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Chapter 4: Insurance and Estate Planning

Insurance
Unexpected events, such as a severe illness, car accident, or house fire, can put a serious cramp in your financial health, even if you have savings. Having the right amount of insurance will help protect you from the financial consequences associated with many of life’s adversities.

  • Life Insurance: If you have a spouse, child, parent, or anyone else who relies on your support, this is something you should consider having. Life insurance is not just intended to replace the wages you provide but services as well. (For example, a stay-at-home mother may want to purchase life insurance to pay for child care if she dies.) There are two basic types of life insurance: term and cash-value. Term insurance is pure life insurance. You pay the premiums for a specific period of time, and the only way the policy will pay out is if you die. With cash-value life insurance, part of your premium pays for the policy and part of it goes into a savings plan. You can keep the policy as long as you pay the premiums. You can also borrow against the money in the savings plan or cancel the plan and get the cash back. However, the premiums are generally higher for cash-value life insurance, and it may not be worth the extra cost if you don’t anticipate needing life insurance for the rest of your life.
  • Disability Insurance: If you are employed, it is a good idea to have disability insurance, which replaces a portion of your income if you are unable to work. There are two types of disability policies: short-term, which only provides coverage for a limited period of time (usually up to six months to two years), and long-term, which provides benefits until retirement age. Long-term insurance is the most important insurance to have. If you are only out of work for a few weeks, you should be able to pay for your expenses with savings. However, if putting aside money in savings is a struggle, a short-term disability policy could be a helpful thing to have. Check to see what coverage you have through work before purchasing a policy on your own.
  • Auto Insurance: In most states, drivers are required by law to have at least liability auto insurance, which covers your legal costs (up to a limit) if you injure a person or damage property with your car. If your car is several years old and worth little, liability coverage may be adequate. However, if your car is newer, you may want full coverage insurance. (This will likely be required by your lender if you have a car loan.) In addition to liability coverage, it typically includes medical expenses coverage, uninsured motorist protection coverage, collision coverage (which pays for repair costs or replacement due to accidents), and comprehensive coverage (which covers repairs costs and replacement due to damage resulting from other causes, such as theft or fire).
  • Homeowners Insurance: If there is a mortgage on your property, you are required to have homeowner’s insurance, but is your coverage sufficient? It is a good idea to consider if you should increase your coverage when you make improvements to the house. Also, if your policy only pays you the actual cash value for stolen or damaged property, you may want to switch to replacement cost coverage (which pays you what it actually costs to replace the property). Furthermore, if you have expensive jewelry, antiques, artwork, or other possessions whose value exceeds the coverage provided by a standard policy, you can supplement it with a personal article floater.
  • Renters Insurance: Renters insurance covers personal property loss and liability for renters. This insurance is relatively inexpensive, especially compared with what it would cost you to replace all your clothing, furniture, electronics, and other property if they were stolen or damaged. Don’t assume that your landlord’s policy will cover your losses – in most circumstances, it won’t.

Estate Planning
Do you want to leave money to your favorite charity? To friends? Do you not want people to fight over who gets your beloved plaid lounge chair? Planning your estate allows you to determine what happens to your hard-earned cash and other assets when you pass away.

  • Will: A will is basically a set of instructions that specifies who gets what assets. You can also stipulate guardianship for a dependent. If you die without a will or other declaration, state law determines how your property is distributed. While the law may be in line with a person’s wishes, often it is not. Even if it is, with a will, probate (the legal process of distributing a person’s estate) is typically a lot easier and cheaper.

If your estate is relatively simple, you may choose to create your own will with the help of a quality software program or book. Make sure you are familiar with your state laws. If you do not follow certain rules or procedures, such as having the proper number of witnesses, your will may not be valid. If your situation is complex or you do not feel comfortable writing your own will, you can hire an attorney to do it for you.

  • Trust: A trust is a legal entity in which your property is held for the benefit of another person. While a will has to be validated as part of the probate process, a trust bypasses probate completely. Many people use one to leave assets to a minor or special needs child. Another situation in which it is commonly used is when a person remarries. A trust can allow the spouse to use the assets while he or she is alive and then pass them on to the children after the spouse’s death.

A trust can be either living, in which the assets are placed in the trust while you are still alive, or testamentary, which is created by a will and only becomes active after death. A revocable living trust allows you to remain in control of the assets in the trust. (For example, you can remove them from the trust or obtain income from them.) An irrevocable living trust is a permanent arrangement. Once it is established, you lose the title to the property, and the trust cannot be altered.

As with a will, you can create a trust using software or a book. However, trusts are typically more involved than wills are, so having a lawyer set it up for you may be the best way to go. Also, since trusts can be costly and timely to set up and maintain, it may be helpful to discuss with a lawyer if having a trust would even be beneficial in your situation.

Having a trust does not necessarily eliminate the need for a will. Most trusts do not cover all assets in the estate. Having a will can ensure that nothing is neglected.

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