HOW MUCH INSURANCE DOES A YOUNG FAMILY WITH ONE BREADWINNER NEED?
By MARLYS HARRIS REPORTER ASSOCIATE: BARBARA SOLOMON

(MONEY Magazine) – Q. My husband and I are in our mid-thirties, and I'm at home with our two children. Five years ago, we each bought a $100,000 universal life policy from the Woodmen of the World Life Insurance Society. Premiums total about $1,200 a year. The salesman assured us the dividends would pay the premiums at some point, but I wonder when. Now, a new agent from the company says we each need at least 12 to 15 times what my husband earns, even though my husband also has a policy through his company worth six times his income. How much insurance do we need? And is Woodmen on the up-and-up? NANCY MOY Norfolk, Mass.

A. A name like Woodmen of the World makes you wonder, but the Omaha-based outfit is a respectable fraternal organization of lumbermen that got its start in the 19th century. It provides insurance to members and their friends and gets good ratings of A+ from A.M. Best and AA from Standard & Poor's. That said, the Woodmen are lumbering you with expensive insurance you don't need. First, according to a Woodmen actuary, the dividends from your policies won't cover the premiums until you are both 72. That's a long time to wait. Second, there is no way your husband needs as much insurance as Woodmen recommends. According to Jim Hunt, the life insurance specialist for the Consumer Federation of America, a breadwinner should figure on replacing six to eight times gross income. So you probably don't need much more insurance because you would already collect your husband's company policy. You need even less insurance for yourself. To be safe, buy enough to cover the babysitting and housekeeping your family would need in your absence. Cancel the policies you have; there's no surrender fee after five years. Use the accumulated cash value to buy term insurance from a low-cost carrier like USAA (800-531-9093). A nonsmoking 35-year-old woman would start out paying $130 a year for $100,000 worth of annual renewable term coverage.

Q. I understand how dollar-cost averaging works, but I was wondering whether there is some way to make it work even better. For example, what if I slightly increase the amount of my periodic investment when the market slides downward and slightly decrease my investment when the market rises? Would that lower the average purchase price of my shares and give me bigger profits? RICHARD JOHNSON Iowa City

A. As you probably know by now, one of the credos I live by is KISS--that is, "Keep it simple, smarty-pants." Indeed, the beauty of dollar-cost averaging is its simplicity: By investing equal amounts at set periods, you wind up with more shares bought at lower prices. Once you try to time the market's peaks and dips, you will find yourself roiled in confusion and indecision. For example, how much should the market rise before you cut back on your investment? And what benchmark should you use?

If you want to go beyond plain-vanilla dollar-cost averaging, try the so-called constant-ratio plan as well. Let's say that you would like to keep half of your portfolio in a stock fund and half in a bond fund. Your periodic investment in each fund would remain the same, but you would rebalance your portfolio to fifty-fifty twice a year. Careful, though. Use this strategy only for no-load mutual funds lodged within tax-free accounts or else commissions and taxes will reduce its effectiveness.

Q. Over the past seven months, I have received many calls and letters from ACS, a collection service that claims to be affiliated with the U.S. Department of Education. ACS says that I owe about $7,800 in college loans, plus some $5,500 in interest and $7,100 in collection costs and other fees, but it will accept about $18,000 as payment in full. As far as I know, I had only three loans, all of which were repaid. I even checked with the Virginia State Education Assistance Authority, which granted the loans, and they say I'm debt-free. But ACS keeps demanding money and will deal with me only by phone. What can I do? ELIZABETH SMITH Betheseda, Md.

A. Oh, I hear your pain--which will only get worse when I tell you this: You owe the money. Tim Branner, a loan specialist at the Debt Collection Service of the Department of Education, looked up your records and learned that you had three loans of $2,500 each taken out in three different years in the early '80s when you were in school. Two loans that you thought you had paid were actually consolidated, and you still owe money on them as well as on two more. The Virginia State Education Assistance Authority folks no longer had any record of the loans because they had already been turned over to the feds for collection, not because they had been repaid.

A few things confound me about this story: That you could forget about all this dough and that it took the feds so long to send you a bill. (Branner says the government didn't find you until recently.) But ACS is legit, although when we called them, they were difficult to reach. Meanwhile, Branner has sent you the documentation, and you should apply to the DOE (the toll-free number is 800-621-3115) to consolidate your debts so you can keep the payments low. But pay something on the loans immediately just to keep the sharks away. If you don't, the IRS will seize your future tax refunds and apply them to your loan balance.

Q. When I bought a new Chevrolet Suburban in 1989, I paid $574 for the "Lifetime Protection Plan," an extended-service contract that covers 100,000 miles or seven years. I had some repairs done recently that cost more than $500, but I couldn't reach Interstate Dealer Services, the issuer of the contract. I was told it had been taken over by another issuer that then went under. The dealer from whom I bought the car had also been taken over by another car dealer, who told me they would get back to me, but that I may have to get in contact with the insurance commissioner. When I didn't hear from them, I called the commissioner's office and was told that the contract said the American Home Insurance Co. of New Jersey insured the dealer's obligation. I wrote them, but my letter was returned. Is there any way I can get my money back or get my repairs covered? NOLA VORBRICH Arroyo Grande, Calif.

A. This was an unholy mess to sort out so I will just hit the main points. Unlike extended warranties, extended-service contracts are provided by car dealers, not car makers. (Another party, an issuer, merely designs the coverage and has nothing to do with providing service.) As a result, if something happens to the dealership, you have no big GM or Toyota to fall back on. For that reason alone, I wouldn't touch one of these plans--but, hey, that's just me.

Your contract, fortunately, was backed by an insurance company, and any consumer who buys one that isn't should be beaten about the head and shoulders with old brake linings. But here's another hitch: Two years after you signed, American Home dropped out of the business, and the issuer hooked up with a new insurance company, National Colonial, which folded. Anyway, American Home has no legal obligation to cover your repairs, but the folks there decided that if their name was on the contract, they would honor it. Just call Claim Services at 800-233-8538. Nice going, American Home. No wonder you're still in business.

Q. I am a sales representative working from home for a Fortune 200 company located hundreds of miles from my territory. I use an office in my house exclusively for my work, but I always see clients at their places, never mine. Am I qualified to take a deduction for my home office? STEPHANIE GARBER Silver Spring, Md.

A. According to a 1993 Supreme Court decision, you're out of luck. Commissioner vs. Soliman pitted the IRS against Dr. Nader E. Soliman, an anesthesiologist, who had no office in the hospital where he worked and used a home office exclusively to do paperwork for his practice. The court ruled that his principal job was at the hospital, so he was not entitled to the office deduction. Since the main part of your business is client contact outside your office, you're in the same fix. You'll get no deduction unless Congress keeps a provision in the Budget Reconciliation Act that overrides the Supreme Court decision and allows the deduction for folks like you and Dr. Soliman who have to use home offices for paperwork and management.

Reporter associate: Barbara Solomon