he was forced to sell his home at a large loss due to a soft real estate market in his area.
Mary owned a home in California and, despite the known risk of earthquakes, didn’t purchase earthquake coverage. “It’s so expensive, and besides, the insurance companies won’t be able to meet the claims in a major quake. Government assistance will help,” she said. Mary’s home was a total loss in an earthquake, and although the government made a loan, it didn’t pay for the loss — ultimately, the money came out of Mary’s pocket.
Maggie and Donald were living a charmed life in the New England countryside with their two children, a white farmhouse, and a dog and a cat — until Maggie came down with cancer. She left her job, which placed some strain on the family finances. After much treatment, Maggie died. Donald and the kids were forced to move because Maggie lacked proper life insurance.
Michelle had a walkway in disrepair. Unfortunately, one day an older man tripped and severely injured himself. To make a long story short, after lengthy legal proceedings, the settlement in favor of the man was significant enough to force Michelle to sell her home. A good chunk of the settlement money came out of Michelle’s pocket because she lacked sufficient liability insurance.
Now, we’re not about to try to tell you that insurance would have made these situations come out totally fine or that these are common occurrences. Insurance generally can’t prevent most major medical problems, keep a person from dying, or stop someone from suing you. However, proper insurance can protect you and your family from the adverse and severe financial consequences of major problems. The right kind of insurance can make the difference between keeping versus losing your home, and it can help you and your family maintain your standard of living.
Wanting to skip insurance is tempting. After all, insurance costs you your hard-earned, after-tax dollars, and unlike a meal out, a vacation, or a new stereo, insurance has no up-front, tangible benefit.
Insuring yourself
Before you buy a home, get your insurance protection (for yourself and for your valuable assets) in order. Not doing so is the financial equivalent of driving down the highway in an old subcompact car at 90 miles per hour without a seat belt. You should purchase sufficient protection to prevent a financial catastrophe.
Disability insurance
Your ability to produce income should be insured. During your working years, your future income-earning ability is likely your most valuable asset — far more valuable than a car or even your home.
Long-term-disability insurance replaces most of your lost income in the event that a disability prevents you from working. Major disabilities are usually the result of accidents or medical problems — occurrences that, of course, can’t be predicted. Even if you don’t have financial dependents, you probably need disability coverage. Unless you’re quite wealthy and no longer need to work for income, aren’t you financially dependent upon your paycheck? Although many larger companies offer long-term-disability insurance, many small-company employees and self-employed people have no coverage — a risky proposition.
Life insurance
When you have dependents, you may also need life insurance protection. The question to ask yourself and your family is how they’d fare financially if you died and they no longer had your income. If your family is dependent on your income and you want them to be able to maintain their current standard of living in your absence, you need life insurance.
Term life insurance, like most other forms of insurance, is pure insurance protection and is the best type of insurance for the vast majority of people. The amount of coverage you buy should be based upon how many years’ worth of your income you desire to provide your family in the event of your passing.
Health insurance
Insuring your assets
As your wealth builds over the years (ideally, at least in part, from the increasing value of the home that we help you buy), so does the risk of losing — or facing a lawsuit arising from — your valuable assets. For example, you should have comprehensive insurance on your home and car(s). If your home burns to the ground, a comprehensive homeowners insurance policy would pay for the cost of rebuilding the home. Likewise, if your car is totaled in an accident, auto insurance should pay to replace the car.
WILLS, LIVING TRUSTS, AND ESTATE PLANNING
Although some of us don’t like to admit it or even think about it, we’re all mortal. Because of the way our legal and tax systems work, it’s often beneficial to have legal documents in place specifying important details such as what should be done with your assets (including your home) when you die.
A will is the most basic of such documents, and for most people, particularly those who are younger or don’t have great assets, the only critical one. Through a will, you can direct to whom your assets will go upon your death, as well as who will serve as guardian for your minor children. In the absence of a will, state law dictates these important issues.
Along with your will, also consider signing a living will and a medical power of attorney. These documents help your doctor and family members make important decisions regarding your healthcare, should you be unable to make those decisions for yourself.
Even a will and supporting medical and legal documents may not be enough to get your assets to your desired heirs, as well as minimize taxes and legal fees. When you hold significant assets (such as a home and business) outside tax-sheltered retirement accounts, in most states, those assets must be probated — which is the court-administered process for implementing your will. Attorneys’ probate fees can run quite high — up to 5 percent of the value of the probated assets. Establishing and placing your home and other assets in a living trust can eliminate much of the hassle and cost of probate.
Finally, if your net worth (assets minus liabilities) exceeds $11.58 million, under current tax
