first two years after college I still didn’t have much more than a TV, stereo speakers, and kitchen utensils. I didn’t even buy any furniture until I reported aboard my first submarine, but I insured my uniforms and other military gear with Armed Forces Insurance. Within a year after reporting for sea duty, though, insurance got more complicated. I’d furnished a two-bedroom condo that I’d bought on a VA loan. The VA loan meant that I didn’t have to buy mortgage insurance, but I carried homeowner’s insurance with a high deductible and a hurricane rider. My personal-property insurance premiums also rose considerably.

By the end of that sea duty, life got busy. Girlfriend v3.0 upgraded to Spouse v1.0, we combined our households & finances, and we moved across the country from my cheap East Coast condo to a horrifically expensive Monterey condo.

I don’t remember much of an insurance discussion after our marriage. (Hey, I was on shore duty, I hadn’t seem my spouse for most of the last three years, and Monterey is one of the world’s largest adult playgrounds!) My spouse was active-duty military, too, so neither one of us really needed to insure the other’s life. However a couple of our shipmates had already been widowed, so we bought $100K policies on each other. The idea was that the survivor would be able to leave the service if they wanted to, or at least get a head start on their retirement savings.

We combined our personal-property insurance. (Spouse had been stationed overseas, and she’d accumulated furniture & tchotchkes.) The Navy was still carrying our medical & dental expenses. Our crappy compact cars only had the state minimum insurance plus liability.

We bought our Monterey condo without a VA loan, so we ended up paying mortgage insurance for a couple of years. We also elected not to carry earthquake or flood insurance– not because that was such a great idea, but because we couldn’t afford see a reason to spend so much money. Policy choices were limited and very expensive, so we went with the primary residence “Special Form HO-3″ type of policy that’s typical for almost all homeowners. We felt that it would be better to keep saving and self-insure, especially because we expected to sell the place within a few years. The mortgage debt was insured by the PMI and the lender didn’t require earthquake insurance, so we didn’t. The worst case would be having our home (and equity) destroyed by a disaster, walking away from the rubble, and then moving into a rental for the rest of our tour. Eventually we transferred, sold our condo by ourselves into the rising real estate bubble, and made a profit.

Today our youthful homeowner’s hubris & chutzpah leave me gasping for breath, but back then in our ignorance we really didn’t expect to have to deal with a catastrophe. We’d gone through several earthquakes that had only rattled the pictures. If I was buying a California condo again then I’d look for the highest-deductible earthquake/flood policies I could find, or I’d rent instead of buying a home.

What insurance lessons had we learned?

1. When you’re just starting out, buy as little insurance as you can. Focus on the catastrophic risks that you can’t cover with your own assets, and keep your deductibles high.

2. Vehicle insurance is expensive. The fewer new autos you own during your life, the more you’ll save. Buy used cars (for the lower insurance rates as well as the lower purchase price) and keep them as long as you can. You’ll reduce your budget, and the savings over 10-15 years helps you buy a (used) replacement vehicle with a cash discount.

3. While you’re on active duty, owning a home is a huge financial risk. Most new homeowners add to that risk by being tempted to under-insure. Minimize your risks: only buy a home when you leave active duty. At the very least, be reasonably sure that you’ll be in the area for at least five years.

4. Newlyweds should insure each other. It’ll make you feel more secure. The survivor may not “need” the money, but it’s a tremendous financial help in recovering from the trauma and the inevitable expenses. The money can also provide a cushion to work through the grief and decide what life changes to make.

I’ll wrap this post up in one week with the insurance issues around starting a family, being a landlord, leaving active duty, and retiring.

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Filed Under: Finances · Tagged With: early retirement, financial independence, Home insurance, Insurance, military, military retirement, Personal property, PostAWeek, USAA, VA loan

Tricare, vehicle insurance, and uninsured/underinsured motorists

June 20, 2012 by Doug Nordman · 5 Comments

I’ve enjoyed military retirement for over 10 years, and in that time I’ve been lucky enough to be mostly ignorant of my Tricare Prime benefits. I found a good civilian clinic for my primary care manager (just a couple of miles from our house), and I’ve only visited once or twice a year for the usual respiratory infections or knee injuries or immunizations. No complaints.

I’d always assumed that Tricare would cover your medical insurance. I knew from shipmates’ stories that if you woke up with appendicitis, Tricare would cover the operation and recovery. I knew that if you fell off a ladder and fractured a bone, Tricare would cover the ambulance ride and the surgery and the physical therapy.

But I haven’t had a fender-bender for over three decades. I recently learned that if you’re injured in a vehicle accident then Tricare coverage isn’t so simple anymore.

I started to learn this when a neighbor’s car was rear-ended during her commute. (The other driver was at fault.) She seemed all right, but she was shaken up so the EMTs took her to the hospital for more tests. She said and did all the right things, so there were no legal issues. She took painkillers for a couple of days and had several physical therapy sessions. (She’s fine now, and her car has been fixed too. No problems.) I helped her fill out the insurance claims paperwork for her car, and USAA wanted to know about doctors and emergency rooms and physical therapy.

As expected, during the week after her accident the medical bills started rolling in. She let everyone know that she had insurance with USAA and Tricare, and the billing agents were happy.

Much to my surprise, the following week she received a letter from Tricare telling her that they would not pay her medical expenses. She didn’t understand why, and I didn’t either.

So I finally did something that strikes fear & trembling into the hearts of all U.S. military veterans and their spouses: I called the Tricare “customer service” line at TriWest. It actually went a lot better than I expected. I didn’t even spend any time on hold, which seems most unusual. I decided to go for the worst-case situation, so I asked them: if I was disabled in a vehicle accident caused by the other driver’s fault, and I carried only the minimum state-required insurance, and the other driver had no insurance, would Tricare still cover me? What about my family? What about lifetime care if I was an invalid?

The woman in the Benefits section kept breaking into my questions to make comforting noises and to reassure me that Tricare would take care of me. I guess that’s part of her job, but the only problem was that she couldn’t answer the question. She kept telling me (in between reassurances) that it would be an insurance issue. She kept telling me that the other driver was required by law to have insurance. I kept trying to clarify that the question assumed the other driver had no insurance. She kept telling me that I should really have more insurance to protect myself. Then she told me I should have long-term care insurance too. This was not comforting.

She politely decided to get rid of me by passing me to Claims. (I supported that.) The Claims branch was all over it. The representative understood my questions but answered them in her own way. She told me that for vehicle accidents, Tricare is not first-party coverage. The vehicle insurance companies would sort out their claims first (if both sides had auto insurance). Then the state would step in with personal injury coverage (whatever limit was on the policy). If the other driver didn’t have insurance then I could be protected by Uninsured Motorist/Underinsured Motorist coverage. Whether or not I had UM/UIM insurance, my auto insurance company would pursue the at-fault driver for whatever they could get.

Finally, if I was confronting disability, Tricare would see if I qualified for Medicare benefits. If so then Medicare would step in and Tricare would be second payer under Tricare For Life. If nobody else was required to pay anything further for my medical care, then Tricare would step up as the payer of last resort. They’d only pay for medical issues, and frankly it seemed like a fuzzy line between medical expenses and long-term care expenses. Bottom line, however, was that Tricare would pay for any remaining medical expenses– but only after everyone else had finished paying their part. Underpayment for injury claims has been a problem in some parts of the insurance industry, so I was glad to learn that Tricare would backstop us.

Keep in mind that I might have other expenses. If I was still working and wanted to replace my employment income, then I’d need disability insurance. The Veteran’s Administration might cover some of my disability or long-term care expenses, or I’d have to pay out of my pension & savings. (I’m still relatively ignorant of VA coverage.) If I needed long-term care for my activities of daily living, then I’d need long-term care insurance.

If a family member was injured in the accident, then the same process would be followed– as long as that family member was also covered under Tricare. My vehicle insurance company would pay for any of my passengers– up to our policy limits.

Everything worked out fine for our neighbor. USAA is very good at member service and she hasn’t had to worry about any of the medical bills. But this incident made me take a look at our own insurance coverage.

Triwest’s answers raised an interesting question for the Ohana Nords insurance plan. Nearly two decades ago, when our college student was a toddler, we bought a huge amount of UM/UIM insurance coverage. The idea was that it would cover her expenses if she was disabled in a vehicle accident and needed lifetime care. However last month she bought her own car and she insured it under her own name. She was no longer on our USAA policy, so hypothetically we no longer needed to carry UM/UIM insurance. This “hypothetical” question is costing us over $220/year. (We may be financially independent, but researching these questions is how we got there.) So I called USAA.

Of course I’m a little cynical about asking an insurance company if I need more insurance. I ended up speaking to one of USAA’s experts who understands both the financial-planning issues and insurance-coverage issues. One of USAA’s challenges at answering this question is that the laws vary by state, and each member’s specific insurance policy may have different types of coverage. It’s not easy to just spit out a blanket answer like “You should have lots of UM/UIM insurance, thanks for calling!”

At the national level, he said that USAA has no problems working with Tricare. He said that UM/UIM coverage is set up for vehicle passengers (guests who might not have Tricare) as well as for drivers and family members. He agreed that in Hawaii, if my spouse and I did not have UM/UIM insurance, then after USAA and the state were finished, any remaining medical expenses would be covered by Tricare. We’d still be on the hook for the non-medical aspects of long-term care, and we still might need long-term care insurance, but Tricare (and Medicare if necessary) would cover our medical needs.

Not only was that good news, but it also matched what we learned from TriWest.

In the end, we decided to keep forking out the $220/year for a couple more years. NROTC has kept our young adult pretty busy with summer school and Navy training, and now she’s living off campus in her own year-round apartment, but she’s still staying with us in Hawaii for 4-6 weeks/year. Although she has her own vehicle insurance policy with USAA, they still consider her a “guest driver” of our car. She won’t have her own medical insurance until she’s commissioned and on active duty, and she’ll only have Tricare coverage from us until she turns 23 years old. If she’s a driver or passenger in our car, UM/UIM coverage still gives us the peace of mind today that we sought when she was a toddler.

Otherwise, our driving habits are minimal– my spouse and I are retired on an island that’s only 30×40 miles, with no other family, and we don’t drive very much. We rarely have passengers in our car, either, and the occasional passenger that we do carry is usually an adult with their own insurance. When our daughter has her own active-duty Tricare insurance and she’s off our policy, then we’ll cancel our USAA UM/UIM coverage.

Keep in mind that every state has different laws, and your family situation might be different from ours. However I finally have a better understanding of Tricare’s coverage and the benefits of UM/UIM insurance. I hope this information helps you decide how to optimize your insurance coverage too!

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Filed Under: Finances · Tagged With: early retirement, financial independence, Insurance, military, military retirement, PostAWeek, Tricare, USAA

USAA starts an online service to sell your car

June 4, 2012 by Doug Nordman · 1 Comment

One of the most critical steps you can take toward financial independence is minimizing the cost of the big purchases– like homes and vehicles. Buying economical vehicles and maintaining them for their entire service life can save thousands in upgrade/replacement costs, and buying used can save thousands more. Even if you’d never touch a cheap used car, it’s still worth a buyer’s time to consult a new car buying service. They can help negotiate a price and financing for you before you even disclose your credit rating to the dealer.

USAA’s Auto Circle has been featured on their website for several years. It originally grew out of their insurance business as a buying service. USAA negotiated with major manufacturers for lower prices, helped people buy their new vehicle, and then sold them the insurance coverage. That later grew into financing and maintenance services.

However part of the vehicle-buying business is trading in the old car– or selling it. Members started telling USAA that they wanted more help with selling their cars, and now the “Sell” tab has been added to Auto Circle.

USAA’s “Sell” announcement happened with typical Ohana Nords timing. The press release is dated 22 May, just three weeks after our daughter bought her first car. She had already spent plenty of time on USAA’s website reading about buying a used car and the insurance options. But then she put in even more hours on Craigslist (in two different cities) sorting through her choices and prices. She spent at least $50 on CarFax verifying that car titles were clean and that their history checked out. Then, of course, there’s always the thrill of driving to an unfamiliar part of town and meeting a total stranger in a dark parking garage.

Now USAA lets members list their cars for sale to each other. They’ve removed the uncertainty of responding to ads and added transparency to the whole process. Their Sell service offers a discount on CarFax. And finally, you know that the USAA account owner you’re meeting is just as interested in selling their car as you are at seeing it. It’s still wise to take the usual precautions, but USAA’s service is already considerably more user-friendly than Craigslist’s “anything goes” environment.

Steve Thompson, USAA’s AVP of their Consumer Lending branch, says that Auto Sell has grown just from the press release. Their Used Car Search feature has nearly 161,000 listings on it (up over 1% since the announcement) and now displays nearly 250 private sellers alongside dealers. As the word on Auto Sell spreads through USAA’s marketing campaign, he expects member use to grow quickly.

Members are always asking for new services, but not every service is used by enough members to justify its expense. Starting this type of offer from scratch can have a significant cost, too, and the membership is pretty demanding about keeping rates low (even while they’re asking for more service). Steve pointed out that USAA already had most of the infrastructure in place for Auto Sell, and the startup cost has been very low. Auto Circle already offered dealer listings for used vehicles, and it was fairly straightforward to add private seller’s listings to the software. USAA already offers financing for used vehicles as well as new, and they already have a system of transferring funds between account owners. That was added to Auto Sell with very little effort. USAA has a very robust suite of mobile applications, both for Android and iPad/iPhone devices, and Auto Sell will soon have its own app.

I asked Steve how far this could go: Homes? Boats? Personal watercraft? Private airplanes? He says that if USAA can insure it, then they want to help buy & sell it too. They’re looking at all the options. They’re even considering partnering with major charities that accept used cars as donations.

When will I start using the service? Probably not for another decade– our cars are only 6-7 years old. We tend to drive ‘em into the ground, so even when we’re ready to replace one of them it’s more likely that we’ll need a tow truck than a selling service. But USAA has made buying a used car easier than ever, and they’ve added tremendous convenience to the ordeal of parsing the options. When our daughter is ready to replace her hauler (hopefully at least a decade from now), then USAA’s Car Sell will make it even easier for her to choose a replacement.

The fine print: Anyone can use USAA’s Auto Circle features, but you have to sign up for at least a USAA financial or investment account. If you want to buy USAA’s insurance on that vehicle then you have to qualify for membership– that means “all who have served honorably, and their families”. If you’re an immediate family member of someone who’s been honorably discharged from the service, you might be eligible. Work through their website application or contact them to discuss your connection.

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Filed Under: Finances · Tagged With: CarFax, Craigslist, early retirement, financial independence, Insurance, military, military retirement, PostAWeek, USAA, Used car

The finances of used cars

April 9, 2012 by Doug Nordman · 4 Comments

Well, it’s finally happened. Our college daughter is moving off-campus and she “needs” a car.

She realizes that this could also be viewed as a discretionary purchase. She’s less than two miles away from campus and could easily walk or bicycle over residential streets. If she had to haul extra books or uniforms then she could use a two-wheel trailer. Public transportation is a poor option in her location, but she could share a ride with a friend. On exceptionally heavy-duty days she could grab a cab for a few bucks.

But ROTC usually starts their day before sunrise (and her roommates do not), so she’d have to do that bicycling even earlier. It rains surprisingly often in her college town, and it’s not the gentle little mauka showers that she grew up with in Hawaii. If she spends the day on campus and then chases down homework & projects with her study group, it could easily be after sundown before she heads back to the off-campus pad.

Car ownership is a hassle because she has to choose which state to register it in. Then she has to go through the registration bureaucracy with her chosen state and do it all over again with campus security. Parking isn’t too bad on campus but she’s going to find out what it’s like on the streets. (Hopefully she’ll avoid theft or vandalism.) In addition to all of that, she’ll have to keep the car maintained & inspected.

Finances are a challenge, but she can swing it. When she turned eight years old she embarked on the “Kid 401(k)” program. (We plagiarized this idea from David Owen’s “First National Bank of Dad” book.) A dollar of her weekly allowance went to this mysterious account, which could be seen on Quicken but could not actually be touched (let alone taken for a test drive at the toy store). However with some carefully managed parental matching and the magic of compounding (in a perfectly risk-free market, of course), by her 16^th birthday she had $5000 to spend on any car she could afford. Eight years of watching the car fund grow avoided a lot of teen angst (and parental debate) about “my first car”.

We thought the money would burn a hole in her pocket, but we’d learned by then that she frequently came up with a third answer to two-choice questions. Sure enough, she didn’t want to put the money in CDs or blow it all on a cheap Honda sedan. Instead, she suggested that we parents should buy a used Prius, and she’d contribute her $5000 to the purchase as a minority shareholder. She’d get to use the car when we didn’t need it, and when she left the islands for college then she’d sell her share back to us. Of course if there was any damage or excess mileage then the value of her shares would be damaged as well, but we were happy to participate in this scheme.

The arrangement worked surprisingly well. She lost a little on a parking-lot ding, but the lesson was only a couple hundred bucks. I was retired by then so she was driving the car to school almost every day. (We live on a 30×40-mile island. She needed all the driving practice she could get.) A Prius is a dream car for both a teen and their parents, because it’s not too dorky for the high-school parking lot and the car’s engineering tolerates teen-driver abuse surprisingly well. We parents also got out of the weekly grocery shopping for nearly two years!

The most gratifying surprise of all was USAA. For some reason they decided that three drivers in a two-car family made our daughter the “occasional” third driver. We explained the reality to them several times, but for nearly four years now we haven’t paid a dime of extra money to have our daughter on our car insurance policy. Of course we parents will pay for her policy while she’s in college, and USAA will do a good job for her there. We expect that three cars and three drivers will really boost our insurance expenses, although our daughter’s first ride is unlikely to need comprehensive or collision insurance. From a parental safety perspective, paying her insurance will make sure that she doesn’t skimp on liability coverage or feel the financial pressure to buy a Yugo. I think we’re also wise to spring for towing insurance, and we’ll take a look at theft coverage.

But we’re seven paragraphs into this post, and while our daughter has nearly $5000 sitting in CDs again she still doesn’t have that car.

We parents feel no obligation to subsidize a car purchase. When I bought my college ride (a studly “arrest-me red” 1981 Mazda GLC two-door hatchback, which to this day I still regret buying new) I borrowed the money from my grandparents.

Showing off "my first ride" to the grandparents. Over a decade later, on the way to the hospital our daughter was nearly born in this car.

My first car: 1981 edition

Dad showed me how to work the loan amortization spreadsheet, and I paid 5% interest. (Kids, this was back when spreadsheets were actually special sheets of paper with the cells already drawn on them.) A year later when spouse’s dad found a used car for her, she also had to pay back their purchase price. We kept those cars running for 12 years, too.

While we parents don’t feel obligated to buy her a car, we agree that this might be a good time for her to get a car. Her other choice would be to buy a car just before she’s commissioned, and that adds even more stressful tasks to the months before graduation. She’d have to adjust to the car very quickly before driving it halfway across the continent to her first duty station. If she buys now she’ll be doing it during this summer’s break, so she’ll have the time to devote to the process. She’ll have two years to get used to the car’s quirks and frailties, and she’ll just have to do a little graduation tune-up before heading to that first homeport.

She could hypothetically spend more than $5000 on her car. For example, she could withdraw her Roth IRA contributions at any time, although that would substantially slow down the growth of her retirement account. I agree that it’s difficult to get a young adult to perceive the wisdom of this long-range deferred gratification, but this life experience will certainly leave an impression on her. I know she’d feel the pain of withdrawing a Roth IRA contribution (to buy a depreciating asset) for far longer than she’d remember any parental admonishments.

It’s also possible for her to find a car loan. I remember that during the last millennium the military-affiliated insurance companies were all too happy to loan us gullible midshipmen an obscene sum of money to buy our ensignmobiles. She can probably swing the same with USAA or another insurance company, although I’m not sure what year of college they start handing out the money.

However much money she’s able to pull together on the purchase, I think she’ll find the math of used cars much more compelling. USAA and Military.com cover the issues in their “new car vs used car” article, which points out that new cars are a much better deal than they used to be. However used cars still avoid that gigantic depreciation hit when you drive a new car off the lot. I think $5000 will force the decision toward a car with a few dings & scratches, too, so she won’t be paying extra for shiny metal (and the car won’t be attracting unsavory attention). Even if the car is 10 years old, I think it’ll still have adequate safety equipment– ABS brakes, power steering, and airbags. I doubt it’ll have an AUX jack for an iPod, let alone a Bluetooth link to a hands-free speakerphone, but she’s a smart engineer and she can figure out the alternatives.

She also has great resources for buying used. She’s already familiar with articles like GIMoney’s “Four keys to buying a used car”. I wrote a four-page “Dad’s Guide to Buying a Used Car” covering everything from the valuation websites to CarFax to test drives and a mechanic’s inspection. I found plenty of helpful Dollar Stretcher and BankRate car-buying articles for her reading, too.

Whether she chooses to buy used now, or continue to bicycle and share rides with friends, she has plenty of time & resources to work through the decision. While she’s out there test-driving her first adult ride, she’s also test-driving the decisions that will put her on the six-lane highway to financial independence.

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Filed Under: Finances · Tagged With: David Owen, early retirement, financial independence, Insurance, military, military retirement, PostAWeek, USAA, Vehicle insurance

Pricing insurance and investments

September 21, 2011 by Doug Nordman · 6 Comments

Today’s (lengthy) post has been inspired by a reader question. Let me try to stop sounding like a USAA fanboy for a few paragraphs and talk about the issues of pricing and service.

“Some of my relatives use USAA and the costs on the services they get are cheaper than what we pay. Which USAA services did you find to be higher than other companies?”

Everyone’s insurance situation is different. We all have different demographics, different records, different needs, and different claims histories. At one end of the bell curve, some of us are just starting out with limited financial resources and we can’t afford to absorb a catastrophic loss. At the other end of the bell curve, some of us can choose high deductibles or even go without a few types of insurance. A good insurance quote has many variables, and I only have three decades of personal experience. What follows is what I’ve personally learned. (I’d love to hear what you’ve learned, especially if it was a bad experience!) Please consider your own personal situation before taking my advice.

Vehicle insurance
From the day I got my first vehicle in 1981, I’ve never found anybody cheaper than USAA. I’ve checked those rates every few years for three decades. That’s not just “cheaper because they have worse service”. That’s cheaper, period. The catch is that you have to be eligible for USAA membership, although these days it’s open to “All who have served honorably” and their families.

I’m a loyal USAA auto insurance customer for life, but not for the reason you might think. First here’s the FTC-required disclosure: “USAA recently paid for my trip to San Antonio to participate in a Blogger Event.” I estimate that they spent less than $1000 for round-trip airfare from Oahu, two nights in a hotel, and four meals. Heck, I probably drank $100 of their coffee.

USAA’s spent a lot more on us than that, though, because here’s another surprising disclosure: we’ve saved far more than a thousand bucks from USAA in just the last three years that our teen’s been driving. You may be wondering how in the world it’s possible to save money when you license a teen driver.

We buy used cars from Craigslist and drive them into the ground. We haven’t carried collision or comprehensive insurance for over 20 years, although we do carry hefty liability insurance. We haven’t filed a claim (or been at fault) for over 25 years. Yet on the day that our daughter passed the exam for her learner’s permit, USAA didn’t jack up our premiums. Gosh knows they could have, and frankly they probably should have. I spent nearly 50 hair-raising hours in the ~~“Seat of Doom”~~ front passenger’s seat while our daughter honed her driving skills, and only parental love kept me from requesting hazardous-duty pay. Yet USAA got nothing for their MUCH higher insurance risk.

When our daughter passed the road test (first try!) USAA could’ve jacked up our premiums again. However they observed that we had a household of three drivers and two cars, so USAA decided to classify our newbie driver as “occasional”. They didn’t even ask if she’d qualify for a good-student discount (yes!) or how much detention she’d served (none that we know of).

Smart business move, USAA. Two retired parents and a teen driver in a house with two cars. Who do you think drove to school five or six times a week, did all the grocery shopping, ran all the errands, chauffeured her parents everywhere, and “socialized on wheels” about 46 hours per weekend? For the next 20 months (until she fled to the Navy recruiting office) our teen wasn’t just an “occasional” driver… she was darn near our ONLY driver. Yet USAA got no compensation for this foolhardiness. I was honest about the situation– I explained it all to the service member rep on the phone while our daughters’ new license was still smoldering from the DMV’s laminater, but the rep said that was their policy.

Good thing that USAA operates as a privately held association for its member’s benefits. If they’d been a publicly traded company, my “disclosures” might have driven their stock price down 10%.

Another military choice (if for some reason you don’t want to use USAA) is Armed Forces Insurance. They don’t insure vehicles in every state, but they may be competitive on price.

If you’re not eligible for military membership, then I’m also a fan of ~~gecko~~ GEICO. That’s mainly because their 8% discount to Berkshire Hathaway shareholders makes their rates almost (but not quite) as low as USAA. Hey, these days you can buy a Berkshire Hathaway share for under $75, darn close to book value. It might be worth the investment to make a GEICO quote cheaper than the competition.

Home insurance
USAA doesn’t insure Hawaii (except for first-time buyers) and in the past has stopped insuring Florida and parts of Texas. So we’re with Armed Forces Insurance, which is cheaper but which is also effectively our only choice. We’ve been with AFI for three decades and their service has been very good.

I still check USAA’s home insurance policies every few years. When they get back into the Hawaii market then we might be able to get a price break for consolidating all our insurance policies.

Liability & umbrella insurance
Armed Forces again, but I wonder what we’d pay if we could consolidate our homeowner’s and liability/umbrella at USAA.

One problem with comparing different insurance companies is their confusing limits. Almost all of them have different deductible settings and special discounts. Even worse, one company will “stack” multiple occurrences of an incident (like a four-car collision) while another will simply limit their total coverage. Another will offer a standard homeowner’s policy but will add extra rules for hurricanes. A third will sprinkle their liability coverage among home, auto, and umbrella policies, and then offer special deals for consolidating your insurance with them.

USAA is working on a rate-comparison utility. The idea is that you’d be able to describe the sort of coverage you need for all your different policies, and then USAA would provide a quote. (They can do that right now, of course.) But instead of leaving you to do the legwork of getting quotes from the other companies, USAA would also do a side-by-side comparison of what all the other companies are offering for the same coverage. (If you fax or scan/e-mail your other company’s rate quote to USAA, then they can do that now too… but you’re doing the legwork.) Of course this innovation isn’t exactly being greeted with cries of joy by the other companies, so USAA is moving cautiously to do what’s right for their members.

Personal property
Sorry, no recent experience in this area. Armed Forces Insurance treated us well for nearly three decades, but we dropped our personal-property insurance when we realized that most of our possessions are Craigslist bargains of marginal value. From a consumer-minimalism standpoint, it’s far better to avoid the need for personal-property insurance than to have a good personal-property policy. At this point in our lives we can self-insure and bank the premium savings. However I wouldn’t recommend this for anyone just starting out or with valuable collectibles or limited assets. If you’re active duty with a substantial investment in uniforms and special equipment, then you need personal-property insurance.

Life insurance
Sorry, I did my career on SGLI (spouse did the same during her military service) and we canceled when we retired. However servicemembers with families may need extra insurance coverage, and USAA has a supplemental policy for that too. Check this article against another insurance company’s policies.

Moving on from insurance, let’s look at a few other financial areas.

Investments
Fidelity & Vanguard are cheaper than USAA and probably always will be, but USAA trades on its trust factor and its ease of consolidating all your finances at one place.

Vanguard is the country’s best investment company– as long as you know exactly what you want and exactly how to go about doing it. Even so, the company manages to annoy even its diehard fans with its processes and rules. Vanguard is a classic example of trading away service for low expenses, and there’s nothing wrong with that– as long as you understand what you’re (not) getting.

Fidelity charges more for service, and they’re one of the nation’s largest 401(k) providers. If your company’s 401(k) is with Fidelity then you’ll find it convenient to consolidate your other accounts with them for their investment tools. They also offer the best combination of low expenses and service. Fidelity certainly has the assets to compete on price, even against Vanguard. However even Fidelity comes up short in some areas, particularly for new (low-balance) investors and Roth IRAs for teens.

USAA is not trying to muscle other financial companies out of the investing market. They don’t have the assets, and investments are not their core business. Anyone can open an investment account at USAA, but the company doesn’t subsidize their products. I spoke to one of USAA’s CFPs about this issue, and he explained that USAA wants to offer its members a convenient (and trustworthy) place to consolidate their business. They want to help the customers who would find it difficult to handle their own investments at any time, let alone during bear markets. They particularly want to take care of military families who are too busy with deployments, transfers, and raising their kids to find the time to focus on their investments. USAA is especially good for deployed military (something that Fidelity and Vanguard just don’t seem to handle well) and USAA’s service will do the right thing for its members. USAA can accomplish all this wonderful service by charging expenses of 0.50%-1%, which they see as a bargain compared to ~~Edward Jones~~ ~~FirstCommand~~ other companies. However USAA can’t compete with the lower prices of Vanguard & Fidelity. If you know what you want, know how to get it, and don’t need occasional hand-holding, then you’ll probably do better at Vanguard & Fidelity. If you’d rather have your own life back while placing all your investments with someone you trust, then USAA is a great choice.

Checking & CDs
Pentagon Federal Credit Union & Navy Federal Credit Union occasionally offer higher rates, but USAA offers check deposit by iPhone and iPad2 (upon approval). USAA also refunds ATM fees from other banks.

Again, anyone can open a checking account at USAA, but PenFed and NFCU have some membership restrictions.

For checking and CDs, I don’t see any particular difference among these three institutions. (Sorry, guys, but they’re low-margin products anyway.) PenFed offers higher rates for lower service, NFCU has more assets and choices, and USAA has great service. I’ve kept my checking with NFCU for over 30 years, mainly from inertia. I usually shop our CDs among the three of them and go with whoever’s offering a special deal or a higher rate. PenFed frequently wins that competition by 0.10%, occasionally to my annoyance at their website quirks and their lack of service.

Credit cards
USAA’s rewards cards aren’t as good as some, but I have a very high limit on my USAA card from my decades of membership. (BREAKING NEWS: I’ve just learned that my Fidelity 2% rewards card may be canceled by their provider, Bank of America. Let me know if you’ve heard about this.) USAA also just approved our college-sophomore daughter for her 2nd credit card based only on her NROTC stipend and six months’ payment record with Amex Blue. Unsurprisingly, this earned USAA yet another raving fan among their Millennial demographic.

Another military-friendly advantage of USAA’s credit card starts as soon as you cross the border. USAA has only a 1% currency conversion fee– a big deal if you’re stationed overseas. They also reimburse most ATM fees in both America and the rest of the world.

Mortgages
PenFed offers lower rates for truly awful service. (See this discussion board thread on our last PenFed refinance. And I do mean “last”.) Spouse and I are serial refinancers who know exactly what we want and how to get it. Even so PenFed managed to make the process extraordinarily painful– not just for us but also the title company. A first-time refinancer would have lost thousands of dollars due to PenFed’s incompetence. Can you tell that I wasn’t very happy with PenFed’s alleged “service”?

NFCU’s refinancing staff has done a better job than PenFed but will still get backlogged with applications if rates are dropping.

If service is important to your mortgage application, then USAA wins again. USAA recently helped a homeowner avoid foreclosure– while she was deployed to Afghanistan no less. USAA was the home’s insurer, not the mortgagor, but they still interceded with the lender (probably to explain SSCRA to them) and helped fix everything when she got back.

Do you have a company to recommend for insurance or finances? Post your (spam-free) comment here or contact me!

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Filed Under: Finances · Tagged With: early retirement, Insurance, military, military retirement, postaweek2011

Five Money Missteps

July 4, 2011 by Doug Nordman · 6 Comments

State Farm Insurance recently published “Five Money Missteps to Avoid” in their monthly magazine. (Thanks for sending this, Jay!)

I’m a sucker for short lists that help you succeed one sound bite at a time. They’re a quick read, they’re easily compared to your own practices, and you don’t feel as if you’re slogging through a personal-finance marathon. The trick is applying them to your own situation, which frequently requires thinking about your own values and then analyzing the math.

Along with the article’s text, here’s a more in-depth discussion of these mistakes from a military family perspective:

1. Tapping into your retirement account early.
Good: Easy money! A quick solution for spending emergencies.

Bad: Higher income taxes plus possible penalties on the withdrawal. Once the money’s taken out of the retirement account, it’s no longer compounding for your retirement. 401(k)s can be tapped for a loan (you’re repaying yourself with interest), but if you lose your job then the loan is either immediately due or classified as an early withdrawal.

Other:
It’s possible to take a loan from the Thrift Savings Plan. If you must tap a retirement account then this one will probably have the lowest interest rate: whatever the G fund yields. That rate will be fixed for the life of the loan (1-15 years). You might even be able to arrange the loan without having to tell your chain of command, which is perhaps more attractive to some servicemembers than requesting advance pay. However the loan effectively busts your TSP account’s returns down to the rate of the G fund without any compounding benefit.

Don’t borrow from your retirement account. Consider the following options:

Roth IRA contributions can be withdrawn any time.
A Roth IRA can also be tapped for a first-time home purchase or educational expenses.
A long-term way to tap into a conventional IRA before age 59½ is a series of “substantially equal periodic payments” based on IRS tax code rule 72(t). Although this method works well for early retirees, it’s exceedingly complex.

Again, although these withdrawals may not be penalized, they’ll be subject to income tax and won’t be compounding away in your retirement account.

2. Paying too much for your mortgage. (Both the payment amount and the interest rate.)
Good: “Gosh, we can live in a great house/location!”

Bad: You won’t spend much time in your great house/location because you’ll be working to earn the money to make the payments. If the housing market drops then you may even owe more money than your home is worth.

Really bad: Active-duty military may have to transfer on short notice, resulting in extra house/mortgage expenses that could lead to foreclosure or even bankruptcy.

Other:
A generation ago, mortgage lenders used to limit the payment to 28% of your after-tax income, while limiting total debt (house, car, student loans) to ~36%. This was conservatively based on decades of payment statistics because the lender was probably going to keep your loan on its books instead of selling it to Wall Street for “creative financial engineering”.

Even with today’s record-low interest rates, mortgage balances have been rising. In “The Two-Income Trap”, Elizabeth Warren claims that two-income couples have spent the last 30 years bidding up the prices of homes in good neighborhoods with good schools. This is especially problematic for active-duty military because they’ll transfer so frequently that they’ll rarely profit from real estate appreciation. Equity gains (if any) will be spent on the transaction costs and unreimbursed moving expenses.

The only time to keep a mortgage with a higher interest rate is when you’re aggressively paying it off early. Do the math: the total difference of the higher monthly payments should be less than the refinancing costs. In most cases this difference will be just a few years of higher payments.

While you’re on active duty it’s almost always safer to rent (or to live on base) than to own. After you leave active duty there will be plenty of time to find a good home and make a fortune in real estate.

3. Confusing sticker price with affordability. State Farm says “Being able to make a monthly payment doesn’t necessarily mean you can afford a purchase. If you want to buy a car but can’t also manage the insurance, gas and maintenance expenses, you can’t truly afford the purchase.”
Good: “Wow, look how much money I can borrow!!”

Bad: Eventually you’ll have to pay it back.

Other:
The root of this misstep is the retailer’s dream: shopping based on how much you can (probably) pay, not on how much value you’ll receive. Every car sales rep knows that buyers are much more susceptible to maximizing their monthly loan payment than they are to assessing how much that vehicle (and the loan) will cost them.

The best approaches?

Save up the cash to buy the car.
Try to choose housing and work locations that minimize the commute.
Use alternate transport (public transportation, carpools, bicycling) as much as possible.
Buy a used vehicle in a model with a high reliability record.

4. Saving for your child’s college education instead of your retirement. State Farm says: “Many families opt to fund college accounts before contributing to their long-term savings. But experts agree that while there are affordable college loans, there aren’t comparable loans to cover basic retirement expenses– so pay yourself first.”
Good: Nothing about this is good for you. It might not even be good for your college student.

Bad: You’re sacrificing your retirement future in the hope that your kids will get a good return on your investment. This is problematic.

Other: Find more food for thought on this controversial subject in these posts:
Early retirement and the kid’s college fund
How much should you save for college?

5. Not protecting your income. State Farm says: “If you suffer a disability and can’t work then every person who relies on your income will be negatively impacted. Disability insurance can protect your family against the loss of a paycheck by making up a sizable chunk of that lost income.”
Good: When you’re on active duty, your disability benefits are far more affordable than the civilian equivalent.

Bad: Most of the military’s occupational hazards tend to be deadlier than civilian careers.

Other:
When you’re leaving active duty, pay close attention to your medical & dental records to make sure that any potential disability issues are evaluated and assessed. This is tedious and time-consuming, so start at least six months early and don’t be dissuaded by the bureaucracy. As hard as it may be, it’s far easier to complete this process on active duty than after you’ve left the service.

If you pursue a bridge career after the military then buy disability insurance. It’s just as essential as life, home, vehicle, and liability insurance.

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Filed Under: Finances, Military · Tagged With: 401(k), 72(t), College, early retirement, Elizabeth Warren, Insurance, military, military retirement, mortgage, postaweek2011, Thrift Savings Plan

Suze Orman advises a dual-military couple

May 4, 2011 by Doug Nordman · 11 Comments

Suze Orman recently gave less-than-great advice to a military couple. If you know JoAnn & Tony from Colorado then I’d love to ask them if their plans have changed. Until we hear from them, today is a great chance to show why financial advisers might not always understand the intricacies of military benefits.

For those of you with recorders, the “It’s A Family Affair” episode started airing 23 April 2011 on CNBC and might still be in rotation. Our dual-military couple start their “How Are We Doing?” segment at about minute 40.

JoAnn & Tony are 52 & 54 years old, empty nesters with all three kids out of college (and two married). From one frame grabbed out of the video it appears that they’re a retired E-8 and a retired O-4 earning $6700/mo in active-duty military pensions. They’re working in bridge careers bringing in another $5500/mo.

Assets include:

Their home valued at $360K.
$477K in retirement accounts (including $123K in their TSPs)
$320K in “emergency” funds
$145K in taxable investment accounts.

They plan to completely retire in three years, and over that three years they could conservatively save another $150K. Their current retirement/taxable accounts add up to approx $942K and could grow to at least $1.1M by the time they retire from their bridge careers.

They owe $116K on the $360K home. No other debt. Expenses are $6035/mo, which probably includes the mortgage payment, and also includes premiums on term life insurance policies.

JoAnn pointed out that they put three kids through college and paid for two weddings without going into debt. I suspect this couple’s military experience has made them experts in frugal living, and I’m pretty sure that they have a very good handle on their expenses and their budget.

When they retired from the military they turned down each other’s Survivor Benefit Plans. They’ve bought term life insurance on each other that they plan to keep until he’s age 70, and then they’ll let the insurance expire. Reading between the lines, I suspect that they plan to defer their Social Security benefits until age 70 so that either one of them will have sufficient pension/SS if the other dies. I think they also expect to save more money on term insurance premiums than they’d pay for SBP.

If they retire in three years, their military pensions will be at least $6700/month pre-tax (plus three years of COLA raises). Conservatively, after taxes their pension estimate would be $5500/mo on expenses of $6035/mo. (Expenses would drop if they paid off the mortgage during the next three years.) In other words, even with a mortgage payment they’d only be dipping into their savings at $535/mo or roughly $6500/year. That’s less than 1% of their retirement & taxable accounts now, let alone what they’d grow to in three years.

Sounds pretty good, right? JoAnn thought Suze would give her an A+. I’d be pretty happy with her situation.

Suze gave her a D-/F.

The failure grade hinged around their lack of SBP. Suze felt that if either spouse died then the remaining spouse wouldn’t have enough pension or SS income to avoid running out of money. Suze says that when they drop the term life insurance at Tony’s age 70 then JoAnn “can’t count on their savings to be there for her if her spouse dies”, leaving her with just one pension and one SS deposit. This is despite the fact that they have $320K in “emergency funds”, presumably in CDs and money markets, and a net worth over $1M.

Suze went on to admonish them to both keep working until they were ages 67– or preferably 70! No other alternatives. There was no discussion about how much they’d need to save to self-insure, or buying an annuity, or changing their asset allocations. Presumably Suze’s staff digs into these details and accounted for their impact. (Those details don’t fit into the show’s three-minute sound bite format.) Suze gave JoAnn a pretty harsh lecture, too, which wouldn’t go down well with a veteran of any rank, and (in my opinion) even insinuated that they were incapable of understanding the complexities of managing their own finances.

Suze completely missed the value of the COLA in their military pensions, their cheap Tricare health insurance, and their cheap long-term care insurance. She gave them no credit for their savings. She even claimed that they couldn’t tap into enough of their 401(k)s before age 59.5, but the words she used leave room for interpretation and she probably didn’t want to go into the details of a 72(t) withdrawal.

In her defense, Suze gets a lot of air time in our house. Each show is worth an hour’s money conversation with our 18-year-old daughter, who now completely knows the rules for “Can I Afford It?” and has the big picture on “How Am I Doing?” When she hears the word “girlfriend”, she knows there’s trouble: “You are SO denied!” is part of our household vocabulary.

Suze is also extremely conservative in her advice. Lately that advice has been to continue working until at least age 67 (if not 70!) to maximize savings and Social Security benefits. She expects “retirement” to mean (1) pension/portfolio income for life with no consumption of principal, (2) healthcare & long-term care insurance, and (3) survivor benefits or life insurance to replace income after a pensioner’s death. Many in her audience are struggling with consumer debt and lack an understanding of the fundamentals of saving for retirement.

Meanwhile, over on Early-Retirement.org, most early retirees are limiting their expenses to 3-5% of their portfolio. Consuming the principal is a given. Most will watch their portfolios to cut back on lifestyle or work part-time if necessary, while others are ready to buy a single-premium immediate annuity if their portfolio dips toward the failure line. If Suze moderated a retirement seminar among these people, her head would explode. But then Suze has one of the world’s best jobs and thinks it’s a wonderful thing to be able to work until age 67.

If JoAnn was over on E-R.org then they’d point out that her $1M of accounts, invested in a 50/50 split of stocks & bonds, would easily throw off an average 4% per year (before inflation & taxes!) for another 30 years. She could start withdrawing 4% the first year and raise it every year for inflation. Meanwhile if her spouse died just after the life insurance expired, and her pension/Social Security income dropped to an absolutely horrific worst-case level of $3000/mo, then she’d still be receiving two COLA pensions that would keep up with her expenses. Even if her widow’s expenses stayed at $6035/mo, she’d only need $3000/mo or $36K/year– less than 4% of their accounts.

In other words JoAnn (when she reached her late 60s) would be spending principal but would be doing just fine. The numbers in the last paragraph don’t account for the fact that the mortgage would be paid off, she’d have cheap healthcare and cheap long-term care insurance, and she’d be able to tap her home equity for large expenses. Even if one of them dies at the absolute worst possible time, their savings would last longer than the survivor. I’d love to confirm the details with JoAnn, but I suspect that her pension/SS income would be more like $4500-$5000/mo and her expenses would have dropped to slightly over $5000/mo.

JoAnn’s risk assessment seems conservative enough to me. However Suze is telling them to hold up their pants with a belt, suspenders, duct tape, SuperGlue, and a nail gun.

Granted, it’s difficult to explain the military retirement system in a three-minute segment. But if it’s difficult to explain Joann’s situation on TV, then why bother? I don’t think Suze should have taken JoAnn’s call, let alone stomped on her with those Suze-Smackdown combat boots. It just seemed mean.

If anyone knows how to reach JoAnn & Tony, retired Air Force veterans in Colorado, I’d love to learn more from them!

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Filed Under: Finances, Military · Tagged With: early retirement, Insurance, military, military retirement, Personal finance, postaweek2011, Survivor Benefit Plan, Suze Orman

Military long term care insurance (part 2 of 2)

April 21, 2011 by Doug Nordman · 4 Comments

The last post discussed the different forces that cause people to pay ever-higher prices for long-term care insurance– at the same time when the industry may be less likely to be able to actually pay their claims.

Those problems haven’t been solved yet, and it may be another 25 years before they’re properly addressed. We can’t afford to wait.

“Conventional wisdom” is that the cost of long-term care could easily be $75K/year, and over $100K/year in high-cost major cities. Many Alzheimer’s patients can be in care for 10 years, and other dementia patients for over a decade. Long-term care inflation is running 5-10%, a rate that’s substantially higher than overall inflation (measured by the Consumer Price Index) and even higher than the average CPI over the last 30 years. A patient’s care at a private facility could easily cost $1M-$1.5M.

It’s difficult to accept a cost that exceeds the net worth of many military early retirees. However the long-term care infrastructure is patched together with a number of payment systems where the “private pay” and insurance companies are subsidizing a portion of the care facility’s budget for their Medicaid patients. There’s also a huge difference in the quality of care between a “warehouse” and a facility that staffs a memory-care unit with stimulating activities. Many more families of dementia patients manage to put together a system of home care with paid help (or no help at all). Admittedly if you’re suffering from dementia then much of the quality difference may not be noticed by you, but you’d prefer to not suffer and to not to be a burden on your family. A million bucks seems like a small price to pay for that level of care.

It’s worth remembering that insurance is designed to help the insured cope with a financial disaster– one that may never happen– by sharing the risks with many other people. Ideally, like fire or vehicle insurance, premiums would cost a fraction of a percent. Unfortunately the reality is that many long-term care premiums for a person in their 60s can run $2000-$3000 per year for essentially a total of $300K of coverage limited to a three-to-five-year period. There are also a number of waiting periods, exclusions, deductions, and other caveats. As the last post pointed out, these premiums may actually be too low for the insurance company to make a profit and stay in business long enough to pay out on your own benefits. It’s difficult to know whether you’re paying the “right price” for your insurance coverage when the insurance companies can’t even confidently predict a profit. They just don’t have enough history with their products to be sure.

Financial advisers usually suggest that retirees with a net worth under $1M may want to skip the insurance. The theory is that the premiums would be unaffordable and unsustainable anyway. If long-term care was necessary, the family would quickly spend down their limited assets and then qualify for Medicaid. Although it’s a financial plan, this is not a very reassuring “solution” for a good quality of life and the surviving spouse’s peace of mind. It’s just a safety net.

For retirees with a net worth between $1M and $2M, the financial theory is that insurance is affordable. The insurance might not cover all the costs but it would offer a reasonable quality of care while preserving peace of mind.

If your net worth is above $2M then the cost of long-term care is not considered a financial disaster. You can self-insure your long-term care risks and probably afford to buy life insurance for estate planning. However most families will always feel a little troubled about the “worst case” scenario, so this situation does not necessarily provide peace of mind. If peace of mind is more important than other retirement spending then the cost of insurance would not have a severe lifestyle impact.

How does the Federal Long-Term Care Insurance Program differ from the rest of the industry? First, it’s the nation’s largest pool of long-term care insurance. This spreads the same risk across a larger crowd of paying customers. Second, the insurance company spends less money to market to the eligible customers and to sign them up. This reduces their costs and commissions, allowing the customers to (hopefully) pay lower premiums. Third, the plan choices are streamlined and heavily monitored. Price increases are subject to extensive justification and negotiation. While this won’t avoid misconduct or higher premiums, it will hopefully offer enough oversight to minimize unpleasant financial surprises. Finally, the eligible customers (particularly the military) tend to be healthier and have access to a better quality of healthcare. This would just seem to raise the probability that they’d survive long enough to make a claim, but it also raises the probability that they’d pay premiums for more years before making a claim. The insurance company would be more likely to make a profit and be able to pay out the claims.

This link summarizes the FLTCIP’s benefits and features. Costs of the standard plans are summarized on this monthly premium chart or through this premium calculator. The FLTCIP website also offers a benefits and features comparison worksheet to help assess other LTC insurance plans. Finally, if you’re a Texas resident, this website offers a comprehensive comparison of premiums for different policies.

The numbers in this post aren’t very reassuring, but it’s important to use long-term care insurance only to minimize the impact of a financial disaster. It’s still possible that neither you nor your parents will need to make a claim, and will pay tens of thousands of dollars over several decades for peace of mind. The key is to stay as healthy as you can, to keep an eye on the costs so that you can adapt your financial planning, and to focus on minimizing the financial impact. Once you’ve taken prudent steps to control the risk, then go out and enjoy your life.

Does this post help? Sign up for more free military retirement tips via e-mail, Facebook, or Twitter!

Filed Under: Finances · Tagged With: Consumer Price Index, Federal Long Term Care Insurance Program, FLTCIP, Home care, Insurance, Long term care insurance, Long-term care, Medicaid, Nursing home

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