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: , , , , , , , ,

This post will save you from a lifetime of servitude.

October 5, 2011

 

Free at last, free at last

“Servitude” is one of our favorite words here at CYC. It’s just so versatile in the realm of personal finance. It describes the average employee’s relationship with her employer, the average debtor’s relationship with creditors, and the average human’s relationship with money.

Credit card debt is an inescapable condition of life for most people, as much a constant as snow in winter or the sun rising in the east. On the 1st of every month, you examine your brake fluid level, flip your mattress, and write another check to MasterCard to cover your minimum balance and maybe a little more.

Like illegitimacy, morbid obesity, and collecting welfare, the idea of credit card debt having shame attached to it sounds Paleolithic in 2011. Why shouldn’t it, when the issuers charge those confiscatory rates and expect us to pay them as some sort of punishment for spending our own money? It’s un-American, I tells ya.

You probably already have a card, if not several. That’s just what we do when we reach adulthood in this society. As far as rites of passage go, it’s less jarring than having to leave the village and come back with the head of grizzly. Or cotillions.

Maybe we can catch you early. Maybe you’re young enough not to have anything beyond a debit card, and want to build your credit history. Oh, who are we kidding? For every person who makes a sober effort to “build his credit history”, 50 others want a credit card solely so they can overextend themselves.

Some folks can neither handle nor detect sarcasm, so we’ll play the rest of the post straight. Which isn’t easy.

There are plenty of legitimate reasons to obtain a credit card. A credit card as a concept that is, rather than a particular card. And by “plenty” we mean 4:

  1. Building credit history (see above).
  2. Fronting money when you need to leave a deposit larger than either the value of what you’re taking possession of or what’s in the account tied to your debit card (e.g. renting a car)
  3. Consumer protection.
  4. Rewards.

And one more, universality. You don’t want to run the risk of your card not being accepted, especially if you carry only one. American Express is recognized around the world, but as any American Express cardholder knows, even in the United States plenty of businesses won’t accept it. VISA and MasterCard are accepted almost everywhere, from Timbuktu to Timor. Discover claims that’s its honored in over 40 countries, but that’s news to people who live in 39 of them.

Any card will give you the first two.

As for consumer protection, you want your issuer to guarantee defective purchases up to the purchase price. If the card issuer is willing to underwrite what you buy, then the card issuer should be willing to bear the entire brunt should things go wrong.

I’ve had two instances when I relied on card issuers. In one, I visited South Africa and used the VISA debit card issued by my former bank. Some enterprising sales clerk now had my card number, a copy of my signature, and, presumably, the 3-digit Card Security Code.* Weeks later, after I’d returned home, she rang up a couple of purchases each around $50. I saw them on my next statement and brought them to my bank’s attention. They made me fill out a form and then refunded me the money within days.

American Express helped me out with a hotel that didn’t state a no-refunds policy, but charged me for a full stay even though I cancelled with plenty of days’ notice. The resolution took little more than a week, and I didn’t lose a penny.

Neither time was the issuer at fault. In the first example it’s pretty obvious who’s guilty, yet my bank reimbursed me under VISA’s auspices. They figured it was worth the $100 or so for them to keep me as a customer, even though it wasn’t. They’ll never make $100 off me.

In the second example, the card issuer was slightly at fault. Maybe. You can argue that the because the issuer gave its imprimatur to the hotel, vouching for it as the kind of honorable company that doesn’t assess arbitrary charges to customers who cancel, the issuer should be held somewhat responsible. I’m guessing the hotel (it’s a tiny place, 17 rooms) doesn’t pull that garbage any longer.

That leaves rewards. Which we’ll get to Friday, in Part II of this thrilling dilogy (bilogy?) on which card(s) to get. The definitive answers, coming up. Until then, pay cash.

*So does every other retail employee and waiter you’ve ever dealt with. But yeah, Grandma, typing in your credit card number on the internet is risky. 

**This article is featured in the Yakezie Carnival – October 9th, 2011 Edition**

Filed Under: Consumer Debt, Credit Cards, Making Smart Choices, Personal Finance

Follow these steps for guaranteed wealth. Seriously.

September 16, 2011

 

Make fun of this guy and his fellow investment advisors all you want, but what they lack in sexy they more than make up for in forbearance.

I need an investment policy? (yawn) Spare me, please. I just want to be rich.

An investment policy sounds like something that’s calibrated during long, torturous hours in someone’s corner office. Where you’re sitting across from a prim and effete financial advisor, fresh out of business school, all proud of his MBA and his new job and those reams of theoretical knowledge practically spilling out of his overcoiffed head. Do you seriously need that?

Almost certainly not. If you do, most likely you’re already rich and have better things to do than read a blog. In that case, you need an accountant, maybe a tax lawyer. A portfolio manager? Go away now.

Here’s a quiet truth about personal finance and many of the industries that have arisen surrounding it: there’s not a tremendous difference between the professionals and you. As a discipline, personal finance is similar to sociology and women’s studies in that there’s almost no hands-on knowledge involved. Unlike petroleum engineering, where you have to get oil on your fingers and have some physical representation of your data. Or medicine, where you have to treat real patients with ailments and sometimes risk their lives.  What separates a professional financial advisor from an amateur is little more than a few officially administered multiple-choice tests.

Learning the details of personal finance can be intensive and demanding, but the basics are available to anyone with opposable thumbs.

For starters, you don’t merely throw money into the stock market and hope for the best. You don’t even read financial statements, invest in the stock market and hope for the best. You’ve got to look at when you’re going to die, and what you’re going to do before then.

If that sounds morbid, that’s what a formal investment policy is, for the most part. The way the professionals formulate and administer an investment policy, a client is supposed to sit down and list rules that the person in charge of her money then adheres to. But it can’t just be “I want to maximize my return and minimize my risk”, which describes every investor in the history of the universe. You need to be more specific, with regard to:

1. How old you are. Obviously, the more life you have ahead of you, the less conservative you can afford to be and the less calamitous it is if you lose everything.

2. How liquid you need to be. Having cash on hand and being wealthy aren’t always the same thing. Your average meth dealer has plenty of money in his wallet, and probably sleeps in a room that you wouldn’t feel comfortable entering without wearing a surgical mask.

In a famous story from the 1980s, baseball pitcher Rick Sutcliffe loaned $500,000 to Bruce Springsteen so he could close on a house. The Boss was at his apex of popularity at the time. He obviously wasn’t poor, but his money was tied up in investments that he couldn’t immediately get out of and convert to cash without paying a big penalty. Even if you have a billion dollars socked away in inflation-protected securities, you still need a few readily available bucks for day-to-day living.

In the end a formal investment policy will begin with something like this, only written in legalese and incorporating a service fee that’ll eat up part of your principal:

  • I’m a 25-year old woman. I have no kids, and thus smaller expenses than a mother would. Also, I live with my boyfriend, so my expenses are even less than they’d be if I was living alone. We rent a townhome, while we’re waiting to build up equity to buy a house.
  • I make $40,000 in annual salary. After taxes and expenses, I can save around $10,000 a year.
  • My 401(k) is worth $2,500, but I don’t even know what it’s invested in and wouldn’t mind finding something a little more aggressive.
  • I live in Chicago, which means I’m paying a relatively high cost of living. We want to get married and move to Nebraska, where the people are friendlier and everything’s cheaper.
  • My job is unfulfilling but secure. It’s so secure that I know what I’ll be making for the next 5 years if I stay in it. I’m willing to invest in volatile stocks rather than super-safe T-bills if it means having a chance to reach my goals more quickly.
  • Oh yeah, my goals. I want my investments to clear $75,000 a year when I turn 65, tax-free, and continue to until I die.
  • I don’t have any dependents and won’t, so I don’t care about leaving a will.

You almost want to do this backwards, starting with the answer, and then work your way back to the questions. “I want a principal of $x, and an annual cash flow of $y. How much do I have to save, how hard to I have to work, what kind of return on my investments do I need to make this happen?”

You should be able to do this yourself – ask the right questions, and give yourself honest answers. And don’t limit yourself. Start big. Don’t designate the summer villa in Provençe as either achievable or unachievable – it’s simply a goal that you can devise a plan to reach, or not. The same goes for the 4 kids you want to have or the kitchen you want to renovate.

Let’s take the kitchen renovation. You shop around and figure that putting in new appliances, wall tiles, wooden floors with a decorative inlay and an island will cost you $10,000.

Sure, you could take it out of your available cash and pay for it today. But if you’re the woman from our example, you just wiped out your entire savings and had better hope that no unforeseen expense finds you.

If you’re willing to wait 9 months, you can invest $5,000 of that $10,000 in what you believe to be an undervalued stock. You can continue saving your salary at your current rate, which would net you another $7500. The stock might gain 20%, which means that the redone kitchen would make a far smaller dent in your nest egg then than it would now.

Some people choose to place such expenses on their credit cards and pay 19% interest on them until the end of time. Others like to do some calculations first. You can probably figure out which is the better idea.

**This article is featured in the Yakezie Carnival September 25, 2011**

Filed Under: Estate Planning, Personal Finance, Taxes Tagged With: , ,
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