ONLINE News Briefs

January 11, 2002

Bonds, Credit Insurance

 

ONLINE News Briefs

Jump to:Choose article section...Bonds: Few investors understand them wellCredit Insurance: Skip the insurance coverage when signing for a loanBonds: The government is selling war bonds

Bonds: Few investors understand them well

Mutual fund investors flocked to bond funds in place of stock funds last year when the market plummeted. Investors pumped $68.9 billion into bond funds in the first nine months of 2001, more than five times the $13.5 billion that was invested in stock funds, according to the Investment Company Institute, a mutual fund trade group. But even as bond funds became more popular, investors seemed to get more confused. Only 27 percent of investors surveyed by American Century Investments answered at least five of 10 questions correctly in 2001, compared with 35 percent in 1998.

Only 31 percent of investors surveyed last year knew that when interest rates go up, bond prices usually drop. Forty-one percent confused the relationship between the time it takes for a bond to mature and its sensitivity to changes in the interest rate, mistakenly believing that the longer a bond matures, the less sensitive it is to interest rates changes.

Credit Insurance: Skip the insurance coverage when signing for a loan

Avoid buying credit insurance when you take out a loan, unless you live in one of a handful of states that adequately protect consumers, says the Consumer Federation of America. Borrowers paid about $6 billion for credit insurance in 2000–but would have paid only $3.5 billion if states had followed rate standards set by the National Association of Insurance Commissioners, according to a report by the CFA and the Center for Economic Justice.

The best measure of whether a policy is reasonably priced is its loss ratio, or the ratio of benefits paid to premiums received. The NAIC has suggested that credit insurance pay out in claims at least 60 percent of the premiums collected. But the ratio in 2000 was 41 percent for credit life and 46 percent for credit disability. (Credit life insurance pays off the covered loan if the borrower dies, while credit disability policies will cover the monthly loan payments if the borrower becomes disabled.) Credit insurance in only six states–Maine, Maryland, New Jersey, New York, Pennsylvania, and Virginia–is adequately regulated and pays nearly 60 percent of premiums. In the rest of the states, the insurance offers such poor value that consumers should skip the coverage unless they are in poor health or over age 50.

Bonds: The government is selling war bonds

Patriot Bonds, which are Series EE bonds dressed up with a new name and label, are now available from the Treasury Department. Buyers will contribute to the federal government’s war on terrorism, though proceeds will not be earmarked for any specific purpose. Bonds purchased through April will earn 4.07 percent interest, compounded semiannually. Interest is exempt from state and local income taxes, and federal taxes are deferred until the bond is redeemed or stops earning interest after 30 years. Bonds can be redeemed anytime after six months, although you will pay a three-month penalty if you cash them in within five years. The bonds are sold by financial institutions or directly from the Bureau of the Public Debt at its Savings Bond Direct Web site at www.savingsbonds.gov. They are available in denominations of $50 to $10,000, and sell for half their face value.

 



Yvonne Wollenberg. ONLINE News Briefs.

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