Looking Out for Number One
Thus far in our financial planning articles, we have touched on investments, disability and life insurance, health insurance, estate planning and numerous other topics. Much of the time, our discussions have centered around acquiring financial security, but we never really hit on the other side of the equation - keeping what you have earned.
Oh sure, we have talked in other articles about tax planning and keeping the government from getting what you have worked for all your life, but we haven’t told you how to protect yourself from those who want to get your money through that great American pastime - litigation - or even theft. Hopefully you noticed that word protect, because there is no way to ever be absolutely certain you can totally avoid the untoward actions of your fellow human beings.
What you can do, though, is decide how much risk you are willing to assume yourself and how much you want to transfer to someone else. The amount of your assets that you are willing to risk losing is what we will call your risk tolerance and the rest is what you have to find a way to protect.
If you are like many of us, the best way you have found to protect your assets so far is to purchase insurance on them, but do you have the right kind of insurance? Do you have enough insurance? Let’s take a look at some of the more common forms of insurance you need.
Let’s start at the beginning: the beginning of your life of independence. Most of us start life with some form of transportation. That’s not an absolute, but given the mobility of our society, sooner or later (generally sooner) you will need a vehicle of some kind. With that vehicle comes freedom and also responsibility. It is your responsibility to make sure you can cover someone else’s monetary loss if you do something wrong behind the wheel. Hence, you buy liability insurance. That insurance will hopefully be enough to cover any damage you do to someone else’s property and, perhaps, their body. This, however, covers only the other guy. What about your car? When the agent sold you automobile liability insurance, we hope he or she pointed out the collision and other coverage available to you. Simply put, collision damage is what you will look to if you find yourself in a wreck. Not only that, you might consider purchasing uninsured motorist coverage, medical payments and rental car coverage.
Next, you need to consider the contents of your home and your vehicle. If you are presently renting, you need to obtain renter’s insurance. This insurance will help you replace stolen or damaged items and it can also serve as your first line of defense against lawsuits when Mr. R. trips over your cat after giving you a good tongue lashing for playing your music too loud. Make sure you discuss your needs with your agent. Typically, renter’s insurance will cover normal items, but there is generally a limit on jewelry and collectibles, unless you purchase insurance specifically designed to cover those items.
Unless you are a homeowner, or own other buildings, you typically won’t need to cover any building damage. After all, you are paying the landlord a good rent to make sure that house you are renting doesn’t fall on your head. Structural integrity and proper operation of the building in which you live is the responsibility of the owner of the building. Your responsibility generally ends at the part about writing rent checks.
If you (or the mortgage company) own the home in which you live, forget about the preceding paragraph. In this case, you will need to make sure that you have homeowner’s insurance that covers both building and contents. Make sure you know the extent of your coverage. Most of the time, things like war and flooding are excluded risks, so if we are invaded you may well have no coverage. Unless you are in a flood plain that the mortgage company says requires flood insurance, you are likely to have no coverage if you are flooded by Mother Nature. Don’t worry, though, you can always purchase appropriate insurance for a reasonable price. Again, make sure you carry enough insurance to replace your home if destroyed and also make sure you have good general liability insurance. As with renter’s insurance, don’t bank on all your jewels being covered unless you have specifically insured them.
Even with the preceding basic insurance policies, you still are not done protecting yourself. If you have any level of assets, or you have good earnings prospects in the future, you are a potential target for frivolous litigation. To protect against this, in addition to the liability coverage you have on your vehicle or home, make sure you buy an umbrella policy. This is a policy that picks up where your other insurance quits. For example, if your homeowner’s insurance pays for up to $300,000 when someone slips on your grass, an umbrella policy covering you for up to $1 million will pay for the difference in an adverse judgment and your base coverage for up to $700,000 ($1 million less $300,000). We suggest you get at least $1 million in coverage. Even if you win in a lawsuit, attorney fees can bankrupt you if you don’t have the proper coverage.
The foregoing is just a little primer on some of the ways to keep the property you have acquired in your life. Even if some heirlooms are irreplaceable, having the proper insurance will help you replace the necessities of life and help protect you from liquidating assets to pay legal fees. If you are not certain that you are presently well protected, give us a call. We will be glad to sit down with you to discuss your needs.
Have a tremendous March!