Collision Insurance Doesn’t Make a Lot of Sense if Your Car’s Not Worth Much
Q: I was recently in an accident. My insurer decided the damage to my 1988 van was more than the vehicle was worth, so my insurance agent declared the van totaled and the company paid me off with a check. The insurer let me keep the car, which actually still runs. I had to register it as a salvaged vehicle at a value of $500. Should I continue to buy collision insurance?
A: It is kind of silly to have collision insurance on a 12-year-old car in the first place. Renewing it on a car that’s worth $500, if that, is pretty much insane. Insurance should be used to help you protect yourself from financial catastrophes. If a $500 loss strikes you as catastrophic, then it’s time to park the old wreck and take the bus.
If you insist on driving the thing, though, you still need to buy liability insurance, which pays for the damage you do to others in an accident.
Don’t Hesitate to Pay Off Debt
Q: I am thinking of taking $11,421 I have in a mutual fund that earned about 11% in the last year and using it to pay off most of my $14,771 credit card debt, which carries interest of 9.9%. I know by paying off my debt I am supposedly earning a guaranteed 9.9%, but why am I finding it so hard to do? In my head, I see that once the money in the mutual fund is gone, it’s gone for good, and that bothers me. I don’t connect that once the debt is paid, it’s paid for good. Then I think, well, maybe this money is an investment, rather than savings, and does that affect the equation? Help!
A: Only you can decide what the goal is for the money in that fund--whether it’s an “investment” for some defined future purpose or just “savings.” But if it’s not in a tax-advantaged account earmarked for retirement, there’s little reason not to cash out and pay the debt.
Your 11% gain could turn into a loss overnight. Meanwhile, there’s no guarantee your credit card rate will stay at 9.9%. Even “fixed” rates aren’t really that, because credit card companies typically can change even a fixed rate with little notice.
You’ve read it here before: There’s no such thing as a safe, 10% return on an investment. There is such a thing, however, as a safe, 10%--or more--return when paying off a debt. But in our greedy little minds, we think how awful it will be when the money used to pay the debt is “gone,” particularly if the market suddenly spikes higher and we think how much more we could have made.
So, since the issue here is greed, let’s turn it around. Gather up your credit card statements and take a look at how much money you lost last year because you were carrying debt. You’ll see you cost yourself about $1,500 in interest charges. That’s money that can’t be used to buy clothes or go on a vacation. Wouldn’t you rather have that cash than give it to some credit card company?
Bite the bullet, sell the fund (remembering to withhold the proper amount for taxes) and pay down that lousy debt. Then continue making payments as large as possible until the card is paid off. You’ll feel better being debt-free. That’s a promise.
A Delicate Estate Scenario
Q: You recently dealt with a situation in which a woman was reluctant to ask for removal of her brother as executor of their mother’s estate even though he had failed to perform his duties in that office in the three years since the mother’s death.
I have been a California lawyer for 50 years and want to offer a suggestion. All California executors must be bonded, unless this requirement is waived in the will, so the sister could contact the brother’s bonding company and inform them of the brother’s default. The bonding company would then apply all the pressure necessary to compel the brother to complete his duties, or seek his removal as executor.
The sister could go after the bonding company for losses to the estate, which in turn would seek recovery from the brother. As the brother is a fiduciary, he might be unable to obtain bankruptcy relief from his breach of trust but could remain liable to the extent of his assets.
A: Your suggestion, though certainly a valid one, is be the equivalent of dropping a nuclear bomb in the middle of this family.
It’s true the brother’s negligence has probably cost the estate, once worth $1.5 million, tens of thousands of dollars in failure-to-file penalties and interest. It’s also true that the Internal Revenue Service could hold him personally liable for the debts, if for some reason the agency couldn’t recover the money from the estate.
Having the bonding company go after the brother, however, adds a whole new dimension of familial unpleasantness to the scene. That’s assuming there even is a bonding company; as you noted, many wills waive this requirement, particularly when a family member is named executor.
Still, people should know about this option, and those who have the slightest worry about their wishes being carried out should consider not waiving the bond when drawing up their wills.
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Liz Pulliam Weston is a personal finance writer for The Times. Questions can be sent to her at liz.pulliam @latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com /moneytalk.
