Protect Against Collisions and More If you drive a car in the United States, liability insurance must cover it. This type of policy pays for medical and property damage resulting from a vehicular accident. You can also purchase comprehensive and collision insurance to cover other costs. These additional coverages help protect the value of your car should it be damaged. If you are calculating how much it will cost to buy a car, you need to take into consideration the cost of insurance as well. In this article, we’ll review the basics of car insurance and the best auto insurance companies in America, including costs, pros and cons. This is a brief introduction to automobile coverage. Liability Coverage When an accident occurs, liability insurance covers you, household members and authorized drivers for the costs associated with property damage and bodily injury. It covers the cost to repair or replace property damage that you caused. [youmaylike] You are also covered if you cause the bodily harm or death to someone else while you are driving the car. This includes medical expenses, loss of income and specified legal defense costs. Collision Insurance If you are involved in a collision, this type of insurance will help pay for repairing or replacing your vehicle. If the collision is your fault, the coverage may extend to other damaged vehicles involved in the accident. States do not mandate that you buy collision insurance, but your lender or car dealer will if you finance or lease the car. Policies offer a range of deductibles, which is how much you’ll have to pay for repairs before the insurance kicks in. Larger deductibles lower the policy premiums but expose you to more out-of-pocket expenses if a collision occurs. Comprehensive Insurance Comprehensive insurance covers damage to your car that occurs for reasons other than a collision, including theft, fire, vandalism, weather and natural disasters. This coverage is often required if you finance your automobile. You can add riders to this insurance to provide coverage of additional costs, including auto towing, glass repair, daily rental while your car is in the shop and emergency roadside service. As with collision insurance, you can set the deductible on your comprehensive insurance policy to cut your premium costs. Gap Insurance If your car is severely damaged in an accident or other incident, you might find that your comprehensive and collision damage won’t provide enough coverage to pay off the amount you owe on the vehicle. Many policies pay only the fair market value of a totaled car, which might be only 80% of the amount you owe. You can buy additional insurance to plug this gap and ensure you can pay off the car loan in full if the vehicle is destroyed or stolen. Normally, car leases require you to buy gap insurance. If you pay cash or pay off your loan, you can save money by avoiding or dropping gap insurance when no longer needed. Top Five Auto Insurers These five insurers all offer full coverage policies and many additional services. Amica Amica is a superstar among car insurers, winning accolades from Consumer Reports and J.D. Powers. It’s known for handling the claims process smoothly. The average annual cost for full coverage: is $1,360. Pros You can have your car repaired at any body shop, without restrictions. Offers a premium package which, for an additional cost, provides full glass coverage, rental coverage, good driving rewards and identity fraud monitoring. Superior financial stability rating from A.M. Best. Cons Missing some discounts, such as military, low-mileage and prepay discounts. Must speak on the phone to get a quote. Sparse website when it comes to customer education. State Farm State Farm is the country’s largest multi-line insurance company. It excels in customer service and regularly garners high marks from customers. The average annual cost for full coverage: is $1,337. Pros Superior financial stability rating from A.M. Best. Excellent online quote tool, getting customers a quote in as little as five minutes. Easy claim handling and top service from its more than 18,000 agents and its easy-to-use mobile app. Cons Doesn’t offer coverage for new car replacements or uninsured motorists. Missing prepayment and automatic payment discounts. The Hartford While only 11th in size, The Hartford is big when it comes to policy options. It offers rates based on your actual driving as well as full replacement of new cars when destroyed shortly after purchase. Average annual cost for full coverage: N/A. Pros Solid benefits, including superior roadside assistance and towing programs. High marks from customers for their purchase experiences. One of the few insurers with mechanical breakdown coverage for out-of-warranty repairs. Cons Mediocre service interaction according to J.D. Power surveys. Sparse online learning materials. Geico Geico is the second-largest U.S. car insurer. It is a favorite among tech-savvy geeks who appreciate the insurer’s mobile app and excellent online service. The average annual cost for full coverage: is $1,627. Pros Geico offers plenty of ways to save, such as multi-vehicle, driving history and vehicle safety equipment discounts. Special savings for active and retired military members and federal employees. Full-featured mobile app for getting quotes, buying insurance, managing your policy, submitting claims, summoning roadside assistance and making payments. Cons Human help may be in short supply, as just about everything is handled online. No gap insurance is offered. USAA No insurer matches USAA for service to military members. Unfortunately, it's only available to active service members, their families and retired veterans. Average annual cost for full coverage: $896. Pros Superior financial stability rating from A.M. Best. Top-ranked purchase experience score from J.D. Power. Cons Missing gap coverage. Doesn’t offer interior vehicle coverage or new car replacement coverage. Limited availability. The Right One for You Competition in the insurance industry helps drive down prices and prompts insurers to offer money-saving features. For example, your carrier might reward you for a safe driving record and for having a long-term relationship with the insurer. The right insurer for you is highly rated for service, offers the exact coverage you want and does so at an unbeatable price. You should always gather multiple quotes before selecting an insurer, and make sure you get credit for all applicable discounts.
High-Yield Bonds
When it comes to investments, stocks get all the attention. In fact, I’d be willing to bet many of the people reading this have 100% of their retirement savings in the stock market.
There are a few issues with this strategy, however. A portfolio only consisting of stocks is vulnerable to the whims of the stock market. This means that if stocks head lower, your portfolio will do poorly as well. When you’re younger and have time to recover, this isn’t so bad. But it really hurts as you start to approach retirement age.
Standard, low risk bonds are a natural choice to protect yourself during the next financial crisis, or if you are investing as a senior. There’s just one problem: with interest rates so low, the average bond doesn’t yield much. This means the asset class doesn’t offer much more than protection, which isn’t very exciting. You want to at least be paid to wait.
Let’s take a closer look at high-yield bonds, a special kind of bond that offers some protection while also paying generous yields.
What’s a High-Yield Bond?
First off, let’s talk about what a high-yield bond is and how it differs from a regular bond.
A bond is a special debt security created when a company borrows money from investors. Some bonds are secured by specific assets on a company’s balance sheet, but most are just borrowed against the general credit worthiness of the firm. The firm must make interest payments back to investors — these usually happen twice a year — and the bond will have a maturity date where the full amount borrowed (face value) must be paid back. A corporation will either have enough cash in the bank to do so or, more commonly, they will issue a new bond to pay off the old one.
What interest rate a company pays on this loan depends on its credit rating. Companies with good balance sheets and bright futures get the best interest rates. These safer bonds are called investment grade bonds. Organizations that struggle to be profitable or who aren’t growing must pay higher rates. It’s these so-called "junk" bonds that make up the heart of the high-yield debt market.
Ultimately, the interest rate on a bond is directly related to a company’s likelihood of paying back its debt. High-yield bonds have a greater chance of default, so they pay a higher interest rate.
Two Types of High-Yield Bonds
One thing you might not know about bonds is there’s a bond market, a place where bondholders can trade their assets, just like stocks. But unlike the stock market, which has one central trading area, the bond market is less organized. Trading happens between market participants on an over-the-counter basis, facilitated by various brokers.
The first type of high-yield bond is one issued by a company with a poor credit rating. Everyone knows the bond is risky, and the interest rate is higher to compensate for that risk. This type of debt is very straightforward.
The bond market makes the other kind of high-yield bond a little trickier. Say a company issues a 10-year bond. Everything is all good for the first four years, and then the company’s earnings fall off a cliff. To accurately price in this new risk, the price of the bond goes down. This increases the potential total return to compensate for the risk.
Let’s look at a quick example. A bond might go from 100 to 90 while paying a 4% interest rate. Someone who buys the bond at 90 with five years remaining on the debt will get 4% annually from the interest and an extra 10% in five years when the debt is fully paid off. That translates into a 6% annual return, which is much better than the 4% interest rate offered at the beginning.
How You Can Buy High-Yield Bonds
Every online broker has a section where you can buy individual bonds. It’s as simple as finding the individual bond you want, placing an order, and you’ll end up owning it.
However, I’d recommend most DIY investors not touch individual bonds, for a few reasons. Firstly, bonds are complicated. There are a lot of variables that go into pricing a bond, and there are thousands of smart minds trying to pick up the best deals in the bond market. Chances are these folks have an edge you don’t.
Secondly, it’s hard for retail investors to build a diverse bond portfolio. You want as many bonds in your account as possible, especially if you’re buying riskier high-yield bonds. That’s hard to do with just a portion of an already small portfolio.
Retail investors also don’t get very good deals when buying individual bonds. Brokerages would much rather deal with big investors; therefore, they get better pricing, while regular folks get ripped off.
It’s not all bad news, however. There is one simple way a retail investor like you or me can get access to the high-yield bond market, instantly getting a diverse portfolio filled with hundreds of different bonds: we can buy a high-yield bond ETF. Learn more about ETF investing.
The biggest one is the Barclay’s High Yield Bond ETF (NYSE:JNK), an exchange traded fund that holds stakes in 910 different bonds and has a market cap of $11.4 billion. It only charges a 0.4% management fee, which is a very reasonable price to pay for that much diversification in one place.
The best part of this investment is the yield. JNK currently pays a distribution of 5.4%. Compare that to investment grade bond ETFs, which have yields in the 2.5–2.75% range.
There’s another kind of junk bond fund, one that offers much higher yields. These products will pool investors money — plus a certain amount it borrows — into a high-yield bond portfolio. These products are obviously riskier than straight high-yield bond funds, but they pay yields in the 7–8% range.
The Bottom Line
There’s a reason high-yield bonds offer a better interest rate. They’re riskier than investment grade bonds on two fronts: they’re more likely to default, and the price of the underlying bond tends to fall when the economy falters. This makes these bonds a relatively poor choice if you’re looking for a product to insulate you from stock market dips.
For investors with a long-term view, temporary setbacks aren’t a big deal. For them, high-yield bonds are a good choice for a portfolio. They deliver big yields and diverse ETFs minimize default risk.
They’re an excellent buy-and-hold choice for the average portfolio. Just don’t be surprised when your high-yield bond fund falls 20% the next time there’s a recession.