Time to Review Your Health Insurance Continuation Coverage Under COBRA

The Kaiser Family Foundation has posted a timely Issue Brief on Health Coverage in a Period of Rising Unemployment By Karyn Schwartz. With rising unemployment and a tightening job market it is time to consider the possibility of being laid-off and the related impact on your family's health insurance protection. As discussed in this issue brief you may be able to hold on to your existing coverage, but it may be expensive. Those with preexisting medical conditions may view that as a preferred alternative to taking out a less expensive policy that omits coverage for preexisting conditions and only covers major medical expenses.

FDIC Study Released on Bank Overdrafts

The FDIC has just released the "FDIC Study of Bank Overdraft Programs." Here are a few of the more interesting findings"

• Customers with 5 or more NSF transactions accrued 93.4 percent of the total NSF fees reported for the 12-month period. Customers with 10 or more NSF transactions accrued 84 percent of the reported fees. Customer accounts with 20 or more NSF transactions accrued over 68 percent of the reported fees.
• Customer accounts with 1 to 4 NSF transactions were charged $64 per year in NSF fees on average. Customer accounts with 5 to 9 NSF transactions were charged $215 per year in NFS fees on average. Customer accounts with 10 to 19 NSF transactions were charged $451 per year in NFS fees on average. Customer accounts with 20 or more NSF transactions were charged $1,610 per year in NSF fees on average.
• Almost half (48.8 percent) of all reported NSF transactions took place at POS/debit (41.0 percent) and ATM (7.8 percent) terminals. Checks accounted for 30.2 percent of the reported NSF transactions.
• Assuming a $27 overdraft fee (the survey median), a customer repaying a $20 POS/debit overdraft in two weeks would incur an APR of 3,520 percent; a customer repaying a $60 ATM overdraft in two weeks would incur an APR of 1,173 percent; and a customer repaying a $66 check overdraft in two weeks would incur an APR of 1,067 percent. More rapid repayment of the overdraft amount results in higher APRs, and slower repayment results in lower APRs.
• Accounts held by young adults (ages 18 to 25) were the most likely among all age groups to have automated overdraft NSF activity. Among young adult accounts, 46.4 percent incurred NSF activity, compared with 12.2 percent of accounts held by seniors (over age 62) and 31.9 percent of accounts held by other adults. Nearly 15 percent of accounts held by young adults recorded more than ten NSF transactions during the year, compared with 12.1 percent of adult accounts and 3.0 percent of senior accounts. Most NSF transactions made by young adult accounts (61.7 percent) originated at a POS/debit terminal.

Almost half of the non-sufficient funds (NSF) withdrawals were by young adults using debit cards. No doubt most of these were honest mistakes from not keeping track of accounts. Given the electronic network that exists it would be easy for banks to notify users of insufficient funds at the point of sale. Having been notified, most would have chosen not to incur the overdraft fee. However, given the enormous fees these transactions generate, the banks seem to have little incentive for notifying account holders of a potential overdraft. They make the fees charged by payday lenders look good.

The Individual Health Insurance Market

The American Society of Actuaries has posted an informative issue brief, "The Individual Medical Insurance Market: A Guide for Policymakers."

Insurance purchased in the individual market was the primary source of health coverage for about 5.4 percent of the nonelderly population, or 14 million people, in 2006.1 The individual market is an important segment of the health insurance market. People who purchase coverage in the individual market include those who are self-employed, between jobs, or don’t have access to either employer coverage or public coverage.

What Happens to Your Health Insurance Coverage When Your Company Goes Bankupt?

The WSJ in "For Workers, Medical Bills Add to Pain as Firms Fail" (Dec. 6) contains heartbreaking stories of employees who lost their health insurance and were liable for thousand of dollars in medical expenses when their firms were shutdown or entered bankruptcy. The Department of Labor, Fact Sheet: Your Employer's Bankruptcy - How Will It Affect Your Employee Benefits?, has some questions you should ask your employer in the event of bankruptcy.

• Will the plan continue or will it be terminated?
• Who will be acting as plan administrator of the plans during and after the bankruptcy, and who will be the trustee in charge of the pension plan?
• If the pension plan is to be terminated, how will accrued benefits be paid?
• Will COBRA continuation coverage be offered to terminated employees?
• If the health plan is to be terminated, how will outstanding health claims be paid, and when will certificates of creditable coverage (showing, among other things, the dates of enrollment in your employer’s health plan) be issued?

In a Chapter 11 reorganization the bankruptcy may or may not affect your pension and your health care plan. With a Chapter 7 bankruptcy the firm ceases to exist and the health plan is terminated, which means that you are probably not eligible for a COBRA extension on your coverage.

FDIC Advice on New Insurance Limits and How to Be Fully Protected

Fall 2008 – Special Edition: Your New, Higher FDIC Insurance CoverageHow You Can Be Fully Protected

With banks and the economy in the news so much lately, many people are thinking more about the safety of their money. The good news for consumers is that federal insurance coverage has significantly increased, primarily as a result of a temporary boost in the basic insurance limit from $100,000 to $250,000. That’s also why the Federal Deposit Insurance Corporation has issued an explanation of the new changes along with tips and information to help bank customers better understand their insurance coverage and how to be sure all their deposits are fully protected.

Kaiser Family Foundation Updates Medicare Primer

Medicare: A Primer

This primer explains key elements of the Medicare program, which now provides health coverage to 45 million people -- including nearly 38 million people age 65 and older and another seven million younger adults with permanent disabilities. It looks at the characteristics of the Medicare population, what benefits are covered, how much people with Medicare pay for their benefits and the program’s overall costs and future financing challenges.

Should a Detroit Executive Drive to Washington?: A Comparative Cost Analysis

Congress is blaming the top auto executives of being wasteful for flying private jets to Washington rather than driving. It makes nice headlines and the auto execs were sufficiently embarrassed by the babbling Washington elite and the news media, but was the choice really inefficient? I decided to try to answer that question by making some heroic assumptions in order to estimate the relative cost of flying versus driving for a top auto executive. In addition, the costs of flying commercial (first class, I thought it was too much to ask them to fly with the hoi polloi) and by private jet were also estimated. The results indicate that driving is the most costly means of travel between Detroit and Washington. Both commercial travel and private jet travel are cheaper. In fact, commercial travel is only slightly cheaper than flying private jet. If the private jet is shared with other passengers, it is most likely the cheapest alternative.

The most important variable in the analysis is the opportunity cost of time. What is one hour worth to a top auto executive and the company? Let's assume that the average annual salary including bonuses and fringe benefits is about $14 million. Let's also assume that these executives work realy realy hard putting in an 80 hour week, twice as hard at the rest of us. Given these assumptions the hourly wage of $3,365 represents a top auto executive's hourly opportunity cost.

The driving time and mileage was estimated with Google Maps. Flying also requires some driving. The first-class air option includes cab fare to and from the airport, while the private jet option assumes a limo. Both air options include one and a half hours flying time. However, I assumed that using the private jet and limo would reduce time at the airport, eliminating the time in line and waiting on the tarmac.

A review of flights on Orbitz indicates that a first-class one-way fare is about $700 and $10,000 was mentioned by the media as the cost flying private jet. Driving costs are valued at the IRS standard rate of 58.5 cents.

Given these assumptions the cost of driving is over ten thousand dollars more expensive than the least cost alternative. Do we really want Washington running the auto companies?

One-Way Cost of Travel Between Detroit and Washington for a Top Executive

The Graham Ratio Indicates the Market Does Not Suffer From Irrational Pessimism

Christopher D. Carroll in "Recent Stock Declines: Panic or the Purge of “Irrational Exuberance”? The Economists Voice, Vol. 5 (2008) presents new data on the Graham Ratio. As originally proposed by Benjamin Graham it is the ratio of stock prices to a 10-year average of lagged earnings. Carroll revises the ratio for a 12-year average of lagged earnings in order to more closely follow the political cycle. As indicated in the above diagram from the article, high values of the Graham ratio have signalled lower subsequent returns over the next 12 years. The current Graham ratio is about right in the center of the data plot indicating neither irrational exuberance or pessimism.

Recourse and Non-recourse Home Mortgages

A home mortgage is secured by the property. The mortgage provides the lender the right to foreclose on the property in the event the mortgage payments are not made. Suppose the home sells at foreclosure for less than the outstanding balance on the mortgage? With a non-recourse loan, the lender may not come after the borrower for the remaining amount. With a recourse loan the borrower is responsible for any outstanding amount still owed after the sale of the home. Most homes are financed with non-recourse loans; however, this differs by jurisdiction. Moreover, in some markets the first mortgage may be non-recourse, while second mortgages may be recourse loans. The state laws governing home mortgages can be found at Foreclosures.com. As always, the information should be checked with a lawyer in your state.

When debt is forgiven, it is generally taxed as income. However, the IRS has special rules when home mortgage debt is forgiven because of a non-recourse mortgage. The amount forgiven reduces the cost basis in the home.

Martin Feldstein has argued that non-recourse home mortgages give the homeowner too much of an incentive to walk away from the home when housing prices drop. He maintains that this has contributed to the current mortgage crisis. To alleviate the drop in home prices, he believes the government should offer to refinance a share of each homeowner’s mortgage at a substantially lower interest rate. In return for the lower interest rate and smaller monthly payments the borrower would be obligated to repay a full-recourse loan. The government loan would be a full-recourse loan that could not be discharged in a personal bankruptcy. Such a mortgage would eliminate the potential incentive for default and stem the rising tide of foreclosures. There is no doubt that the sale of foreclosed property has contributed to the decline in housing prices. The WSJ reports that the sale of distressed properties accounted for 35% to 40% of transactions in the third quarter. You can go to Freakonomics for a discussion of this proposal.

Terrorism and Homeowners Insurance

Now that Congress has issued a report indicating we are likely to suffer a terrorist attach by 2013 maybe it is time to review your homeowners policy. The Insurance Information Institute states the following:

Standard homeowners insurance policies include coverage for damage to property and personal possessions resulting from acts of terrorism. Terrorism is not specifically referenced in homeowners policies. However, the policy does cover the homeowner for damage due to explosion, fire and smoke—the likely causes of damage in a terrorist attack.

Condominium or co-op owner policies also provide coverage for damage to personal possessions resulting from acts of terrorism. Damage to the common areas of a building like the roof, basement, elevator, boiler and walkways would only be covered if the condo/co-op board has purchased terrorism coverage.

Standard renters policies include coverage for damage to personal possessions due to a terrorist attack. Again, coverage for the apartment complex itself must be purchased by the property owner or landlord.Auto insurance policies will cover a car that is damaged or destroyed in a terrorist attack only if the policyholder has purchased “comprehensive” coverage. Most people who have loans on their cars or lease are required by lenders and leasing companies to carry this optional form of coverage. People who buy liability coverage only are not covered in the event their vehicle is damaged or destroyed as the result of a terrorist attack.

Life insurance policies do not contain terrorism exclusions. Proceeds will be paid to the beneficiary as designated on the policy.

Looks like you should be pretty well covered. But what if the losses exceed the ability of the company to pay? That contingency is covered by the Terrorism Risk Insurance Act (TRIA).

The Financial Crisis and Private Defined Benefit Plans

The Financial Crisis and Private Defined Benefit Plans
by Alicia H. Munnell, Jean-Pierre Aubry, and Dan Muldoon
IB#8-18

Between October 9, 2007 and October 9, 2008, the value of equities in retirement plans dropped by about $4 trillion, with the decline divided equally between defined benefit and 401(k)/Individual Retirement Accounts (IRAs). The decline in the defined benefit arena was in turn divided equally between private sector plans and those sponsored by state and local governments. This brief explores what a loss of roughly $1 trillion of private sector defined benefit equities means for the individual participants and for the firms that sponsor those plans.

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Mortgage Fraud Jumps 45% According to the Mortgage Asset Research Institute

Key Findings: Fraud Most Often Occurs at the Beginning of the Loan Process

RESTON, Va. - December 2, 2008 - Reported incidents of mortgage fraud in the U.S. increased by 45 percent on fewer loan applications in the second quarter of 2008 from a year ago, according to a new report released today by the Mortgage Asset Research Institute (MARISM), a LexisNexis service. The MARI Quarterly Fraud Report is based on data submitted by MARI subscribers on loans originated in the second quarter of this year that have since been classified as fraudulent.

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New Law Encourages Cash Donations for Midwest Disaster Relief

IR-2008-133, Nov. 25, 2008
WASHINGTON –– Taxpayers who make qualifying cash contributions for disaster relief efforts in the Midwest could benefit from a recently passed law that suspends the percentage-of-income limits that would normally apply when taxpayers deduct the contributions on their 2008 federal tax returns.

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Saver’s Credit; Tax Break Helps Low- and Moderate-Income Workers Save for Retirement

IR-2008-134, Dec. 1, 2008
WASHINGTON — Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2008 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements (IRAs) and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

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IRS Announces 2009 Standard Mileage Rates

News release IR-2008-131 gives the optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes beginning on Jan. 1, 2009.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

55 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations