NerdWallet's Smart Money Podcast - Rising Insurance Costs and Choosing the Best Savings Account for Your Money

Starting point is 00:00:00 Insurance is designed to protect you from financial ruin when unlikely but potentially catastrophic events occur. But what happens when those potentially catastrophic events become more and more likely to happen? This episode will help you understand how to think about protecting your home and other assets with insurance as climate disasters increase in frequency. Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Sarah Rathner. This episode, we'll answer a listener's question

Starting point is 00:00:35 about whether money market accounts are better than high-yield savings accounts and how to know which one to use to meet your savings goals. But first, we're going to talk about a significant nationwide issue coming up in the aftermath of the fires in and around Los Angeles. In fact, an issue that's been building with each weather-related catastrophe. It's the skyrocketing cost of home insurance. If you're a homeowner, you're probably already seeing this in your monthly bills.

Starting point is 00:01:02 And if you're a renter, this affects you too, because your landlord has to pay insurance for your building. We're joined now by Caitlin Constantine. She oversees home insurance coverage here at NerdWallet. Caitlin did a special series for us back in the spring of 2023 on the financial ramifications of climate change. We did an entire episode on what was happening with home insurance in the wake of floods, hurricanes,

Starting point is 00:01:24 fires, tornadoes, and everything else Mother Nature throws at us. So we're getting the latest on this to help you cope with a future that is rapidly changing. Caitlin, welcome back. Thanks Sean and Sarah. I'm always happy to join you, but my gosh the circumstances for this conversation could not be worse. Yeah what's happened and is happening in and around Los Angeles is a disaster of staggering proportions. You have tens of thousands of folks who are displaced, many who no longer have a home. And it's not like there are homes to spare in that part of the country. So what these fire victims

Starting point is 00:01:56 are facing is not only finding shelter, but figuring out where they're going to eventually live. And that's getting more and more complex because insurance companies are pulling out of a lot of these climate change crisis zones, right? Right, we've seen Florida, California, and Louisiana all have challenges with keeping insurers for a variety of reasons. But underpinning all of this is the fact that climate-related disasters are becoming more common,

Starting point is 00:02:20 more extreme, and more costly. So let's take California. Over the past few years, California has actually seen several major insurers, like Allstate, more extreme, and more costly. So let's take California. Over the past few years, California has actually seen several major insurers, like Allstate, State Farm, and Farmers, either stopped writing new home insurance policies or they declined to renew other policies. And in fact, in July, State Farm dropped about 1,600 policies

Starting point is 00:02:38 in Pacific Palisades alone. Insurers say that the cost of paying for wildfire losses has been greater than what they were able to collect in premiums, so they chose to reduce how much they were covering in the state instead of continuing to take those losses. And just last month, California's insurance commissioner released new rules that were supposed to bolster

Starting point is 00:02:55 the insurance market in the state. Where might that play out in this recovery effort? So these new regulations require insurers to write more home insurance policies in areas with high risk of wildfire. In exchange, those insurers can make changes in how they set their rates, and that's likely going to result in higher premiums. So to put it simply, more California homeowners will likely have access to home insurance, but they're going to have to pay more for it. The regulations may be starting to work as intended, as some insurers

Starting point is 00:03:22 have recently announced that they would resume business in the state. But that said, we don't know how the wildfires are going to impact this. Now, it's also worth noting that there's a one-year moratorium on dropping home insurance policies in the areas affected by the LA wildfires. The California Insurance Commissioner also called on insurance companies to rescind non-renewals that were issued in the 90 days before the wildfires, and then to also cancel pending non-renewals. These moves should help homeowners maintain coverage when they begin to rebuild after the fires. But this isn't a new story, is it?

Starting point is 00:03:51 We've seen this happening all over the country. You already mentioned Florida, California, Louisiana. We also saw storms in western North Carolina this summer. In all these places that have gone through enormous tragedy, these extreme weather events end up jacking up insurance prices. Sadly, it's becoming more and more common. We've been seeing home insurance costs increase around the country as extreme weather becomes

Starting point is 00:04:13 more destructive and happens more frequently. And it's not just the usual suspects like Florida, Louisiana, and California. Last month, the Senate Budget Committee released a report on climate change and insurance that indicated parts of southern New England, New Jersey, New Mexico, Oklahoma, and the Carolinas may not be far behind. That report also warns that if these trends continue, we're going to start to see this impact property values. Kaitlin, I know you have some personal experience with this issue. You live in Asheville, North Carolina, where Hurricane Helene brought so much destruction last fall. What have you seen in insurance rates in the

Starting point is 00:04:49 wake of natural disasters that hit where you live? Well, it's a little soon for us to know how much our premiums will go up, but we do know that last week, North Carolina's insurance commissioner approved an average rate of increase of about 15% across the state that will take effect by the middle of next year. So it's safe to say that many of us are going to pay more for home insurance. I will say that one thing we do know for sure that posed a huge problem for us, a lack of flood insurance. So standard home insurance doesn't cover flood damage. You have to have flood insurance specifically for that. And an analysis done by a local nonprofit news group, Asheville Watchdog, they found that less than 1% of

Starting point is 00:05:25 the buildings in Buncombe County, which is where Asheville is located, were covered by flood insurance. So that means that a significant number of people who lost homes and businesses when the French Broad River flooded will not have nearly enough money to rebuild. And Asheville is not alone in this regard. A new report from the Consumer Financial Protection Bureau found that people who live near inland rivers and streams are more likely to go without flood insurance than people who live near the coast. And unfortunately, the report also

Starting point is 00:05:50 found that people who live near rivers tend to have fewer resources to recover than do people who live near coasts. I think it's sometimes easy for people to think, well, I don't live in an area that's threatened by these kinds of events. So this insurance discussion isn't relevant to me. But it actually is. Can you tell us about how the insurance losses from disasters that might even be far from where you live end up being paid for by all

Starting point is 00:06:14 of us? Well, it's important to remember that the point of insurance is to spread the cost of recovering and rebuilding over a wider group of people instead of expecting individuals to shoulder those costs entirely on their own. And so it follows that when more of us file bigger claims more frequently, the pool of money we're being paid out from has to increase as well.

Starting point is 00:06:34 And that's when premiums go up. I think it's an indicator of the scope of this problem that the cost of paying for weather-related damage has become so high that the increase is being felt even in places that don't see a lot of extreme weather. Can you give us a sense of how much more everyone is paying because of these rolling crises? Well, we've been seeing home insurance rates increase almost across the board for a few years now. Partly that's been due to inflation, but partly it's due to the aforementioned

Starting point is 00:07:00 increase in severe weather. In 2023, premiums increased by more than 11%, according to S&P Global. And then in 2024, our average rate for home insurance in the US was $160 a month or a little over $1,900 a year. And that was calculated before the most recent disasters in LA, in Florida, and North Carolina. So we're getting ready to do our analysis for the upcoming year, and we fully expect to see rates go up once again. Let's talk about what all of this means for the cost of housing in this country. How do insurance costs play into the rising price you have to pay for a house or even to rent?

Starting point is 00:07:35 Well, in recent years, insurance premiums have become so costly for so many people that they now are paying more for insurance and taxes than for the mortgage itself. And this is yet another factor that's making home ownership unaffordable for so many people, especially first-time buyers. It's not just that the house itself has become so much more expensive, but it's also much more expensive to insure it. And if you have a mortgage, you can't go without insurance. Plus, it's no longer a predictable expense, as so many of us have seen big increases in

Starting point is 00:08:04 our home insurance year over year. So even if you can swing the expense one year, who knows if you're gonna be able to manage it three or four years down the road. And renters, this is gonna impact you as well. Your landlord is going to end up paying more to insure that property, and those costs will be passed down to you.

Starting point is 00:08:20 Let's get to some practical advice for folks who are facing, or very well could face in the future, some soaring insurance bills for their homes. Kaitlin, can you give us three or four top things people can do right now to try to lower those bills? So first of all, if you get hit with a big insurance bill, you definitely should shop around for a new policy.

Starting point is 00:08:39 We recommend getting quotes from at least three insurers. You can start on our site. If you do a search for nerd wall at home insurance quotes, you'll get a page and you can get started by entering your zip code on the page that comes up. When you are getting quotes, it's really important to make sure that the quotes have comparable levels of coverage so that you are measuring apples to apples. If insurance is scarce in your area, which it very well could be, your best bet is going to be working with an independent insurance agent. They will know about all of the good insurers who sell in your area,

Starting point is 00:09:08 not just the ones with the big ad budgets or the goofy mascots. And another money saving tactic is raising your deductible. We found that if you raise your deductible from a thousand to twenty five hundred dollars, you can save on average nearly 13% on your premium. But if you do this, it's super important to make sure you can cover that expense. And really, it's important that you make sure you read your policy carefully.

Starting point is 00:09:31 You might have a separate deductible for hail or wind damage. In fact, your policy is going to have all kinds of details about possible exclusions or limitations, so it's really critical to read it and make sure you understand it. One thing we don't recommend doing to save money is reducing how much coverage you have. It may be tempting to save money by lowering your coverage limits, but if disaster strikes, you're going to be very glad you're

Starting point is 00:09:53 not underinsured. Kaitlin Constantine, thank you so much for helping us out today. Thanks so much for having me. In a moment, we'll turn to this episode's Money Questions segment where we help you dig into whether high yield savings accounts live up to the hype or if other types of savings accounts might be better for you. But before we get into that, we're going to ask you, nerdy listener, to pause, literally, perhaps, to think about where you need some guidance with your money. Maybe you're wondering about how to compare different insurance companies or you're trying

Starting point is 00:10:22 to break yourself out of a bad financial habit, but just can't seem to do it. Whatever your money question, we nerds are here to help. Leave us a voicemail or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. And a reminder that one of our goals on Smart Money this year is to talk with more of you

Starting point is 00:10:44 live on the podcast to help you with your money questions. If you want to hang out with Sarah and me for a bit and get some nerdy wisdom, let us know. One more time, leave us a voicemail or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD. And you can always email us at podcast at nerdwallet.com. All right, let's get to this episode's money question segment. That's up next. Stay with us.

Starting point is 00:11:16 We're back and answering your money questions to help you make smarter financial decisions. This episode's question comes from Erin, who sent us an email. Here it is. Hi NerdWallet team, I wanted to reach out and share some thoughts on a topic I know you cover often, high-yield savings accounts. As someone who invests across platforms, primarily with Vanguard, I've noticed that their Vanguard Federal Money Market Fund, while requiring a $3,000 minimum, consistently offers a

Starting point is 00:11:42 higher annual return than most high-old savings accounts. This raises a question in my mind. Aside from the convenience of short-term liquidity for bill payments or direct deposits, is there much advantage to high-old savings accounts? The Money Market Fund has no cap on purchases, is FDIC insured, and currently offers a 4.78% yield, which seems to outshine high-yield savings accounts for similar security. Aaron continues, Thinking a bit deeper, it seems that financial institutions heavily market high-yield savings accounts, yet these

Starting point is 00:12:15 often come in half a percent to one percent lower than similar money market funds. From what I see, this setup is quite profitable for banks. They enjoy liquidity from deposits while offering a quote unquote high yield that still nets them a solid margin with minimal risk. High yield savings accounts essentially allow institutions to secure a consistent return without needing to invest actively, a profit margin they might not achieve with conventional investment accounts. Given your expertise in high yield savings, I'd love to hear your perspective.

Starting point is 00:12:46 Do you agree with this assessment? And if so, why are high-yield accounts marketed as a beneficial product for the average saver? To help us answer Aaron's question, on this episode of the podcast, we are joined by Margaret Burnett. Margaret is a savings expert who has been writing about bank accounts for more than a decade.

Starting point is 00:13:01 Her work has been featured in the Associated Press, USA Today, and other major media. Margaret, welcome to Smart Money. Thank you for having me. I'm glad to be here. Hey, Margaret. So let's start with the basics. What is the difference between a high-yield savings account and a money market account? Let's start with the money market account. What is it and where and how do you get one? This is a great question, Sean, and I'm happy to answer it. But there is a point I'd like to clear up first in the terminology, because money market

Starting point is 00:13:29 means different things depending on the context. So a money market mutual fund, like the Vanguard Federal Money Market Fund, is an investment product. It's offered by a brokerage, not a bank. As a mutual fund, it pulls investors' money into low-risk, short-term securities. So think government securities such as treasury bills. This fund is not FDIC-insured. That's the key difference. A money market deposit account, on the other hand,

Starting point is 00:13:58 is a bank product. It is a savings account that can sometimes come with check writing features. But importantly, it is FDIC insured. This means your money is protected by the federal government and you can open one at a bank. And a high-yield savings account, this might seem obvious, especially because we do talk about them a lot on this show, but let's define those as well. A high-yield savings account is also a bank product. It's simply a savings account that pays above average rates. So for example, the national average rate for savings accounts is currently less than

Starting point is 00:14:33 half a percentage point, but you can find high-yield savings accounts that offer more than 4% annually. Also like the money market deposit account, high-yield savings accounts are FDIC insured. So your money is safe. Let's talk about this question of returns or interest that you would earn on money that you deposit in both of these types of accounts. Money market deposit accounts, which is really just a type of savings account and high yield savings accounts, which of course are another type of savings account. Again, the listener was conflating money market deposit accounts with money market

Starting point is 00:15:10 mutual funds. That's a type of investment account. It's very different. So where do returns come from in a money market deposit account? With money market deposit accounts, returns are based on interest rates set by the bank. They are generally tied to something called the federal funds rate, and rates can change at any time. That said, when you make your deposit, you typically know the rate you can expect, at least as of the day you make that deposit. What about high-yield savings accounts or really any savings accounts? High-yield savings accounts work the same way as money market deposit accounts.

Starting point is 00:15:46 Interest rates are set by banks and can change based on the market environment. Again, these are both different from money market mutual funds. Their returns are based on the performance of the securities the funds invest in, like treasury bills. And these returns are called a yield.

Starting point is 00:16:03 It's worth noting that future returns in a mutual fund are not guaranteed. So let's look at Aaron's example here. What would they want to think about when looking at these options for placing their money? Here are a few things to think about. First, fees and minimum balances. You can find high yield savings accounts that don't charge monthly fees and don't have minimum balance requirements.

Starting point is 00:16:26 Money market mutual funds may charge an expense ratio, which is essentially a fee for the fund, and they may also have minimum balance requirements as Erin noted above. Next is your returns, of course. The higher your yield or the more interest you earn in the savings account, the faster your balance can grow. And finally, you'll want to think about access to your money. With savings accounts, if you have an ATM card, you may be able to go to an ATM machine and withdraw money instantly. Or you could set up an automatic transfer that can be sent to a linked account within a day or so. Money market deposit accounts, those savings accounts work similarly,

Starting point is 00:17:06 with some giving you the ability to write a few checks each month. And now what about money market mutual funds? If someone does decide to put their money into one of these investment accounts, is getting your money from one of those accounts as easy as getting it from a money market deposit account or a high-alt savings account?

Starting point is 00:17:22 Some money market mutual funds do let you write checks as well, but there may be a minimum withdrawal requirement. Otherwise, to access your money, you may need to sell shares, and that could take a day or two to settle. I'll note that the savings accounts and money market deposit accounts with the highest rates do tend to be online accounts. So going to a local bank branch to withdraw money usually isn't an option. So you'll want to take that into account when making a decision about which one to open. Fortunately, our job here at NerdWallet

Starting point is 00:17:52 is to make decisions like this easier. So I do want to mention that we have articles on the best Hiled Savings accounts and the best money market deposit accounts on NerdWallet's website. You can check the NerdWallet rating, the APY, and any relevant bonus offers for each account, along with some of that other information

Starting point is 00:18:08 we just talked about, like minimum balances and fees. And if you want, you can also look at money market mutual funds as well. We'll put links to those articles in today's show notes. Aaron also talks about what they think is behind the differences in the rates being offered. They think it's about profitability. Could you talk us through why a bank would be marketing or offering one versus the other?

Starting point is 00:18:31 Here's an important distinction. Banks market deposit products like checking accounts, savings accounts, and money market deposit accounts. They're FDIC insured for customers. Investment companies, on the other hand, market money, market mutual funds. To be fair, these mutual funds are considered low-risk investments, but they don't come with insurance or guaranteed returns. Also, I should point out that some banks have investment arms, so it's possible to see both types of products under a similar brand, but the bank side would not market a mutual fund and the investment side would not market a deposit product. And let's talk a bit about the role of

Starting point is 00:19:11 FDIC insurance here. Can you lay that out for us, Margaret? FDIC insurance is a safety net that guarantees your bank deposits up to $250,000 per depositor per bank. So even if the bank goes under, your money is protected. Now there are regulations for mutual funds, but funds don't have that FDIC guarantee. And again, to get back to Erin's question, it seems like they're making this apples to oranges comparison. They say they can get a return of 4.78%

Starting point is 00:19:42 on their investment account, while savings accounts may offer a yield of closer to around 4% as of this recording. I want to quickly state that each account would serve a different purpose. It's generally not a great idea to have your savings in an investment account in case you do need to draw on that money in an emergency.

Starting point is 00:20:01 In general, I'd suggest folks poke around with a savings calculator to see how much you could earn with a rate of 4.5%, for example, compared with a rate of, say, 5% or 4%. Depending on how much money you have in your account, an account with a slightly higher rate may not net you that much more. So the lesson here is to do a bit of research to find those higher returns for yourself. They could go in either direction with these options. Absolutely.

Starting point is 00:20:28 This is especially true when you consider any fees that could be taken out of your returns with the Money Market Mutual Fund, for example. Do you have any other final advice for our listeners as they chase higher returns in an environment where interest rates are coming down, but sometimes they're faced with products that sound like they're the same thing,

Starting point is 00:20:46 but they're actually completely different things. That's very true. A couple of different issues here. And my answer to both is to shop around. It's not a given that money market mutual funds, which again, our investment accounts always offer better results than the best high yield savings accounts.

Starting point is 00:21:04 You'll want to check out up-to-date lists of the best high-yield savings accounts. You'll want to check out up-to-date lists of the top high-yield savings accounts and money market deposit accounts because you may find some that offer better rates compared to the yields on money market mutual funds. In addition, if you know you won't need the money right away, you can consider looking at a certificate of deposit. If rates fall, then locking in today's CD rates could ultimately give you a better yield than all of the previous options. The key is you generally won't be able to make a withdrawal

Starting point is 00:21:32 with CDs until the term is over. So say for a one-year CD, you'd agree not to make a withdrawal for one year. Overall, depending on your goals, a CD, a high-yield savings account, money market deposit account, or money market mutual fund could be the right choice. B.J. Margeritt, thank you so much for coming on and clarifying all these different accounts

Starting point is 00:21:52 and who they might be best for. M.M. Thank you. B.J. That's all we have for this episode. Remember, listener, that we are here for you and your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcastatnerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode.

Starting point is 00:22:15 And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply

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NerdWallet's Smart Money Podcast - Rising Insurance Costs and Choosing the Best Savings Account for Your Money

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