Pricing insurance and investments

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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!

Related articles:
During retirement: take small financial steps
Would you like a financial planner with that?
Chasing yield
USAA: seven money rules to break
Five Money Missteps

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

2 Comments
  1. Wow! No wonder you are a fan of USAA. Interesting points.

    Comment? Question? What's on your mind?