Alternatives to Large Banks

With the trouble in large banks, many people are re-evaluating their banking needs and looking for alternatives.  Local banks are looking more attractive–particularly ones that have been conservative in their investments and aren’t suffering from the problems larger banks are running into.  Local banks also can be more in touch with local needs and have services that cater better to what you need in your community.

Credit unions are another option.  In the past credit unions were designed to service a particular group or organization, so membership was limited.  A good percentage of credit unions in operation today were founded to help their community so membership is open. Credit unions operate a bit like a Co-Op so they are actually owned by the people who put their money into the bank.  As a result they often have interest rates that are higher than other banks that need to make a profit for the owners.

Online banks are a third option.  While you may sacrifice the personal service of a local bank or credit union, an online bank may offer a lot in terms of online services and higher interest rates.  For example, local banks may have a more difficult time offering free bill pay services while an online bank may have a business plan that requires it to get as many people as possible to use bill pay in order to keep their expenses low and avoid hand sorting physical checks.

Safe Life Insurance

Money Adviser (a publication of Consumer Reports) has some tips for making sure your life insurance is safe.  Here are their main points and our commentary.

1. Can you trust the ratings?

Life insurance companies are givine ratings by rating agencies.  However, these ratings are not always what they seem.   Rating agencies like Fitch, Moody and Standard and Poor have run into a lot of trouble recently because of overly optimistic ratings they gave to the mortgage backed investments.  Also keep in mind that A or A+ may not be the top rating.  The systems used can be very difficult to understand and you need to make sure you understand the whole spectrum before deciding that a particular insurance company is rated well.

2. Does it matter how ratings are financed?

Money Adviser found that when an insurer pays a rating agency, they often get higher ratings that when rated by a company that doesn’t accept payment.  TheStreet.com was shown to be the toughest rating agency and they do not accept payment.

3. Are life insurers at risk?

There has bee quite a shakeup in insurance companies.  The current economic climate is having a big impact on their investments that they use to pay out claims and most of them saw their reserves drop by 24% last year.  It isn’t entirely clear how much worse things can get, but it looks like there may be some more losses in the future.

4. What if your insurer goes under?

Most insurance companies are part of state guaranty associations and other backup insurance that will help cover their payouts if they get into financial trouble.  However, like FDIC insurance, there are limits on how much is paid out and it could be significantly less than the coverage you are paying for.  There are also likely to be delays and other issues in actually getting the money if the company goes under.

Money Adviser gives some advice on how to protect yourself:

1. Maintain good health. If you have to get a different policy, you want to be able to get the best terms possible.
2. Monitor your insurer’s health. TheStreet.com has a track record of identifying troubled insurance companies months before the government gets involved.
3. Shop for the best price. http://www.accuquote.com and http://www.findmyinsurance.com are two places to start.
4. Diversify. Consider buying coverage from separate companies.  Make sure you understand how your state guaranty association limits will apply should the companies go under.  Also consider that you may pay more for two $250k policies than for one $500k one.