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YOUR MONEY | MONEY TALK

You Can See if Fees Are Eating Savings by Keeping an Eye on Bank Statements

October 18, 1998|LIZ PULLIAM | Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine

Q. I deposited $100 when I opened a passbook savings account at a bank five years ago. Last month, I got a notice from the bank saying that the account was dormant and there was only $18 left. Bank fees ate up the rest. The address the bank had for me was current, but it did not contact me any time in the five-year period. Is this legal? Do I have any recourse? Is this common practice?

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A. Yes, probably not, and yes. Chances are quite good the bank did contact you at least quarterly with statements that you just as probably ignored. If you had checked your account or the literature that came with it, you would have noticed that the bank was imposing the monthly fees that ate up your principal.

Banks love to slip fee increase notices in with all the advertisements for address labels and cheap travel clocks that clog your statement envelope. They have especially targeted small savers like you, saying that tiny accounts cost too much to service. It might not be fair, but it's reality. Next time, consider opening an account with a credit union because member-owned credit unions are generally more accommodating to small savers.

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Q. Nowhere in all the coverage about the California Earthquake Authority have I seen any mention of the policy's disclaimers. If you look at your policy, you'll see that it specifically says that the CEA and the California Insurance Guaranty Assn. are not required to pay if the CEA runs out of money. To me, this is like, "Yes, we have no bananas." Based on this, I canceled my policy. Wouldn't you?

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A. Well, no, because the CEA policy just spells out the risk you're taking with any property insurance policy.

If the Big One hits--or if we have a series of truly devastating floods, hurricanes and other disasters--all the reinsurance and guarantees in the world might not be enough to cover the damage.

The California Insurance Guaranty Assn. and other insurance guaranty agencies are designed to step in if an insurer can't cover its losses. But if enough insurers are wiped out, there simply won't be enough money to go around. People who have insurance probably would get a pro rata portion of whatever money is available. The government might step in to make people whole. Then again, it might not.

The CEA is slightly different in that it's not covered by any guaranty association. If it runs out of money, the gap is supposed to be made up with a 20% surcharge on policyholders, assessments on California's insurers and reinsurance--that is, private insurance that's been written to cover risks that the pool can't handle. If all that isn't enough, once again, the government might step in--or it might not.

Insurance companies assure us that the chances of a total train wreck are slim. Even the devastating combination of Hurricanes Andrew and Hugo, Midwestern floods and the Northridge earthquake failed to knock insurers out of the game. But the risk is always there.

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Q I enjoyed reading your Sept. 13 column regarding the wisdom of home remodeling as an investment. Did the general numbers you quoted, such as a remodel recouping 80 cents on the dollar, take into account the capital gains tax benefit? Remodels can be deducted from the sales price of the home, right?

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A The Taxpayer Relief Act of 1997 rewrote the rules on home profits. Now, remodeling makes even less financial sense than it did before.

You probably read how homeowners can exempt the first $250,000 in home sale profits from taxes ($500,000 for married couples). That provision takes the place of previous rules that allowed you to roll over profits into a home that was at least as expensive as the one you sold, as well as the provision allowing anyone older than 55 to take a one-time $125,000 exemption.

It used to be that you would add the cost of home improvements onto your purchase price to determine your tax basis when you sold the home. The more remodeling, the higher the basis, and the lower the profit you would have to roll over or declare. But the $250,000 exemption makes all that a moot point for most local homeowners, who would be lucky to have that much appreciation; the median Southland home is worth slightly more than $200,000 total.

Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent via e-mail to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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