Graphic: Insurance

Poor Insurance Advice in India

Prior research has established that agents tend to sell the financial product that will pay them the highest commission. A new study on India’s life insurance market advances the ball by focusing on the quality of one high-commission product agents recommend and concludes that it’s wrong for the client.

The researchers sent trained auditors into the field posing as customers seeking insurance and then analyzed the advice they received. The auditors’ meetings with agents revolved around life insurance, specifically two types of policies: term and whole life.

In a term policy, the individual pays a premium to ensure a set dollar amount goes to a surviving wife or children if the customer dies. Like term policies, whole life policies also cover the risk of death, but insurers charge a higher premium to provide an additional service: the extra premium is invested on behalf of the client, who accumulates a cash balance that he can later redeem.

The researchers said term insurance is much more valuable, if customers in India take what they save on its lower premium and invest in the government’s savings certificates, earning a higher return than they would get from the insurance company.

Yet the researchers found that just 5 percent of the customer-auditors were advised to only buy term policies when that’s what best suited their needs. …Learn More

Photo: Workers in office orange

Desperate to Retire? Don’t.

A new article in the Journal of Financial Planning lays out the unpleasant reality facing baby boomers who really want to retire but can’t afford it: working longer helps a lot.

In the article, David Blanchett, who heads the retirement research group for Morningstar’s money management unit in Chicago, calculated the impact of delaying one’s retirement date and found that it can sharply improve a retiree’s odds of financial success.

“There is not one silver bullet for success but if there were it would be delaying retirement,” he said in an interview.

The same case has been made for years by the Center for Retirement Research at Boston College, which supports this blog. Working beyond age 62, when individuals are first eligible to receive Social Security benefits, helps in three important ways: …Learn More

Photo of house header

Student Debt May Slow Home Buying

First-time buyers are currently responsible for about 29 percent of all U.S. house sales, down from historical levels of 40 percent, according to the National Association of Realtors. The share of young adults who own a house has also declined sharply.

There’s debate about whether buying a house is a good financial move. But the waning of this coming-of-age ritual is a significant change in behavior for young adults in this country.

One culprit may be student debt, which is becoming more prevalent – 43 percent of young adults have some, compared with 25 percent a decade ago. The average borrower’s balance has also doubled in the past decade, to more than $20,000 in 2012.

Researchers at the Federal Reserve Bank of New York believe these unprecedented student debt levels may be dampening house purchases by first-time buyers. Student loans cause individuals to do poorly under two of the primary tests by Freddie Mac and Fannie Mae that lenders use to approve standard home loans. …Learn More

Social Security and Two-Income Couples

The decades-long march of women into the nation’s workplaces may be the most enduring trend in the labor force – and a signature of American progress.

But it is also one more reason that Social Security benefits today replace a smaller share of the lifetime earnings of married couples than they did in the past, when far fewer women worked for pay.

Other reasons include the gradual increase in the age at which U.S. workers can claim their full retirement benefits, from age 65 for the oldest retirees to 67 for Generation X. Medicare premiums are also taking more out of the monthly Social Security check, and more retirees are being taxed on a portion of their benefits over time.

But for married couples, the sharp increase in the ranks of working wives has reduced the share of their joint earnings during their working years that is replaced by Social Security when they retire. For the typical couple born in the Depression, Social Security benefits cover 45 percent of their prior earnings, but that falls to 41 percent for baby boomer couples retiring today, according to new research by the Center for Retirement Research, which supports this blog.

These Social Security “replacement rates” – benefits as a percent of employment earnings – will continue to decline, to just 37 percent for Generation X couples born between 1966 and 1975. …Learn More

Reverse Mortgages Get No Respect

Fran and Bob Ciaccia.

Fran and Bob Ciaccia

Bob and Fran Ciaccia could not be happier with their reverse mortgage, which unlocked some of the equity in the house they purchased in 1966 for $12,500.

Reverse mortgages are federally insured loans available to U.S. homeowners over age 62. The loan is made against the equity in the house, and the principle, plus interest and some federal insurance fees, are not repaid until the homeowners or their children sell the house.

“I cannot find a downside,” Fran Ciaccia, a retired high school cafeteria cook from Levittown, Pennsylvania, said in an interview. “We have told so many people about it.”

Although the Ciaccias may be big fans, reverse mortgages are unpopular, despite historically low interest rates that make them a good deal for retirees right now. AARP has estimated that only 1 percent of older Americans use them.

In 2012, the average loan size was $158,228, and 54,676 Americans got one. That is less than half the loans made in the peak year, 2009, according to the U.S. Department of Housing and Urban Development, which insures and sets standards for reverse mortgages. …Learn More

Photo: Postit- Pay Mortage, Rebalance Portfolio

The Aging Mind and Money

As we age, the things we forget are at first laughed off as “senior moments.” But when forgetting to send a birthday card becomes forgetting to pay the mortgage, the natural cognitive decline that accompanies aging becomes a serious financial issue.

With Americans living longer and an estimated 10,000 baby boomers turning 65 every day, a spate of fresh research has examined how and whether older brains can handle the challenges of modern financial life. But what the researchers have found out so far about the aging mind and money is somewhat of a mixed bag.

First, the bad news. Diminished cognition is an increasingly important concern in the financial arena, because the choices faced by retirees are getting ever more complex. One recent survey of people either experiencing cognitive decline themselves or observing it in a family member pinpointed the kinds of financial decisions that older people find difficult.

Among those surveyed, 41 percent said they or their family member forgot to pay their bills and 14 percent paid the same bill twice, according to the National Endowment for Financial Education and Harris Interactive. More than one-third had trouble with simple math or made rash purchases.

Retirees today face bigger financial challenges than that if they have to juggle their 401(k) investments and withdrawals. This is a change from the days when an employer simply issued a check every month from the defined-benefit pension plan, said Laura Bos, AARP’s acting vice president of financial education and outreach. …Learn More

Amid Recovery, Part-Time Jobs Still High

One segment of the U.S. labor force sheds light on the continuing struggle to find work: part-time employees who want a full-time job but can’t find one.

The U.S. unemployment rate has drifted down during the economic recovery. But the number of people the Department of Labor calls “involuntary part-time” roughly doubled during the recession to 8 million and still remains stuck at this much higher level.

Millions of Americans work part-time because they want to, but this involuntary part-time workforce is one more gauge of the slack labor market and lingering pain three years after the Great Recession officially ended. The Labor Department counts part-timers as involuntary if they can’t find a full-time job or if they work part-time for economic reasons, say a construction worker who doesn’t have enough projects to keep busy. …Learn More

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