What coverage should you get when renting a car? (I of II)

November 23, 2011

You know what the markup on this gut bomb is? EIGHT MILLION PERCENT.

 

As any savvy retailer knows, the basic products themselves aren’t the profit centers. The extras are. Otherwise appetizers, alcohol and desserts wouldn’t exist.

When you buy insurance on your personal vehicle, you have all the time you need to shop around and run numbers. When you buy insurance on a rental, you’re subject to a monopoly. Plus a clerk is staring at you, and another customer is waiting in line behind you; those are hardly the optimal conditions for making an informed, rational decision.

(Hey, what do you know? This boldfacing gimmick really works. Lots of eyes making their way down the page as we speak. What a fantastic idea. Should have done this months ago.)

The standard rental insurance policy is in zero-point green font on the back of the pink copy of a triplicate sheet that you’re not reading the back of anyway. You don’t want to spend any more time than you need to at a rental desk, and that goes double if you just got off a plane and have an inviting hotel room waiting for you. You just want to get out of there, especially if the alternative is reading paragraphs of legalese. So it’s tempting to just ask the clerk what every type of additional coverage means, then treat his non-binding oral descriptions as Gospel.

Don’t. Coverage can not only exceed the cost of the rental itself, it’s almost always redundant.

There are 17,756 possible 3-letter acronyms in the Roman alphabet. The car rental industry has a corresponding type of coverage for every one of them. Here’s what they are, and why they’re mostly useless. We’ll start with a couple of easy ones. Then on Friday we’ll show you where the car rental agencies do the most efficient job of separating you from your money:

LDW – Loss Damage Waiver (similar to its less encompassing cousin, Collision Damage Waiver, which is offered by some rental companies.) If you rent a car and someone steals it, or vandalizes it, or it gets in an accident, or hailstones fall on it, or it hits a pedestrian who survives and feels litigious, someone has to make good.

LDW is insurance, but the rental companies don’t call it that because they’re not licensed to sell insurance. They use the term “waiver” because when you agree to pay the extra $20 a day, the agency itself is waiving its right to charge you for damages.

We can sympathize with people who argue that LDW gives you peace of mind, which it does. But even peace of mind should submit to cost/benefit analysis. If someone offered you an all-inclusive lifetime medical policy, one that covered everything from standard office visits to trauma care, to all the Purinethol pills you could swallow, would you take the policy – if it cost $5 million?

If you drive, as you probably know if you drive, you have to have insurance. If you’re one of the few people who has a valid license with no existing insurance (certainly possible, if you live in downtown New York or Toronto or somewhere and gave up possessing a car), the rental agency can, and should, require you to buy LDW.

That leaves the 99+% of us who actually use our licenses, and whose primary insurance will cover us first. READ YOUR (primary insurance) AGREEMENT. People don’t like reading agreements. That’s why we have a subprime mortgage crisis in this country, a crisis created by homeowners.

If you temporarily transfer your State Farm or AAA or whomever coverage to your rental car, your deductible will still apply. Which is only fair, isn’t it? Causing damage, in CYC’s carefully ratiocinated opinion, is bad.

Of course, you need to think a little harder if the car you’re renting is vastly more expensive than the car you drive primarily. Say you rejected comprehensive coverage when you bought the policy to cover your 1986 Yugo. (Which makes sense. If a $1200 car incurs $1000 in damage, you should sell it to a junkyard.) But that leaves you exposed if you rent a Jaguar. Also, why the hell are you renting a Jaguar?

Yes, the LDW will cover you for such unremarkable mishaps as flat tires. But your rental vehicle comes with a spare, and most tire places will repair a flat for next to nothing.

SLI – Supplemental Liability Insurance

For $9 a day, give or take, this gives you up to $1 million in excess liability coverage. Above we listed scenarios, however unlikely, in which LDW might make sense. There’s no scenario in which SLI makes sense. If you’re not carrying enough liability insurance on your primary policy to begin with, the Enterprise counter isn’t the place to make a necessary lifestyle change. Instead of marking an X in the Hertz box, call your insurer and add the coverage on your main policy.

Presumably, you can live with a minor dent in a panel on your own Toyota Camry. But when you get a similar dent while driving a car from Alamo, they’re going to be less forgiving about it. Hence the deductible, previously alluded to. The likelihood of you incurring damage greater than your deductible during the brief period that you’re renting the car is small enough that you should play the odds and forgo the supplemental insurance. If it isn’t, then you’re a crappy driver and shouldn’t be renting a car (or getting insured) anyway.

If you think that’s bad, wait 48 hours. More financial skulduggery, and how you can combat it, Friday.

This article is featured in the following carnivals:

**Carnival of Financial Planning: Thanksgiving Edition**

**The Carnival of Financial Camaraderie #9**

**Top Personal Finance Posts of the Week-I Ate Way Too Much Edition**

Filed Under: Finance, Making Smart Choices, Math, Personal Finance Tagged With: , , , , , , , ,

Break Your Appliances, Not the Bank

September 28, 2011

Here, this looks like an easy fix

Rather than obsess on how to save money, at CYC we focus on creating, building, maintaining and protecting wealth – regardless of how much you’ve already accumulated. We maintain that few measures that purport to save money are worth the time. (If you don’t believe us, go visit the simpleton who cans his own preserves and then calculates the savings to the second decimal place. He’s easy to find.)

Easy Street, here comes Trent

That doesn’t mean we can’t write about saving money. But as usual, we prefer to drop anchor where the big fish are. Given the choice between pocketing .07¢ on every serving of peach compote or saving thousands with a couple of keystrokes, we’ll take the latter every time. (And then, of course, invest the savings.)

Do you own a house? You should, given that the combination of prices and financing is at a historical nadir.

Once you’ve got a house, get a home protection plan. It’s not quite insurance, but the differences are inconsequential. For a nominal yearly fee, a plan will cover you if something breaks. It will.

NOTE: This is not an infomercial. American Home Shield isn’t paying us for this. We should probably charge them, but they don’t know we’re writing about this and we didn’t tell them. We’re just trying to sell you on the concept of spending a few bucks today to avoid spending a ton later.

CYC World Headquarters has a policy that costs less than $54 a month. Every time something breaks – something that requires a professional – there’s a $60 service fee.

There’s NO LIMIT to the number of calls we can make. It says so right there in the company literature. Practically speaking, even if everything you own breaks, that wouldn’t amount to more than 20 items in a year. And presumably, every warranty replacement would remain in good condition throughout the remainder of the year.

The policy covers easily repairable stuff that isn’t worth the price of a service call (e.g. smoke detectors, doorbells), but also covers other items that a lay person can spend the better part of a week toiling over before admitting defeat (e.g. water heaters; stupid fancy Swedish dishwashers that we bought because they looked so alluring on the retailer’s showroom floor, but not alluring enough to save the retailer from receivership, and which no one in the six-state area seemed to know how to fix.)

On average, a heating unit costs almost $2700 to repair; or more than 4 years’ worth of payments to the warrantor.  An air conditioning unit costs over 3 years’ worth. Even a water heater can cost 11 months’ worth.

How does our warranty company make money? Who cares? Not our problem.

Wait, that’s not a fair nor satisfactory answer. We preach throughout the book that you should look at every transaction from the other party’s perspective. Determine if they’re screwing you over, or if they’re merely getting a fair price for a good service. In AHS’s case, the company profits by spreading out risk. AHS can almost guarantee its network of electrician and plumber affiliates a certain amount of work in each region where it has policyholders.

There’s an ancillary benefit too, which AHS doesn’t even publicize all that much. They give us non-obvious advice about how to maintain our things. (Non-obvious advice is the only kind we have any use for here at Control Your Cash, which you know if you’ve read us for any length.) For instance, who knew that a few pounds of lemon juice ice cubes will remove debris buildup on the sharp edges of a garbage disposal and put an end to that cacophonous whirring metal sound? It works in seconds, and it saves a visit from a plumber who’d rather be doing something challenging like a main line replacement or a boiler conversion.

That’s a win-win for both AHS and us: it reduces the likelihood that AHS will have to pay a technician, and it reduces the likelihood that we’ll require one in the first place. AHS would just as soon collect our money without having to do anything, and we’d just as soon not have stuff break. Plus we’re getting free, actionable knowledge: put into practice, that’s the very foundation of a worthwhile and productive life.

AHS doesn’t cover everything, but it covers enough. Fine, so we have to pay for own electrical face plates. Big deal. The peace of mind of knowing that we’ll never have to fix a well pump ourselves is more than worth the monthly fees.

 **This article is featured in the Carnival of Personal Finance 329: California Dreaming Edition**

Filed Under: Healthy Living, Making Smart Choices, Math, Net Worth, Shopping Tagged With: , , , ,

Au M G!

September 2, 2011

This bears revisiting, yet again. 88 weeks ago we encouraged you to look at the “rising” price of gold from a different, opposite perspective.

Why is “rising” in quotes? Because it implies that gold is getting more expensive, when technically all it means is that it takes more dollars to buy the same amount of gold than it did previously.

No, that’s not splitting hairs. It’s a distinction with a gigantic difference. Again, it takes more dollars to buy the same amount of gold than it did previously. In other words, each dollar now buys less gold.

Why do we assume that it’s the dollar that’s the consistent source of value and the gold whose price is deviating from some norm, rather than the other way around? Especially since the supply and inherent value of gold are far less subject to political pressure and artificial maneuvering than are the supply (and inherent value) of the dollar?

We proposed that instead of quoting the price of a fixed quantity of gold in dollars, we quote the price of a dollar in the corresponding amount of gold. Hence a new makeshift currency, the Aumg (milligram of gold.)

For instance, as of this writing the price of gold is listed as $1830 per ounce. Using the reciprocal of that, a dollar is thus worth .00056 ounces of gold. Clearly ounces are unwieldy units to use here, so instead we use milligrams. There are 31,103 milligrams in a troy ounce*, therefore a dollar is worth 17 Aumg.

Which means nothing on its own. Instead we have to look at comparisons over time and across currencies.

When we first devised this idea, the dollar was trading at 30 Aumg.

Last November, it was down to 22 Aumg.

And in 1968, it was worth 883 Aumg.

It’s not as if gold suddenly got less plentiful over the last 43 years, or even the last 43 weeks. The world’s gold reserves didn’t exit the atmosphere and head for Venus. It still takes unbelievably long man-hours and prohibitively expensive capital investments for mining companies to dig gold out of the ground and turn it into something shiny and marketable. That’s part of the reason gold has been such a constant source of value throughout human history: unlike oil, natural gas, pork bellies or other commodities, the annual output of gold stays consistent (and low, especially relative to what’s already been mined.)

Dollars are a different story. First off, they’re artificial. They’re an arbitrary representation of value, created and put into circulation by a government that controls all the printing presses. Not to go Montana Freeman on you, but even the most ardent monetarist in the world would have to concede that. It’s a fact, not an opinion. And because dollars are imaginary, there’s no limit to the number of dollars the government can create. If Federal Reserve Chairman Ben Bernanke orders the Fed to create $38 octillion, it can and will. The number isn’t even limited by the amount of paper and ink available: all the Fed would have to do is increase the denominations.

Dollars are imaginary, but that doesn’t mean they’re worthless. (You can place an ad on the ControlYourCash.com sidebar, and we’ll take dollars as payment. At least for now.) But look at the numbers above if you don’t believe they’re a declining source of value.

So who cares? Prices rise, wages rise correspondingly. They’re just numbers, right? My grandparents bought a house for $40,000, but it still represented 4 years’ wages like a similar house would today. What’s the problem?

The problem is that the government owes money. Lots of it. To future retirees, to foreign governments, etc. The federal debt is the largest dollar figure regularly quoted in the media. Either those bills need to be paid, or the government must default.

Government “of, by and for the people” means that 1/300,000,000 of that debt is yours. If that sounds overwhelming, you can thank the representatives and executives you chose to represent you.

Those payments are quoted in dollars. An insolvent government has every incentive to weaken the value of each dollar it owes. It does that by printing more of them, making each dollar worth fewer and fewer Aumg.

Here’s all the proof you need that the number of dollars in circulation isn’t close to keeping pace with the gold in circulation. Those annual increases in the money supply far exceed any increases in population.

What does this mean for you? Relative to the pound, the euro, and the Canadian dollar, the U.S. dollar might stabilize. It might even increase in value. But relative to gold, wagering on the dollar is a losing bet.

Unless that federal debt gets any smaller.
(Try to contain your laughter.)

*You know that childhood brainteaser, “What weighs more, a pound of feathers or a pound of gold?” The answer is the feathers. Metals are measured in troy weight, just about everything else is measured in avoirdupois weight. An “everyday” ounce is larger than a troy ounce, and besides, there are 16 avoirdupois ounces to an avoirdupois pound as opposed to 12 troy ounces to a troy pound.

**This article is featured in Totally Money Carnival #36: Football is Back Edition**

Filed Under: Economy, Estate Planning, Math Tagged With: , , , , , ,
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