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Whole life insurance is a type of permanent coverage that’s offered in a range of “styles” to suit different needs. Since permanent coverage, including whole life, is more expensive than temporary or “term” coverage, many of the different types of whole life insurance have evolved to help owners manage the cost of premiums. But other types are built to maximize the death benefit or the cash value “savings” element.

Before you purchase permanent life insurance, consider the range of available options to determine which best suits your needs.

What Is Whole Life Insurance?

Whole life insurance provides both death benefit protection and a form of tax-advantaged cash buildup (a “cash value” account) that can be accessed by the policy owner. It and universal life insurance are the two most commonly sold types of life insurance policies on the market.

A “standard” whole life policy requires premium payments for the life of the policy for a dollar amount of coverage—the death benefit—that’s determined when the policy is issued. Since this structure can be unnecessarily restrictive, other types have been developed that allow more flexibility. Each type has its own benefits and drawbacks.

Participating Whole Life Insurance

• Dividends, fixed payments, fixed death benefits.

This type of whole life insurance pays dividends into the cash value of the policy when the issuing life insurance company makes a profit. These dividends come from the company’s excess investment earnings and are usually not guaranteed. But they can increase the overall return you receive from the policy.

Participating policies are most commonly issued by “mutual” life insurance companies, which are owned by the policyholders instead of being publicly traded. The dividends that are paid to policyholders are not classified as taxable income (unlike dividends that are paid from stocks). Instead, this form of income is generally considered to be partial repayment of the premiums that were paid and therefore a tax-free return of principal.

Non-Participating Whole Life Insurance

• Lower premium payments that are fixed, fixed death benefit.

Non-participating whole life policies do not pay dividends. The cash value in this type of policy still accrues interest, but the life insurance company doesn’t pass along any of its current profits to holders of these policies. Non-participating policies are known for their fixed costs and more economical premium payments.

Non-participating policies are most often (but not always) issued by publicly traded life insurance companies. Policyholders who want to participate in the profits made by these companies will have to buy stock in the company instead of a life insurance policy.

Indeterminate Premium Whole Life Insurance

• Premiums that adjust according to company performance.

This type of whole life insurance resembles non-participating whole life insurance in that no dividends are paid, but the premiums can be adjusted by the insurance company. The amount of premium you owe is based on the current financial health of the company. So when the insurer is doing well, premiums may go down. Conversely, they may increase during lean periods. However, they can never exceed the maximum amount specified in the policy documents, regardless of the company’s current financial condition.

Indeterminate premium whole life may be a good fit if you’re confident in the company’s financials and expect it to do well in the future. You could pay less in policy premiums over the long run, but if expectations aren’t met, you could pay more relative to a whole life policy with a level premium structure.

Economatic Whole Life Insurance

• Incorporates term coverage for a larger death benefit at a lower cost.

This is a more complex type of whole life policy. It combines a portion of participating whole life insurance along with a portion of decreasing term insurance.

Since the whole life portion is “participating,” it confers dividends, which are used to purchase additional paid-up coverage (coverage for which no additional premiums are due). In other words, the dividends are used to purchase increments of permanent coverage to replace the term coverage as it decreases and eventually expires.

The risk is, if the value of the dividends doesn’t turn out to be enough to replace the term coverage, the value of the net death benefit will decline as the term coverage decreases. The tradeoff for that risk is that this type of policy can give the insured a larger amount of coverage from the outset at a price that’s lower than that of a whole life policy that does not incorporate a term insurance element.

Limited Payment Whole Life Insurance

• High premiums for a set number of years, and then continued coverage with no premiums.

This type of whole life insurance requires a limited number of premium payments until an end date specified in the policy—for example, until age 65. The policy remains in force for the rest of your, or the insured’s life, but does not require any additional payments. This type of policy is popular with policyholders who don’t want to be burdened with premium payments that would otherwise still be required after they retire.

Single-Premium Whole Life Insurance

• One large upfront premium pays for a tax-free death benefit.

This form of whole life coverage, commonly known as a modified endowment contract (MEC), differs from all other types of whole life insurance in that it is funded with a single premium payment, meaning that you purchase a specific amount of paid-up coverage for life, with no additional premium payments required.

If you have money that you intend to leave your family and don’t need to access it yourself, it can make sense to purchase a life insurance policy with that money for those heirs to inherit instead. The death benefit is tax free and may be larger than what a conservative investment amount would be at the time of your death.

For example, if you have a $100,000 certificate of deposit (CD) that is earmarked for your grandchildren, you could withdraw the funds from that CD and instead purchase an insurance policy with, say, a $200,000 tax-free death benefit. Because you’d purchase the policy with such a substantial payment, it would be considered a MEC.

MECs have special tax rules and steep withdrawal penalties if you take money out of the policy in the early years. But MECs usually pay higher interest rates than CDs or other guaranteed investment vehicles.

Modified Whole Life Insurance

• Lower premiums in the early years of the policy, level death benefit.

This form of whole life coverage offers lower premiums during the early years of the policy that increase after a certain number of years. If you anticipate making more money in the future (and therefore being able to afford a larger premium), this type of policy can enable you to purchase a higher initial coverage amount than you could otherwise afford.

The period of lower payments may last anywhere from five to 20 years, and then the premiums are increased. While payments during the initial phase are usually lower than those of a traditional level premium whole life policy, the premiums after the increase are usually higher. Premiums increase only once during the life of the policy. The death benefit is level, which means it stays the same during the entire time you’re covered.

Children’s Whole Life Insurance

• Savings and coverage for babies and children.

This form of whole life insurance is offered as a means of providing a savings vehicle and insurance coverage for babies and children. The parents (or other payor) of the policy can lock in low premiums that are guaranteed to never increase and also secure life insurance for the child regardless of any future health issues. Coverage is often capped at a fairly low amount, such as $50,000, but it may be possible to increase it in the future.

Guaranteed Issue/Acceptance Whole Life Insurance

• No medical exam required, low coverage limits.

This form of whole life coverage is commonly known as burial or final expense insurance. It is usually issued to policyholders who are at least 50 years old, and it has limited or no underwriting requirements, which makes it more expensive. Since no medical exam is required and few, if any, health-related questions are asked, it may appeal if you have health problems that make getting coverage through a traditional underwriting process difficult or impossible.

Final expense coverage is designed to provide a small death benefit that can be used to pay for funeral and burial expenses along with other debts or bills you owe. The death benefit usually ranges from $10,000 to $50,000.

The Bottom Line

Each type of whole life insurance has its place and value, although not all types work for all situations. For example, young parents may be attracted to the benefits of children’s whole life insurance, while older policyholders may need the protection afforded by guaranteed issue policies.

Before you choose a specific policy, know why you’re purchasing one, how much you can afford, how much coverage you need, and how much flexibility you’d like the policy to have. This information will help you explore the range of offerings to determine which is best for you.

	Starter home	Forever home
Definition	A home you plan to own for a short period before buying another one	The only home you plan to buy
Home features	May have drawbacks in size, location, or other features	Must meet both current and future needs
Cost	Typically cheaper	Typically more expensive
Mortgage	May prefer an ARM	May prefer a fixed rate
Incentives	Last the life of the loan, but don’t carry over to the next loan	Last the life of the loan
Equity	Builds equity	Builds equity

Home Features

A starter home gets you out of renting and into ownership, with the expectation that you’ll eventually move on to another home. It might not be perfect—maybe it’s a little too far from work, it only has one bathroom, or is in dire need of upgrades. Since you aren’t planning on living in it permanently, those drawbacks might not be deal-breakers.

A forever home, meanwhile, is the only one you plan on buying. That means you’ll need to find a home that suits your current needs and all your future needs, too. If you plan to get married, have kids, or work from home, you should consider how these decisions will affect your need for features like outdoor space, more bedrooms, or nearby schools. While you can eventually renovate an outdated kitchen, you can’t change your home’s location.

Cost

The perspective described above plays into perhaps the biggest difference between a starter home and a forever home: the cost. Because starter homes typically need a little TLC, they’re often cheaper than newer, larger, or fancier homes in the same area. Homebuyers who only plan to stay for a few years may be more willing to overlook a few flaws or may have a plan to improve them.

Because a forever home needs to meet your future needs, it might be newer or larger than you need right now. For example, a couple might consider buying a four-bedroom forever home because they plan to have kids eventually, but they’ll likely spend more than they would on a home big enough for just the two of them.

Mortgage

If you plan on moving on from a starter home after a few years, an adjustable-rate mortgage (ARM) could be a good choice. An ARM typically starts with a low interest rate, which becomes variable after a certain period of time. If the length of the introductory rate lines up well with the amount of time you plan to own your starter home, an ARM could be a good choice since you can sell your property before the rate increases.

Those seeking a forever home may prefer to opt for a steady 30-year fixed mortgage, where rates won’t ever jump around. While this type of mortgage may come with a higher interest rate than the initial rate of an ARM, it’ll stay put over time—whereas the ARM’s rate has the potential to increase. If you plan to own your home for decades, you may prefer the predictability of a consistent payment.

Incentives

First-time homebuyer programs offer benefits like reduced down payments, down payment assistance, and special interest rates. Programs vary by state, and many have specific income and credit score requirements. In addition, many programs specify a maximum purchase price, so you may need to keep that in mind during your home search.

In many cases, the incentives last for the life of the loan. If you’re buying a forever home, that’s great news—you can continue to enjoy the benefits for years or decades. However, if you buy a starter home, you’ll lose the program’s advantage when you eventually sell it and move on to another property.

Equity

Perhaps most importantly, the money you pay toward your mortgage builds home equity. Whether you buy a starter or forever home, putting money toward your own property means you’re building your own equity instead of paying rent and building your landlord’s equity.

Equity isn’t just built by paying off your mortgage; it also builds as your home’s value increases. For example, 2021 had a historically high year-over-year increase in home prices, with homeowners selling their properties for a median of $85,000 over the price at which they purchased them. That $85,000 is equity, and this type of appreciation is one reason that real estate is often considered a good investment (although there’s always the chance that property values ​​could decrease).

The chance to start building equity sooner is one especially compelling reason to opt for a starter home rather than a forever home if it will take you much longer to save for the latter. Every year you wait before buying is a year you’re not building equity. And when you sell your first home, you can use your home equity to help finance the purchase of your next property. If you buy a starter home, you’ll take advantage of this option sooner than if you choose a forever home.

Starter Home vs. Forever Home: Which Is Right for You?

So how do you choose whether a starter home or a forever home is right for you? In the end, it’s a personal decision, and everyone’s situation is different. For example, one person might consider buying a downtown condo as a starter home, while another might see that condo as the perfect forever home. It all depends on your perspective and plans.

Let’s take a look at some factors that might help you choose one option over the other.

When a Starter Home Is the Best Choice

If you’re keen to begin building equity in your own investment as soon as possible, a starter home might be right for you. Since starter homes are typically more affordable, they might appeal to buyers who want to take advantage of low interest rates by buying sooner rather than later.

A starter home can also be a good option if you’re not sure what your life will look like in five or 10 years. For example, while you hope to eventually have several kids, you don’t have any now—so you don’t necessarily need those extra bedrooms right away. Or perhaps you love living in the city in your 20s but see yourself moving to the suburbs by the time you’re 40. Buying a starter home means you can focus on your current needs rather than trying to predict what you might want later.

When You Should Choose a Forever Home

Perhaps you don’t plan to have kids or your family is already complete, and you love the neighborhood where you plan to buy. Maybe you see yourself hosting gatherings in the same living room for the next 30 years. If you have a clearly defined vision of the future and little desire to move around, a forever home could be a good option.

It’ll likely be more expensive than a starter home, which is an important factor to consider, especially if you live in an area with a high cost of living. It may take you longer to save enough money to cover the down payment and closing costs. However, if this is your first purchase, you can take advantage of first-time homebuyer and down payment assistance programs. Plus, many programs last for the life of your home loan, so staying for the long term means you can make the most of them.

The Bottom Line

In the end, whether you end up buying a starter home or a forever home is your choice. There are plenty of reasons to decide on either option—and you might wind up choosing a combination strategy by purchasing a starter home and then moving to a forever home when you’re ready.

Frequently Asked Questions (FAQs)

That’s the last time (before now) the S&P 500 had fallen five weeks in a row, showing why the stock market’s recent deterioration is so hard to take.

The nearly 11-year stretch without such losing streaks was the longest in the history of the index going back to 1928, according to analysts at Deutsche Bank, suggesting that the “relentless march” of US stocks over the last decade was a fluke characterized in part by “a buy the dip narrative.”

“The last decade has very much been the exception rather than the norm,” they wrote in a commentary.

The benchmark stock index only fell 0.2% last week, but that fifth straight down week left it 9.3% lower than at the beginning of April. And there was no relief on Monday, either. It dropped 3.2% to close at 3,991.24, its lowest point in more than a year, and even farther into correction territory—down 17% from the record high reached in January.

The S&P 500’s recent decline highlights just how many factors have converged to undermine stock prices. Investors are increasingly wary of fallout from rampant inflation. Federal Reserve officials are raising the central bank’s benchmark interest rate to fight higher prices, but many estimate they may trigger an economic recession if they go too high too fast. On top of that, the war in Ukraine and COVID-19 lockdowns in China threaten to further disrupt already gnarled supply chains.

“Wall Street remains uninspired to ‘buy the dip’ as inflation seems poised to remain stubbornly high, which will force the Fed to tighten policy to levels that will jeopardize the soft landing most traders were expecting” for the economy, Edward Moya, a senior market analyst at OANDA, said in a commentary. “No one can confidently answer the question of when stocks will hit the bottom.”

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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Definition and Example of an Unrecaptured Section 1250 Gain

Section 1250 of the Internal Revenue Code (IRC) kicks in when you sell a Section 1231 real estate asset for financial gain after claiming a depreciation tax break for it in previous years. The IRS says the gain is taxable at a pretty significant rate—higher than those for most long-term capital gains.

Section 1231 property is typically business or trade real estate, so unrecaptured Section 1250 gains usually only come into play for non-business owners if they have rental property.

Let’s say you purchased a rental property for $200,000 in 2020. You’re entitled to depreciate it over five years. That works out to $40,000 per year: $200,000 divided by five. You claim $80,000 in depreciation in 2020 and 2021. This brings your cost basis down to $120,000 ($200,000 minus $80,000) in claimed depreciation.

You sell the property for $250,000 in 2022. Under Section 1250 rules, you’ve realized a gain of $130,000 ($250,000 minus your $120,000 basis adjusted for depreciation), not $50,000 ($250,000 minus your $200,000 purchase price). The $80,000 you claimed as depreciation is recaptured and taxed at a maximum of 25%. Only the remaining $50,000 is taxed at the most favorable long-term capital gains tax rate of just 15%.

How an Unrecaptured Section 1250 Gain Works

Section 1250 tags the gain you get from selling property as “unrecaptured” when the sales price exceeds your initial cost basis in the asset, which is the total of what you paid for it and spent on maintaining it. It adjusts this basis by adding back the depreciation you claimed.

An unrecaptured Section 1250 gain effectively prevents you from taking a double-dip tax break. It changes the rate at which realized gains are taxed with the intention of offsetting that depreciation you claimed. It prohibits you from claiming advantageous long-term capital gains rates on the entirety of your profit.

But “offset” is the key word here in another respect. The IRC allows you to offset Section 1250 gains with Section 1231 capital losses, provided both assets were held for more than a year so both your loss and your gain are long term. This means you can subtract your loss from the amount of your gain, and pay tax on the difference.

How To Report Uncaptured Section 1250 Gains

You report uncaptured Section 1250 earnings on Form 4797, then transfer that total to Schedule D. The instructions for Schedule D include detailed explanations and worksheets to help you make your calculations. Enter the resulting tax amount on line 16 of your Form 1040 tax return.

How Much Are Taxes on Unrecaptured Section 1250 Gains?

The tax on unrecaptured Section 1250 gains tops out at 25%, which is considerably higher than two of the three tax rates for long-term capital gains, which ranges from 0% to 20%, depending on your income. Most taxpayers pay a 0% or 15% rate on long-term capital gains, which is at least 10% less than the unrecaptured Section 1250 rate.

The 25% rate applies to money received in the first through fourth years if you accepted installment payments after 1999. Some gains can be taxed at 20% after the first four years, but this is still higher than the long-term capital gains tax rate for most taxpayers.

A home equity loan, or second mortgage, allows you to withdraw the equity you’ve built up in your home so you can use the cash to make repairs to your home, pay for college tuition, or consolidate your debt, for example.

You repay the money over time through a series of regular payments. Home equity loans have a number of benefits, but there are some downsides to consider as well. If you’re not sure if a home equity loan is right for you, you can weigh the pros and cons of alternatives such as lines of credit, refinancing, or personal loans.

Downsides of Using a Home Equity Loan

While many homeowners appreciate the flexibility home equity loans offer, there are some drawbacks to this type of financing. Among the downsides is the fact that your home secures these loans. So if you can no longer afford to make the payments—for example, if you lose your job—you could lose your house.

In addition, this type of loan adds a payment to your budget each month. If your cash flow is tight and you’re using the money for expenses other than consolidating your bills, a second mortgage might not be a good fit.

Having a home equity may also limit your ability to refinance your primary mortgage. So if you want to refinance for better terms on your original mortgage, you may want to delay taking on a home equity loan. Consult your lender or a financial advisor for guidance on your specific situation.

If you’re not sure if a home equity loan is right for you, consider the pros and cons of the following alternatives.

Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, is another type of second mortgage. It’s similar to a home equity loan because you’re accessing the equity built up in your home. But unlike with a regular loan, a HELOC works more like a credit card with a revolving line of credit.

You’re approved for a certain amount of money. You then can access those funds anytime you need them during the loan’s draw period. During this time, you only pay interest on the money you’ve used.

HELOCs usually have variable interest rates. So among the downsides of these loans, your payments won’t be the same each month, which means you won’t have predictable monthly payments.

Once the draw period is over, you’ll need to start repaying the principal, which means your payments will be larger. In some cases, a lender may require a balloon payment, or payment in full, although most HELOCs provide repayment periods of about 10 to 20 years.

If you can’t afford the higher payment, your bank may allow you to refinance your HELOC.

Cash Out Refinance

A cash-out refinance is another option for tapping equity in your home. This type of loan is when you take out a new primary mortgage for more than the amount you currently owe. As with a home equity loan, you get this extra money in a lump sum of cash, and you can spend the funds any way you’d like.

With a cash-out refinance, you won’t add a second payment each month. You can get a cash-out refinance that doesn’t add to the amount of your monthly payments. However, you’ll extend the length of the loan. Also, since a cash-out refinance is a primary mortgage, you’ll usually qualify for better interest rates.

Furthermore, lenders may not require as high a credit score to approve you for a cash-out refinance compared to a home equity loan. So if you don’t have great credit, this could be a good alternative.

Keep in mind that whenever you refinance, you have to pay closing costs. If you don’t have a lot of money up front, taking out a home equity loan might make more sense.

Reverse Mortgage

If you’re at least 62, you may be eligible for a reverse mortgage. This type of loan lets you use your home equity to supplement your income in retirement.

You’re not required to make any payments with a reverse mortgage as long as you live in the home. These terms can save you money right now. The loan is due when the last borrower dies or moves out of the house. At that point, you or your heirs can sell the home to pay off the loan. If the sale price isn’t enough, you or your estate is responsible for making up the difference.

Reverse mortgages do have some drawbacks, such as high fees. You may need to pay for origination costs, mortgage insurance, and closing costs. Due to these limitations, a reverse mortgage may not make financial sense for everyone. Consider consulting a financial advisor about options for your situation.

Personal Loans

A personal loan is another home equity loan alternative. With this type of loan, you can borrow money and use it for any purpose. Unlike a home equity loan, you don’t have to use your home as collateral.

There are two main types of personal loans: secured and unsecured.

Secured Personal Loans

A secured personal loan uses your assets as collateral. If you can’t repay the loan, the lender can take the money from your account to cover the cost. Because there’s less risk for the lender, you may be able to get a lower interest rate.

You can use many different assets as collateral, including your home, but you can use other assets besides your home to back a secured personal loan. You can use, for example, a savings account, a stock portfolio, or even your vehicle.

Unsecured Personal Loans

An unsecured personal loan doesn’t require collateral. However, that means there’s more risk for the lender since they could lose money if you can’t repay the loan. As a result, it’s difficult to qualify for these loans.

You may need good or excellent credit to get approved for an unsecured personal loan. And even with excellent credit, you’re likely to still pay a higher interest rate compared to a secured loan or a home equity loan.

Credit Cards

Credit cards can be other alternatives to home equity loans. However, use them carefully because they generally have higher interest rates.

You could finance a project with your credit card and pay it off over time. Some credit cards offer a 0% APR promotional period in which you won’t accrue interest on your purchases until the promotional period expires. If you can pay it down before the 0% APR period ends, you essentially get a free loan. However, after that period, interest is applied to your remaining balance.

Read the fine print carefully because some carry a penalty APR as well as other potential fees or penalties.

Other Asset-Backed Loans

Other collateral loans may be a good fit for your financial situation. Here are three types to consider.

401(k) Loans

If you have a retirement 401(k) account, which is an employer-sponsored account, you may be able to borrow money from it. With this type of loan, you can borrow up to $50,000 or half of your account balance, which is always less. However, the loan typically must be repaid within five years.

One significant downside of a 401(k) loan is that you’re borrowing from future retirement funds.

Car Title Loan

A car title loan can provide cash in an emergency. However, these short-term loans, which often last for only 30 days, have very high interest rates.

You’ll give the title to your vehicle to the lender until the loan is repaid. If you can’t pay back your loan on time, you’ll pay a large fee and could potentially lose your car.

CD Loan

You can use just about any personal property as collateral for a loan, including the value in a certificate of deposit (CD). In a financial emergency, this type of loan allows you to access the money in your CD without paying an early withdrawal penalty. Check with your bank regarding other potential fees.

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US gas prices reached a new record high Tuesday, erasing the modest relief seen in April.

Higher oil prices and increasing demand for gas pushed the average national price to $4.37 a gallon, according to data from AAA. As the chart below shows, the average has now surpassed the previous high of $4.33—fallout from Russia’s invasion of Ukraine.

The price of crude oil, which accounts for more than half the price at the gas pump, reached almost $110 a barrel last week after falling below $100 in late April. (As of Tuesday, it was back down around $100.) Those increases as well as rising demand and lower supplies of gas have been pressing pump prices higher, AAA said.

The national average for gas was $3.54 a gallon when Russia invaded Ukraine on Feb. 24. Sanctions against Russia proceeded to take as much as 3 million barrels of Russian oil off the market per day, increasing international oil demand and pushing prices higher. After the White House released oil saved in strategic reserves in late March, prices began to drop, but the downward trajectory was short-lived.

Have a question, comment, or story to share? You can reach Terry at tlane@thebalance.com.

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Definition and Examples of Bad Credit

Having bad credit means that negative factors appear in your credit history, indicating that you’re a risky borrower. Several factors can contribute to bad credit, including previous delinquencies, high debt balances, and recent bankruptcies.

Bad credit is usually indicated by a low credit score, the numerical summary of the information in your credit report. FICO scores are one of the most widely used credit scores. They range from 300 to 850, with higher scores being more desirable.

The FICO credit score range is broken up into five ratings:

• Exceptional: 800 and above
• Very Good: 740-799
• Good: 670-739
• Fair: 580-669
• Poor: Below 580

How Bad Credit Works

Your credit score is based on five factors. Each is weighted differently. All of them can contribute to bad credit.

• Payment history (35%): You’re likely to have a lower credit score if you have a history of delinquent debts and late payments, or credit cards that you haven’t paid off.
• Amounts owed (30%): A bad credit score is often due to owing large amounts of money. The more you already owe, the less likely it is that you’ll be able to pay off new debt.
• Length of credit history (15%): You’re a less risky borrower if you’ve been reliably paying off debts for many years. A shorter credit history will lead to a lower credit score. This is also influenced by how long your individual credit accounts have been open.
• Credit mix (10%): Having a variety of types of credit, such as a credit card, a retail card, a mortgage, a personal loan, and/or a car loan, improves your credit score. Having only one type of credit account will lower it.
• New credit (10%): People who open multiple new credit accounts in a short period of time are statistically riskier borrowers. They’re more likely to have bad credit.

Your credit score gives you and lenders a quick indication of your credit standing, but you don’t necessarily have to check your credit score to know if you probably have bad credit.

A few signs of damaged credit can include having your application for a loan, credit card, or apartment denied, or experiencing unexpected cuts to your credit limits. Your interest rates on existing accounts might rise, and you might receive communications from one or more debt collectors.

Your credit score has likely taken a hit if you’ve been more than 30 days late on a credit card or loan payment, or if you have multiple maxed-out credit cards.

Ordering your credit score from myFICO.com is one of the best ways to confirm your current credit standing. There are also a number of free credit score services you can use to check at least one of your scores from the most widely used credit bureaus: Equifax, Experian, and TransUnion.

You can take a look at your credit report to understand exactly what’s affecting your credit score. This document contains all of the information used to create your credit score.

What Are the Penalties for Bad Credit?

Having bad credit can make it difficult to get approved for new credit cards, a mortgage, or other loans. You may be offered a high interest rate or other unfavorable terms if you are approved.

Bad credit can impact other areas of your life, as well. Landlords may not accept you as a tenant, or they may only agree if you have a cosigner. Bad credit can even make it harder for you to get a job if your potential employer checks your credit score as part of your job application.

A good credit score shows that you’re a dependable borrower, which makes lenders more willing to have a relationship with you and give you funds. Consumers with very good or exceptional credit scores have better odds of loan, rental, and mortgage approvals. They can choose from a wider selection of credit card and loan products with more favorable interest rates.

How to Get Rid of Bad Credit

Having bad credit isn’t a permanent condition. You can improve your credit score and demonstrate that you’re a responsible borrower by correcting negative information and improving each of the five categories that make up your credit score.

Check and Correct Your Credit Report

Start by reviewing your credit report thoroughly. Look for any information that’s incorrect, such as paid debts that are listed as delinquent or accounts that you never opened. You can dispute these errors directly with the credit reporting company by sending a letter detailing any mistakes.

Check for information that should have been removed. With the exception of bankruptcy, negative information can only be listed on your credit report for up to seven years. You can dispute any negative items that haven’t expired.

Improve Your Credit Score

Removing negative information is just one part of the process. You should also add positive information by improving as many areas of your credit score as you can.

Keep your oldest credit account open and in good standing to add to your credit age. The longer you’ve had credit, the better it is for your credit score.

Don’t take on new debt or close credit cards in order to change your credit mix or amount of new credit. Closing credit accounts will suddenly leave you with a higher debt-to-available-credit ratio. It can negatively impact your credit score.

Focus on improving your payment history and lowering the amounts you owe. These are the two biggest factors in a bad credit score. Work toward bringing past-due bills current and paying down high balances. Continue to make regular payments on all your debts while focusing on paying off your larger ones.

Open new accounts sparingly. Take on only as much debt as you can afford. Make on-time payments. Keep your credit card balances low, and monitor your progress using a free credit score tool.

You might notice some improvement in your credit score right away when you’re caught up on payments, and positive information starts to show up on your credit report. It can take anywhere from several months to a few years to completely fix your bad credit, depending on how low your credit score was to start with.

Definition and Examples of Loan/Lease Payoff Insurance

Standard loan/lease payoff insurance pays the amount you owe on a totaled vehicle’s loan after your insurance company has paid you because your car has been totaled in an accident or it’s been stolen. You can only purchase this type of insurance if you’re buying the most comprehensive coverage insurance on your vehicle. It typically pays up to 25% of the vehicle’s current cash value (ACV), allowing for any insurance deductible.

• Alternate name: Gap insurance

For instance, if you bought your car and still owe $20,000 on it, it may only have a Kelly Blue Book value of $15,000. You are “upside down” on your car loan. If you are then in an accident where your car is totaled, your insurance may only pay you for the value of the car, which is $15,000. That means you still owe $5,000 to the bank for the remaining balance on your car loan. Payoff or gap insurance could help you pay the bank some or all of that remaining balance.

How Loan/Lease Payoff Insurance Works

The term “loan/lease payoff” is often used in place of gap insurance. Both coverages work in a similar way, but there are some subtle differences between the two. Providers can assign their own sets of rules to loan/lease payoff insurance that separate one type of insurance from the other. Other providers might not distinguish between the two coverages at all.

Suppose that John has purchased a new Chevy truck for $28,000. He purchased the truck with a 0% down payment and an extended six-year loan to keep his payments low.

Unfortunately, the truck is stolen within a month of purchase. The insurance company determines that the ACV of John’s truck is just $21,000 due to the plunging value of these vehicles when they’re driven off the lot. That’s a difference of $7,000, compared to what John Owens on the loan.

Luckily, John purchased loan/lease payoff coverage through his car insurance provider. This insurance will cover 25% of his ACV. It works out like this:

• 25% of $21,000 is $5,250.
• The insurance company will therefore pay $26,150 after subtracting a $100 deductible.
• John is responsible for paying for the remaining $1,850 balance.

John must pay out of pocket to meet his obligation, but he’s still better off than he would have been without the loan/lease payoff coverage, even though his loan wasn’t paid off in full. This is an extreme example of depreciation and no down payment, and it’s an unlikely scenario.

Loan/Lease Insurance vs. Gap Insurance

Gap insurance tends to be a bit more generous and flexible than loan/lease payoff coverage and in some critical ways. You can often avoid out-of-pocket costs at all with gap insurance. You won’t be forced to come up with a portion of the balance in order to retire the loan against the destroyed or stolen vehicle.

Loan/Lease Payoff Insurance	Gap Insurance
Does not cover deductibles	May cover deductibles
Pays only up to 25% of the vehicle’s current cash value	Pays the difference between the vehicle’s current cash value and the loan balance against it

Do I Need to Buy This Coverage?

It’s always best to discuss this type of coverage with your insurance agent rather than deciding on your own whether you need it. Make sure you understand all the details and restrictions that apply to loan/lease payoff agreements.

It can provide helpful coverage even if it doesn’t pay 100% of what you owe, and it will certainly come in handy compared to not having any access to coverage when you know you’re underwater on your car loan. However, some consumer advocates argue that the premiums for these coverages are often too high given that claim payouts are fairly infrequent.

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Definition and Examples of High-Value Home Insurance

High-value home insurance is a type of homeowners insurance that is designed for homes with high market value. A high-value home is defined as property worth $750,000 or more.

Homes that fall into this group might include heritage homes, or homes with special architectural or interior design elements. Of course, they may simply be a mansion. This type of insurance is a full package of coverages and is one of the most comprehensive you can buy. High-value policies provide much better coverage than a standard homeowners insurance policy.

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High-value home insurance isn’t only for houses. You can purchase this type of policy for high-value condos, as well.

How High-Value Home Insurance Works

If you have an above-average priced home, standard forms of home insurance that provide “average coverage” may not be enough to protect or replace your property if you file a claim. To ensure that your policy limits are high enough to avoid paying large amounts of money out of pocket, you may want to think about buying high-value home insurance.

Will Standard Home Insurance Be Enough?

Although the details be set according to the terms in your contract, a standard homeowners insurance policy covers a wide range of costs that might occur in the course of owning a home. At the most basic level, it pays for the cost to repair or rebuild the structure of your home if it is damaged. It will also replace the items within it if they’re taken or destroyed. (Claims of this nature will factor in depreciation in the value of your items, and any payouts will reflect this.) It funds lawsuits that a person might bring against you, due to bodily harm or damage to others’ property, so long as the cause relates to your home. Lastly, it covers any extra costs you might incur for living away from home while your home is being repaired, such as for a hotel or home rental.

How Does High-Value Home Insurance Differ?

Most high-value home insurance policies provide all of the coverage offered by a standard home insurance policy, but with higher limits and extra coverage for the unique needs of people who own expensive homes (and items within those homes).

For example, suppose that John and Jane are next-door neighbors. Both have high-end homes with period features, including ornate wall carvings. Each home has a current market value of $750,000. John has standard homeowners insurance with a structural coverage limit of that same amount. Jane has a high-value home insurance policy featuring a built-in guaranteed replacement cost coverage.

A major fire occurs on their street, and both John and Jane’s homes have to be rebuilt. Because the homes have features and materials that are hard to replace, the current cost to rebuild each is $850,000. John’s policy does not cover more than the stated limit, which leaves him $100,000 below what he needs, after his home is built back to his former glory. In contrast, Jane’s policy comes with the extra feature, so it would cover the full cost of work, even if it exceeds the coverage limit.

What Does High-Value Home Insurance Coverage?

The most common reason for choosing to purchase high-end home insurance is expanded coverage limits, compared to standard homeowners insurance policies, but it can also include a wide range of extra perks or add-on services.

Compared to standard home insurance, a high-end policy includes larger policy limits or enhanced coverage for the following:

• Structural repair or replacement: Structural coverage for standard homeowners insurance may be limited to the cost to rebuild the home. If you think the true cost to build your home back to the state it was in before damage occurred will be higher than what is stated in the contract, you’ll need to get extended or guaranteed replacement cost coverage. This is often an add-on or a rider that will cost you more each month. In contrast, many high-value home insurance policies include extended or guaranteed replacement cost coverage as part of the package. This will allow you to rebuild your home to its former state, even if the cost of doing so exceeds your stated limit.

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The guaranteed replacement cost option covers the full cost of rebuilding the property, no matter how much it exceeds the coverage limit. Extended replacement cost is a more modest option that covers any costs that exceed the limit, up to a certain percentage.

• Possessions: High-value home insurance affords higher limits for items like money, jewelry, art, antiques, or even business items kept at home. If you only have a standard policy, it often costs 10% more to insure your personal belongings at the cost to replace them, versus the true cash value. And if your claim is based on the current cash value of your items, it will pay out less for older items than you first paid for them, due to depreciation. High-value home insurance most often insures your items at the replacement cost, rather than at the current value, which will give you a bigger payout.
• Liability: High-value policies often include higher limits for personal liability, medical payments, and loss assessments. They also often cover costs if you need to defend against claims of slander, libel, or defamation.
• Additional living expenses: You’ll often enjoy much higher coverage limits for living costs you incur while waiting for your home to be restored, such as hotel stays, meals, or laundry.

Some high-value home insurance policies also provide niche coverages that are not often offered by standard policies. They include things you might not even think of if you suffer home damage, such as the cost to replace locks if your keys are stolen, or to protect against identity theft, or the cost to replace food that has been spoiled due to an electric outage. A policy might even cover the costs of a kidnapping or ransom, and legal defense fees.

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Having coverage for living expenses while your home is often a major asset. Many high-end home insurance policies cover the costs needed to meet your former comforts. If your standard of living aligns, you can even stay in a high-end hotel with all the perks while you take the time to hire the right architects and builders to restore your home after an adverse event.

Do I Need High-Value Home Insurance?

Not every dwelling needs high-end home insurance. This type of coverage is specifically designed for houses that would cost a great deal to reconstruct or repair, or if the items in the home are hard or impossible to replace.

High-value home insurance might be a good choice for you if any of the following are true.

• Your home is worth $750,000 or more
• Your home is a heritage home
• Your home has older construction features not found in common methods or practices
• Your home has unique architectural features
• Your home uses materials that are hard to replace
• You own expensive or priceless fine art, rugs, collections, jewelry, wine, or other items that are kept at home
• You chose high-end appliances or fixtures that can not be found at standard stores
• The interior and exterior design features are unique, such as luxurious outdoor living areas, guest houses, swimming pool areas, custom landscaping, or bespoke features that were created by an interior designer

How Much Does High-Value Home Insurance Cost?

High-end homeowners insurance policies will cost more than standard versions, because of their increased coverage limits and top-of-the-line personalized experience. Owners of high-value homes need to budget for higher premiums each year. In 2018 (the latest data from the Insurance Information Institute), homeowners in the US paid, on average, $1,249 in annual premiums for standard home insurance. You can bet that a high-value policy will be much higher.

There are many ways to reduce the price you pay for insurance, no matter the type you choose.

• Get multiple quotes: Shop around with the major insurers in your state to get the best rate.
• Choose a high deductible: The insurance deductible is the amount you pay before your insurance coverage kicks in. Opting to pay more out of pocket when you file a claim is a common tradeoff for lower premiums.
• Bundle your homeowners and auto insurance: Buying both policies from the same insurer can save you anywhere from 5% to 15% on premiums.
• Look for discounts: Some insurers offer discounts for retirees, or for employees or members of certain organizations.

Key Takeaways

• High-value home insurance is a special type of homeowners insurance designed for homes worth $750,000 and more.
• It provides higher limits on coverage than standard policies, plus additional types of coverage for the unique needs of people who own high-end homes.
• This type of insurance can cost more than $1,200 per year, but you can lower your costs by shopping around and looking for deals and discounts.