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					Finance 437
Wednesday, December 10, 2008


Professor: I first want to say this is a wonderful class, and I listened to you and you told great stories. I
think it's wonderful, some of the discussions we've had. The textbook is good, but the parts I've
enjoyed the most are the discussions. There's always new topics that come up.

I only teach 437, because it gives me the chance to really do what I want. There's no real set
curriculum. I learn from it, and I hope you've learned from it too. We've had our share of laughs this
semester. I wish you luck in the future. I always attend the graduation in June, I'm sure I'll see many of
you there if you're there.

Last week we talked about state of California bonds, if they're federal and state income tax free. I said I
didn't know, and someone said an answer. Just by coincidence, this ad was in the paper the following
morning. It says state and federal tax free. It says 6%. If that was taxable, at the beginning of the
semester it probably would have been 7.5%.

The question is though, would we buy them with what's going on with the state? It's an unsecured debt
here, it's not a secured bond. If the state of California was to go bankrupt, you could lose money. But I
don't think that will happen.

But this is a fabulous thing. It's not callable until 2018, for 10 years. You've got 10 year bonds here you
could get 6% after tax, no federal or state tax. Interesting.

The other thing is, we need to help out a fellow student here. I won't tell you their name. I don't have
an answer to this question, and I know some of you do. Please don't try to figure out who it is, we'll
keep them anonymous.

We have an international student who’s here in this country, and went online to get their credit report.
He or she has a social security number here, they're a student here legally. They do not plan to stay in
the US after the person graduates.

He or she goes online and gets the credit report, and there's an American Express card on there that's
not his or hers. It shows it's being paid, and it's current - it's not past due. A person filed an appeal or
grievance or something with the credit agency saying it's not his or hers. What else should this person
do? What do we do to get off the American Express card?

Male Student: The same exact thing happened to my brother. Someone took out a car loan with his
social security number, and my brother's 13 so he couldn't do that. We filed with the credit agency, and
they told us to file a police report.

Male Student: That way there's a record, so if something happens later on you have a record of filing a
police report. You drive over to the station and they have a form for you to fill out. You give them the
credit report the agency gave you. I think they send you something saying they're aware of it from the
credit agency, you show that to the police also.

Professor: Is it awkward that this card is on there and it's shown as being paid currently?

Male Student: For ours, the car payment was being paid for the last 2 years. It's just someone who got
a fake social security card and by chance it was the same number as my brother's.

Professor: Well you don't have to show a social security card to apply for a loan.
Female Student: It could have been entered wrong.

Male Student: But to get a high limit on your credit card, they need to run your credit history. They'd
need your social security number to do that. They might have gotten a fake number to get a higher
limit.

Professor: Okay. But when the credit agencies do this, don't they match up the name and address, not
just the social?

Female Student: Human error.

Male Student: It happened to me two weeks ago. I was opening an account at Wells Fargo and they
called me and said that someone was already using my number with the bank. They told me to call the
credit agency, and then file a police report. It got fixed, but it could be human error.

Professor: Okay. So you do need to file a police report. Well, the person's in the room now, so I hope
that helps. I didn't have all the answers to that question, it's very nice of everyone.

I think it's important, even if you're an international student going home, you never know what's going to
happen in the future. If you come back to visit the US, you don't want to be messed up. It needs to be
cleared up.

Female Student: I had a friend who met an American guy overseas. They got married, and they
moved here, and after about 10 years she got a bill saying she didn't pay for a long long time. She had
to pay up.

Professor: So it needs to be cleared up before the person moves away.

Last chapter in the book. I know the Lakers are playing tonight, the last I heard Shaq isn't playing
tonight. But the way the Lakers are playing these days...

We're talking about insurance and pension funds. Pension funds have been in the news a lot.

Pension funds are 401k plans, 403b - is that what it is? Company match on them. What's going to
happen in the next - well, let's say a company's calendar year tax basis, they start a new year on January
1st. Let's say a company has a 401k plan where the company matches 50% of the contribution made by
the employee into the retirement account. What's going to happen in the papers in the next month
about that type of company matching?

Male Student: They can't do it.

Female Student: They don't have that much money, they're laying off people. How can they afford to
pay extra?

Professor: Absolutely. I heard today driving here, and I'm trying to think of the company, it was a big
company. I just heard it, that the company just announced that starting January 1st they're not going to
do a 50% match of the employee's share going into the 401k. That's coming for sure. I haven't seen
anything on paper about that.

If you're laid off, your 401k can stay with the company. It's not going to be taken away from you. There
is insurance on it, up to a certain dollar amount. I would strongly suggest that if you are under 59.5
years old, which I think you are, that you roll it over into an IRA account and get it out of the
management of the company who’s canceled it.

If you're laid off by the company, that means generally speaking that the company has some problems.
Why let them continue to deal with your money?

You can roll it over into an IRA account. There's no tax on it to do it, and there's no problem. That's
what would suggest.

If you're under 59.5 and you take a distribution of that money, that's taxable plus a 10% penalty. It's
very costly to do that. If it was invested in stocks, they're going to be sold to pay you off. If you get laid
off, it's best to consolidate rather than leave it there.

Male Student: Is it better to roll it to a Roth IRA, so you pay the tax now?

Professor: You have to qualify for it first, and I lose track for the limits. What's it for single? You can't
open up a Roth IRA if you're above a certain limit.

A 401k is deducted, so you don't pay income tax on it. You pay the tax when you take it out. But a
Roth, you pay the tax up front. You can't roll that into an IRA, it's got to be in a regular. Am I right on
that?

Male Student: There are Roth 401ks.

Professor: Right. A Roth 401k, this just started about a year ago. That's where you still pay tax on it,
it's deducted from your paycheck. That can be rolled over into an IRA.

Female Student: I think it depends on the income, plus the amount that you're going to roll it over, that
you have to deposit first to the Roth.

Professor: I don't understand that. Is the Roth already open?

Female Student: If you want to roll over to it. I don't remember what the amount is, but it's a
requirement. Let's say for example, you could roll over with $5000 or $10000.

Professor: Okay. A rollover is different from a contribution, right? So we're not mixing up those two
terms. A rollover is when it's moved from one retirement account to another. A contribution is when you
contribute each year.

Page 675. We start off with life insurance.

There are 2000 life insurance companies classified as either stock or mutual. Mutual is when it's owned
by the stock holders. It's like savings and loans, or - I can't think of the other one. Most of the life
insurance policies are stock owned.

Did I tell you the story about the life insurance that I had, where I got a check from them? I think it was
Hartford Insurance. It used to be a mutual insurance company. When they went public, they had to pay
off the mutual owners of the company. This check just arrived in the mail one day, it was about a $4-
5000 check. They converted to stock ownership from mutual, and I just got paid between $4 and $5000.
It's funny to get a check in the mail for that amount when you don't know it's coming.


[teacher reading -- ]
Page 676. [teacher reading -- It is not offered each semester. There is whole life insurance very costly
builds up a cash value. I'm not sure why people think it is good to have whole life insurance. It is very
expensive and very few people have done this. I certainly don't have a life insurance that long.

Term insurance [teacher reading -- ]. That is the type of insurance it have most of the time but I have a
policy that can't be cancelled for a 10 year period. There is no cash value and after 8 years I got sick
and I don't qualify for another insurance policy. That is a risk. But things in life are a risk. If I got sick
and something happens to me I think. That is not my problem.

[teacher reading -- Verbal life I'm not an expert with those

Bottom of page as seen on the table on the right. Premiums accent for about 70% of their income. That
is where the vast majority of insurance company comes from. Now AIG was an insurance company. It’s
obvious here the 27% of their income in investment is where they got their problem. It definitely is very
low.

Did you see the paper this morning? That the yield on the 3 month is a negative. I'm still figuring out
what that mean. Did it mean we pay them extra money? So if we pay a 50 thousand bond we pay 50
thousand and one. The reason it is in the paper today is people is afraid to put their money in the bank.
So you buy a treasury bill you don't make anything but you don't worry about it. That is a theory. I
mean let’s say you have 40 million dollars. Would you put that in the bank now? What would you do
with it? So you put it in treasury bill but don't get interest with it but don't lose your principal. What


Male Student: Since we have an inflation now people would think the deflation is smaller than the .01.
So they think they won't lose much with that.


Professor: Let’s say the face value is 50 thousand dollars. I assume you pay a premium to buy that.
Didn't we get a check back. I don't know what the mechanics are. I like to know what the mechanics
are.

When did it say was it in the paper. When was the other time


Male Student: 1942


Professor: You are right during WWII. So you read the article now

Get the Chicago tribune. Isn't it shocking about the Chicago tribune that own the LA times. The cubs I
know. What is funny about the LA times is that this guy just bought the times a couple of year. There is
3 big paper the Chicago the LA and the tribune.


Male Student: I wasn't shock actually I kind of expected that. If it comes to me I do everything on line.
That is just me speaking.


Professor: Let’s have a short hand. Who pays money to have a paper delivered to their house?


Female Student: I do because my friend works for the LA TIMES
Professor: I do remember when this goes back a long time.......off record]

It is just like if you look at the stock of Kodak. Imagine Kodak, what is film now? It is unbelievable.
That is a product they have that is gone now.

Did you hear that the house of representative approved the car bailout tonight? It dropped down to 14
million. We started at 25 and I think they wanted 36 but approved at 14. And I was reading online at
money at CNN.com. The article was wrong because they say that bailout was for Chrysler and not ford


Male Student: They said they don't need it but want a credit line


Professor: So it is only going to Chrysler and GM. If you think it is not a lot of money


Male Student: I think ford will be okay by 2010.


Professor: When did they drop out of it?


Male Student: Last week


Professor: The question is if the senate will pass this thing. Bush is in favor of it and in the house it
said only 30 republicans voted for it. The question is if they can pass the senate


Male Student: The 15biln was a separate approved. They want to get another source of fund. I think it
is preapproved money. The 14 billion is for environmental regulation so they took it off because it was
approved already.


Professor: I'm not sure what is going on here because for two companies. 14 billion compared with
what the banks got it is not a lot of money.


Male Student: They keep on mentioning the car czar. What does that mean.


Professor: The point I see is change the fuel efficiency of types of car is not something that takes six
months but 5 years to develop. Let’s say they are getting 7 billion. What will that do? I don't see
people buying cars in this economy yet. But did you see what happened with the DOW future when that
came through. It was down now.


Male Student: Actually I just leased a car. They are giving out really good deal


Professor: It is interesting. I’m trying to think of the down side here. If you give the car back so you
won't drive it more then the mile required.


Male Student: You just return them.

Professor: Any down side with that?

Male Student: You don't own it.

Professor: I can't see a problem with that. And was it. A SUV

Male Student: No. It is a sports car. I don't think they factor that out. They just five a good deal with
that. It is an Infiniti. V37

Male Student: They have a very good program

Male Student: Being that you give the car back it is basically a rental.

Professor: I don't have a problem with it because if the economy really gets worst and you own a car
you may not sell it in the future. It is like buying a house now. If you buy a house now and sell in 2 or 3
years it might be risky to do that.


Male Student: I heard credit unions are giving out good deals on loans so people can buy cars. They
are trying to give good deals so people will buy car. The 40 thousands is just an estimate for that.

Professor: I just drove by the Acura dealer. The sign on front it says .9 percent financing. I saw a gas
station at 1.69.

Female Student: I got 1.65

Professor: It is in Reseda believed and Sherman way.

Male Student: It is because you are between the freeways.

Professor: So you say 1.65

Female Student: Between laurel canyon and magnolia

Male Student: The gas station I work at is always 2 cents lower than the others.


Professor: The price of oil has gone up in the last couple days, but gas is still going down. It's the price
of what it was 5 years ago now. I can't comprehend that.

Male Student: What happened, did we start using the oil in Iraq?

Professor: The demand is down for sure. With the bad economy, are we going to go across country?
Well you might in your new car.

We're all watching our money now. I don't know any of my friends who aren’t. I think, there's such a
huge population in this country that if we all drop miles by 10 miles a week, it's a huge drop in the use of
gasoline.
Female Student: The other day I heard my brother talk about a place where they sell cars where it's
buy 1 get 1 free.

Male Student: I read the same story. It's in Belgium.

Male Student: Buy a Porsche.

Professor: You know my thoughts on the cars here, the registration fees are going to go way up. And
on a lease, you have to pay the registration fees. My car is a year old now, and the annual bill just came.
I think it was $300. It's going to go way up. Be prepared for that.

Female Student: Gas is going down, but how about airline tickets? I'm trying to buy a ticket to Japan at
the end of this month, and the ticket is $700, but the gas is almost as much.

Professor: You're not traveling during Christmas, are you?

Female Student: No, after, for new years. That's bigger in Japan. But you have to pay gas fees more
than the air ticket.

Professor: I have to tell you, I go on Princess Cruises a lot. I just got an email from them that a cruise
leaving in February from Southampton near London is $45 a day. The problem is that you have to get
there on a plane. Has anyone looked? $378 round trip to London, if you fly in the winter, up until March
1st. We could take this cruise. You're talking about 2 people flying round trip, it's less than $800, and
it's a 12 day cruise. It's $100 a day. That's $1400, $2000 for the whole trip, and that includes food.

I don't know about Japan, but I have heard that some of the plane fares are really expensive. But if you
wait until February or so, it should be very good deals.

Male Student: Why don't oil companies just cut production?

Professor: They are. OPEC is meeting today or tomorrow. They're going to cut production, because if
you cut supply, that should make the price go up.

The reserves in this country, apparently we have the strategic reserves. They claim there's an
underground storage for national emergencies. Where is there underground storage? Do they just put
gas underground? They said it's full, there's no more place to put gasoline.

I think the government has a secret of where these reserves are. They don't want them to be bombed.
I can't imagine where they store this.

Female Student: About flights, my sister was looking at them yesterday to Mexico. She asked me to
take her to the airport today, and bought her ticket 3 hours before the flight, and got it $170 one way.

Professor: That means the plane wasn't full. There's good deals in Las Vegas too. I like to stay at the
Paris hotel. There's good deals there. And there's no point in working.

Where are we at? 677, use of funds.

At the bottom of page 677. Life insurance companies are major institutional investors - that word
"major" is major. These people have huge amounts of money to buy new issues of bonds, private
placements, etc.
Look at 678, the chart. It's misleading here. Since the billion is there, that means there's 9 zeros left off
of that, right? So that means the corporate debt is $2 trillion. That's a huge amount of corporate debt.
They really do own the corporate debt. Those are the bonds.

679, mortgages. Don't go to a life insurance company to take out a home loan. But if you own the
Topanga plaza and you want a mortgage, that's the type of thing life insurance companies give
mortgages on, big huge things.

Have you seen the 40 story Ritz Carlton building being built across the street from the Staples Center?
It's a life insurance company behind that. It's part hotel and part condos. That's a dream, to live right
across the street from the Staples Center.

I just went last week, I saw the Toronto? It was $25. That's what it cost for parking.

Page 683, regulations. We already talked about this, and right. Always a question on the test like this,
who does the regulations?

There is an insurance commissioner in California. He is elected, it's an elected official with a statewide
election. They're elected for 4 years.

With AIG being in trouble, my car insurance is now with AIG Direct, which is the old 21st Century
insurance company. I'm concerned about this. I called up the office, and asked what the story was with
AIG Direct, if I was in a car accident would they be able to pay my insurance?

The answer I got was that yes they will. AIG Direct is a subsidiary, but is separate and has a separate
capital.

Male Student: Even if the subsidiary went bankrupt, they'd still pay the state.

Professor: I talked to him about that, and he said the parent company could go bankrupt, but the
subsidiary has enough capital.

Male Student: If both of them go bankrupt, it would go to the state.

Professor: They said it's okay. Did you hear something about AIG?

Female Student: What you're saying. I had to do a paper on insurance in my insurance class, and
they're not going to have a problem. It's the credit defaults that they're having problems with. The
parent company, not the subsidiaries.

Female Student: I worked for an insurance company, and it's not a problem for them, just the creditor.
I did an internship with them.

Male Student: I thought sometimes for car insurance companies when they're on the verge of
bankruptcy, don't they have a pool fund?

Professor: Yeah, that's coming up here somewhere.

Is there anyone who's heard of a car insurance company that's in trouble?

Male Student: I was told Geiko was bringing down the Berkshire portfolio. They own Geiko.

Professor: And Geiko is not doing well?
Male Student: It's the weak chain apparently.

Male Student: I thought they were doing the best of the insurance companies.

Male Student: I heard that also, Geiko, Allstate and State Farm were the best three.

Professor: Can I do a poll again? It's fun to do this. If you don't want to participate, don't raise your
hand. Who has car insurance with Allstate? 3. Geiko? Mercury? What's with Mercury?

Male Student: They're cheaper.

Male Student: I have AAA. It was cheaper for me.

Professor: What do we know about Mercury?

Male Student: I'm in transportation business, so I deal with insurance companies often, and Mercury is
probably the worst company to deal with. If you're in a car accident, dealing with them is the worst
thing. They literally do not call you back.

Male Student: That's why you get into an accident with someone who has Mercury insurance. That way
they'll have to just deal with themselves.

Professor: That's pushing it a little bit.

Male Student: It's true. I got into an accident with someone who had Mercury, and they try to make it
like it was half your fault when it isn't.

Professor: So do we go to Mercury or not? We're hearing cheap, not good service, not wanting to pay
up.

Female Student: I had a friend who got into an accident and Mercury gave her a lot of problems, and it
took a lot of time to get her money. She moved to AAA and it was a lot better.

Male Student: To get AAA insurance, you have to be a member, but that's like $45. My insurance was
still lower than it was with Mercury though.

Female Student: I have Mercury, and my car got totalled. I didn't have any problem with them, they
took care of me very well.

Male Student: It could be different ages.

Male Student: They do a good job of promoting good driver and good student discounts. If you have a
3.0 or higher, they give you a discount. Not everyone does that.

Female Student: I got a discount with that. It was a big help.

Professor: Do you have to send them a transcript?

Female Student: No, you just get a signature from the department chair or someone. It makes a
difference.

Professor: I gotta tell you what I did this summer. I was bored and had time on my hands. I took an
online course of a traffic school for senior citizens. Not from a ticket, but it was if you took this course,
you get a discount on your car insurance. So I took it, it took me about 5 hours to do this. I got a
certificate in the mail, and my discount was 2% a year. It saved me about $15 a year. Do you know
what it cost to take the course? $25. So I figure I'm saving each year, and it says it's only valid for 3
years. That was not good.

Male Student: Next time just scroll down and go to the next page. It'll take 10 minutes.

Professor: No, it's got a timer on it. You couldn't go to the next page. You have to sit there and wait
for it to finish. There was a minimum time limit on it. I took the test, I did not pass it the first time.

684. The national association of insurance commissioners. I have a note here, on final next to that
name of the company.

Where is the insurance? I don't see that. Did they talk about in case they go bankrupt. I thought I saw
that. What page

Male Student: 679.

Male Student: It says balance portfolio.

Male Student: I don't see where there is
Who said that. Do you know if there are some insurance that go bankrupt

Male Student: I don't know if it is in CA. It is like a mandatory fee every year and every month each
insurance company has to give just in case the company goes bankrupt to be sure it would be covered by
that fund

Male Student: I learned that in the same class like the state guarantee Fund. That if the company goes
bankrupt it will be covered

Male Student: Insurance also have reinsurance. Some other companies reinsure them.

Professor: I'm not sure they got that in car insurance. It is on properties, building reinsurance. Is there
one in car? Yes. I'm sure there is but it’s not in the book. Life insurance definitely has that. But we are
talking about car insurance. I know in life insurance.

690 pension fund. What is the largest pension fund

Male Student: Social security.

Professor: Correct [teacher reading -- Pension fund can either be]. We pay money into them now and
get it back in the future if you are still alive. It is not good to pay in for 30 years of worth and to die on
the day you turn 65. The government loves that. Because they will pay if you are alive. Your wife won't
get the full amount and your kids will get something when they are 18. But if you die relatively young ...
you.... and the other thing I want to tell you is that my wife has an annuity. She has been paying Trans
American insurance where she was paying it for 10 years now and at 59 1/2 she will get a lifetime
income. Naturally she turns 50 and a half in November 2 months after the stock went down. We were
putting money into this pension plan into the annuity plan for 10 years. $500 for ten years. It has
invested 107 equities and it drop 40 percent in 2 months. That was fun and that's the type of thing that
hurts because 500 dollars a month for 10 years is about 60 thousand dollars is a lot of money.

Now we will get the annuity and get the monthly check. It is far less than we thought. I take credit for
that bad decision it is very funny how money causes tension at home I'm sure some of you experienced
that. It is sad because I know the business and I made a mistake and my wife is mad at me and asked
why I don't have allocation with this kind of thing. I think I got greedy and should have invested in other
kind but I didn't.

I’m sure you have heard the story at home

Male Student: Why are these companies allowed to make investment with things that are not low risk.
Banks can only risk at a certain minimum. So why are this companies allowed to do that and people lose

Professor: 5 years ago if you had bought bond with GM would you have worried about it? GM motors 2
years ago you won't think twice. They have billions of dollars of bonds. They have gone down in price.
Years ago if you are an accountant you know about how you value your investment to market value.
What is the offsetting entry for that? It is net worth.

Who would have thought GM or Ford with be bankrupt

Male Student: So is it sure we won't get our SS benefits.

Professor: Suddenly the government comes up with trillions of dollars to give to companies. Do you
really think they would not just write checks to pay your SSN. I think it is about 2040 that they run out
of money? I don't care I won't be around.

I think what has happened here with the government is that the government has shown that they are not
going to let horrible things happen. I think the problem is we are all use to that. And I think that is why
the stock market has been okay.

SSN is the same case in my opinion. But they have to do something.

Ian:

Professor: I mean but there has been talked about it for decades now and not something in a couple of
months. SSN and also Medicare we pay a huge amount of money. Anybody here works for LAUSD the
school district?

Page 690 down at the bottom. 2 types of private pension plans the defined benefit plan and defined
contribution plan. The contribution plan is what most of them are it is the defined amount of maximum
amount you can put in. It is not widely use but what your benefit would be. There is very few of the
defined benefit plan out there now.

691. First main paragraph. [teacher reading -- Defined] that is contrary to what I just said. The
defined benefit plan what is an example of that is that SSN? Oh that is why it is so much. I should say
in corporation a defined benefit plan is not use very much.

If you can imagine you probably heard that term. I could remember ERIZA. [teacher reading -- This is
with your work so you should know this at your work or you can have it graded with 20% vesting. You
should know that. Many of the plans now or in the past you can invest sooner. The plans I see are 100
% vested immediately. This is to make you want to stay with the company for 5 years. So you need to
know what you are vesting in when you work for a company. If you don't work there for 5 years you
may not be vested. So you have to find out what the vesting is. Look at the type of life insurance,
dental, and not just your salary.

692. Here is the insurance on pension plans. This is ERISA. This is important for companies like Ford
because when they go bankrupt they have this. If the big one goes belly up who will pay for this. This
has not happened yet but possible

If you know about Enron. The company match to the company was Enron stock. The employee can buy
ENRON stock at a reduced stock. So when the company went bankrupt the stock is worthless. There is
no insurance for that. No guarantee against investment that goes down. It is a guarantee


Page 697. The charts here on the right, the pension plans are definitely in competition with the banks
and brokerage houses. They compete for the supply and demand of our funds. Definitely there are
markets out there for them.

We've made it through the semester. Remember, the final is at 8 next week.

I want to tell you - our final is the last final. I have to have the grades turned in by Friday, so you can
look online definitely by Saturday. I'll have the grades on there. I'll try to have them on there by Friday.

I am going on a trip on Thursday, so I'll try to have them on Friday. I'll see you next week.

If you want to know your final grades, send me an email.

[end of class]

				
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