Don't be fooled by bogus insurance pitches

AIG policyholders, be wary of pitches to replace your AIG policies with coverage from other companies. It's a move that's not just unnecessary but potentially very costly, according to the New York State Insurance Department.

The department recently told consumers recently to ignore salespeople claiming that they needed to replace their AIG policies because the company was in trouble and unable to pay claims. “That is not only untrue, it is against the law," said Insurance Superintendant Eric Dinallo. Click here for Dinallo's statement.

After the AIG insurance mess: When to worry

Should you worry that your insurance company will be the next AIG?

In a word, no. Insurance experts we've interviewed say the insurance giant was singular in its heavy reliance on mortgage-backed securities.

In fact, AIG policyholders themselves need not worry that their claims will be denied. That's because the AIG that got into trouble was a holding company, totally separate from its subsidiaries that pay claims on homeowners, auto, life, and other types of insurance. Those companies are regulated heavily by the states in which they're domiciled. By law, they must have enough in reserve to pay all their claims, according to the National Association of Insurance Commissioners, the professional organization for state insurance regulators.

As a further protection, state insurance regulators have the right to take over a subsidiary that is in trouble and keep it going in the interest of policyholders. According to Robert Hunter, insurance director for the Consumer Federation of America and former Texas insurance commissioner, insurers must by law pay outstanding claims to policyholders—at full value—before any other creditors can step in.

Finally, state guaranty funds, themselves funded by the insurance industry, are available to pay insurance claims. Every state has a limit on how much it will pay per policy; the minimum for any policy is $100,000. Click here for a map that will lead you to your state's insurance department, where you can check out your state limits. If your company were to get into the kind of trouble that required digging into a state guaranty fund, you might have to wait for your money, but you'd eventually get it.

For the most part, Hunter recommends viewing your insurance coverage the same way you always did. With auto, home, umbrella, and term life policies, you always have the option of moving to another company within a year if you're not happy with the service or want less costly coverage. Check financial ratings from companies like A.M. Best and Weiss Ratings, as well as information from Consumer Reports.

Fixed annuities are considered like insurance, and are protected by the same regulations as regular insurance, the NAIC says. While it's always possible that AIG could sell its subsidiary that administers those annuities, policyholders would notice no change except that the correspondence would come from a different company.

If you've got a variable annuity and want to bail, the stakes are higher. Hunter says you'll need to weigh the cost of paying the policy's surrender charges with potential losses you've already suffered. If you've just purchased the policy a few years ago, those surrender charges could wipe out the premiums you've paid. Waiting longer means you could lose more, but your surrender charges also would  gradually decline.

Returns from variable annuities, which combine a life insurance component with an investment component, will suffer along with the the rest of the market. "If you’re into stocks you’re exposed to downside," Hunter says. "But that you knew when you bought it. It’s an investment."—Tobie Stanger

 

Will your AIG policy pay?

There's not much comfort for investors in AIG, the distressed insurance giant that has lost nearly all of its value in the last few days. But AIG policyholders can feel more confident that their claims will be honored, according to state insurance regulators.

The National Association of Insurance Commissioners (NAIC), an organization representing insurance regulators from every state, issued a statement this week reassuring consumers that their policies are safe:

“AIG’s non-insurance parent company is federally regulated and, therefore, not held to the same investment, accounting and capital adequacy standards as its state-regulated insurance subsidiaries,” said NAIC President and Kansas Insurance Commissioner Sandy Praeger. “The insurance subsidiaries are solvent and able to pay their obligations."

The statement went on to note that in the unlikely event that AIG fails, every state has an insurance guaranty fund, subject to certain limits, similar to the FDIC's coverage for bank accounts. To find out about your state's fund requirements, click here, which will lead you to a link to your state insurance department.

Flood insurance: Do you need it? How to get it

The recent floods in the Midwest have called attention to a major financial peril not covered by the typical homeowners insurance policy. Homeowners policies generally cover damage due to fire, wind, and other calamities, but not flooding. For that, you need a separate flood insurance policy.

Unfortunately, not everyone who needs a flood policy has one, sometimes due to outdated federal flood maps that underestimate the risk. In Cedar Rapids, Iowa, according to one news report, about 4,000 homes were damaged by recent flooding, but only 650 or so carried flood insurance.

Consumer Reports recently published an article on how flood insurance works, who needs it, what it costs, and how to buy it.

Tax deadline reprieve for flood victims--and advice for the rest of us

Flood victims in 10 states will have more time to file their quarterly estimated tax payments, the IRS said today. Normally, those payments would be due today. That means self-employed individuals, retirees and others who file quarterly taxes from certain counties in Iowa, Indiana and Wisconsin will get a reprieve; the IRS says new due dates vary according to location. Earlier this spring, the IRS granted similar relief to residents in certain areas in Arkansas, Colorado, Georgia, Maine, Mississippi, Missouri and Oklahoma. Check the IRS Web site for details on your region.

The agency also mentioned that taxpayers in those areas who suffer uninsured or unreimbursed property damage can claim those losses on their 2007 returns. They can either amend their already-filed returns or file for the first time if they have chosen a filing extension. A spokesperson said the purpose of that option was to provide immediate tax relief to flood victims. Alternatively, victims can claim those losses on their 2008 returns.

The recent flood disasters of the last several weeks are a reminder that even areas not considered flood-prone can be vulnerable. For that reason, consider buying National Flood Insurance for your property. Check our report and FEMA's flood insurance Web pages for details.

Q&A: Why does my insurer need my Social Security number?

Q. Before my homeowners insurer would give me a quote on auto coverage, it wanted my birth date and Social Security number. Why is this necessary?

A. Your personal data allow the insurer to access your credit records, which companies use to place drivers in risk classifications. Those with good credit histories tend to pay less for car insurance.

Of course, you can refuse to give information to any business that requests it. Before you give out your Social Security number, ask why it’s needed, how your number will be used and protected, and what the consequences will be if you refuse. And "don’t give the information out to a company or agent you’re not familiar with," cautions Jeanne Salvatore, vice president for public affairs at the Insurance Information Institute. 

Safety nets offer financial protection in turbulent times

Many financial institutions are feeling the pinch of the credit crunch brought on by the subprime mortgage mess. If worry over the safety of your savings and investments is keeping you up at night, take heart. There are several government safety nets that can help if your money is threatened by a financial institution's insolvency. Here are some of those programs, along with their benefits and limitations.

Banks and thrifts. The Federal Deposit Insurance Corp. provides individuals at least $100,000 in basic coverage per institution. For many retirement accounts, including all IRAs and self-directed defined contribution plan accounts, the coverage is $250,000. Coverage limits for joint and trust accounts are a bit more complicated. FDIC insurance does not apply to safety deposit box contents or to mutual funds and other securities and insurance sold by banks.

Federal and some state-chartered credit unions. Insurance from the National Credit Union Administration generally is the same as for banks and thrifts, though there are some differences. Some NCUA-insured credit unions buy excess share insurance from American Share Insurance that covers every account for an additional $250,000. That coverage is not government-backed.

Non-NCUA-insured state-chartered credit unions. Some states allow state-chartered credit unions to forgo government-backed insurance and opt instead for primary share coverage from American Share Insurance.The insurance provides $250,000 protection for every account. About 5 percent of state-chartered credit unions take this coverage.

Broker-dealers. The Securities Investor Protection Corp. provides each investor with $500,000 protection to recover missing assets, of which $100,000 may be based upon a claim for cash, if a brokerage firm closes or becomes insolvent. In most cases, the SIPC replaces existing securities. It doesn't cover market-related losses or losses due to investment fraud; nor does it cover non-members, even if they are affiliates of SIPC members. Click here for more information.

Defined-benefit pension plans. The federal Pension Benefit Guaranty Corp. covers workers with traditional defined-benefit retirement plans, the kind that provides a set income stream or a lump-sum benefit in retirement. Coverage limits are set yearly and vary by circumstances, such as a worker’s age on the date the retirement plan was terminated or went into bankruptcy. The fund does not cover plans created by the government, church groups, or small professional service employers such as doctors and lawyers.

Defined-contribution plans.  There’s no guaranty fund to cover 401(k)s and other defined-contribution plans, although retirement money invested in banks, thrifts, credit unions, and brokerage firms may be protected by the programs that apply to those institutions.

Insurance. Many insurance products, including fixed-rate annuities and life policies, are protected by a variety of state guaranty associations funded by the insurance industry. Coverage varies by state. The National Organization of Life and Health Insurance Guaranty Associations offers information about your state’s life and health guaranty programs.  Similarly, the National Conference of Insurance Guaranty Funds provides details about guaranty programs for property and casualty coverage.—Anthony Giorgianni

Calif. wildfires underscore need to review insurance coverage

The loss this week of more than a thousand homes to wildfires in Southern California brings into sharp focus the importance for all homeowners to have proper insurance coverage. Many of the homes affected by this week’s fires are likely to be compensated to some degree by homeowners insurance. Any home that still has a mortgage must also have homeowners insurance, and fire is a covered peril under the typical policy.

But many homeowners may find belatedly that their policies won’t pay as much as they had anticipated. Guaranteed replacement-cost coverage, which promises to finance the rebuilding of your home no matter what the cost, is either too expensive or impossible for many consumers to buy today. Some homeowners also forget to add coverage when they make additions to their homes; their original insurance may not cover the cost of rebuilding that additional space.

That’s why it’s important to review your policy regularly to make sure your policy is keeping up with the increasing cost of replacing or rebuilding your home. Click here for our advice on protecting your home and belongings.

Another peril for California homeowners who’ve lost their homes is the specter of being denied insurance for the next home they build. That happened to a number of Californians following the last major fire in San Diego in 2003. In response, Consumers Union, parent organization of Consumer Reports, this week urged California Insurance commissioner Steve Poizner to prevent insurers from refusing to issue or renew homeowners insurance policies based on claims from this fire and other natural disasters.

In addition, Consumers Union offers some useful information, including a resource list and some claims-filing recommendations, for California homeowners who’ve experienced a loss. For others, this concise guide will help you to prepare yourself for a natural disaster.—Tobie Stanger

Self-serving survey of the week

And the winner is: The Guardian Life Insurance Company of America for its just-released “Consumer Attitudes: Whole Life Insurance & Retirement.”

We’ve become accustomed to surveys used to position various financial companies and their products as the answer to Americans’ retirement needs. A lot of money is currently up for grabs, after all. But even we were impressed by the big insurer’s attempt to hoist whole life insurance onto that pedestal.

Yes, whole life insurance, the kind derided for decades by consumer advocates as an overpriced, oversold blend of life insurance and an investment account.

The ancient advice to “buy term and invest the rest” still holds for the huge majority of people, in our view. Term insurance, you’ll recall, is the kind that simply pays off if you die--and it tends to be far cheaper than whole life when people most need it.

Indeed, many people won’t need life insurance at all when they reach retirement age. Unless you still have children or others dependent on you for support, there’s little reason to keep buying life insurance. (If you’re of retirement age and happen to have a whole-life policy you’ve been paying premiums on for years, deciding whether to keep it is another issue.)

Among other things, Guardian says its “research shows that 80 percent of individuals and families owning a whole life insurance policy believe they will have enough money to live comfortably during retirement, compared with 60 percent who do not own whole life insurance.”

Maybe so. But people who believe they own the Brooklyn bridge probably feel much the same. Plus, if they’re looking for a way to keep active in retirement, they can always set up a toll booth.

—Greg Daugherty

PS: Those who agree or disagree, vehemently or otherwise, are invited to comment below. You don’t have to leave your name but please indicate any affiliations, so other readers will know where you’re coming from.

Greg Daugherty’s “Retirement Guy” column is a monthly feature of the Consumer Reports Money Adviser newsletter.