Value (Routinely) Added – Case Study #3

I finished a case this week that bears out an important point: many who come to me for insurance advice walk away with something they didn’t expect; frequently it’s more valuable than what they came for.

This client is a UPS pilot considering long-term care insurance and wanted me to look over his life insurance as well. Like a lot of pilots he had a military background and already connected with a good insurance company, USAA. He got a 20 year term policy at preferred rates 6 1/2 years old so he could not improve upon it. Then the question of long-term care insurance became the focus.

As we reviewed his overall financial picture, which is something I always do, his most glaring deficiency was using a home equity line of credit (HELOC) to buy his house. He did not currently have any equity. Furthermore, he had a $30K loan from USAA at 3.25% and the cash was just sitting there as an emergency fund. It made him feel comfortable, though he almost never used it. He had a very high monthly take-home paycheck, and like a lot of high income people he had gotten a little loose in his spending habits.

My first recommendation was to pay off this unnecessary loan which was costing him over $80 per month interest. Recommendation number two was to carefully track all expenses for his two months to reveal where his money was going and what could be cut out to build up his emergency fund. His debt service for the USAA loan was $450/month which we committed to build the emergency fund with the goal of quickly growing it to one-month’s disposable income. After this he will pay off 20% of the HELOC loan so he can get permanent financing on his house and not have to pay private mortgage insurance.

We put the long-term care insurance on hold (see Debt-Free is Stronger than Well- Insured post) until we get on a sound budget and debt repayment plan. Interestingly USAA discouraged him from repaying the loan even though he rarely used it. (They have an agenda too.) If he has an emergency that exceeds his currently-too-small emergency fund, he can put it on a credit card. No sense paying interest to have a fund for an emergency that may never occur.

So the agent promotes long-term care insurance (a low priority); USAA promotes an (unnecessary) loan, and that’s the nature of commerce: everyone is trying to get him to buy something, when the real secret to his financial advancement is to cease buying anything (insurance included) while he pays for that which he has already bought (his house).

This client got a benefit he didn’t expect and will receive a 160% annual after-tax return on the fee he paid me just for the debt repayment idea, aside from another handful of ideas.