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Qualities of good home insurance

Dear Dave

My wife and I are purchasing a home and we are closing on it in about three weeks. I heard you speak a few weeks ago about homeowner’s insurance, and what to look for and what to avoid. I just wanted to ask you about replacement cost policies versus others and basically what to be looking for. What can you tell me?

Darren

Jacksonville, Fla.

Dear Darren,

I was really disappointed when some of the big-name homeowner’s writers in the country such as State Farm, All State, etc. decided to do away with replacement cost insurance. Replacement cost insurance, by definition replaces your home no matter what. If you had a $200,000 policy on your $200,000 home and its value goes up to a half-a-million dollars, and you never change the policy; if that home burns you get a half-a-million dollar house.

What they have gone to is a policy that covers up to 25 percent above the policy face. So in our example now, if the value of the home goes up to $500,000 but you still have the $200,000 policy, the most you could hope to get is a $250,000 home. As long as you update the policy fairly often it is not a big deal. But I have a paid for home and I want to know that is going to be covered without having to argue with some insurance agent. I think it is just a way to set it up so they don’t have to cover it all. It is a sad thing because the agents are great people but their companies have done them a disservice by changing these policies.

I would call an independent insurance agent in your area and let them shop several different companies for you. I use a company where I pay the same price for a better product than I could get with some of the big names right now, because of these changes that they have made.

Also when you find a good company to go with, if you can move your cars and other property and casualty items together, you will probably get a discount on your homeowner’s policy. It’s almost always better to do it that way.

Dave


Cash out 403(b) to pay debt?

Dear Dave,

My wife and I recently moved from Kentucky to Texas. For a while we owned both homes because we were waiting for the first to sell. We had to somehow make ends meet, so we used credit cards to help with the house payments. We also had our third child. When the house finally sold in Kentucky, we paid off a lot of debt. But we still owe $10,000. My wife and I both have 403(b)’s and we’re thinking to cash hers out to pay off the debt. Is this a good idea?

Tim

Tyler, Tex.

Dear Tim,

Yes, it would feel good to cash out your 403(b) because you’ll use it to pay off your debt. However, it is a big mistake. With taxes and penalties, it is the same as taking out a loan at 40 percent interest. In your situation, if you cash out it will cost you $5,000 in taxes and penalties. You’ll be taking your wife’s 403(b) from $13,000 down to $8,000.

Mathematically this does not make sense. Would you ever borrow money at 40 percent interest to pay off your credit cards? No way! Leave the money in the 403(b)’s. You will appreciate leaving it alone when you are ready to cash out at retirement. For now, work at your debts the old-fashioned way; by using the Financial Peace snowball method. Pay off the smallest debts first and work your way to the biggest. Live frugally and be smart – if you and your wife work at this together, you will be out of debt quicker than you think. And the best part is, you’ll still have your retirement in place.

Dave


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