Wynton Magazine

10 Ways to Save on Life Insurance

2008-10-08T07:46:00.000-07:00

The price you pay for life insurance will depend on your age, your health and your habits. That is to say, forget about a really cheap policy if you smoke, have existing health problems or enjoy skydiving. Still, there's plenty you can do to save on your premium and avoid some common pitfalls. Here are 10 suggestions:

Forget Corporate Loyalty
If you get some life insurance as a job benefit, that's fine. But that should never be all you have. You can't count on keeping it if you lose your job or become disabled and can no longer work. There's no federal law that says your old employer must allow you to keep the coverage, even if you foot the bill. So it's a good idea to use any life insurance you get from work as a supplement to what you buy on your own. If your company allows you to buy additional insurance, be sure to compare rates on coverage you can buy from your employer; more often than not, you can find a better deal on your own, although you'll have to qualify medically to get a policy on the open market.

Be Sure to Negotiate
Kevin Campbell thought he was just being honest a couple of years ago when he told a medical examiner for John Alden that he smokes a cigar about once a year. The Ohio physician, who plays racquetball once a week and jogs regularly, had no history of medical problems.

He figured the insurer would understand that cigars were simply a way to mark special occasions. No such luck. As far as John Alden was concerned, there was no difference between Campbell and a two-pack-a-day man. The company quoted him a $2,150 annual premium for a $1.3 million, 10-year term policy, $1,150 more than the nonsmoker's rate.

But Campbell wasn't having it. He wrote a letter to John Alden demanding a nonsmoker's rate. After three weeks of negotiating, the company caved in and cut his initial quote by 50%. Says adviser Michael Chasnoff, who helped Campbell set up the policy: "When I started in this business, I would have never thought to question what an insurance company told a client. Now I can't see a reason not to." (If you do smoke, 'fess up. If you die of a smoking-related illness, your insurer can choose not to pay your death benefit, opting instead to return to your beneficiaries only paid-up premiums plus interest.)

Buy in Bulk
If you're going to buy $240,000 of coverage, you might as well buy $250,000. If you buy $240,000 worth, you'll pay $274.80 per year. If you buy $250,000, it will cost $260. How's that?

Sometimes more insurance costs less, especially as you approach multiples of $250,000. So, for example, a 35-year-old male nonsmoker buying $100,000 to $249,999 of renewable term insurance from USAA Life would pay $1.02 per $1,000 of coverage. For $250,000 to $499,999 of coverage, the rate drops to 92 cents per $1,000.

Health Problems? Seek Out a Specialist
Forrest Luu, 37, has diabetes. When he set out to buy life insurance, he asked his insurance agent, Murray Halbfish, to shop for a diabetics-friendly company. The best deal Halbfish came up with: Manhattan Life Insurance, which quoted him an annual premium of $891 for $100,000 of whole life. Other companies wanted as much as $1,500. As Luu found out, some companies specialize in particular diseases or lifestyles. For heart disease, cancer or other "impaired risks," companies such as Connecticut National and U.S. Financial offer competitive rates. These companies employ underwriters who are trained to analyze the extent of a given problem. Instead of lumping all diabetics into one group, they rate differences between diabetics who take their medication regularly and diabetics whose disease is out of control. A person whose disease is under control could save as much as 50% on a premium.

Don't Get Churned
That agent who talked you into turning in your old whole life policy for a new one (More coverage! No extra premiums!) didn't do you a favor. In fact, you've been scammed. More often than not, victims of this practice, known as "churning," receive a bill for new premiums within a year or two — after the value in their old policy has been exhausted. But you can get help if you've been ripped off by your agent. Contact your state insurance commissioner to find out how to proceed. Dozens of companies have agreed to compensate victims of these and other illegal practices. Don't forget to complain to the main office of your insurance company directly. Many insurers are now fairly quick to make whole life customers who have been hoodwinked by their agents.

Clean Up Your Act
You may know that you can cut your insurance premium if you stop smoking and lose weight, but you may not know just how much you can save. Well, how does 50% sound? That's right, most insurance companies charge twice as much to insure a smoker. The rewards for getting back down to the right weight for your height can be just as great.

That's what Quotesmith President Robert Bland learned. When Bland, who's five feet, 11 inches and 245 pounds, went shopping for $3 million of term, he got premium quotes ranging from $4,000 to $7,000 a year. When he balked at those prices, he was told that his premium would be more like $3,000 if he were 35 pounds lighter. For the moment, Bland has decided to go with a $4,000 policy from Investors Life of Nebraska. All the same, he's considering losing weight and reapplying.

Don't Get Taken for a Rider
Insurance companies have come up with a host of extras to pad your life insurance bill, most of them not worth the paper they're printed on. Consider the accidental-death rider, more commonly called double indemnity. For about $1 or $2 per $1,000 of coverage, an insurance company promises to pay your survivors double the face amount of a policy if you die in an accident.

But it's foolish to speculate on the manner of your demise, especially since accidental death is relatively rare. If you really want to gamble, buy lottery tickets. Buy enough coverage to support your dependents regardless of the manner in which you shuffle off this mortal coil.

The "waiver of premium" rider is another to skip. Under this rider, which can cost as much as 10% of your annual premium, your insurer will continue your coverage in case you're disabled. But you should already have enough disability insurance to cover living expenses. If you do, you don't need a waiver of premium. Finally, some companies offer spousal or dependent riders that add a term-insurance element to your whole life policy that will cover your spouse or your children. Chances are, if your spouse needs term insurance, you can find a cheaper policy. And unless your child is supporting the family, he or she doesn't need insurance.

Know What You're Buying
Agents call it the "L" word. Life insurance, that is. Some companies teach their agents never to utter the word to prospective clients. Thus you are more likely to hear a host of euphemisms such as mortgage-protection policy, retirement plan and tax-free savings plan.

Don't be taken in. What agents are selling is whole life insurance, pure and simple. In their sales pitches, agents like to emphasize the tax-free accumulation of cash value in a whole life policy but what they don't tell you is the down side: High commissions, seemingly endless payments before any sizable cash value is accumulated and murderous penalties if you want to get out early.

Try a Low-Load Company
It's a dirty little secret that insurance agents don't want you to know. But some companies sell life insurance at little or no commission. That can mean big savings for you, if you're the type who doesn't need much handholding to make a decision.

A few of them even sell whole life policies this way. Ameritas (800-552-3553) is a leader in the low-load business with hard-to-beat rates on all types of policies. For example, a female, age 30, can buy $250,000 worth of coverage for just $162 a year. Northwestern Mutual (414-271-1444) is a traditional insurer that sells some low-load policies through its agents. It has some of the best prices around, particularly on whole life policies.

Avoid Hidden Fees
Convenient monthly payments, automatically deducted from your checking account. What an easy way to pay your life insurance premium. But before you sign up, ask a simple question: What's this going to cost me? At many insurers, the answer is plenty. Metropolitan Life, for example, charges some life policyholders fees equal to 15% to 20% of the annual premium simply for the privilege of making monthly payments. Charges like these are often built into the payments, so you may not even know they put the bite on you.

Life Insurance Blunders to Avoid

2008-10-08T07:22:00.000-07:00

Other than insurance salesmen, no one likes to talk about life insurance. After all, no one wants to be reminded about their looming death. However, it's hard not to suspect that keeping this subject taboo is more in the interest of insurance companies than consumers. Better informed buyers are more likely to spend wisely. And like dentistry, life insurance can't be ignored forever.

Five for the Money usually advises readers on how to spend or invest wisely. This week, we're twisting it slightly to look at some of the biggest mistakes people make after inhaling deeply and deciding that as adults, they should probably pick up some life insurance.

Don't buy the wrong amount

There are rules of thumb about exactly how much life insurance one needs, with 5 to 10 times an annual salary being a common guideline. But these numbers should be taken for what they are: very general numbers. They don't account for an individual's requirements. "The need that we're often talking about is an income replacement," says David Greene, of financial planning firm Cooper, Jones & McLeland, so that survivors don't encounter financial havoc in the wake of a loved one's death.

Starting from the conventional wisdom, Greene says policy holders with a good pension might be able to get by with less than the standard amount. A more common problem is not buying enough—this is even truer in cases where small children are involved. Greene and other experts caution that lump-sum payments that look substantial on paper often don't add up to much compared with a consistent salary spread over many years. Then again, it's hard to imagine too many complaints about receiving too much insurance money.

Don't trust just any insurance agent—shop around
The life insurance options available are dizzying. Charles Massimo, president of CJM Fiscal Management, which works with wealthy clients in Garden City, N.Y., advises against limiting yourself to insurance advisers who are "captive" to one company. This is doubly true for people worried about their health. Insurers calculate risk factors independently of each other, so they won't all give health conditions such as heart disease the same consideration in evaluating an application. "Some [companies] are more aggressive with different risk factors," Greene says. A good place to compare offers from different insurers is Insure.com.

Weighing your options doesn't end with the purchase of a policy. "The standard is, people buy insurance and they put the deposit in the safe-deposit box and never look at it again," Greene says. That's a mistake. The fact is people's circumstances change, and so do the offerings from insurance companies. The policy that best fit your circumstances five years ago might not always be the right choice.

Don't be cagey
Most people would rather not talk about their life insurance, what with its intimations of mortality and the implication—still considered tacky in some circles—that a dollar amount can be placed on human life. But if holders don't talk about their policies with the beneficiaries, letting them know what company holds the policy, if not the amount, something worse can happen: Human life becomes worth no dollar amount at all.

Sometimes survivors simply don't know about the deceased's policies, says Steven Weisbart, an economist with the Insurance Information Institute. "It happens much more than it should," he says.

Corporate consolidation can also complicate matters. A policy bought 40 years ago could have been through an outfit that has since been assimilated by an insurance giant. Insurance companies, Weisbart says, like to pay out on policies as it makes for good public relations. Even so, it "becomes very hard to make a claim unless you've got good documentation," he adds. Not knowing where to begin can't help.

Don't forget, the world goes on
One of the hardest things for life insurance policy holders to realize is that they'll no longer be around when the insurance pays out. The purpose of it is to protect their immediate family or beneficiaries.

Weisbart says insufficient foresight can hurt relatives. For example: Say a policy holder's spouse receives health insurance from the policy holder's employer. In planning how much a life insurance policy pays, then, the primary caregiver should account for the spouse no longer receiving health insurance. In a slightly less dramatic example, buyers should remain aware that the cost of big expenses like college will continue to increase after they pass away.

Don't depend on employer insurance
When asked about life insurance, it can be easy to choose a policy provided by an employer with the premium deducted from a paycheck. But those policies can often provide a false sense of security. Among their other problems, they sometimes expire at retirement, when buying a more comprehensive policy could be more costly.

Worse, group life insurance is less tailored to an individual's health and needs. And often, the policy isn't worth enough money, Weisbart says. "Most group life coverage [plans] are really pretty modest, one or two times salary," he says. "In relation to what [beneficiaries] need, it's not a lot of money." In the end, buying the wrong policy can leave your family shortchanged.

Long-Term Care Insurance: Understand Your Options

2008-09-21T13:30:00.000-07:00

Although America as a nation is aging rapidly, many people avoid thinking about the day when they or a loved one will need long-term care services and, therefore, fail to plan. Others wrongly assume that Medicare or standard health insurance policies will cover the costs of long-term care services. This article provides an overview of long-term care insurance, covering issues such as when to purchase coverage and what to look for in a policy.

Long-Term Care Insurance

What Long-Term Care Insurance Is -- And Is Not

Shopping for Long-Term Care Insurance: Consumer Guidelines

Summary

The aging of America, and the increasing health care expenses that will follow, are the biggest factors contributing to the growing interest in long-term care insurance.

Demographers predict that a third of all people who reach age 65 will need to enter a nursing home at some point in time.

Today the average cost of private nursing home care in America tops $74,000 a year, making private long-term care insurance a potentially smart investment for individuals who want to protect assets and avoid burdening their family.

In general, long-term care insurance covers a range of nursing home and community-based personal care services for individuals who need ongoing assistance due to illness or disability.

Neither Medicare, Medicare supplemental coverage, nor standard health insurance cover long-term care expenses.

Premium costs increase as you age, so the younger you are when you purchase a policy, the lower the premiums you'll pay during the life of the policy.

McCain defends retirement accounts amid stock dive

2008-09-21T13:21:00.000-07:00

McCain, aides defend idea of private Social Security accounts amid Wall Street turmoil, Wall Street turmoil left John McCain scrambling to explain why the fundamentals of the U.S. economy remained strong. It also left him defending his support for privately investing Social Security money in the same markets that had tanked earlier in the week.

The Republican presidential nominee says all options must be considered to stave off insolvency for the government insurance and retirement program, and top McCain advisers say that includes so-called personal retirement accounts like those President Bush pushed in 2005 but abandoned in the face of congressional opposition.

The aides tried to soothe voters concerned about the bankruptcies, takeovers and bailouts on Wall Street by declaring McCain favored only the option of such accounts, just for younger workers, and most likely in a conservative investment vehicle such as bonds.

Private accounts for Social Security are "always an easier sell when the markets are going up instead of going down," said David Wyss, chief economist at Standard & Poor's. "I don't think this is a good week to sell that one politically, but you're looking at the long term here. You're investing your retirement funds for 20 or 30 years down the road."

A headline Friday in the Manchester, N.H., Union Leader, the leading paper in that battleground state, underscored the political challenge. "Pension funds for workers take a hit," read a story about a roughly $500 million decline the past three months in the state's public pension fund.

Democrat Barack Obama opposes the accounts and has warned they could be a precursor to eliminating the government entitlement program. Critics also note that one of McCain's top economic advisers is former Texas Sen. Phil Gramm, a free-marketeer who pushed the idea of a privatized retirement system as far back as 1988.

Obama, a senator from Illinois, has suggested shoring up the program by imposing a Social Security tax of no more than 4 percent on earnings above $250,000; currently, only the first $102,000 in income is subject to the tax. Income in the "doughnut hole" between those figures would not be taxed.

McCain calls such a tax punitive and counterproductive. He also says refusing to discuss private accounts amounts to political posturing. He says his willingness to broach the subject is emblematic of his "Country First" campaign motto and harkens back to bipartisan discussions between President Reagan and Democratic House Speaker Tip O'Neill Jr. the last time the system was revamped in 1983.

"We have to have some straight talk for America. The Social Security system is going to go broke. It will not be there for present day men and women who are working. And we have to fix it and we have to do it in a bipartisan fashion," the Arizona senator said Wednesday during a town hall meeting with running mate Sarah Palin in Grand Rapids, Mich.

He added: "We have to realize that the worst thing we can do is continue to allow these unfunded debts to mount, and to pass on to another generation of Americans a burden that we've imposed on them."

McCain aides bristle at talk of "privatizing" the Social Security system.

"He's not ever talked about outsourcing Social Security into the private sector," senior adviser Steve Schmidt told reporters Thursday. "What people talk about with regard to personal accounts is giving the American people an ability to have a greater return on an investment -- it could be bond funds, for example."

Wyss, the Standard & Poor's economist, said the concept of supplemental private accounts is valid, but there are so many variables in constructing them it makes discussion difficult. He also warns that it's too late to make changes for the Baby Boom generation, which has begun retiring. That is reducing the number of workers paying into the system at the same time there is an increase in benefits being paid out.

By about 2020, more people will be drawing on the system than will be paying into it, and the government projects Social Security could be insolvent around 2040. Those projections change slightly each year.

"I think it's a good idea, but again, it doesn't solve the immediate problem," said Wyss. "And you also have to make sure you maintain an adequate safety net because you don't want people eating cat food in retirement."

What You Need to Know About Credit Scores

2008-09-21T13:17:00.000-07:00

You've probably realized by now that your principal in high school was full of it when he or she warned you about your "permanent record." There is no such thing.

But there is, in a way. It has nothing to do with cutting class or smoking out by the football field. It's called your credit report, and it shows your current credit accounts, outstanding debts, and payment history going back for several years. Credit cards, student loans, auto loans: They're all there, and if you have a problem paying any other kind of bill or have an overdraft on your checking account, it will show up, too.

High Score

So why is this important? Well, credit reports yield credit scores, a powerful little three-digit number ranging from 300 to 850. A bad credit score -- less than 620 is considered subprime -- will have you paying 10.99 percent interest on a car loan when your friend with squeaky-clean credit is paying 6 percent, or 29 percent on a credit card when your friend's card charges 12 percent.

Credit scores can also affect your rates for mortgages and home, auto, and life insurance.

And increasingly, bosses are conducting credit checks when they make hiring decisions.

Credit scores are a great scam for the credit card industry. Without fail, when I give a talk on college campuses about the dangers of credit cards, someone in the audience asks, "But don't we need a credit card to build a good credit score?" And I have to say, well, yes. You need those credit cards to get a mortgage or an auto loan down the road. But you don't have to run up any balances! The most cautious thing to do is to use your credit cards to make a regular payment, like a cell phone bill, and then set up automatic bill paying online each month.

There are lots of businesses, some fraudulent, offering to "repair" your credit.
But as the Federal Trade Commission wants you to know, self-help is the best approach. Here's what you can do:
The Score Decoded

Requesting your credit reports and scores is a good way to start taking control of your money. There is one most common credit score used by banks to make decisions: the FICO score, developed originally by Fair Isaac Corporation.

FICO scores, once again, range from 300 to 850. Three different credit bureaus combine information from credit card companies and banks to make credit reports: TransUnion, Experian, and Equifax. Each of these bureaus may have slightly different information on you in their reports, which yields a different score. The Equifax score is seen by some as being most similar to what banks actually see when they pull your credit report.

By federal law, you are entitled to one free copy of your credit report each year from each of the credit bureaus. Go to annualcreditreport.com to request them. You will have to pay about $7.95 a pop to see the scores as well.

To write this column, I pulled my free credit report from TransUnion. It's pretty easy to read, showing my name, Social Security number, and current address, as well as two previous addresses and the payment history for my credit cards: a Capital One Visa, a Chase/Bank One Visa, and a Washington Mutual card that I've since canceled. I don't have any balances on the cards right now, and I have made nearly all on-time payments. But my credit score is only 705, shy of the "excellent" cutoff of 720.

This is primarily because last year I traveled out of the country, moved apartments, and forgot to pay a $40 charge on my Capital One Visa. The payment went overdue for 90 days, until Capital One finally reached me on the phone. So now I am patiently repaying my cards on time each month, via automatic direct debit, and waiting for my score to improve. On the advice of TransUnion, I'm also going to open another credit card to increase my available credit, which could help improve my score.
The Breakdown

Your credit score is based on several factors, many of which will hit Generation Debt harder than older folks.

1. Payment history -- the biggie, about 35 percent of a FICO score. Also the no-brainer: Any late payments or overdrafts, like mine, will ding your credit score for several years.

2. Amount owed -- about 30 percent

This figure compares the amount you owe to your available credit. So someone who has a $2,000 balance and a $2,000 credit limit -- they're maxed out -- will look worse than someone who owes $3,000 but has cards with $30,000 worth of limits. This may hurt folks with large student loan balances. It's also the reason that you don't necessarily want to close accounts after you pay them off -- it's better to leave them dormant to raise your available credit.

3. Length of history -- about 15 percent

The longer your perfect record of on-time payments, the better your score -- so if you've only been out of school for a couple of years, your credit score won't be as high as it can be down the road if you keep it clean.

4. New credit -- about 10 percent

Repeatedly shopping for credit -- either credit cards or bank loans -- can hurt your score because it makes you look desperate. I learned this the hard way when I got out of college. I had smugly avoided signing up for a student credit card. Well, suddenly I was a freelance writer's assistant, with no regular income. I applied for and was rejected from so many cards in the first few months out of school that I was told I couldn't file any more applications for six months. I finally got a Capital One Visa with a $300 limit. All of this probably hurt my credit.

Message: Confine your credit card shopping to 30 days, and, yes, get a student card if you're in school.

5. Miscellaneous-- about 10 percent

This includes stuff like having a nice "mix" of credit cards, auto loans, and other types of credit.

Mr. Fix-It

First, make sure your report has no mistakes. The Public Interest Research Group found in 2004 that 79 percent of credit reports had some kind of mistake. One out of four had a serious error that could lead to denial of credit.

If you're young and have never requested it before, your credit report may contain information from someone else with the same name. Or there may be duplicate information.

Evan Hendricks, an expert who wrote the book "Credit Scores and Credit Reports", told Bankrate.com that student loan borrowers especially have to watch out:
"Student loan information will sometimes multiply like rabbits on the credit report because student loans are sold from one company to another, and the old company continues reporting and then the new company continues reporting it, and it might make it look like you have more loans than you actually do. Then if they're showing any late payments, you can get hit with double whammies on late payments as well."

If you have a mistake, you need to send a dispute letter to the credit bureau and ask them to "reinvestigate" it. Include copies of any supporting evidence like your drivers license. Keep records of everything in writing. You can also request that the bureaus include a note in your file to help explain any delinquencies -- e.g., you were taking care of a sick parent or were unemployed. "Credit Scores and Credit Reports" has all the info on how to do this for free, yourself.

If your credit report is accurate, do what I'm doing now. Set up automatic direct debit to pay all your bills on time, on the day they're due. Start paying down your credit card balances, starting with the highest-interest cards, paying at least $10-$15 over the minimum each month. But don't close any accounts -- remember, you need a high ratio of available credit to used credit.

Take courage. It doesn't happen overnight, but after seven years, most blemishes on your credit report -- even bankruptcies -- are erased by your most recent payment history. Take comfort in the fact that there isn't really a permanent record after all.

by Anya Kamenetz

The Financial Crisis: Getting to the Roots

2008-09-21T12:24:00.000-07:00

It's clear that the economy is in for a rough ride over the next two years -- and possibly longer. As unemployment rises and the credit markets tighten further, consumers will rein in their spending, leading to more layoffs and another downward cycle. Housing prices may continue to slide, and lines of credit shrink further.

This tumultuous week, amid the Lehman Brothers bankruptcy filing, Bank of America's takeover of Merrill Lynch, and the AIG bailout, Treasury Secretary Henry Paulson suggested a bright spot in the mess. The federal bailout of the government-sponsored entities Fannie Mae and Freddie Mac will make mortgage credit more widely available, he said, which could help stem the housing slide.

"The root of the problem lies in this housing correction, and until ... the biggest part of that is behind us and we have more stability in housing prices, we are going to continue to have turmoil in the financial markets," Paulson said. "That's why the actions we're taking with Fannie and Freddie are so important...that is the key to turning the corner here."

Where It All Began
Well, if we're defining the root of the problem, I'd go back a little farther than that. The root of the problem is a cocktail of debt with a chaser of pathological optimism, and many Americans got drunk on both. Awash in credit offers, they bought homes, cars, and lots of other stuff they couldn't afford, and hoped for a best-case scenario, in which their home values and rising salaries would take care of it.

There were plenty of foolish, crooked, and greedy intermediaries who played key roles in the meltdown -- from the Federal Reserve, which held interest rates too low for too long; to mortgage brokers who defrauded borrowers; to the investment houses that securitized and sold toxic mortgage derivatives; to those who aggressively pushed for deregulation, insisting the free markets would naturally behave themselves. Like, say, a compulsive shoplifter let loose in the Mall of America.

But what happened on Wall Street this week was fundamentally linked to the decisions made on Main Street to borrow like crazy and hope for the best. The reality is, lots of responsible people did not accept the invitation to get in over their heads during the boom. (I wrote about that in this column in February 2006, in which I predicted the Fannie and Freddie takeover. Four months later, Fed Chairman Ben Bernanke was still suggesting that U.S. households were "managing their personal finances well.")

The Worst Case Scenario
And now, in a worst case scenario, the price of living a leveraged life becomes abundantly clear -- and its effects go well beyond cash-flow issues.

Debt hurts, physically: Twenty percent of people with moderately high or high levels of debt stress also report more incidents of mental and physical health problems, according to a recent survey by AOL Health and the Associated Press. Their ailments range from back pain to migraines, ulcers to heart problems.

The leveraged life also changes your character and your relationships. I recently received an email from a reader who paid off three credit cards and an auto loan after committing to using software to track and restrain his spending.

"Debt not only costs money, but it also forces you to sacrifice who you are as an individual," he wrote. "Debt has made me stretch my morals so that I feel I have to hold my tongue or temper my opinion in my profession. After all, my debt required I stay employed. It has cost me time with my family because I had to work to make the payments. As a result, debt cost us a balanced life."

A Founding Father Debtor
And debt can make you feel wretched, as was the case for Thomas Jefferson, who in 1787 wrote to his friend Nicholas Lewis, "The torment of mind I endure till the moment shall arrive when I shall not owe a shilling on earth is such really as to render life of little value."

That moment never arrived; he died with $107,000 in debts (about $2 million today). Jefferson shared similar traits with modern-day debtors, in that he took big risks, was overly optimistic, and remained deeply in denial when things turned against him, says Barnard Professor Herbert Sloan, a historian and author of "Principle and Interest: Thomas Jefferson and the Problem of Debt".

Jefferson's trouble began when his father-in-law died, and he and his brothers-in-law quickly divided the estate before its debts were settled. It made each of them liable for the whole amount due -- which turned out to be more than they expected.

Debt Through the Centuries
"People were aware in Virginia in the 1770s that this was not the smartest way to go, and that people who did this often got into trouble," says Sloan. "But it was risk-taking on his part. He was a little too optimistic about what would happen, and he got caught. As a result of things he could not have foreseen, he got badly burned and suffered for the rest of his life, because he was never able to feel [financially] secure."

Jefferson sold land before the American Revolution to pay off the debts, but by the time he received payment, the paper money was worthless amid the skyrocketing inflation of the war years. Cornwallis ravaged Jefferson's plantation during the war, and British creditors resumed their collection efforts when the conflict ended. Jefferson was burned again when he co-signed notes for a relative who reneged on debts in the financial panic of 1819. Only Jefferson's public stature prevented creditors from seizing Monticello and selling it out from under him during his lifetime.

"He's got this optimistic outlook, a kind of sign of his failure to face reality," says Sloan. "Even after everything has collapsed, in 1823 he's drawing up these plans: 'If only the following 25 assumptions work out, I'll be debt free by...' You can see him playing these games with himself."

Jefferson's experience with personal debt reinforced his views on the evils of public debt. "Loading up the nation with debt and leaving it for the following generations to pay is morally irresponsible," he wrote. "Excessive debt is a means by which governments oppress the people and waste their substance. No nation has a right to contract debt for periods longer than the majority contracting it can expect to live."

Elements Beyond Our Control
And that's the rub. Because I'm debt-free (except for a fixed-rate mortgage) and save regularly, my short-term financial life isn't disturbed by the immediate crisis; I plan to stay the course, avoid debt, build up cash, and watch closely for investment opportunities. (I distinctly remember the dirt-cheap, one-bedroom co-op I passed up in Manhattan in the early ‘90s crash. This time I'm prepared.) But it's the elements I can't control that are troubling.

American taxpayers have had an unprecedented financial obligation dumped in their laps in the Fannie/Freddie bailout. William Poole, former president of the Federal Reserve Bank of St. Louis, told Bloomberg Radio that the two entities have $6 trillion in liabilities. If just 5 percent of the loans on their books go bad, the cost will be $300 billion.

The government has made a two-year, $85 billion loan to insurer AIG, which will supposedly be paid back with interest. Gee, how many of you think that will go as planned? Then there's the $30 billion tab to bail out Bear Stearns back in March.

What sort of oppression -- as Jefferson put it -- will these decisions bring? Will savers regret putting money away all these years (rather than living it up on borrowed funds) if the federal government prints money like crazy to pay for the mess and inflation continues to soar? (I really don't need to know first-hand how Jefferson felt.) How high will income taxes go? Will the "permanent" tax breaks on vehicles like 529 plans and Roth IRAs eventually become not-so-permanent?

I asked Sloan how Jefferson would feel about the bailouts.
"Awful," he said. "All the [founding fathers] are turning in their graves."

by Laura Rowley

How To Set A Forex Trading Schedule

2008-09-19T11:39:00.000-07:00

Many first-time forex traders hit the market running. They watch various economic calendars and trade voraciously on every release of data, viewing the 24-hours-a-day, five-days-a-week foreign exchange market as a convenient way to trade all day long. Not only can this strategy deplete a trader's reserves quickly, but it can burn out even the most persistent trader. Unlike Wall Street, which runs on normal business hours, the forex market runs on the normal business hours of four different parts of the world and their respective time zones, which means the trading day lasts all day and night.

So what's the alternative to staying up all night long? If traders can gain an understanding of the market hours and set appropriate goals, they will have a much stronger chance at realizing profits within a workable schedule.

Know the Markets
Currency trading is unique because of its hours of operation. The week begins at 6pm EST on Sunday and runs until 4pm on Friday.

But not all hours of the day are equally good for trading. The best time to trade is when the market is most active. When more than one of the four markets are open simultaneously, there will be a heightened trading atmosphere, which means there will be greater fluctuation in currency pairs. When only one market is open, currency pairs tend to get locked in a tight pip spread of roughly 30 pips of movement. Two markets open at once can easily see movement north of 70 pips, particularly when big news is released.

First, here is a brief overview of the four markets (hours in EST):

* New York (open 8am to 5pm): According to "Day Trading the Currency Markets" (2005) by Kathy Lien, New York is the second largest forex platform in the world and is watched heavily by foreign investors because the U.S. dollar is involved in 90% of all trades. Movements in the New York Stock Exchange (NYSE) can have an immediate and powerful effect on the dollar. When companies merge and acquisitions are finalized, the dollar can gain or lose value instantly.

* Tokyo(open 7pm to 4am): Tokyo takes in the largest bulk of Asian trading, just ahead of Hong Kong and Singapore. It was the first Asian trading center to open. The best currency pairs to aim for (for traders looking for a lot of action) are USD/JPY, GBP/CHF and GBP/JPY. The USD/JPY is an especially good pair to watch when the Tokyo market is the only market open because of the heavy influence the Bank of Japan has over the market.

* Sydney(open 5pm to 2am): Sydney is where the trading day officially begins, and while it is the smallest of the mega-markets, it sees a lot of initial action when the markets reopen on Sunday afternoon because individual traders and financial institutions try to stabilize after all the action that may have happened since Friday afternoon.

* London (open 3am to noon): The United Kingdom dominates the currency markets worldwide, and London is its main component. London, known as the trading capital of the world, accounts for roughly 34% of global trading, according to a report by IFS London. The city also has a big impact on currency fluctuations because the Bank of England, which sets interest rates and controls the monetary policy of the GBP, has set up shop in London. Forex trends often originate in London as well, which is a great thing for technical traders to keep in mind.

Overlaps in Trading
As stated earlier, the best time to trade is when there is an overlap in trading times between open markets. Overlaps equal higher price ranges, resulting in greater opportunities. Here is a closer look at the three overlaps that happen each day:

* U.S./London: (8am to noon): The heaviest overlap within the markets occurs in the U.S./London markets. According to Kathy Lien, more than 70% of all trades happen when these markets overlap because the U.S. dollar and the euro are the two most popular currencies to trade. If a trader is looking for the most optimal time to trade (when volatility is high), than this would be the ideal time.

* Sydney/Tokyo (2am to 4am): This time period is not as volatile as the U.S./London overlap, but it still offers a chance to trade in a period of higher pip fluctuation. The ideal currency pair to aim for in this period is the EUR/JPY pair, as these are the two main currencies influenced.

* London/Tokyo (3am to 4am): This overlap sees the least amount of action of the three overlaps because of the time (most U.S.-based traders won't be awake at this time), and the one-hour overlap gives little opportunity to watch large pip changes occur.

News Releases
While understanding the markets and their overlaps can aid a trader in arranging his or her trading schedule, there is one influence that should not be forgotten: the news release.
A big news release has the power to enhance a normally slow trading period. When a major announcement is made regarding economic data - especially when it goes against the predicted forecast - currency can lose or gain value within a matter of seconds.

However, just because dozens of economic releases happen each weekday in all time zones and seemingly affect all currencies, it does not mean a trader needs to be aware of all of them. It is important to prioritize these releases so that the important ones are watched and the lesser ones are simply monitored for surprises.

Some of the bigger news releases to watch for include:

* interest rate decisions
* CPI data
* trade deficit
* consumer consumption
* central bank meetings
* consumer confidence
* GDP data
* unemployment rates
* retail trade

Conclusion
When setting up a trading schedule, it is important to run a strong balance between market overlaps and news releases. Traders looking to enhance profits should aim to trade during more volatile times, while keeping an eye on what economic data is released when. This balance allows part-time and full-time traders the opportunity to set a schedule that gives them peace of mind, knowing that opportunities are not slipping away when they are not watching the markets.

Health Winners & Losers: Abbott

2008-09-19T11:30:00.000-07:00

Health stocks were nothing to flirt with Thursday as the major biotech and pharma indices followed the broader markets into the red and regulators took a cautionary stance.

The Food and Drug Administration issued a notice Thursday that makers of TNF inhibitors, used to treat immune system-related diseases such as rheumatoid arthritis and Crohn's disease, must beef up their labels with regard to the risk of fungal infections.

The agency said the makers of Humira, Cimzia, Enbrel and Remicade must strengthen their existing warnings on the risk of developing opportunistic fungal infections. Abbott , which makes Humira, and Amgen and Wyeth , which market Enbrel, are among those affected. Abbott, Amgen and Wyeth traded down 2.4%, 3.5% and 3.6%, respectively.

The FDA, which said some patients with invasive fungal infections have died, used its new authority under the Food and Drug Administration Amendments Act of 2007 to mandate the label changes.

Meanwhile, U.S. regulatory staff members said in a pre-panel analysis Thursday that Pfizer's bone drug Fablyn -- made with Ligand's technology -- was effective for preventing fractures in post-menopausal women with osteoporosis. However, they noted that patients who received the experimental osteoporosis drug had a higher death rate than those who took a placebo, though that outcome wasn't statistically significant. In their review of Fablyn, FDA staff members also noted concern that patients taking the pill had more than twice the chance of developing a blood clot in a vein.

An expert advisory panel will meet Monday to discuss the safety of the drug, which the agency rejected in 2005.

Pfizer's shares declined 2.8% to $18.67. The stock, in addition to Wyeth, Amgen and Abbott, is a component of the Amex pharmaceutical index, which was down 2.4%. King Pharmaceuticals -- the only component on the Pharma index that saw positive territory -- was up 60 cents, or 5.5%, at $11.58.

In nonregulatory news, Medivation continued to rise Thursday, a day after it announced a substantial deal with Pfizer -- including a $225 million upfront payment -- for its experimental Alzheimer's disease drug Dimebon. Shares were up $2.34, or 8%, at $31.37 after an 11% hike a day prior.

In analyst actions, UBS downgraded pharmaceutical company Forest Labs to neutral from buy and lowered its price target to $35 from $46. This comes a day after the company announced results from two late-stage trials on its experimental drug for patients with moderate to severe chronic obstructive pulmonary disease. The results met Forest Labs' main goal but underwhelmed expectations. The stock, which dipped to a seven-year low Wednesday, was off another 2.7% at 30.25 on Thursday.

HSBC scraps agreement to buy South Korean bank

2008-09-19T11:16:00.000-07:00

HSBC ends agreement to purchase South Korean bank from US buyout group; cites global turmoil. British bank HSBC Holdings PLC said Friday it has canceled an agreement to purchase a controlling stake in a South Korean bank from U.S. private equity group Lone Star Funds amid world financial turmoil.

HSBC said in a statement that it "exercised its right to terminate the acquisition agreement with immediate effect." The London-based bank cited "all relevant factors including current asset values in world financial markets" for the decision. It gave Thursday as the date of the cancellation.

"Discussions with Lone Star have not led to agreement on how the transaction might proceed on a basis acceptable to HSBC," the bank said.

HSBC agreed in September last year to purchase the stake in Korea Exchange Bank from Dallas, Texas-based Lone Star, which has faced regulatory and legal obstacles in efforts to sell its 51 percent stake in the local lender it purchased in 2003.

South Korea's financial regulator, which was reviewing the proposed acquisition by HSBC, had recently suggested it was likely to be approved. Global financial turmoil this week, however, appears to have played a major role in scuttling the deal.

"In the light of developments around the world, not least changes in asset values in world markets, we do not believe that it would be in the best interests of shareholders to continue to pursue this acquisition on the terms negotiated last year," Sandy Flockhart, chief executive officer of HSBC Asia and an executive director of HSBC, said in the statement.

HSBC had contracted to buy Lone Star's controlling stake in KEB, South Korea's sixth-largest lender, for about $6 billion.

The Financial Services Commission, the regulator, expressed disappointment.

"It is regrettable that HSBC unilaterally canceled the contract during the review process despite active efforts by the FSC," the regulator said in a statement.

Lone Star Chairman John Grayken confirmed HSBC's decision.

"We are disappointed that HSBC terminated the agreement and that the transaction will not be completed," he said in a statement.

Investors reacted to the news, rewarding HSBC while punishing KEB.

HSBC's stock price rose 7.48 percent to close at 123.50 Hong Kong dollars ($16) in Hong Kong trading. In Seoul, KEB shares fell 10.3 percent to finish at 11,350 won ($10).

Also Friday, the British bank announced it was selling its 18.7 percent stake in Mexican microfinance lender Financiera Independencia for $145 million.

HSBC said in a statement to the Hong Kong stock exchange that it has decided to focus on its core Mexican retail financial services business.

HSBC signed the deal with Lone Star after a previous effort to sell the stake to Kookmin Bank, South Korea's largest bank, collapsed in 2006.

Lone Star has battled suspicions that it was able to purchase KEB at a bargain price after allegedly colluding with government officials to understate the bank's financial health.

The fund has denied any wrongdoing and argued its rehabilitation of once-financially strapped KEB has been good for South Korea's economy.

Lone Star's efforts to sell KEB have also run up against public opinion in South Korea seen as hostile to foreign buyout firms.

In June, a South Korean appeals court overturned a guilty verdict against Lone Star in a stock manipulation case, causing speculation that its fortunes were turning.

Korea Exchange Bank CEO Richard Wacker lamented HSBC's cancellation in a statement, calling it "a lost opportunity for KEB and Korea."

More Contradictions from the Party of Less Government

2008-09-19T11:06:00.000-07:00

All hell is breaking loose on Wall Street, and one of the more subtle things the crisis has exposed is a growing ideological rift in the Republican Party that's starting to border on intellectual incoherence.

Wanting It Both Ways

The traditional small government, "hands off" wing has always argued for minimal regulation and healthy dollops of personal responsibility. This line of thinking suggests that the appropriate response to the Lehman collapse is for investors and executives to exercise more caution in the future. That's how markets work.

Yet there's now a competing populist strand of the party that seeks to protect the "little guy" against greed and incompetence. John McCain was quoted in the New York Times earlier this week as saying that our economy has been put at risk "because of the greed by some based in Wall Street and we have got to fix it."

The problem is that you can't simultaneously embrace markets and personal responsibility and then, when those markets have a car wreck, argue that it's the government's job to protect us against rapacious Wall Street traders.

Fault Lines Exposed

This is just a tiny example of a phenomenon that's been developing through the Bush presidency and into this campaign. Do you remember Sarah Palin's rousing convention speech? Forget the "First Dude," the hockey mom thing, the eyeglasses, and even whether she did or did not support the "Bridge to Nowhere."

Instead, just pay attention to what she said and what it means for the growing contradictions within the GOP. For those who were paying attention, Palin raised two issues that should have exposed the fault lines that will eventually consume her party.

First, do Republicans favor small government, or do they think that government should provide more assistance for families with children who have special needs? Because you can't have it both ways.

A Dual-Sided Speech

In her critique of Barack Obama, Palin told the adoring crowd, "Government is too big ... [Obama] wants to grow it." That's a legitimate point. And it's consistent with Ronald Reagan's famous assertion that the nine most dangerous words in the English language are "I'm from the government and I'm here to help."

The Republicans are supposed to stand for less government -- lower taxes, less regulation, and, as a result, more personal responsibility and self-reliance. That's one of the most important and defensible tenets of the party.

But wait! Was that the same ostensible conservative telling the audience, "To the families of special-needs children all across this country, I have a message: For years, you sought to make America a more welcoming place for your sons and daughters. I pledge to you that if we are elected, you will have a friend and advocate in the White House."

Whose Special Needs?

Why are families who have children with special needs any different from farmers at risk of losing their land, workers who need health insurance, employees hurt on the job, families dealing with parents who have Alzheimer's disease, veterans eating out of trash bins, and so on. If you have those problems, then "a friend and advocate in the White House" is big government.

But if you happen to have a special-needs child, apparently that's different because Palin happens to share your challenge. And if one of her family members happens to get Alzheimer's, then maybe we'll have new programs for that, too.

Palin's speech suggested that, again, the Republicans want it both ways -- and it's no anomaly. This explains how the Republicans can talk about small government and then deliver huge new programs like Medicare prescription drug coverage, the largest expansion of entitlement spending in decades.

Or how the party of personal responsibility is fielding a ticket whose website calls for "aggressive federal action to help keep 200,000 to 400,000 families from losing their homes."

Governing Through Inefficiency

The second point is more subtle but ultimately more damning of the Republicans: How can the government be inefficient and ineffective at most things it does -- and yet perfectly able to decide who should be held indefinitely at Guantanamo Bay without even rudimentary legal protections?

Governor Palin told the convention, "Al-Qaeda terrorists still plot to inflict catastrophic harm on America ... [Obama's] worried that someone won't read them their rights." The Republicans have consistently promised to get tough on terrorists -- no problem there. A terrorist organization with a nuclear weapon is arguably the most dangerous threat we must confront. But Palin was also mocking our basic legal protections, and that's a huge, scary mistake.

Believe it or not, the reason her position makes so little sense is rooted in economics. Researchers have long recognized that any time we test or screen for something -- whether it's detecting prostate cancer or keeping hijackers off airplanes -- there's an unavoidable tradeoff. The more sensitive the screen, the greater the risk that you tell someone they have cancer when they don't, or that you'll stop a guy in the airport security line because he has a big belt buckle and not a hand grenade.

But if you design a less sensitive test to avoid "false positives," then occasionally you won't catch a tumor or the guy trying to board an airplane with a semiautomatic weapon -- a "false negative."

Missing the Tradeoff

The challenge of terrorism is that both false positives and false negatives are unacceptable. We can't let just a few terrorists slip in. But if we design a system so sensitive that it will catch every person who has the potential to do us harm, then we're almost certainly going to snare plenty of people who've done nothing wrong.

Palin's smug line about reading terrorists their rights misses this inevitable tradeoff. The tougher we are on potential terrorists, the more legal protections we need to fix our inevitable mistakes. That's not politics, it's basic logic. Should we send everyone who sets off an airport metal detector straight to prison and leave them there indefinitely?

There's a philosophical inconsistency to the GOP position as well. The Republicans are skeptics about the limits to what government can or should do. Again, this is a reasonable position; without market competition, the government tends to be slow, inefficient, and largely unaccountable.

But how can the party that so vociferously (and effectively) maligns government be willing to entrust so much unchecked power to that very same government when it comes to arresting people and holding them without trial? Would you let the Post Office or the IRS or FEMA send people away indefinitely? If not, why should we entrust any other bureaucracy with that power?

Identity Crisis

Remember, this is the party that has historically opposed gun registration for fear that the government might someday swoop in and take away guns from its citizens. Where's that paranoia and distrust of authority when we need it most?

Yes, the Democrats have heaps of problems of their own. A reasonable person can agree with everything I've written here and still conclude that the Republicans are less dysfunctional than the Democrats.

But that doesn't answer the question that's been festering since the Reagan presidency, and has been highlighted anew by McCain's nod to the Palin wing of the party and by his response to the Wall Street carnage: Who are the Republicans, and what do they stand for?

by Charles Wheelan, Ph.D.

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2008-09-17T09:59:00.000-07:00

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Best Buy 2Q profit slides 19 percent

2008-09-16T12:39:00.000-07:00

Best Buy 2Q profit falls 19 percent on higher spending on Best Buy Mobile
Best Buy Co. said Tuesday that its second-quarter profit slid 19 percent as it spent money to boost cell phone sales by completing the rollout of its Best Buy Mobile concept to nearly 1,000 North American stores.

Revenue rose, however, as consumers bought more flat-panel TVs, laptops and cell phones, ahead of forecasts.

The nation's largest consumer electronics retailer earned $202 million, or 48 cents per share, for the three months ending Aug. 30. That's down from $250 million, or 55 cents per share, during the same period last year. Revenue rose 12 percent to $9.8 billion.

The profit came in below Wall Street forecasts, sending the stock down, despite results that beat projections for revenue and same-store sales.

"Although we're never satisfied with earnings below expectations in any quarter, we think it does not reflect the long term health of our company or the soundness of our strategy," said Brian Dunn, the company's president and chief operating office.

Analysts surveyed by Thomson Reuters had expected the company to earn 57 cents per share on revenue of $9.67 billion.

Despite the worse-than-expected profit, the company eked out a 4.2 percent increase in same-store sales, a retail industry metric that measures sales at existing locations rather than newly opened ones. In the U.S., comparable-store sales rose 5.3 percent.

RBC Capital Markets analyst Scot Ciccarelli told investors in a research note that the Richfield, Minn.-based company's same-store sales were "very solid in (a) tough environment."

Analysts said the slowing U.S. economy will likely challenge Best Buy even more in the second half -- a time that includes the important holiday shopping period on which retailer depend.

"These results highlight the challenge of delivering consistent profit performance while juggling a broad array of growth initiatives," Goldman Sachs analyst Matthew Fassler told investors in a research note Tuesday. "... (Best Buy) has often thrived most with its back to the wall, when the reality of tough markets and expense misses intensify discipline."

The company reaffirmed its earnings per share guidance for the fiscal year on Tuesday, saying it expects a profit of $3.25 to $3.40 per share on revenue of about $47 billion. Wall Street analysts expect Best Buy to earn $3.28 on revenue of $44.7 billion.

The company said it expected same-store sales in 2009 to be on the higher end of its previously predicted range of 1 percent to 3 percent growth. Second-half same-store sales are expected to be lower than first-half growth of 4 percent.

The company also acknowledged it would have to rein in spending in order to meet full-year expectations.

Best Buy shares fell $1.81, or 4.1 percent, to $41.89 in afternoon trading Tuesday.

Car Leasing Chaos: What's Right for You

2008-09-16T12:31:00.000-07:00

If you want to lease one of Detroit's big vehicles, things just got a lot more complicated. Is it worth it anymore?

With so many auto financing companies getting out of the leasing business, you might think they don't want you to lease anymore.

Leasing really makes sense if you're absolutely sure you don't want to keep a vehicle longer than the term of the lease. It's sometimes even sold as a way to "try out" a car before buying it (bad idea).

But if you want to hold on to a vehicle for a while, it makes more sense to buy one with traditional financing. That's because the total cost of purchasing a vehicle after you've leased it will be a lot higher.

And with lease rates likely to rise, especially on large trucks and SUVs, financing will start looking even more attractive. Beyond the cost, it's already simpler than leasing, and recent changes will only make it more so.

At one time, you could reasonably assume that a car company's "captive financing arm" would get you the best lease deal possible. After all, a manufacturer-affiliated auto financing company is there to make that manufacturer's products as attractive as possible.

But Chrysler Credit recently said it was getting out of the auto leasing business altogether. That doesn't mean you won't be able to lease a Chrysler 300 or Jeep Grand Cherokee, but you'll be doing it through some other financing company. Ford's (F, Fortune 500) credit arm and GMAC, which has a relationship with General Motors (GM, Fortune 500), have said they were tightening rules for leases.

Some independent financing companies say they're getting out of the leasing business. On Wednesday, Wells Fargo (WFC, Fortune 500) said it wouldn't finance auto leases after this month, and Chase Auto Finance said it wouldn't write leases on Chrysler Corp. products.

When you lease, the finance company buys the vehicle and sells it when the lease is done. The customer sends in monthly payments that are calculated to recover the value the car will lose during the time of the lease, plus some profit for the financing company.

But as gas prices spiked over the past year, values for used trucks and SUVs plummeted. Monthly payments were no longer enough to cover the decline in the vehicles' value, which stuck financing companies with huge losses.

If It's Still on the Table
All of this makes it even more crucial to compare your options if you still want to lease.
• Before you go to a dealership, check with a local bank or credit union to see what they can do for you.
• Make sure to look at all the costs in the lease plans you're considering. Besides monthly payments, there could be up-front costs and closing costs.
• Check the number of miles you're allowed to drive the car during the lease term. Make sure it more than covers your actual driving habits.
• If you're leasing an imported car, it's more-or-less business as usual, but leases on large vehicles, no matter what the make, will probably be more expensive.

It's Not Going Away
This situation probably won't last forever. Auto finance companies are pulling back in response to specific market conditions.

"We certainly don't see leasing going away," says John Sternal, a spokesman for LeaseTrader.com, a company that specializes in helping people get out of leases early.

"It's all about making corrections so they can be more competitive going forward," he said.

Meanwhile, history dictates that the values of used SUVs and trucks will recover, says Paul Taylor, an economist with the National Automobile Dealer's Association.

"When gasoline prices came back down," in the past, he said, "prices of large vehicles generally recovered."

Ultimately, that will mean that financing companies for domestic cars will once again be able to offer leases at lower costs. And they will have an incentive to do so, Taylor said, because making it more difficult or expensive to lease gives an advantage to competitors.

No matter what, Taylor said, there will be customers who want to lease and there will be companies willing to help them.

Student Loan Woes Hurt Upper Middle Class

2008-09-16T12:25:00.000-07:00

The biggest problems consumers are facing in the U.S. marketplace include some familiar suspects, such as shady used-car salesmen, fake mortgage-rescue deals, online scams and soaring credit-card rates and fees.

A survey of state and local consumer agencies around the country conducted by the Consumer Federation of America found that the top complaints last year related to autos, home contractors, loans, retail disputes and utility or cable providers. Other complaints related to faulty household goods and repairs for big-ticket items, fraudulent Web solicitations or Internet sales, telemarketing and home solicitations, and landlord-tenant disputes.

"In economic hard times, consumers are even more vulnerable to phony promises to help them financially or money-making schemes," says Susan Grant, CFA's director of consumer protection.

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In one familiar incident related to the housing crisis that is crushing consumers' wealth and contributing to their debt burdens, a Georgia company charged an initial $400 to $500 to help consumers whose homes were in danger of foreclosure, plus other fees for appraisals, title searches, processing and refinancing. It reached out to customers through Web advertisements and direct mailings.

However, according to the governor's office of consumer affairs, none of the services offered were ever provided and most of those who paid the steep fees lost their homes. The agency is still investigating the company, which CFA did not name.

Bob Harris, who manages the Office of Consumer Protection in Washington, D.C., says state and local agencies have also had to develop "expertise to deal with the evolving nature of fraud, especially online."

For instance, in one online scam, a Florida man was deciding whether to purchase a vehicle from an online seller. Before sending a payment, he checked with the Better Business Bureau to see whether there were any complaints, but found that the dealer had a good reputation. He then wired a $4,000 deposit, but never heard back from the seller or received the merchandise. An investigation by the Consumer Fraud Unit in Orange County, Fla., found that the crook posed as a legitimate dealer by copying its Web site, then picked up the payment using a phony passport.

It can be difficult for even the savviest consumer to thwart rip-offs, but here are some useful tips to avoid becoming a victim:

1. Beware of "danger signs" of fraudulent schemes. Don't get pressured into a deal you're not comfortable with. If a merchant tries too hard to convince you about the value of the company's product or service, what it's presenting is probably not true. Merchants also shouldn't have to play to your sympathies or use scare tactics to force you to purchase or agree to something immediately.

Avoid any purchases that require a wire transfer and merchants that reach out to you though mailings, telemarketing and online ads promising deals that seem too good to be true. Those struggling with mortgages or facing foreclosure are particularly vulnerable to such offerings and should call government agencies or consumer advocates for help before discussing the situation with someone who wants to profit from their misfortune.

2. Check into merchants and their products. Dubious merchants can be found online, behind the sales counter or in the passenger's seat during a test drive.

Though it didn't help the unlucky Florida consumer, anyone buying expensive items should investigate the seller's history with the Better Business Bureau and consult a local consumer agency. Ask for references when applicable, and make sure contractors and other professionals are licensed. When buying from online outlets, make sure there's a customer-service line and legitimate address to call or locate the business if trouble arises.

Make sure any goods you're buying are not part of a product-safety recall. At auto dealerships, request all documentation related to the vehicle you're interested in, and question the dealer about high mileage on "new" cars.

3. Use a credit card for items purchased online or those that need to be delivered. That way, you can dispute charges if you don't receive what you were promised. Of course, make sure you can afford the item, otherwise you'll be paying interest or late fees as well.

4. Ask to make a down payment instead of paying in full, up front. Consumers often complain that home-improvement work and other services were not conducted in the manner promised. But once you've paid the tab, it's more difficult to coax subpar contractors to clean up their messes or finish what they started.

5. Get everything in writing and understand everything you sign. Service estimates, as well as any other agreements with merchants, lenders, landlords and roommates should always be in ink on paper -- but never sign an agreement you don't fully understand or aren't comfortable with. Before signing any document that is written up by someone else, read it thoroughly or consult a lawyer, accountant or other expert to comb through the details.

Cash Advances on Your Home: A Do or Don't? Finding Cash in a Home

2008-09-16T12:20:00.000-07:00

Many older adults looking to extract cash from their homes have recently turned to reverse mortgages, rather than take on new monthly debt through second mortgages or home equity lines of credit. But these transactions can be expensive -- closing costs can often run to $15,000 -- and risky, since borrowers face big penalties if they move.

Now, financial institutions are starting to offer new alternatives to such loans. One particularly innovative idea is being offered by EquityKey, a San Diego-based company that is a division of KBC Bank, a financial services company with headquarters in Belgium. EquityKey's service essentially offers a cash advance on the home, in exchange for the owner's promise to share in the home's future appreciation.

Owners 65 to 85 with good credit who live in homes valued above $400,000 (above $500,000 in New York and California) can receive a payment of up to 15 percent of a home's equity. Those who move out within 10 years must pay back the entire amount -- and 5 percent more if they move within the first five years.

If the house sells at any time after that, though, the customer or the estate pays EquityKey only if the home's value has increased since the time of the payment. In that case, EquityKey receives half of the appreciation amount. If the homeowner dies within 10 years of signing the deal, the heirs owe nothing to EquityKey.

That is because the company takes out a life insurance policy on the client at the time of the transaction. "So, you need to be able to qualify for life insurance to do this," said Jeff Nash, a founder of EquityKey. If that is the case, the transaction can yield significant benefits to those who are "house rich and cash poor," he added.

Take, for example, the owner of a home appraised at $1 million. EquityKey conducts a credit check and otherwise evaluates the applicant's financial ability to maintain the home. It also considers local market conditions in determining the likelihood that the home's value will rise.

Assuming the applicant clears those hurdles, EquityKey writes the homeowner a check of up to $150,000 and refunds a $300 application fee. There are no closing costs. Mr. Nash said income and estate tax implications depend on each homeowner's circumstances, but he said clients typically need not pay taxes until the home is sold.

Mr. Nash said a prospective client should speak with a financial planner before entering such a transaction. "If you have some reasonable likelihood of being forced to sell your home in the near term," he said, "don't do this deal."

With its risk-sharing concept, EquityKey is similar to products recently introduced by Grander Financial and REX & Company -- but neither of them imposes age restrictions. Grander Financial serves customers in New Jersey and Connecticut, but not New York.

REX & Company, which serves all three states, offers clients cash advances of up to 15 percent of the home's value. But unlike EquityKey's transactions, REX agreements require clients to repay part of the payment if the home loses value when it sells.

Michael Berman, REX's chief executive, said the company had conducted about 175 transactions and disbursed about $20 million. The typical client, he said, is someone "who is very sophisticated financially."

"They seem to really understand what they're getting into, and know they're choosing to forgo some of the change in value of their home for some good use of the money," he added. "It's definitely not an impulsive thing."