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Extended Warranties: Should You Take The Bait?
By Tara Struyk
Extended warranties, by offering protection for expensive purchases and increasing the length of a
product's original warranty, have become the norm for many retailers. These warranties often appeal
to thrifty consumers, for whom buying big-ticket items like appliances and electronics can be an
exacting decision.
When you're pulling out your wallet to pay for that new refrigerator, big-screen TV or treadmill for
your home gym, it's hard not to be tempted to buy into the extended warranty sales pitch - even if it
will increase the cost of your purchase by hundreds of dollars. But are these warranties worth the
price? We'll show you why in most cases, the benefits of these warranties don't extend beyond the
profit margins of the companies that offer them. (To read more about risk and warranties, see Using

Logic To Examine Risk.)
An Extended Warranty Is Insurance
An extended warranty works like an insurance contract for the product you purchase and can be
offered by either the product's manufacturer, or by the retailer, which contracts this service out to an
insurance company.
What most consumers fail to realize is that although the price of an extended warranty often seems
like a bargain to a consumer who is aware of the steep price of repairs, it has actually been carefully
considered through actuarial analysis by the company that offers it. In other words, the company
uses probability and statistical methods to calculate the likelihood that your new refrigerator or bigscreen television, for example, will require repairs. This figure is weighed against how much those
repairs would cost to arrive at the price that a company will charge consumers for a warranty on a
particular item. This formula is not designed to work in your favor.(To find out what other policies you
can avoid, see Fifteen Insurance Policies You Don't Need.)
Probabilities and Profit Margins
Extended warranties, like the products they claim to protect, are sold to consumers for a profit and
can be big money-makers for retailers. According to "The Warranty Windfall" ( BusinessWeek, 2004),
profits from warranties accounted for all of CircuitCity's 2003 operating income. In fact, the operating
profit margins on extended warranties can be as high as 70%, compared to only 10% for the
products they cover, according to a December 2003 article in Consumer Reports. (To find out how to
read companies' financials yourself, see What You Need To Know About Financial Statements,

Footnotes: Start Reading The Fine Print and Common Clues Of Financial Statement Manipulation.)
What this means is that for every dollar you spend on an extended warranty from a retailer, $0.70
goes to the retailer, with the remaining $0.30 going to the insurance company. Because the insurance
company also expects to profit from the agreement, it is clear that it doesn't expect to have to make
very many payouts. In fact, when Consumer Reports conducted a survey of 38,000 consumers in
2000, it found that only 8% of camcorders, stove ranges, dishwashers and refrigerators were
repaired within the first three years of when they were purchased. Because these warranties cost
almost nothing to market and often go uncollected, they are a simple way for retailers to boost their
bottom lines.
Suppose you are in the market for a new washer and dryer. You choose a high-end set that costs
$2,250. The salesperson offers you an extended warranty that will cover the cost of services and
repairs for three years and includes a replacement guarantee if the product can't be fixed - it costs

$660. If you're tempted to shell out for this warranty, it's because you know that the cost of in-home
repairs for your new appliance would add up fast if you have to pay for them yourself and could
easily exceed $660 if something goes wrong.

Figure 1: Consumer report repair rate
Risk-Reward Ratio
The concept of weighing risk and reward is a key principle in investing: taking on more risk increases
an investment's possible return. The same is true for warranties.
Let's return to our example with the washer and dryer set. In a best-case scenario, you would
purchase your appliances, turn down the warranty and your new purchase would not require repairs
within the three-year period that the warranty would have covered. If this occurs, you save yourself
$660. Of course, if you don't buy the warranty, the worst-case scenario is that your new appliances
require repairs within three years and that those repairs cost more than the $660 warranty you could
have purchased.
However, according to the statistics from the Consumer Reports study shown in Figure 1, your
washing machine has a 22% chance of needing repairs within the first three years, and your dryer is
even more reliable, with only a 13% possibility that it will break down within that period.
If your appliance retailer (and its insurance company) is willing to bet on these odds, why shouldn't
you? Better yet, instead of handing your money over to the retailer, could put the $660 aside in case
your new purchase requires repairs down the road. This way, not only will you get to collect interest
on your own money, but you'll also get to keep it if you beat out the odds and your appliances keep
running as they should.
The Flip Side of Warranties
Manufacturers and retailers tend to push warranties because they're profitable, but you need to

decide for yourself whether the risk outweighs the reward; if a warranty gives you peace of mind, it
may be worth the money. Also keep in mind that many products come with a standard
manufacturer's warranty - free of charge. This warranty usually applies to the first year of the
product's life. This should be enough to cover you if your product turns out to be defective.
Furthermore, if you buy an extended warranty on top of this initial warranty, it will also start
immediately, forcing you to pay a second time for coverage you already have.
Also consider the replacement cost of the product you are buying, particularly when it comes to
electronics. As these goods continue to improve and the prices continue to drop, your warranty could
easily end up costing more than it would to replace the product when it fails.
Conclusion
Although warranties may seem like an act of customer service that companies extend to consumers,
they are actually carefully calculated to be profitable for the companies that offer them. Before you
agree to insure your next big-ticket purchase against failure, carefully consider the likelihood that the
product will fail as well as how much it would cost for you to repair or replace it yourself. In many
cases, the odds will be in your favor and your best course of action will be to bet that your appliances
and electronics will outlast the warranties you left behind.
Read more: http://www.investopedia.com/articles/pf/07/warranties.asp#ixzz3ev7EgZA1
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12 THINGS YOU NEED TO KNOW ABOUT FINANCIAL STATEMENTS
By Richard Loth AAA |
Knowing how to work with the numbers in a company's financial statements is an essential skill for
stock investors. The meaningful interpretation and analysis of balance sheets, income statements and
cash flow statements to discern a company's investment qualities is the basis for smart investment
choices. However, the diversity of financial reporting requires that we first become familiar with
certain general financial statement characteristics before focusing on individual corporate financials.
In this article, we'll show you what the financial statements have to offer and how to use them to
your advantage.
TUTORIAL: Advanced Financial Statement Analysis
1. Financial Statements Are Scorecards
There are millions of individual investors worldwide, and while a large percentage of these investors
have chosen mutual funds as the vehicle of choice for their investing activities, a very large
percentage of individual investors are also investing directly in stocks. Prudent investing practices
dictate that we seek out quality companies with strong balance sheets, solid earnings and positive
cash flows.
Whether you're a do-it-yourself or rely on guidance from an investment professional, learning certain
fundamental financial statement analysis skills can be very useful - it's certainly not just for the
experts. Over 30 years ago, businessman Robert Follet wrote a book entitled "How To Keep Score In
Business" (1987). His principal point was that in business you keep score with dollars, and the
scorecard is a financial statement. He recognized that "a lot of people don't understand keeping score
in business. They get mixed up about profits, assets, cash flow and return on investment."

The same thing could be said today about a large portion of the investing public, especially when it
comes to identifying investment values in financial statements. But don't let this intimidate you; it can
be done. As Michael C. Thomsett says in "Mastering Fundamental Analysis" (1998):
"That there is no secret is the biggest secret of Wall Street - and of any specialized industry. Very
little in the financial world is so complex that you cannot grasp it. The fundamentals - as their name
implies - are basic and relatively uncomplicated. The only factor complicating financial information is
jargon, overly complex statistical analysis and complex formulas that don't convey information any
better than straight talk." (For more information, see Introduction To Fundamental Analysis and What

Are Fundamentals?)
What follows is a brief discussion of 12 common financial statement characteristics to keep in mind
before you start your analytical journey.
2. What Financial Statements to Use
For investment analysis purposes, the financial statements that are used are the balance sheet, the
income statement and the cash flow statement. The statements of shareholders' equity and retained
earnings, which are seldom presented, contain nice-to-know, but not critical, information, and are not
used by financial analysts. A word of caution: there are those in the general investing public who tend
to focus on just the income statement and the balance sheet, thereby relegating cash flow
considerations to somewhat of a secondary status. That's a mistake; for now, simply make a
permanent mental note that the cash flow statement contains critically important analytical data. (To
learn more, check out Reading The Balance Sheet, Understanding The Income Statement and The

Essentials Of Cash Flow.)
3. Knowing What's Behind the Numbers
The numbers in a company's financials reflect real world events. These numbers and the financial
ratios/indicators that are derived from them for investment analysis are easier to understand if you
can visualize the underlying realities of this essentially quantitative information. For example, before
you start crunching numbers, have an understanding of what the company does, its products and/or
services, and the industry in which it operates.
4. The Diversity of Financial Reporting
Don't expect financial statements to fit into a single mold. Many articles and books on financial
statement analysis take a one-size-fits-all approach. The less-experienced investor is going to get lost
when he or she encounters a presentation of accounts that falls outside the mainstream or so-called
"typical" company. Simply remember that the diverse nature of business activities results in a
diversity of financial statement presentations. This is particularly true of the balance sheet; the
income and cash flow statements are less susceptible to this phenomenon.
5. The Challenge of Understanding Financial Jargon
The lack of any appreciable standardization of financial reporting terminology complicates the
understanding of many financial statement account entries. This circumstance can be confusing for
the beginning investor. There's little hope that things will change on this issue in the foreseeable
future, but a good financial dictionary can help considerably.
6. Accounting Is an Art, Not a Science
The presentation of a company's financial position, as portrayed in its financial statements, is
influenced by management estimates and judgments. In the best of circumstances, management is
scrupulously honest and candid, while the outside auditors are demanding, strict and

uncompromising. Whatever the case, the imprecision that can be inherently found in the accounting
process means that the prudent investor should take an inquiring and skeptical approach toward
financial statement analysis. (For related content, see Don't Forget To Read The Prospectus! and How

To Read Footnotes - Part 2: Evaluating Accounting Risk.)
7. Two Key Accounting Conventions
Generally accepted accounting principles (GAAP) are used to prepare financial statements. The sum
total of these accounting concepts and assumptions is huge. For investors, a basic understanding of
at least two of these conventions - historical cost and accrual accounting - is particularly important.
According to GAAP, assets are valued at their purchase price (historical cost), which may be
significantly different than their current market value. Revenues are recorded when goods or services
are delivered and expenses recorded when incurred. Generally, this flow does not coincide with the
actual receipt and disbursement of cash, which is why the cash flow becomes so important.
8. Non-Financial Statement Information
Information on the state of the economy, industry and competitive considerations, market forces,
technological change, and the quality of management and the workforce are not directly reflected in a
company's financial statements. Investors need to recognize that financial statement insights are but
one piece, albeit an important one, of the larger investment information puzzle.
9. Financial Ratios and Indicators
The absolute numbers in financial statements are of little value for investment analysis, which must
transform these numbers into meaningful relationships to judge a company's financial performance
and condition. The resulting ratios and indicators must be viewed over extended periods to reflect
trends. Here again, beware of the one-size-fits-all syndrome. Evaluative financial metrics can differ
significantly by industry, company size and stage of development.
10. Notes to the Financial Statements
It is difficult for financial statement numbers to provide the disclosure required by regulatory
authorities. Professional analysts universally agree that a thorough understanding of the notes to
financial statements is essential in order to properly evaluate a company's financial condition and
performance. As noted by auditors on financial statements "the accompanying notes are an integral
part of these financial statements." Take these noted comments seriously. (For more insight, see

Footnotes: Start Reading The Fine Print.)
11. The Auditor's Report
Prudent investors should only consider investing in companies with audited financial statements,
which are a requirement for all publicly traded companies. Before digging into a company's financials,
the first thing to do is read the auditor's report. A "clean opinion" provides you with a green light to
proceed. Qualifying remarks may be benign or serious; in the case of the latter, you may not want to
proceed.
12. Consolidated Financial Statements
Generally, the word "consolidated" appears in the title of a financial statement, as in a consolidated
balance sheet. Consolidation of a parent company and its majority-owned (more that 50% ownership
or "effective control") subsidiaries means that the combined activities of separate legal entities are
expressed as one economic unit. The presumption is that a consolidation as one entity is more
meaningful than separate statements for different entities.
Conclusion
The financial statement perspectives provided in this overview are meant to give readers the big

picture. With these considerations in mind, beginning investors should be better prepared to cope
with learning the analytical details of discerning the investment qualities reflected in a company's
financials.
Read more: http://www.investopedia.com/articles/basics/06/financialreporting.asp#ixzz3ev95TxD7
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FINANCIAL FOOTNOTES: START READING THE FINE PRINT
By Investopedia Staff AAA |
If there's one piece of advice we hear often, it's that it is always good to read the fine print. Why
should it be any different for a company's financial statements? If the income statement, balance
sheet and statement of cash flow make up the core of a company's financial information, then the
footnotes are the fine print that explain this core.
However, what is often not provided along with this wise advice is a set of instructions on exactly
how to read a company's footnotes. This article will not only explain what footnotes are, but what
they mean and how to use them to your financial benefit.
What Are Footnotes?
Pick up any financial report and you'll always find references to the footnotes of the financial
statements. The footnotes describe in detail the practices and reporting policies of the company's
accounting methods and disclose additional information that can't be shown in the statements
themselves. In other words, footnotes expand on the quantitative financial statements by providing
qualitative information that allows for a greater understanding of a company's true financial
performance over a specified time period.
Footnotes information can generally be split into two different areas. The first deals with the
accounting methods a company chooses to formulate its financial information, such as revenue
recognition policies. The second provides an expanded explanation of important company operational
and financial results.
Accounting Methods
This area, which tends to be at the beginning of the footnotes, identifies and explains a company's
major accounting policies. These footnotes are broken into specific accounting areas (revenue,
inventory, etc.), which detail a company's policy with regard to that account and how its value is
determined.
For example, one of the most important financial measures is revenue. In the footnotes, you will
often find a revenue recognition note, which describes how a company determines when it has
earned its revenue. Due to the often complex nature of business operations, the point at which a sale
can be booked (put on the financial statements) is not always clear cut. This section will give an
investor valuable insight into when a company books revenue. For example, Ford Motors recognizes a
sale at the time that a dealership takes possession of a Ford vehicle.
What to Look for
There are two things to focus on when analyzing a company's accounting methods found in the
footnotes. The first thing is to look at a company's accounting method and how it compares to the
generally accepted accounting method and industry standards. If the company is using a policy that
differs from others in the industry or one that seems far too aggressive, it could be a sign that the

company may be trying to manipulate its financial statements to cover up an undesirable event or
give the perception of better performance.
As an example of using revenue recognition at car company X, let's assume that instead of booking
revenue upon ownership transfer, company X books the revenue when a car is produced. This
strategy is far too aggressive, because company X can't ensure that dealerships will ever take
possession of that car. Another example would be a magazine company that books all of its sales at
the start of the subscription. In this case, the company has not performed its side of the sale
(delivering the product) and should only book revenue when each magazine is sent to the subscriber.
The second item of importance to examine is any changes made in an account from one period to the
next, and the effect it will have on the bottom-line financial statements. In the company X example,
imagine the company switched from the delivery method to the production method. Booking revenue
before goods are transferred would increase the aggressiveness of company X's accounting. The
company's financial statements would become less reliable, because investors would not be sure how
much of the revenue was derived from actual sales, and how much represented product that was
produced but not delivered by company X.
It is important when tackling this area to first gain a basic understanding of the Generally Accepted
Accounting Principles (GAAP) standards of computing financial information. This will allow you to
identify when a company is not following this standard.
Disclosure and Financial Details
The financial statements in an annual report are supposed to be clean and easy to follow.To maintain
this cleanliness, other calculations are left for the footnotes. The disclosure segment gives details
about long-term debt, such as maturity dates and interest rates, which can give you a better idea of
how borrowing costs are laid out. It also covers details regarding employee stock ownership and
stock options issued, which are also important to investors.
Other details mentioned in the footnotes include errors in previous accounting statements, looming
legal cases in which the company is involved and details of any synthetic leases. These types of
disclosures are of the utmost importance to investors with an interest in the company's operations.
Another important focus when looking at the disclosure segment is what is left off of the financial
statements. When a company is meeting accounting standards, the rules may allow it to keep a large
liability off the financial statements and report it in the footnotes instead. If investors skip the
footnotes, they will miss these liabilities or risks the company faces.
Problems with Footnotes
Although footnotes are a required part of any financial statement, there are no standards for clarity or
conciseness. Management is required to disclose information "beyond the legal minimum" to avoid
the risk of being sued. Where this minimum lies, however, is based on management's subjective
judgment. Furthermore, footnotes must be as transparent as possible without harmfully releasing
trade secrets and other pertinent information about things that give the company its competitive
edge.
Another problem with the footnotes is that sometimes companies attempt to confuse investors by
filling the notes with legal jargon and technical accounting terms. Be suspicious if the description is
difficult to decipher - the company may have something to hide. If you see situations in which the
company is writing only a paragraph on a major event/issue, or using convoluted language to skirt it
entirely, it may be wise to simply move on to another company.

The Bottom Line
Informed investors dig deep, looking for information that others typically wouldn't seek out. No
matter how boring it might be, read the fine print. In the long run, you'll be glad you did.
Read more: http://www.investopedia.com/articles/02/050102.asp#ixzz3ev9CDHAh
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COMMON CLUES OF FINANCIAL STATEMENT MANIPULATION
By Andrew Beattie AAA |
Law enforcement has crime scene investigators to tell them the significance of a bloody fingerprint or
a half-smoked cigarette, but investors are often left to their own devices when it comes to trying to
figure out whether an accounting crime has taken place and where the fingerprint might be. Now
more than ever, investors have to become forensic accountants themselves if they want to avoid
being burned by unscrupulous accounting in a company's financials. In this article we will look at
some common signs, both obvious and subtle, that a company is struggling and trying to hide it.
Exaggerating the Facts
With all the big baths that companies take, it's tempting to believe that Wall Street is the cleanest
place on earth. The big bath refers to the swelling of corporate write-downs in the wake of poor
quarters. When a company is going to take a loss anyway, they sometimes take the opportunity to
write off everything they possibly can. This is often compared to spring cleaning; the company
realizes losses from future periods and/or losses that were kept off the books in previous quarters.
This makes poor results look even worse and artificially enhances the next earnings report. In this
case, there is no actual crime taking place, but it is a deceptive accounting practice. However, the
biggest problem with this practice is that once a company has taken a big bath, income manipulation
is a step away. (For more insight, see Cooking The Books 101.)
A company taking a big bath isn't difficult to evaluate in comparison with other companies in its
sector that haven't used deceptive accounting practices. Generally, the company has a very bad year
followed by a "remarkable" rebound in which it begins to report profits again. The danger comes
when companies make an excessive write down, such as claiming unsold inventory as a loss when it
is probable that it will be sold in the future. In this case, when the inventory moves, the company
would add the profits to their operational earnings. This type of income manipulation makes it hard to
tell whether the company is actually rebounding or is merely enjoying the benefits of the items they
"erroneously wrote off". This type of write off is similar to the difference between spring cleaning and
burning down your house for the insurance money, so any company that rebounds quickly from a big
bath should be viewed with suspicion.
Smoke and Mirrors
One of the most prevalent approaches to corporate accounting is to omit the bad and exaggerate the
good. There are a number of subjective figures in any financial report that accountants can tweak.
For example, a company may choose to exclude costs unrelated to its core operations when figuring
its operating cash basis - say an acquisition of another company or purchasing investments - but will
still include the revenue from the unrelated ventures when calculating their quarterly earnings.
Fortunately, companies have to break down the figures, thus dispersing the smoke and mirrors, but if
you don't look beyond a few main figures in a company's financials you won't catch it. (For more on
this, see How Some Companies Abuse Cash Flow and Analyze Cash Flow The Easy Way.)

Finding the Accomplice
There can be a number of accomplices to any accounting crime, but two popular suspects are special
purpose entities (SPE) and sister companies. SPEs allowed Enron to move massive amounts of debt
off its balance sheet and hide the fact that it was teetering at the edge of insolvency. Sister
companies have also been used as a way to spin off debt as new business. For example, a
pharmaceutical company could create a sister company and hire it to do its research and
development (R&D) (pharmaceuticals' biggest expense). Instead of doing the work, the sister
company hires the parent company to do their own R&D - thus the parent company's biggest
expense is now in the income earned column and no one notices the perpetually debt-ridden sister
company. Nobody, that is, except those who read the footnotes.
The footnotes list all financing related affiliates and financial partnerships. If there is no
accompanying information disclosing how much the company owes to the affiliates or what
contractual obligations there are, you have plenty of good reasons to be suspicious. (To learn more,
read Footnotes: Start Reading The Fine Print, and How To Read Footnotes - Part 1, Part 2 and Part

3.)
Elder Abuse
Sometimes when a company is struggling, it starts dipping into financial reserves that it hopes no one
will notice. Target No.1 is usually the pension plan. Companies will optimistically predict the growth of
the pension plan investments and cut back on contributions as a result, thereby cutting expenses.
When the pensions start coming due, however, the company will have to top off the plans from
current revenue - making it clear that putting off expenses doesn't make them go away. A healthy
company pension plan has become critical as baby boomers near retirement. (For more on this, see

Analyzing Pension Risk and The Pension Benefit Guaranty Corporation Rescues Plans.)
Getting Rid of the Body
Companies may try to hide an unsuccessful quarter by pushing unsold merchandise into the market,
or into the distributors' storage rooms. This is usually called channel stuffing. This may save a
company from a big quarterly loss, but the goods will return unsold eventually. Channel stuffing can
be detected in two figures: the stated inventory levels and the cash meant to cover bad accounts. If
inventory level suddenly drops or the money for bad accounts is drastically increased, channel
stuffing may be taking place.
Fleeing Town
Because the Canadian and American markets are so intertwined, companies that trade on both
exchanges can choose which country's accounting standards to use. If a company changes from the
historical accounting standards for that firm, there had better be a good explanation. The two
systems, while generally similar, account for income in different ways that may allow a wounded
company to hide its weakness by switching sides. Any change in accounting standards is a huge red
flag that should prompt investors to go over the books with a fine-toothed comb.
Guilty Tongues Slip
Damning statements are often casually mentioned in a company's financials. For example, a "going
concern" note in the financials means that you should get out your magnifying glass and pay close
attention to the following lines. With the practice of overstating the positive and understating the
negative, a company admitting to a "going concern" may actually be confiding that they are two steps
from bankruptcy. Unexpectedly switching auditors or issuing a notice that the CEO is resigning to
pursue "other interests" (most likely in the Cayman Islands) are also causes for concern.

Conclusion
Although there are many interesting numbers in a company's financials that allow you to make a
quick decision about a company's health, you can't get the full story that way. Due diligence means
rolling up your sleeves and scouring the sheets until you are sure that those main figures are real.
The best place to start looking for bloody fingerprints is in the footnotes. Reading the footnotes will
provide you with the clues you'll need to track down the truth.
For further reading, see the Investment Scams tutorial and Playing The Sleuth In A Scandal Stock.
Read more: http://www.investopedia.com/articles/07/statementmanipulation.asp#ixzz3ev9GoFDO
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15 INSURANCE POLICIES YOU DON'T NEED
By Lisa Smith AAA |
Fear of the future sells insurance. Because we can't predict the future, we want to be ready to cover
our financial needs if, or when, something bad happens. Insurance companies understand this fear
and offer a variety of insurance policies designed to protect us from a host of calamities that range
from disability to disease and everything in between. While none of us wants anything bad to
happen, many of the potential catastrophes that happen in our lives are not worth insuring against.
In this article, we'll take you through 15 policies that you're probably better off without. (To learn
about the basics of insurance, see Understand Your Insurance Contract and Exploring Advanced

Insurance Contract Fundamentals.)
1. Private Mortgage Insurance
The infamous private mortgage insurance (PMI) is well known to homeowners because it increases
the amount of their monthly mortgage payments. PMI is an insurance policy that protects the lender
against loss when lending to a higher-risk borrower. The borrower pays for this insurance but derives
no benefit. Fortunately, there are several ways to avoid paying for this unnecessary policy. PMI is
required if you purchase a home with a down payment of less than 20% of the home's value. The
small down payment is viewed as putting you at risk of defaulting on the loan. Put down at least 20%
and the PMI requirement goes away. Alternatively, you can put down 10% and take out two loans,
one for 80% of the sale price of the property and one for 10%, although interests rates can prevent
the economics of this maneuver from working out in the homeowner's favor. (To read more about
mortgages, see Understanding the Mortgage Payment Structure , To Rent or Buy? The Financial

Issues - Part 1 and Part 2.)
2. Extended Warranties
Extended warranties are available on a host of appliances and electronics. From a consumer's
perspective, they are rarely used, particularly on small items such as DVD players and radios. If you
purchase a reputable, brand-name product, you can be fairly certain it will work as advertised and
that the extended warranty is statistically likely to be unnecessary. If you spend $5,000 on a giant,
flat-screen television, the policy is still unlikely to pay off, but might make you feel better. For
everything else, forget it. (To learn more, read Extended Warranties: Should You Take The Bait?)
3. Automobile Collision
Collision insurance is designed to cover the cost of repairs to your vehicle if you are involved in an
accident. If you have a loan out on the car, the loan issuer is likely to require that you have collision

insurance. If your car is paid off, collision is optional; therefore, if you have enough money in the
bank to cover the cost of a new car, collision insurance may be an unnecessary expense. This is
particularly true if you are driving an old car, because cars depreciate so quickly that many vehicles
are worth only a fraction of their purchase price by the time the loan is paid in full. (To find out more
about car insurance, read Shopping For Car Insurance.)
4. Rental Car Insurance
Most auto insurance policies offer additional coverage for the cost of car rentals, touting it as a useful
feature if your car is ever involved in an accident and needs to spend some time in the repair shop.
This may sound like a good idea, but in reality, most people rarely rent a car, and when they do, the
cost is relatively low and hardly worth insuring against. Although rental car insurance is relatively
inexpensive, amortized over the course of a lifetime you are still likely to spend far more than you will
benefit.
5. Car Rental Damage Insurance
Many auto insurance policies already cover rentals, so there's no need to pay for this twice. Check
your policy before you pay. Depending on where you rent the vehicle, you may also be able to pay a
small fee for insurance on your rental when you pick it up at the rental center. If this fee is less than
what you'd pay for a year in your old policy, choose the fee over the policy. (To read more, see

Travel Tips For Keeping You And Your Money Safe.)
6. Flight Insurance
Flight insurance coverage is completely unnecessary. Despite media portrayal, airline accidents are
relatively rare, and your life insurance policy should already provide coverage in the event of a
catastrophe. (For more information on life insurance, see How Much Life Insurance Should You

Carry?, Life Insurance Distribution And Benefits and Life Insurance Clauses Determine Your
Coverage.)
7. Water Line Coverage
Water companies have made an aggressive push to sell policies that cover the repair of the water line
that runs from the street to your house. The odds are in your favor that you will never use this
coverage, particularly if you live in a newer home. If you live an average suburban neighborhood and
you do need to repair the water line, the distance to the street is short, the likelihood of a problem is
low and repair costs are a few thousand dollars or less. The same goes for policies offered by other
utility companies.
8. Life Insurance for Children
Life insurance is designed to provide a safety net for your heirs/dependents. Because children don't
have heirs to worry about and, statistically speaking, most kids will grow up safe and healthy, most
parents should not purchase life insurance for their kids. Instead, use the money that you would have
spent on life insurance to fund an education plan or an individual retirement account (IRA). (To read
more on saving money for your kids, see Investing In Your Child's Education, Teaching Your Child To

Be Financially Savvy and Don't Forget The Kids: Save For Their Education And Retirement .)
9. Flood Insurance
Unless you live in a flood plain or an area with a history of water problems, don't even bother buying
flood insurance. If none of the homes in the area has ever been flooded, yours is unlikely to be the
first.

10. Credit Card Insurance
Purchasing coverage to pay your credit card bill in the event you cannot pay it is a waste of money. A
far better idea is to avoid running up your credit cards in the first place, so you won't need to worry
about the bills. Not only do you not save on the insurance premiums, you'll also save the interest on
your debt. (To learn more about credit, see Take Control Of Your Credit Cards, Credit, Debit And

Charge: Sizing Up The Cards In Your Wallet and Understanding Credit Card Interest.)
11. Credit Card Loss Insurance
Federal law limits your liability if your credit card is stolen. Your out-of-pocket costs are limited to $50
per card and not a penny more. In fact, many credit card companies don't even try to collect the $50.
12. Mortgage Life Insurance
Mortgage life insurance pays off your house in the event of your death. Rather than add another
policy - and another bill - to your list of insurance plans, it makes more sense to get a term-life policy
instead. A good life insurance policy will provide enough money to pay off the mortgage and to cover
other expenses as well. After all, the mortgage isn't the only bill your survivors will need to pay. (To
read more, see Buying Life Insurance: Term Versus Permanent.)
13. Unemployment Insurance
This coverage makes minimum payments on your bills if you are out of work, which sounds like an
attractive proposition. A better plan is to save your money and build up an emergency fund instead.
You won't have to cover the cost of the insurance policy and, if you are never out of work, you won't
spend any money at all. (Find out how to create an emergency fund in Build Yourself An Emergency

Fund.)
14. Disease Insurance
Policies are available to cover cancer, heart disease and other maladies. Instead of trying to identify
every possible disease that you may encounter, get a good medical coverage policy instead. This
way, your medical bills will be covered regardless of the problem you face. (For related reading, see

Fighting The High Costs Of Healthcare.)
15. Accidental-Death Insurance
Unless you are extraordinarily accident prone, an accident is unlikely. Major catastrophes such as car
wrecks and fires are covered under other policies, as is any harm that comes to you while at work.
Accidental-death policies are often fraught with stipulations that make them difficult to collect on, so
skip the hassles and get life insurance instead.
When Choosing Insurance
There are so many policies to choose from, and they all cost money. While a certain amount of
insurance coverage is necessary and prudent, you need to choose carefully. In general, broad policies
that offer coverage for a multitude of potential events are a better choice than limited-scope policies
that focus on specific diseases or potential incidents. Before you buy any policy, read it carefully to
make sure that you understand the terms, coverage and costs. Don't sign on the dotted line until you
are comfortable with the coverage and are sure that you need it.
To read more, see Five Insurance Policies Everyone Should Have.
Read more: http://www.investopedia.com/articles/pf/07/cutpolicies.asp#ixzz3ev9LBtAD
Follow us: @Investopedia on Twitter

DID YOU BUY A LEMON?
By Lisa Smith AAA |
"Don't buy a lemon." It's the first thing many people say when you talk about buying a new car. But
what exactly is a lemon? And what do you do if you just bought one? Despite all the talk about
lemons, figuring out whether or not you have one can be a whole lot harder than most people expect
it to be, and getting the problem fixed can be a sour deal indeed.
Your Warranty Is Key
Your new car is a piece of junk! The door sticks, the seat adjustment won't work, the steering wheel
makes a funny noise and the turn signal stopped working. It's a lemon, right? Maybe, but determining
whether a vehicle is a lemon can be a complicated and bitter process.
At the federal level, there is no specific "lemon law." The most applicable federal statute only covers
what is stated in your warranty package. The Magnuson-Moss Warranty Act, which was passed by
Congress in 1975, mandates that manufacturers and sellers of consumer products provide buyers
with detailed, written information about warranty coverage.

Not Covered by Warranty
Using this law as the basis for deciding whether your car is a lemon means that if the issue in
question is not specifically spelled out in the vehicle's written warranty, then you have no recourse
under the federal law. So, if that sticking door, broken seat, funny noise in the steering wheel and
broken turn signal are not specifically covered in the vehicle's written warranty, you could be out of
luck. According to the government, you don't have a lemon - no matter how much your car's noises
drive you crazy.

Covered by Warranty
If the items are covered by the warranty, you must give the seller the opportunity to correct the
problems - you can't just cry "lemon" and demand your money back.
A single instance of mechanical failure does not qualify a vehicle for lemon status. In most cases, the
seller must be given at least three opportunities to make the repair before the consumer can seek to
return the defective vehicle.
SEE: Extended Warranties: Should You Take The Bait?
State by State
To further complicate matters, individual states often handle lemon law cases in dramatically different
ways. For example, Florida's lemon law applies to new or "demo" motor vehicles purchased or leased
in Florida for personal use. The vehicle must have a manufacturing defect that substantially impairs
the vehicle's value, use or safety.
The law covers the vehicle for a period of two years after the date of original delivery of the motor
vehicle. The manufacturer must be given three attempts to make a repair or the vehicle must be out
of service for a total of 15 or more days while repairs are being made. If these conditions are met,
complaints must be filed withing 60 days through a state arbitration request or, if the manufacturer
participates, the state-certified program.
In Maryland, the state lemon law only applies to new or leased vehicles registered in that state that
are less than 15 months old and have been driven less than 15,000 miles. Defects covered include:


A brake or steering failure that was not corrected after the first repair attempt and that
causes the vehicle to fail Maryland's safety inspection; or



Any one problem that substantially impairs the use and market value of the vehicle that was
not corrected in four repair attempts; or



Any number of problems that substantially impair the use and market value of the vehicle
that have caused it to be out of service for a cumulative total of 30 or more days.

Clearly, even under the state laws, a sticking door does not qualify the vehicle for lemon status, as it
does not "impair the use and market value." Likewise, that car you bought from your Uncle Joe or
through an auction on eBay was likely sold "as is," with no warranty at all.
SEE: Car Shopping: New Or Used?
Document Your Case
If the brakes have failed on your car for the fourth time or you still can't get it to accelerate to a
speed above 50 miles per hour despite multiple trips to the dealer, you may have a case. If so, you
need to prove it.
Documenting the problems that you are having with your vehicle will be crucial to making your case
in court or before an arbitration panel. To demonstrate your point, you need to save all the paper
work from the repairs. Keep copies of any letters you have written or correspondence that you have
received. Create a timeline, detailing the dates of each occurrence of your problem, and any steps
that you have taken to get it corrected. If you had the vehicle towed or were involved in a accident as
a result of the problem, be sure to save any documentation that proves that these events took place.
Professional Assistance
Depending on your state, you may want to seek professional representation. If so, look for an
experienced attorney and make sure that you are familiar with the applicable state laws regarding
attorney compensation. In some states, the defendant must pay the lawyer's bill if the plaintiff
prevails. In others, the plaintiff pays the bill regardless of the verdict.
Read more: http://www.investopedia.com/articles/pf/08/buy-a-lemon.asp#ixzz3evAsT7ul
Follow us: @Investopedia on Twitter

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