How to Deal With a Minimum Payment Increase

Chase recently announced a 3% increase in their monthly minimum payment for certain credit cardholders. More credit card issuers could follow. Unfortunately, there's no option to reject the change, so unless you get rid of the balance, you're stuck with the higher payment. Here's what you can do if your card issuer increases your minimum payment.

Stop making purchases on the credit card.

The last thing you need is a higher balance on a credit card whose minimum payment is already difficult to afford. Put the credit card away and avoid using it until you've paid your balance off. Then, make small, affordable charges on the card and pay the balance in full each month.

Pay the entire balance.

If you don't have a balance on your credit card, a minimum payment increase won't affect you. If you're actively working toward paying off your credit card balance, you'd be making higher-than-minimum payments anyway. Since your minimum payment is a percent of your credit card balance, reducing your balance will lower your minimum payment. Ultimately, getting rid of credit card debt completely is the best way to avoid credit card changes like minimum payment increases.

Transfer to another credit card.

When you simply can't afford the increased minimum payment, consider moving the balance to a credit card with a lower, more affordable minimum payment. You might end up with a higher interest rate on the new credit card, so make sure you'll still be able to afford the payment.

Shuffle around some debt payment amounts.

If you're in the process of paying off your debts, you're probably sending higher credit card payments to one or more of your other credit cards or loans. In that case, you can lower payments on your other debts to get more money for the increased minimum payment.

Cut your expenses to the bare minimum.

In some cases, the credit card minimum payment increases by $500 or more. If this is true for you, you have to come up with an extra $500 each month to send to your creditor. It's time to take out your household budget and cut back on some expenses. Some areas you can quickly cut back: cable or satellite television, cell phone, landline phone, and eating out. Look at where you've been spending money each month to see where you should cut back.

Enroll in consumer credit counseling.

You may be able to reduce your minimum payment by enrolling in consumer credit counseling. Credit counselors work with your creditors to lower your minimum payments and often your interest rates as well. Be careful though, that your creditor doesn't use credit counseling as an opportunity to increase your interest rate. Unfortunately, if you're backed into a corner, you have have to accept a higher interest rate in exchange for a lower minimum payment.

Use a home equity loan to pay the balance.

Using your home equity loan to pay off debt is risky business. That's because you're using your home as security for your credit card debt. If you fall behind on your credit card payments, your credit gets tarnished. On the other hand, defaulting on a home equity loan puts you at risk of foreclosure and hurts your credit. Nevertheless, a home equity loan is an option you should carefully consider and take at your own risk.

Cash for Trading in Your Car

The federal government might give you cash to trade in your existing car or truck for a newer, more fuel-efficient vehicle. The Consumer Assistance to Recycle and Save Act (part of H.R. 2346 which has been passed by Congress and is headed to the Whitehouse for the President's signature). This is not a tax credit or a tax deduction, but it is money from the government.

Under this program, the National Highway Traffic Safety Administration will issue vouchers to be used to offset the purchase of a new car. The vouchers are worth up to $3,500 if the new car has a fuel-efficiency rating at least 4 miles per gallon higher than the old car traded in. The voucher jumps to $4,500 if the new car is at least 10 miles per gallon more efficient than the old car. There's different fuel-efficiency guidelines for trucks. (See below.) Purchases need to be made between July 1, 2009, and November 1, 2009, to qualify for the vouchers.

The tax impact? Here's the part I like best. The payment vouchers will not be considered taxable income for the car buyer.

In addition, car buyers are eligible to deduct the full cost of sales taxes paid on the purchase of a new car. This vehicle sales tax deduction is available for purchases made after February 16, 2009, and before January 1, 2010. Also, there's still some tax credits available for hybrid and other fuel-efficient cars.

Making the Most of Your Savings

Where is the best place to stash your cash? Under your mattress? In a cookie jar? Your checking account? Savings account? Certificate of Deposit? With so many choices, it's easy to throw up your hands and take the path of least resistance, but that can end up costing you money in lost interest.

It also doesn't help that lower interest rates are making it more difficult to find good rates of return on your money. Nevertheless, this isn't a time to abandon your emergency fund just because the rates are low. Your goal should be to maximize returns while maintaining the liquidity you need.

There are five common places that you can use to manage your short-term savings:

• Checking Accounts
• Savings Accounts
• Money Markets
• Certificates of Deposit
• Savings Bonds

Learn more about where you should keep your savings, and check out the primer on U.S. savings bonds to help you make the most of your savings.

By Jeremy Vohwinkle, About.com Guide to Financial Planning

How Long to Pay Off Balance With Minimum Payments

If you only make the minimum payment on your credit card, it could take years to pay off the balance. Not even that, you could end up spending hundreds, possibly even thousands, in interest by the time the balance is repaid.

How Minimum Payments are Calculated

Typically, minimum payments are calculated as a percentage (something like 1-3%) of your credit card balance. Late fees and over-the-limit fees can increase your minimum payment beyond the base percentage of your balance. Your credit card agreement will describe how your minimum payment is calculated.

Even though it seems like minimum payments are easier to make, they actually cost more in the long run.

Minimum Payment, Maximum Cost

Consider having a balance of $5,000, at 14% APR, and minimum payment as 2% of your credit card balance. Making minimum payments only, it would take you 22 years and $5,887 in interest payments to pay off this debt.

Increasing your payments to $125 a month would allow you to pay off the same debt in less than 6 years and spend only $1,775 in interest.

Not only does increasing your payments allow you to pay off the balance sooner, you also save money in interest.

Calculate Your Minimum Payment Timeline

To see the pay off time and cost of making minimum only credit card payments on your balances, you can use this minimum payment calculator from Credit.com. You might also use the pay off calculator to calculate your pay off time and cost when you make higher monthly payments.

Dollar Cost Averaging - Still a Good Idea?

When you dollar cost average (DCA), you invest a certain sum of money in a specific investment (or investments) on a pre-set schedule. For example, you might arrange to put $100 into mutual fund X on the first day of every month. The primary advantage of dollar cost averaging is that you will buy more shares when the price of the investment is low and fewer shares when it is comparably higher. You automatically use DCA when you sign up for your 401(k) plan.

So, when wouldn't DCA be a good idea?

Turns out, about two-thirds of the time. Since the stock market generally goes up (notwithstanding the nearly two years of current market pain), by waiting to invest a lump sum of money, you miss out on more of the long-term price appreciation. Still, if and when you have a lump sum to invest, you don't know if we're about to enter a period of time when you would be better off investing all at once (two-thirds of such situations) or doing so over several months or longer (one-third of similar occasions). Like everything else, using dollar cost averaging is a trade-off between risk and reward. What would you do? What do you actually do? What do you think about dollar cost averaging?

By Michael Rubin, About.com Guide to Retirement Planning

Insurance Report Card

Now that the school year has ended are you ready for those report cards? Not just students are graded, so are insurance companies.

They are called ratings. These ratings are administered by independent companies. They are sort of like a report card on various aspects of a company's financial strength.

Best's Insurance Reports is an example of a popular independent insurance rating company. Similar to a report card, the ratings range from A+ to a C.

Now that you know..have you checked your insurance company's grade yet? Need to know how? It's easy-just call your insurance agent or company and ask.

Finding More Money to Help You Pay Off Debt

When you're just trying to keep up with your minimum credit card payments each month it can be hard to think that you have extra money sitting around. Although you may not realize it, you're probably sitting on at least an additional $100 per month worth of money that could be used to get that debt paid off faster.

It may be hiding in the more traditional places such as investments or an old cash value life insurance policy, but even more likely is the money that is slowly being drained from your bank account every month. The silent money pit usually comes in the form of small monthly payments. A few dollars a month for a magazine subscription, a gym membership that is rarely used, or even that premium cable channel can really begin to add up. Find five ways to save $10 each month, and you have another $50 a month, or $600 a year to accelerate those credit card payments. This can result in a significant savings on interest, and even cut months or years off the repayment period. Learn more about how you can find extra money to help pay off your credit card debt.

12 Simple Ways to Save Money Today. Learn how.

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Financial Emergency! Tap the Roth?

With the unemployment rate rising practically weekly, many folks are facing real financial emergencies. An event such as a job loss is the perfect time to tap an emergency fund - money put aside for just such an unexpected occurrence. Unfortunately, many people still don't actually have emergency funds. As a result, such folks may consider tapping their Roth IRA money to get by while they look for new employment.

There are plenty of downsides to tapping your Roth IRA in an emergency, not the least of which is the permanent reduction in the future value of your retirement account. That said, a Roth IRA distribution may be the only option for some people. If the total you take out is less than the amount you had previously contributed, you won't owe any income tax or early distribution penalty. If you exceed your contribution total, the financial implications get ugly fast, so try your best to avoid going over that magic number.

Kobrin Ememo - Shrinking your life insurance premium

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New opportunities for consumers
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More generally, this news item illustrates a growing trend. Carriers that are seeking a competitive edge will choose one or several health areas in which recent medical advances now allow a more precise prognosis. This means their underwriters can more accurately assess an applicant's mortality risk.

For example, some carriers now utilize cognitive testing when underwriting applicants over age 70, to determine whether or not certain impairments inherent in that age group are manifest. Other carriers use specific blood tests to better appreciate the probability of a heart attack.

All of this translates into new opportunities for consumers. People with an impaired health risk may be able to reduce their costs, if they were previously saddled with high premiums. Likewise, people who could not even obtain coverage before, may be able now. A broker who specializes in impaired risks can direct you to the carrier that is right for you.

Interested in Some Free Life Insurance?

If you are employed at least part time and make less than $40,000 per year then you may qualify for free life insurance by MassMutual. The free life insurance program is called LifeBridge. Here are some details according to their website:

"MassMutual's LifeBridge Program provides free life insurance. It is designed to help you protect your dream of providing an education for your children if you die before they complete their schooling.

Under the LifeBridge Free Life Insurance Program, Massachusetts Mutual Life Insurance Company (MassMutual) will issue a $50,000 life insurance policy to a trust for a period of 10 years and at no cost to you. If you die within that time period, the $50,000 is used to cover the educational expenses of your children. And your children have 10 years after your death or until age 35 (whichever is later) to use this $50,000 educational benefit."

A New Federal Tax Reform Panel

Obama has appointed Paul Volcker to head a panel that will make recommendations for reforming our nation's tax laws. Volcker is also the head of the President's Economic Recovery Advisory Board.

The advisory panel will consider ways to simplify the tax code and reduce tax evasion, and will make recommendations to the President by December 4th, 2009, according to a White House briefing.

The last time we had any serious consideration for tax reform was in 2005 when President Bush appointed a panel of advisors to come up with simplified tax systems. Those recommendations were never implemented. There is a strong suspicion that recommendations coming out of this new tax reform panel might not fare any better. Rosanne Altshuler, who worked as the chief economist on the 2005 panel, fears that Paul Volcker and his team might be too constrained,

"President Obama has said that no one making less than $250,000 could pay higher taxes under any new reform. That means ninety-five percent of taxpayers can’t pay additional tax, even if it would result in a more efficient system, decrease inequities, or make their lives much simpler. At a time of monster deficits, that pretty much rules out any sensible reforms." Tax Reform 2.0 (TaxVox blog)

There's no sign of any Web site where we can see what's going on with this advisory panel. The Web site for the 2005 panel, located at www.taxreformpanel.gov, has been removed. Perhaps it will be resurrected for the new panel? I also hope the panel solicits recommendations from the public and holds meetings. This would gives all of us a chance to voice our ideas for tax reform.

By William Perez, About.com Guide to Tax Planning since 2004

Black Swan Theory in Insurance

Black swan theory was bound to show up in the insurance industry, but so far there has been limited discussion. Do you know what a black swan is? Black swans are important in assessing future insurance losses, but are they adequately represented in the models?

The term originates from a book called The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb (also see here, or see Recent Books on the left of this blog). Wikipediahere): provides a good definition (see

a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations

The book was written from the perspective of investing (Taleb was a hedge fund manager), but the concepts are particularly important for the insurance industry. A central thesis of his book is that models are defective and lead to incorrect conclusions because black swan events are not contained in the data and are therefore assigned a probability of zero outcome – obviously incorrect.

While there has been quite a bit of discussion of insurance modeling, there has been little discussion of black swan events and the ability of predictive models to adequately assess severe catastrophes for insurance purposes (see here and here for two such articles).

However, two articles came to our attention recently. The first (see here) is a response to some comments made by Taleb in an interview (see here). Taleb notes:

My idea in The Black Swan is to make people think of the unknown and of the potency of the unknown, particularly a certain class of events that you can’t imagine but can cost you a lot: rare but high-impact events.

The author makes an excellent pitch for combining predictive modeling techniques with outcomes not envisioned in historical data, and makes 4 suggestions for planners (see here).

In the second (Risk & Insurance commentary, see here) the author is concerned that the black swan theory may result in less risk management and assumes that because black swan events occur we should or will not consider past history.

I fear they may increase paralysis in risk management and further promote inaction.

But black swan theory is telling us that modeling, which relies on historical data, is only part of the story. In fact, the future will be a combination of prior history, reflected in historical data, and new events, which can and at some point will lead to more volatility – sometimes better, sometimes worse.

The important point is that black swan events are not contained in historical data, and therefore traditional predictive models cannot provide complete picture of the future. The second piece is equally important: these events can be so large that they will dwarf other outcomes if they occur, although the probability of occurrence is extremely small.

Unfortunately, we have seen a number of these black swan events in the insurance business in the last few years, 9/11 and Katrina being two such examples. Maybe a more flexible approach to modeling and a focus on risk management could be beneficial to the insurance industry.

Brought to you by MercatorPro.

The Rule of 72 for Doubling Your Money

Compound interest is an amazing thing, and the Rule of 72 is a simple way to quickly estimate how long it will take your investment to double. The only piece of information you need for this calculation is the annual rate of return. While most investments don’t have a fixed rate of return over a long period of time, you can use an average estimate to get a pretty good idea.

How to Use the Rule of 72

To estimate how long it takes for your money to double, simply divide 72 by the interest rate. The result is how many years it will take for your money to double at that rate. For example, let’s assume you can earn a 6% rate of return. How long will it take $1,000 to grow into $2,000?

72 / 6 percent = 12 years

In this example, if you invested $1,000 into an account that earned a flat 6% annual rate of return, after 12 years, your investment would be worth around $2,000. To save a little time, here are some interest rates and the corresponding amount of time to double:

1% - 72 years
2% - 36 years
3% - 24 years
4% - 18 years
5% - 14 years
6% - 12 years
7% - 10.3 years
8% - 9.0 years
9% - 8.0 years
10% - 7.2 years
11% - 6.5 years
12% - 6.0 years

Remember, It’s Just an Estimate

Keep in mind that this is just a quick estimate. Depending on changes in the rate of return over time, what you’re invested in, how you invest it, how interest is applied, and possible tax implications, the actual amount of time needed to double your money will vary. Even so, the rule of 72 can be helpful when you quickly want to compare the rate of growth of two investments.

The rule of 72 also works in reverse and can be helpful in understanding the power of inflation. If you consider the average long-term rate of inflation is between 3 and 4 percent, you’ll notice that something worth $100 today will cost $200 in about 20 years. This can help illustrate the power of inflation and the importance of realizing a rate of return over time that can not only overcome inflation, but also taxes.

By Jeremy Vohwinkle, About.com

New Information in Your IRMI Library

For decades, farm insurers had essentially two choices when it came to selecting insurance forms and rating procedures for insuring farms and agribusinesses: to use "farmowners" forms and rating developed for family-owned and operated farms or to select components from commercial property and liability programs and modify them to fit agricultural risks. That changed in 2001 when the American Association of Insurance Services (AAIS) developed and filed its Agricultural Output Program (AgOP), a standardized program providing a wide range of commercial property and inland marine coverages designed for large agricultural operations. In 2008, AAIS followed up on the liability side by filing its new Agricultural General Liability Program (AgGL), the first standardized general liability program specifically designed for farms, ranches, and other agricultural operations.

The May 2009 issue of The Risk Report provides a detailed review of this new portfolio of specially designed policy forms and how they work to provide tailored liability protection for agribusinesses. If you subscribe on IRMI Online, you can learn all about the AGL program here.

All the best,
Jack

Jack Gibson, CPCU, CRIS, ARM
President
International Risk Management Institute, Inc.

Retirement Deductions for Self-Employed

Type of Deduction:

Above-the-line tax deduction (you don't need to itemize). The deduction reduces the income tax, but does not reduce the self-employment tax.

Basics of Self-Employed Retirement Plans:

If you have self-employment income, then you can take a tax deduction for contributions you make to a SEP, SIMPLE, or solo 401(k) retirement plan. You can set up the retirement plan with a financial institution of your choice. Each plan has different deadlines and funding limits. If you are a sole proprietor, you'll need an Employer Identification Number to set up the plan.

SEP-IRAs:

SEP-IRAs can be established and funded as late as October 15th for the previous year, provided that the taxpayer filed an extension. The maximum contribution is 20% of the person's net self-employed income, with a maximum dollar limit of $46,000 for 2008. "Net self-employment income" means self-employed income minus one-half of the self-employment tax. More about SEP-IRAs.

SIMPLE IRAs:

Simple IRAs can also be funded as late as October 15th (with an extension), but the plan needs to be established by the taxpayer no later than October 1st of the tax year for which the contributions will apply. SIMPLE plans consist of a salary deferral portion with a maximum of $10,500 for 2008, plus a matching contribution of up to 3% (but not to exceed $4,600 for 2008). Taxpayers age 50 or older can defer up to $20,000 for 2008. More about SIMPLE IRAs.

Solo 401(k) Plans:

Solo 401(k) plans combine a deferral portion with a matching portion. The maximum elective deferral is $15,500 for 2008 (or $20,500 if age 50 or older). The maximum matching portion is 20% of net self-employment income. The total of both the deferral and the matching cannot exceed $46,000 (for 2008). Solo 401(k) plans need to be set up by December 31st, but contributions can be made as late as October 15th of the following year with an extension. More about solo 401(k) plans.

Qualifications to Take the Deduction:

You must have self-employment income. Self-employment income for the purpose of this deduction means net profits from a Schedule C or Schedule F, self-employed income from a partnership, or wages as a shareholder-employee in an S-corporation. Additionally, you must set up and fund a qualified retirement plan by the required deadline.

Where to Claim Deduction:

You must use the worksheets found in IRS Publication 560 for figuring your allowable tax deduction for SEP, SIMPLE, and 401(k) contributions. The allowable deduction is then reported on your Form 1040 Line 29. S-Corporations report SEP contributions on the corporation's Form 1120S.

Explanation from the IRS:

"SEP, SIMPLE, and qualified plans offer you and your employees a tax-favored way to save for retirement. You can deduct contributions you make to the plan for your employees. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself. You can also deduct trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan." (from IRS Publication 560)

Relevant Tax Laws:

The deduction for SEP, SIMPLE, and other retirement plans is found in Internal Revenue Code Section 62(a)(6) and Section 404.

By William Perez, About.com

Coastal Risk Management

Coastal Risk Management

Insurance exposures within coastal communities are rising from climate change and development. Increasing populations and property values, higher sea levels and more violent weather are all working to threaten insured property and challenge property insurers. The insurance industry response has been focused on financing the aggregation of coastal exposure in a manner that does not risk insurer solvency. Most of the political response has been focused on affordable insurance options, and one such result, which nobody in the insurance industry believes is effective or reasonable, is Citizens in Florida (see here & here).

Very little attention has been paid to risk management and the impact a risk management approach can have on adverse outcomes. Both pre-loss and post-loss risk management tactics are critical components of successfully financing risk, yet there is little will within the industry or political segments to promote risk management.

A recent paper by The Heinz Center and Ceres has brought a group of diverse organizations (sponsors) together to generally agree on an approach to address the coastal threat that includes a heavy emphasis on risk management (see here, and here for the entire report). Some key points:

Over half the U.S. population lives in coastal counties and almost half of the nation’s gross domestic product – $4.5 trillion – is generated in those counties and in adjacent ocean waters. Further, insured property values along the Gulf and Atlantic coasts have been roughly doubling every decade.

Wharton has demonstrated that homeowners in Florida could reduce losses from a severe hurricane by 61 percent, resulting in $51 billion in savings, simply by building to strong construction codes. Putting this in perspective, the same cost reductions applied to Katrina damages would have reduced the $41.1 billion worth of insured property losses to about $16.1 billion. Similarly, the National Institute of Building Sciences showed that every dollar spent on mitigation saves society about four dollars on recovery costs. Despite this evidence, nearly all U.S. coastal cities and towns lack adequate land use requirements and building code standards to realize these savings.

Five hundred commercial clients of the insurer, FM Global, experienced approximately 85 percent less damage from Hurricane Katrina as similarly situated properties. This significant reduction in the amount of damage was directly attributable to hurricane loss prevention and preparedness measures taken by these policyholders. The return on investment is striking – a $2.5 million investment in loss prevention resulted in $500 million in avoided losses.

While risk management will not eliminate the exposure, it can go a long way towards making the cost of insurance reasonable.

Brought to you by MercatorPro.

Determining if You Can Afford to Stay Home with Your Kids

One of the big questions many new parents are faced with has to do with deciding whether or not one of the parents should stay home with the child. Obviously, if you’re accustomed to living on dual incomes, the thought of giving up an income may sound like a daunting task. Even so, if you sit down and crunch the numbers, you may find that it might be more doable than you thought.

The True Cost of Working

When you think about it, your job not only provides income, but it likely creates some expenses as well. If you were to decide to continue working with the child, you’ll probably create additional expenses in caring for the child. On the other hand, if you were to stay home, you would also eliminate many work-related expenses. Some of the expenses you may have if you decided to continue working with a child:

• Child care: Depending on the level of care you require, you’re looking at anywhere between $400 and $700 per month per child. It isn’t uncommon to spend upwards of $7,000 each year on full child care during the child’s early years.
  
  
• Food and Beverage: While you can save money by taking your own lunch and drinks to work, most people end up grabbing a coffee or a lunch on the go while working. Even just $5 a day on lunch adds up to about $1,300 each year.
  
  
• Transportation: This varies greatly depending on how far you have to commute and whether or not you have public transportation, but even if you spend just $25 each week for transportation costs (gasoline, bus, subway, etc) you might be spending another $1,300 each year just to get to and from your job.
  
  
• Odds and Ends: If you’re in a profession that requires certain attire, you may need to spend money on clothes or dry cleaning. This can add another few hundred dollars a year. Your job may also require certain licenses, professional fees, or continuing education courses that could tack on additional expenses annually.

As you can see, there is more to that second income than meets the eye. Most people will think of the paycheck that comes with the job and assume that’s the bottom line, but there are many other factors to consider. While giving up that job may result in a loss of income, if you consider the expenses you will also give up, the end result may not be as painful as you had suspected.

The Non-Monetary Benefits

While all of this discussion about money is good, you have to think about the other benefits tied to staying home with your child. Money can’t replace the time spent with your children, and if the bonding aspect of parenting is important to you, this can factor in greatly when determining whether or not you can give up an income. Everyone is different and your priorities may lead towards one direction over the other, but don’t overlook the non-monetary issues when making this important decision.

The Bottom Line

There’s no right or wrong answer, and as you can see, it isn’t as straightforward as deciding whether or not you can live with one less paycheck in your pocket. Depending on the type of job you have, how many hours worked, and how much money you make, you may reach the conclusion that it’s impossible to be able to provide for your family if you give up this income. On the other hand, you may find that after factoring in the expenses related to working and the other benefits of staying home, you’re giving up a lot less than initially thought.

So, take your time and go over your options carefully. The decisions you make will significantly impact your family, so it’s important to take everything into consideration. And if you do find that you can afford to stay at home, you can find plenty of assistance at About.com’s own Stay-at-Home Parents site.

By Jeremy Vohwinkle, About.com

An Investment Guide

Stock Markets Fall - Corporate FDs Rise
May 30, 2009 at 10:19 pm

At a time when stock markets zigzag, what would be the right investment arena? Corporate FDs or equities?

THE sharp fall in the equity markets has changed a lot of things including India Inc's fund raising plans. This, in turn, has changed investment avenues for retail investors. Till about a year ago, the only way for retail investors to participate in a company's growth was to buy equities either in the secondary market or invest in primary issues (IPO) or rights issue.

However, the primary market option currently is almost closed with the virtual drying up of the IPO market. Bearish sentiments and lack of investors' confidence due to wild volatility, on the other hand, has decreased the participation of investors in the secondary market. In such a situation, India Inc is now approaching the potential investors through fixed deposit (FD) schemes.

In fact, FD schemes are not new to India Inc. Earlier, every major company had an FD department and it was considered to be one of the main sources of funding. However, this way of funding decayed slowly as it became easier for companies to raise funds through equity and quasi equity. Besides, equity has no direct servicing cost (except earning and dividends expectations of shareholders), where as interest on FDs is a fixed cost and that has to be paid in all circumstances.

The wheel has now turned a full circle and newspapers are now flooded with advertisements by corporate houses inviting public to entrust their savings with them. To make the deal juicer, most of them are offering interest rates that are significantly higher than bank deposits. But, how attractive are these corporate FD schemes? Do they score over bank deposits or other traditional sources of assured returns only because former offers greater returns? For many investors corporate FDs can be lucrative substitutes for bank deposits. They not only offer higher returns, but many of them also structured similar to a bank FD with facilities, such as premature withdrawal, cumulative accrual of interest, TDS (tax deduction at source) cut up to a certain limit (Rs 5,000) etc.

However, investors should know that bank deposits are insured up to a maximum of Rs 1 lakh per customer and the way banks are regulated in India, it is difficult for retail customers to lose their money.

In contrast, corporate deposits have no such insurance and the investor is solely at the mercy of the company and its financial fate. Given this, it makes sense to invest in corporate FDs that have high credit ratings and are known for their financial soundness and credible past performance. Though corporate FDs look riskier, they carry higher interest rates.

While most corporate FDs are currently offering pre-tax interest ranging from 7–12%, for 1-3 years tenure, interest rate offered by a bank is between 10.25% and 11% for a three-year period. For one year, banks are offering 8.5-9% and there is no TDS up to an interest income of Rs 10,000 a year.

So, is higher interest rate a tempting one to invest his money in corporate deposits? Or is equity investment in these companies still a preferred route? A comparison of the current dividend yields on the company's stock with post tax return on its FD will give an answer. The sharp fall in stock prices of most companies has led to a spike in the dividend yield, based on the dividend payout last year. Tata Motors, for instance, is available at a dividend yield of over 11% as compared post-tax FD return of 7.6%. Dividends are also tax-free in the hands of the investor. The only catch being that dividends are slave of earnings and they tend to rise and fall in line with profit growth. In the near future, market expects most companies to cut dividend payouts. However, as soon as profit growth resumes, dividends pay out will catch up and the stock prices also will begin to soar. This way, equity investors get the best of both the capital appreciation and cash flows in the form of annual dividends payouts.

But, if equity has its advantages, there are risks, too. The biggest shortcoming here is the market risk associated with equity investments. Equity is a risk capital and returns are a function of external macroeconomic environment.

FDs, on the other hand, are relatively riskfree and, in most cases, post-tax returns from FDs are much higher than the tax-free dividend yields. The risk here, however, is that of creditworthiness of a company. Meanwhile, fear of the company defaulting has become prominent after the Satyam fiasco. But, in such cases, default applies to both debt and equity investment.

Investors are thus advised to go for well known companies that have a strong and credible standing in the market. Unlike a bank FD, where high interest rates usually dominate the investment decision over the choice of bank, the integrity of the company should be given the highest priority in case of corporate FD. A few basis points should not matter, for the assurance that the capital is in safe hands.

Understanding UK Payment Protection Insurance

Understanding Payment Protection Insurance Cover in the UK

On Monday, Building Societies and Banks will no longer be allowed to sell payment protection insurance at the point of sale.
They will also be banned from selling lump sum upfront single premium policies. This article explains the principles of PPI and how best to purchase it given the recent legislation and changes in the UK economy.

If you have ever bought a new car or a large flat screen television the chances are you paid for it with some type of finance plan, credit card or credit facility, or loan. Apart from being offered a breakdown warranty, in the past you may well have been offered an insurance plan to cover the repayments of the credit should something terrible befall you. This is the basis of payment protection insurance or PPI as it is commonly known.

What does PPI cover?
Payment protection is widely available these days to cover all forms of credit or borrowing. Loan protection products are sold that either individually or collectively cover credit cards, bank loans, car finance and all other monthly payments and outgoings. Until recently you may well have been offered this type of cover when you took out the loan or credit card; however this was made illegal in 2009 after a long enquiry by the Competition Committee looking into the restrictive practices of the major high street banks and lenders. Consequently payment insurance premiums and plans have become a lot cheaper now that independent suppliers have entered the market.
If you own a house under a mortgage you can purchase what is known as Mortgage Payment Protection Insurance or MPPI. This type of plan though often cheaper, will only cover the monthly mortgage payments.
Other protection insurance products are available, the most common being those that cover your salary or income often known as Income Payment Protection Insurance or lifestyle cover. With these types of products you are not limited to agreed repayments and can spend the income benefits as you would your salary or wages.

What does PPI cover you against?
All payment protection products cover you against and will pay a monthly sum to protect your payments, in the event of you suffering from one or a combination of accident, sickness or unemployment.
It is possible to buy these as standalone covers, although accident cover is more often than not sold alongside sickness cover. Unemployment Insurance cover, which protects you against sudden redundancy or unemployment is often sold by itself but because of the nature of the risk, commands a much higher premium.

How long does protection insurance cover you for?
The length of time of the cover is dependent upon how long someone wants the benefits to be payable for in the event of a claim. This varies by insurance company and is often only for twelve months although some of the better more flexible providers offer cover for up to 24 months, at a premium. It should be noted that this type of insurance is viewed by the providing companies as an invaluable short term solution to life's difficulties and not the correct type of cover for long term illness or disability, for example.

Purchasing payment protection cover
With so many offerings in the market it is a worthwhile exercise to shop around for cover. Most independent suppliers have online applications that literally only take a few seconds to complete. You normally have to supply you age, and how much benefit you would like each month.
When buying you will need to decide how long you wish to wait after you become sick or unemployed, before you start to receive the monthly benefits. This is known as an excess period and you will normally be offered periods of 30, 60 or even 90 days. Obviously the longer you wait the cheaper the monthly premiums will be! Look out for companies offering back to day one cover which will pay you back to day one of your claim once the excess period has passed.
When comparing payment protection insurance plans it is necessary to find one that will cover all of your monthly outgoings. Many providers have different limits and it is important that you find one that will not leave you with a shortfall for repayments!
As with purchasing all types of insurance, but particularly with payment protection cover, it is very important that you check that you are you eligible for cover and not excluded under the policy conditions, which are often more rigorous than for other types of cover.

When comparing payment protection plans for Mortgage Payment Protection Insurance and Income Protection Insurance it is sensible to visit a large respectable, independent supplier such as PPI Insurer of the Year Burgesses.com for advice and quotes. Burgesses offer a vast array of information and online quotes backed up by a useful helpline of experts.

The Original Article Source and more information about purchasing specialist insurance can be found at: http://EzineArticles.com/?expert=Dave_Healey
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