Investing in Treasury Inflation-Protected Securities (TIPS)

The Federal Reserve aims for an average annual inflation rate of 2%. But they don’t directly control the value of the dollar or the price of goods and services, and inflation sometimes leaps unexpectedly. Inflation dilutes the value of your retirement savings, and all other savings for that matter.

That’s precisely why you shouldn’t leave all your money sitting in a savings account. Instead, you can protect against inflation by investing money to earn a return higher than the pace of inflation. In the wake of the COVID-19 pandemic and the massive “printing” of new money to spend on stimulus measures, many investors have looked for inflation-proof investments to avoid a post-pandemic drop in the dollar’s value.

One of these strategies includes unique U.S. Treasury bonds called Treasury inflation-protected securities, otherwise known as TIPS.

How Do TIPS Work?

Treasury inflation-protected securities fluctuate in value specifically based on inflation rates. The Treasury ties their value directly to the Consumer Price Index (CPI), which measures inflation.

These bonds pay interest (coupon payments) twice per year based on a fixed rate declared when the Treasury first sells each bond. Investors receive an interest payment based on that interest percentage of the principal amount — the value of the bond. However because the principal amount changes along with inflation, so too do the semiannual payments.

The higher the inflation rate, the greater the jump in the value of the bond. But these adjustments work both ways: your principal and interest payments both fall during deflationary periods. If the CPI falls before your term is up, you are guaranteed to get your principal back, but will not benefit from any growth.

Because TIPS adjust in principal value — unlike normal bonds — they generally pay less in interest than normal Treasury bonds.

The Treasury issues TIPS at five-, 10-, and 30-year maturities. You can buy them new, directly from the Treasury, in increments of $100. Or you can buy them from other investors on the secondary market through a brokerage account like SoFi Invest.

For that matter, you can also buy them securitized as exchange-traded funds (ETFs) or mutual funds. These funds make TIPS easy to buy or sell instantly, but prices gyrate based on the market.

Example TIPS Investment

Confused yet? Don’t fret — TIPS work differently than normal bonds, which makes them hard for many investors to wrap their head around. An example helps clarify how they work.

Say you buy $1,000 in TIPS that pay 1% interest. In the first year, you receive $10 in interest (1% of $1,000), split into two semiannual payments of $5 apiece.

Over the course of that first year, inflation runs at 2%. So the face value — the principal amount — of your TIPS adjusts upward from $1,000 to $1,020 at the end of that year.

In the second year of ownership, you collect 1% of the new principal amount of $1,020. That comes to $10.20, again split into two semiannual payments, this time of $5.10 apiece.

At the end of that second year of ownership, the principal amount adjusts again, based on the inflation rate that year. If inflation jumps by 4% that second year, your principal amount adjusts upward to $1,060.80. For the following year, you collect interest payments equal to 1% of $1,060.80, or $10.61 total.

And so on, until the bond matures.

You can sell your TIPS bonds on the secondary market if you like. Or you could keep them until maturity, and receive the final adjusted principal amount back.

Advantages of TIPS

To begin with, TIPS are as risk-free as investments get. They come with the full backing of the U.S. government, they protect against inflation, pay a predetermined interest rate, and guarantee that you won’t lose your initial investment.

Upon maturity, you receive back more than you paid, in direct proportion to inflation since you purchased — assuming that inflation was positive during your period of ownership.

Your interest payments also rise over the course of your TIPS ownership, as the principal value rises. That adds another layer to your protection against inflation.

In short, TIPS offer straightforward protection against inflation, plus a small return.

Downsides of TIPS

That last point deserves special emphasis: a very small return. Investors don’t get rich form TIPS; they serve as more defensive investments.

As noted above, TIPS usually pay lower interest rates than traditional Treasury bonds. That’s the tradeoff for the upward mobility of the principal amount.

In a period of slow or no inflation, you earn a low return. Periods of zero growth do happen, especially with the Federal Reserve’s dovish stance in recent years keeping interest rates low, which hasn’t seen an accompanying rise in inflation. When Japan instituted similar policies in the late 1990s, a period of zero growth lasted for about a decade.

During periods of deflation, your interest payments actually fall since they are calculated off of the downwardly-adjusted principal.

Speaking of interest payments, you pay regular income taxes on them. The IRS taxes them like dividends, rather than capital gains, because you earn them as income within the same year.

How Do TIPS Differ From Regular Bonds?

Traditional bonds pay a predetermined interest rate for their entire lifespan. You earn interest each year, and when they mature, you get back your original principal amount (purchase price). The principal amount never changes.

The principal amount on TIPS does change, adjusting every year based on the inflation rate that year.

Imagine you purchased a traditional 10-year treasury bond paying 4% on a $1,000 investment. You would earn $40 in income every year, regardless of any changes in the economy, and then you’d receive the principal $1,000 back at the end of the 10-year period.

High inflation would eat into your returns because your $1,000 would be worth less when you got it back than when you invested it. And if the inflation rate surpasses your 4% interest rate, then your real return would in fact be negative.

If you instead invested in 10-year TIPS that started at only 3.5% with that same $1,000, your interest payments would start out lower at around $35. Then, the inflation adjustment would increase or decrease your principal on a monthly basis, which would in turn impact your interest payment.

If the rise in the inflation index increased your principal to $1,250, then your new interest payment would be $43.75. As inflation continues to rise, so do your regular payments.

Moreover, as long as the economy doesn’t experience deflation, you will also benefit from the upwardly-adjusted principal amount you receive back once the bonds mature.

Where Do TIPS Fit Into Your Portfolio?

Treasury inflation-protected securities offer a valuable hedging tool for your personal investment portfolio. They protect you against inflation without the heightened risk of commodities or precious metals.

That makes them low-risk, low-return investments — a safe-haven investment for playing defense, particularly if you worry a rise in inflation is coming. As low-risk investments, they make for a good short-term investment to simply avoid losing money to inflation.

I keep some of my capital in an ETF that holds TIPS to avoid losses from inflation while parking money. As a real estate investor, I typically set aside money for upcoming property purchases, but I don’t always know when I’ll need that money. A deal might come along next month, or I may need to wait a year for the right deal.

As safe as TIPS are, however, the majority of your money should probably work harder for you, earning a higher long-term return. Speak with an investment advisor about the ideal asset allocation for your age and long-term goals.


Final Word

If you suspect higher inflation lurks in the near future, TIPS can make a great addition to your portfolio.

With virtually no risk of losses and easy liquidity, they offer more security than other inflationary hedges. The federal government guarantees that you won’t lose money on them.

But that doesn’t mean they pay well. You could easily find yourself earning one-tenth the long-term average return of stocks. As you structure your portfolio, consider TIPS as a conservative backstop reserve, rather than the main force of your investment dollars out working to earn you money.

Source: moneycrashers.com

The Importance of Establishing a Good Credit History

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Looking around at the number of people struggling with debt, it’s easy to see why someone might think the best route to staying out of trouble is to avoid credit altogether. On the surface, this may seem like a good plan; without taking on any debt, it is certainly impossible to be buried by it. Unfortunately, for the majority of people, the credit-free lifestyle simply isn’t an option.

From car loans to home mortgages, most consumers will need to use some sort of credit in their lives, and, thus, take on some type of debt. Furthermore, when it comes time to get that big loan or mortgage, not having a well-established credit history can make the process much more difficult — and, often, more expensive.

Consumers Without a Credit History are an Unknown Risk

Whether taking out a loan or opening a credit card, when a borrower receives a line of credit from a creditor, that creditor is faced with the inherent risk that the borrower will default on (fail to repay) their debt. To help mitigate as much of that risk as possible, creditors rely on a consumer’s credit history to determine the actual likelihood of the consumer repaying the debt.

Borrowers with well-established credit histories showing consistent, on-time payments to a variety of credit types are considered to be good credit risks. These consumers will be offered the best interest rates and lowest fees when they seek new credit.

When a potential borrower does not have an established credit history, however, the creditor is left without any information on which to base a lending decision. While some creditors are happy to give an unknown borrower the benefit of the doubt and assume they are more likely to pose a good risk than a bad one, other creditors are less optimistic.

Of course, even when creditors are willing to take on the unknown risk of an unestablished applicant, they rarely extend that optimism too far. Borrowers without proof they can pay back their debts in full — and on time — will pay higher rates than their established counterparts.

Most consumers looking to begin establishing credit will have the best luck starting with a credit card, and there are a good number of options for consumers who need credit cards for no credit. All of the major credit card issuers report to the three main credit bureaus, and many also offer cards with no annual fees.

Having No Credit is Bad (But Bad Credit is Worse)

From the time of the first credit card bill or loan payment, consumers start establishing their credit history. Each payment made to a creditor according to the credit agreement (that is, at least the minimum amount, by the due date), counts in the consumer’s favor when reported to one of the three major credit bureaus, and is the best path toward developing a good credit history.

At the same time, when a consumer makes a late payment, misses a payment, or defaults on a debt entirely, those actions are also reported to the major credit bureaus. Where those without an established credit history are considered to be an unknown risk, those who demonstrate a pattern of missed or late payments are considered to be high risk, and more likely to default. This, of course, is reflected in your credit score.

In the case of high-risk applicants, creditors know there is a greater chance of not being repaid; they attempt to mitigate some of the increased risk by charging those consumers much higher interest rates. For consumers with extremely risky credit profiles, the only option for new credit may be to turn to a creditor that specializes in subprime credit cards and loans. The easiest credit card to get with bad credit will be a secured card, which requires a cash deposit; that said, some unsecured options are still available.

Depending on the types of negative accounts impacting a consumer’s credit report and score, some may benefit from going through credit repair. An experienced credit repair specialist, such as those at Lexington Law, will have the tools necessary to find any disputable accounts on a credit report and may be able to have some or all qualifying items removed.

Don’t Hide From Credit, Build It

Anyone who has watched a loved one struggle with debt, or been through it themselves, may be tempted to swear off any type of credit. Unfortunately, credit has become a necessity for many people, especially those interested in one day owning their own home. The best way for a consumer to ensure they will qualify for an important loan in the future is to establish a good credit history early on.

Whether they have no credit or bad credit, every consumer’s path to a healthy credit profile is the same: use credit, in moderation, and make all payments as required by their credit agreement. The best credit histories are built over years, not days or months. With a little patience and a lot of diligence, even a blank or bad credit history can be made creditworthy.

Source: lexingtonlaw.com

Credit Bureaus and Fraud Alerts

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Identity theft is a harsh reality in a world of debit cards, credit cards, and online banking. If you’ve been a victim, you know the importance of protecting yourself from future infractions. A little-known solution is available through the credit bureaus: fraud alerts. If you want to avoid identity theft, review the information below and take the crucial first steps.

What is a Fraud Alert?

For anyone who has dealt with the aftermath of identity theft, fraud alerts are a useful way to ensure future security. By initiating these alerts with the credit bureaus, lenders are required to contact you by phone or other means to authorize new lines of credit or the use of your name on applications. If they cannot reach you, the application or credit activation will be denied and flagged for fraud. This process ensures your awareness of any and all activity on your account, and will help you recognize when fraud is being committed in your name.

What Are the Disadvantages?

While fraud alerts can protect you from identity theft, the convenience of instant credit authorization becomes a thing of the past. Unless you are available by phone to confirm your credit application, you may have to wait a day or two to make an in-store purchase. For example, Emma is shopping for a new sofa and wants to get 10 percent off by opening a department store credit card. Although her credit score is acceptable, the fraud alert requires the lender to contact her by phone to authorize the new line of credit. If her cell phone is listed as her primary contact, she won’t have to wait. However, if her home phone is her primary number, she may face a short delay in completing her purchase. Despite this minor inconvenience, those who seek fraud alerts are likely to weigh the benefits over the drawbacks.

How to Set it Up

Once you have decided to set up fraud alerts, it is up to you to take the first step. While some claim that the credit bureaus work together to maintain fraud alerts, the best way to avoid identity theft is to contact Experian, TransUnion, and Equifax individually. The process is simple and should only take a few minutes to complete. Depending on the bureau, your alerts may expire after 90 days, so it is imperative to reactivate them periodically to ensure your protection.

What Happens Next?

You should receive a confirmation letter within a week or two of setting up your fraud alerts. If not, make sure to call the credit bureaus to verify your alerts. With fraud alerts attached to your credit report:

  • Your name will be removed from pre-approved offer lists, such as credit cards and insurance offers.
  • You may become eligible for an extended victim statement status, which will keep your fraud alerts in place for seven years. This process requires approval from each credit bureau.

Although it is difficult to protect yourself from identity theft entirely, fraud alerts are a strong first line of defense. By working with the credit bureaus and taking a proactive stance, your credit report is more likely to be shielded from modern-day theft.

Source: lexingtonlaw.com

What Is Term vs. Whole Life Insurance – Types of Life Insurance

According to data collected by the Insurance Information Institute, about 60% of all Americans were covered by some form of life insurance in 2018. About 20% of Americans believe they don’t have enough coverage and are in the market for more.

All life insurance policies take one of two forms:

  • Term life insurance, which charges fixed premiums and pays a set death benefit to a named life insurance beneficiary or beneficiaries during a fixed term.
  • Permanent life insurance, commonly known as whole life insurance, a more expensive product featuring a savings or investment component that grows in value over time and may offer a variable-premium option to control costs.

Life insurance shoppers keen to choose the right type of life insurance must understand the key differences between term and whole life insurance. This guide can help.

Key Features of Term Life Insurance and Whole Life Insurance

Whole or permanent and term life insurance both share a common purpose: to provide a tax-free windfall upon the death of the policyholder. While ensuring this windfall is effectively the sole purpose of term life insurance, the cash value component makes permanent life insurance a useful pre-death investment vehicle for higher-income policyholders as well.

Policy Premiums

Like all forms of insurance, term and permanent life both require policyholders to pay premiums as a condition of coverage. Failure to pay premiums eventually results in the policy’s cancellation and the attendant loss of any benefits or accumulated cash value.

Both types of life insurance charge fixed premiums by default. For term life policyholders, premiums remain “level” — fixed — for the full term, no matter what. (The proper name for term life insurance is “guaranteed level term life insurance.”)

Some permanent life insurance subtypes, such as variable universal life insurance, allow policyholders to pay lower premiums without interrupting coverage, although the death benefit and cash value may decline.

Even when premiums remain fixed for the full policy term, inflation all but assures they grow cheaper over time in real terms.

Term Life Insurance Premiums

A term policy’s premium remains fixed for the full duration of the initial term: 10 years on a 10-year policy, 20 years on a 20-year term, and so on. The premium is a function of term length, with longer terms generating higher premiums due to the policyholder’s greater likelihood of death while the policy is effective. Premiums on 30-year term policies are higher by a factor of two or more than premiums on 10-year policies of equal size.

Many term policies offer the option to extend coverage for a series of consecutive one-year terms after the initial end of the term. Each one-year term’s premium is higher than the last and extending coverage may well prove prohibitively expensive.

However, medical underwriting is generally not required to extend coverage. For policyholders in ill health, extension — rather than applying for a new policy for which approval is unlikely — may be the only option to continue coverage.

Permanent Life Insurance Premium

A permanent life policy’s premiums also remain fixed, or level, by default for the policy’s full duration: until the policyholder dies or reaches the age of 100, whichever occurs first. The premium doesn’t change due to age or health status, although a lapse in coverage that necessitates a fresh application will likely result in a higher premium once the new policy is issued.

Unlike level term policyholders, permanent life policyholders may have the option to pay reduced premiums. This option is available on variable universal life insurance policies, which allow policyholders to use their accrued cash value to pay part or all of their premiums once the cash value reaches a certain threshold.

Variable universal life policyholders can also front-load premium payments to accrue cash value faster, then use the stored balance to reduce out-of-pocket premiums.


Policy Term

A life insurance policy’s term is the length of time it remains effective — assuming timely, in-full premium payments as stipulated by the insurance contract — without requiring action by the policyholder or additional underwriting by the life insurance company.

Term Life Insurance Policy Terms

Term life insurance coverage through a company like Haven Life is designed to be temporary, albeit relatively long in duration. Initial policy terms, during which the premium remains fixed regardless of health or age, typically range from five to 30 years. Some life insurance companies underwrite policies with initial terms as long as 40 years, but these aren’t as common.

Term life policyholders looking to continue coverage for 30 years or longer without paying the premium demanded by a single 30-year policy can instead create a life insurance ladder using multiple smaller policies that steps down the coverage amount over time.

For a 30-year-old applicant looking to replace $2 million in expected income over the subsequent 30 years, a suitable ladder might include:

  • A 10-year policy with a $500,000 death benefit
  • A 20-year policy with a $1 million death benefit
  • A 30-year policy with a $500,000 death benefit

This ladder ensures $2 million in total coverage during the first 10 years, $1.5 million in coverage during the second decade, and $500,000 in coverage during the final decade. This gradual decline in coverage accounts for the policyholder’s likely accumulation of wealth and the corresponding decrease in remaining lifetime income and expenses.

Permanent Life Insurance Policy Terms

A permanent life insurance policy is designed to provide lifetime coverage. That is, the term usually lasts the entire life of the policyholder and ends with the policyholder’s death. Life insurers generally cancel permanent policies, go ahead and pay the death benefit, and return the cash value if the policyholder reaches the age of 100.


Death Benefit

Both term and permanent life insurance policies guarantee death benefits to the named life insurance beneficiary or beneficiaries.

A policy’s death benefit is generally payable upon the insured party’s death, although a portion may be paid out to terminally ill policyholders as part of an accelerated death benefit rider. When the named beneficiary is an individual, death benefits are not subject to income tax.

Term Life Insurance Death Benefit

A term life death benefit remains fixed for the entire policy term. Absent certain rare extenuating circumstances, such as provable fraud during the application process — like failure to disclose a serious medical condition — or suicide during the first two years of the term, the death benefit is paid to named beneficiaries upon the policyholder’s death.

Permanent Life Insurance Death Benefit

The rules governing permanent life insurance death benefits vary by policy subtype:

  • Whole Life Insurance. The death benefit generally remains fixed for the life of the policy, regardless of the policy’s accrued cash value.
  • Universal Life Insurance. Universal life policyholders offer more flexibility around death benefits. Policyholders generally have two options: a level death benefit that remains fixed until death or an increasing death benefit that combines a level death benefit with the steadily increasing cash value component and pays the combined sum at the policyholder’s death. Loans against cash value or withdrawals of cash value may decrease the death benefit, however.
  • Variable Universal Life Insurance. A variable universal policy’s death benefit can increase or decrease, depending on the performance of the investment instruments underlying the policy’s cash value. The risks and potential rewards are greater for policyholders and beneficiaries alike.

Cash Value (Surrender Value)

Cash value, sometimes known as surrender value, is a key distinction between term and permanent life insurance. Permanent policies build cash value over time; term policies don’t.

Term Life Insurance Cash Value

A term life insurance policy has no cash value component. The death benefit is paid in cash, of course, but there’s no value to borrow against or cash out before the policyholder’s death. If the policyholder outlives the initial term and doesn’t renew, the policy expires worthless.

Life insurance companies do offer optional “return of premium” riders to would-be policyholders. In exchange for a higher fixed premium, return of premium riders guarantee the tax-free return of all premiums paid over the life of the policy to policyholders who outlive the term.

However, policyholders can’t withdraw or borrow against premiums paid before the term expires.

Permanent Life Insurance Cash Value

All permanent life insurance policies have a cash value component that exists separately from — but can sometimes be combined with, depending on policy subtype — the death benefit:

  • Whole Life Insurance. Whole life insurance policies offer guaranteed rates of return that increase the cash value by predictable increments over time. These returns typically come as dividends that can be reinvested in the cash value, delivered to the policyholder as income, or used to reduce premiums.
  • Universal Life Insurance. Universal life insurance policies index the cash value component to an underlying benchmark — such as the S&P 500 — that can gain or lose value. Like whole life, universal life pays dividends that can reduce premiums or supply income.
  • Variable Universal Life Insurance. The cash component of variable life is also invested in market instruments. While the upside is usually higher, so are the management fees, and the dividends and returns can vary as a result.

The cash component’s value remains low during the policy’s early years but steadily builds over time and eventually represents a considerable sum available for withdrawal (surrender) or as collateral for a low-interest loan.

During the policy’s first number of years, usually 10 to 15, surrender fees — fees designed to dissuade early withdrawals — keep the surrender value substantially lower than the full cash value. Eventually, surrender fees no longer apply and the full cash value is available for withdrawal.


Medical Exam Requirements

Most term and permanent life insurance policies require applicants to undergo medical exams as a condition of approval. These exams are thorough but not invasive and typically involve checking the applicant’s vital signs, asking a battery of personal health questions, and running basic metabolic labs.

Term Life Insurance Medical Exam Requirements

Virtually any applicant, regardless of age or health status, can qualify for a term life insurance policy without undergoing a medical exam. The catch is that no-exam policies invariably carry higher premiums and lower maximum death benefits than otherwise identical policies that include medical exams.

For older applicants past retirement age, no-exam coverage is limited to a policy subtype known as “guaranteed issue” — a no-questions-asked product with high premiums and a low coverage limit meant to defray final expenses without much left over.

Permanent Life Insurance Medical Exam Requirements

Most permanent life insurance policies require a medical exam as a condition of coverage, but high-premium, low-value guaranteed issue whole life insurance policies do exist.

These are mainly appropriate for older policyholders looking to defray final expenses while building modest cash value over time. However, because they’re less costly overall, guaranteed issue term policies generally offer better value than guaranteed issue permanent policies.


The Verdict: Should You Choose Term Life Insurance or Whole Life Insurance?

Both term and whole life ask applicants to commit to many years — decades, in most cases — of timely premium payments. Given the time spans and dollar values involved, the stakes for choosing the correct type of insurance are high.

You Should Apply for Term Life Insurance If…

A term life policy is a better fit if:

  • You Want to Minimize Premium Payments. Term life insurance premiums are invariably lower as a share of face value than permanent life insurance premiums. If you aim to minimize premium payments over the life of the policy while maximizing the policy’s death benefit, term life insurance is the clear choice.
  • You Don’t Need Coverage Forever. A finite term is not necessarily a drawback. As you age out of obligations like your mortgage and college tuition for your kids, you’ll also build wealth, assuming you’re saving diligently for retirement. This combination of lower future expenses and higher net worth, along with an inexorable decline in your future expected income as you realize an ever-greater share of your lifetime income potential, will reduce and eventually eliminate your need for life insurance coverage.
  • You Want to Customize a Multipolicy “Ladder” That Steps Down Coverage Over Time. Although certain types of permanent life insurance allow policyholders to customize premiums and death benefits, it’s simpler and cleaner to do so with a multipolicy term life insurance ladder, especially for policyholders who expect not to need as much coverage as they approach retirement.
  • Your Family Won’t Rely on Life Insurance to Supplement Savings or Investments Later in Life. A key advantage of permanent life insurance is the promise of guaranteed cash value in perpetuity. If you expect your family to have adequate liquid savings and investments not to need that backstop after your death, whole life likely isn’t worth the significant added cost.
  • You Want to Skip the Medical Exam. Permanent life insurance policies invariably require medical exams, making term life the de facto choice for applicants who’d prefer to avoid that part of the underwriting process.

You Should Apply for Permanent Life Insurance If…

A whole life policy is a better fit if:

  • You Want Your Policy to Last Indefinitely. If you want the peace of mind that comes with ensuring truly long-term, tax-free financial protection for your survivors and don’t want to roll the dice on another round of underwriting when you’re much older, whole life insurance is the clear choice.
  • You Expect to Borrow Against (Or Cash Out) Your Policy’s Cash Value. If you expect to need a ready source of low-cost leverage later in life instead of or in addition to home equity products, permanent life insurance provides it. Term doesn’t.
  • You Need Help Saving for the Future. Even if it’s not used or thought of as such by many policyholders, permanent life insurance effectively forces policyholders to save a portion of their monthly income for the far future. This is a key selling point for policyholders who worry about their capacity or diligence to save consistently for their later years.
  • Your Income Can Support Higher Premiums. Permanent life insurance is not always the superior choice for higher-income policyholders. Indeed, term life insurance is a better fit for many affluent families that don’t need the tax or cash value benefits of permanent life insurance. But whole life is useful for high earners who consistently max out contributions to other tax-deferred savings vehicles, such as employer-sponsored retirement plans, 529 education savings plans, and IRAs.
  • You Want the Option to Vary Your Premiums Over Time. By definition, level term life insurance premiums remain fixed for the duration of the initial term. That’s not the case with certain subtypes of permanent life insurance. Variable universal life insurance, for example, allows policyholders to pay higher or lower premiums as their needs dictate — salving the sting of higher overall policy costs.

Both Are Great If…

Both term and permanent life insurance are excellent options if…

  • You Need to Shield Your Family From Medium- or Long-Term Expenses Resulting From Your Death. Assuming timely and consistent premium payments, both term and permanent life coverage provide tax-free benefits to policyholders’ survivors, mitigating the financial fallout that would otherwise result from their deaths.
  • You Can’t Afford to Cover Expected Future Expenses From Savings Alone. If you expect your future expenses to exceed the capacity of your survivors’ future income and net worth, either type of life insurance provides a valuable and perhaps critical lifeline to maintaining their living standards and providing for dependents left behind.

Final Word

Most American adults have life insurance coverage. Some prefer the low cost and fixed, finite span of term life insurance through an online insurer like Haven Life. Others happily pay more for peace of mind that lasts a lifetime. All agree that life insurance provides an important layer of financial protection for their loved ones.

It’s an important layer, but not the only one. A term or permanent life insurance policy is necessary but not sufficient to protect against the full range of setbacks that can sidetrack a long-range financial plan — or permanently knock it off course.

Other all-but-essential layers of protection include disability insurance, which helps replace income lost to chronic injury or illness, and health insurance, which helps defray the cost of lifesaving medical interventions — a significant cause of bankruptcy in the United States.

So, by all means, celebrate when you finally cross “get life insurance” off your long-term to-do list. Just don’t assume it’s the last insurance application you’ll need to make.

Source: moneycrashers.com

Prepaid vs. Contract Cell Phone Plans – Differences, Pros & Cons

These days, cellphones are more popular and powerful than ever before. According to Pew Research, 96% of Americans own a smartphone, and the days of clunky flip phones are long gone.

However, while mobile technology and accessibility keeps improving, costs haven’t taken a hit. In fact, according to the Bureau of Labor Statistics, the average person spent nearly $1,200 on their cellphone plan in 2018 and have seen consistent increases in cost.

Thankfully, there are several ways to lower your monthly cellphone bill without sacrificing service quality. A common strategy is to switch to a prepaid phone plan, which is often cheaper than fixed-term contracts with major carriers.

If you want to find a cheaper phone plan and stay flexible, prepaid phone plans are certainly worth considering. However, you should understand the differences between prepaid phone plans and contract plans, as well as the pros and cons of making the switch.

Prepaid vs. Contract Cellphone Plans — What’s The Difference?

If you haven’t done a lot of cellphone shopping, it’s easy to get confused when searching for your next plan. Additionally, you might hear the terms “prepaid,” “postpaid,” and “no-contract” plans thrown around.

A prepaid phone plan is what it sounds like. You pay upfront for your monthly phone usage, deciding how many minutes, texts, and gigabytes (GB) of data you think you’ll use. When you run out, you have to wait until the next month for your minutes, texting, and data limits to refresh unless you buy more during the month to hold you over.

In contrast, contract cellphone plans are more rigid arrangements that are common with major service providers like AT&T, T-Mobile, and Verizon. Plans are typically two years long, and you choose from a variety of monthly plans that include different amounts of talk, text, and data. The cost of your phone hardware is usually built into your monthly bill even though many contract phone plans advertise new phones as being $0.


Advantages of Prepaid Cellphone Plans

The differences between prepaid and contract cellphone plans might seem irrelevant. However, there are several advantages of prepaid cellphone plans that also cut costs. If you want to save money on a tight budget, prepaid carriers might be your best option.

1. Lower Monthly Cost

The main advantage of prepaid phone plans over contract plans is lower pricing. With a prepaid service, you have the freedom to buy exactly what you need. If you only text, SMS-only plans are available. You can also find plans that offer unlimited calling and data if that’s what you need.

For example, Verizon’s unlimited talk, text, and data plan is $70 per month for an annual contract. Its unlimited prepaid phone plan is $60 per month, which is $120 per year in savings for the same services. Additionally, if you don’t need unlimited data, you can find prepaid options that are even cheaper compared to their contract plan counterparts.

There may be exceptions, but on average, prepaid phone plans are almost always cheaper than their contract equivalent. Plus, many prepaid plans don’t charge an activation fee, so you don’t have to worry about an expensive first month.

2. Flexibility

Another advantage of using a prepaid phone plan is flexibility. Contract plans usually last two years. If you want to switch carriers for better service or to save money, you typically pay a termination fee or have to buy out your contract before leaving.

This fee often makes it impossible to leave before your contract is up because the cost is simply too high. With prepaid plans, there aren’t contracts to hold you back. If you want to try a new cellular service, you’re free to make the switch at any time. If you’ve ever been stuck in a costly contract, you’ll understand the benefit of this freedom.

3. No Credit Check

Contract cellphone plans usually require a credit check for approval. This is because mobile carriers want to mitigate the risk that you won’t be able to pay your phone bills on time.

Carriers want to see a good credit score. Therefore, if you’re in the process of improving your credit score, you might find it difficult to get approved by certain carriers. In this instance, going with a prepaid phone plan is an easy solution. Prepaid cellphone plans usually don’t require a credit check because you pay upfront for service, eliminating the risk that you won’t pay your phone bill.

4. Abundant Features

Prepaid phone plans used to have limitations, especially for data and calling. These limitations made them inferior to contract plans for several years, although today this trend has changed dramatically.

The amount of competition between prepaid mobile phone providers and improvements in cellular networks has put prepaid phone plans on par with contract plans. There are numerous carriers that offer unlimited talk, text, and data plans at competitive rates. Plus, network coverage and data speed has improved over the years.

Many prepaid phone providers actually piggyback off the cellular networks from the three major carriers, AT&T, T-Mobile, and Verizon. This enables nationwide access and data speeds that suffice for regular Internet usage and even streaming. Your prepaid plan might not be as fast as a top-tier plan from a major provider, but the savings are worth it.

5. No Overage Fees

An easy way to waste money with a contract plan is to go over your limits. Because you pay at the end of each month, overage fees are a real threat, and there are plenty of horror stories of people racking up $1,000 phone bills accidentally.

This mistake is easier to make than you might think. An accidental tap on the screen can turn off your phone’s Wi-Fi, making you rapidly drain your data. Similarly, if you don’t get the right roaming package, good luck the next time you travel internationally.

Prepaid phone plans eliminate the risk of overage fees. If you use your limits, your service stops until your next payment or until you buy additional usage. If you’ve been stung by overage fees in the past, prepaid phone plans are your best protective measure.


Disadvantages of Prepaid Cellphone Plans

Prepaid phone plans are affordable, flexible, and remarkably competitive with contract plans. However, there are several downsides to consider.

1. Family Plans Are Often Superior

Contract phone plans are more expensive than prepaid phone plans for individuals. However, major carriers sweeten the deal for families or with service bundling, which can make their price-per-phone more competitive.

For example, the same unlimited Verizon plan that costs $70 for an individual only costs $35 per phone for a family of four. Other carriers usually have similar family deals that significantly lower their monthly price. Although contract plans still lack flexibility, they certainly suit larger households from an affordability perspective.

If you haven’t cut the cord for cable, you can also consider bundling your phone and cable service with different contract providers to potentially save more money.

2. International Limitations

Because many prepaid phone plans use existing U.S. cellular networks to provide service, they aren’t always the best for traveling internationally. However, most major carriers let you buy a pay-as-you-go add-on for international roaming or upgrade your plan during a trip.

Prepaid phone providers like Mint Mobile have recently added roaming capabilities, so it’s becoming easier to save money on vacation as a prepaid user. However, don’t expect this feature for every prepaid cellphone plan.

If you frequently travel for work or are trying the digital nomad lifestyle, some international-friendly prepaid phone plans include:

  • Keepgo. Buy a prepaid travel Sim card and Wi-Fi hotspot plan that works in over 100 countries. Prepaid data Sim card plans are only $8 per 1GB of data you use.
  • Google Fi. Enjoy unlimited data and texting while abroad and calling for $0.20 per minute with the $70 per month unlimited plan. Alternatively, a flexible travel plan costs $20 per month and provides unlimited texting and $0.20 per minute calling. You can also buy data for $10 per gigabyte with the travel plan.

Again, your existing carrier might make it affordable to upgrade your plan for your next international trip. Check your options before making the switch to a prepaid phone plan if you have upcoming travel plans.

3. Upfront Hardware Cost

Contract plans work hardware price into their monthly cost. While this is one reason contract plans are more expensive than prepaid plans on average, the upfront cost of having to buy a phone separately is a drawback for prepaid plans if you’re living paycheck to paycheck.

If you want the latest smartphone model, you usually have to buy it upfront with a prepaid plan. Some prepaid providers offer financing, but this increases the long-term cost of your phone.

Many prepaid plans allow you to bring your own phone, provided it’s compatible with their monthly plans. Ultimately, this means the easiest way for many people to switch to a prepaid phone plan is to finish their existing contract and then bring their own device.

4. Speed Throttling

Most cellphone plans throttle data speed after a certain usage amount. For example, AT&T sometimes reduces data speed for different unlimited data plans when customers use more than 22GB or 50GB in one billing period. They also throttle speed if their network is too busy.

Because many prepaid cellphone plans use major cellular networks, their customers aren’t the priority for maintaining data speed. This means many prepaid plans offer 5G and 4G LTE data speeds but only for a certain amount of data before throttling kicks in.

For example, the popular prepaid cellphone provider Tello throttles 4G data to 2G speed on unlimited plans after you use 25GB. This is a common practice for prepaid plans, even for unlimited data users.

This isn’t a deal-breaker unless you require fast data speeds and considerable usage limits per month. However, potential speed reductions are worth keeping in mind if you switch to a prepaid phone plan.


The Best Prepaid Phone Plans

If you’re convinced that prepaid cellphone plans are for you, there are several affordable options worth researching:

  • Boost Mobile. The least expensive unlimited plan costs just $35 per month for unlimited talk, text, and data. You get 3GB of 4G LTE data; afterwards, speed reduces to 2G. You can opt for a $50-per-month plan to get 35GB of data at 4G LTE speed instead.
  • Cricket Wireless. Enjoy unlimited data, talk, and text within the U.S. for $50 per month when you set up auto pay. Cricket has cheaper prepaid phone plans that don’t include unlimited data. You can also add international calling to your plan if needed.
  • Mint Mobile. Get unlimited talk and text and 3GB of data per month for only $15 per month if you commit to three months. Afterwards, this plan renews at $25 per month. You get 5G and 4G LTE data speeds, nationwide coverage, and can add international data plans. Mint is undeniably one of the least expensive prepaid cellphone providers on the market.
  • Tello. Build your own plan or choose from existing options. Tello has budget prepaid phone plans starting as low as $5 per month without data. However, data plans are still affordable. For example, 2GB of data and unlimited talk and text is only $14 per month. Unlimited data is $39 per month.
  • Straight Talk. Get unlimited data, talk, and text for $34 per month when you set up auto pay. Unlimited data has 4G LTE speed for the first 5GB before dropping to 2G speed.

As mentioned, major carriers are also becoming more competitive with their prepaid phone plans. Their prices aren’t as low as companies like Tello or Mint Mobile, but family deals and potentially better coverage might make them superior depending on your cellphone needs.


Final Word

One of the simplest ways to become more frugal is to find ways to save money on the things you already buy. Cellphone plans aren’t an exception. Plus, because the annual cost of phone plans steadily increases each year, you can find some major savings by switching to the right prepaid phone plan.

Once you choose the right cellphone, take time to shop around for plans before jumping into a contract. Prepaid phone plans are becoming more competitive each year, and if you can find one that suits your needs, you’re looking at potentially hundreds of dollars in savings per year.

Source: moneycrashers.com