Protecting Your Assets

You may be at risk of making a catastrophic investing mistake: not protecting
your assets properly due to a lack of various insurance coverages. Manny,
a successful entrepreneur, made this exact error. Starting from scratch, he
built up a successful million-dollar business. He invested a lot of his own personal money and sweat into building the business over 15 years.
One day, catastrophe struck: An explosion ripped through his building, and
the ensuing fire destroyed virtually all the firm’s equipment and inventory,
none of which was insured. The explosion also seriously injured several
workers, including Manny, who didn’t carry disability insurance. Ultimately,
Manny had to file for bankruptcy.
Decisions regarding what amount of insurance you need to carry are, to some
extent, a matter of your desire and ability to accept financial risk. But some
risks aren’t worth taking. Don’t overestimate your ability to predict what accidents and other bad luck may befall you.
Here’s what you need to protect yourself and your assets:
✓ Major medical health insurance: I’m not talking about one of those policies that pays $100 a day if you need to go into the hospital, or cancer
insurance, or that $5,000 medical expense rider on your auto insurance
policy. I know it’s unpleasant to consider, but you need a policy that
pays for all types of major illnesses and major medical expenditures.
Consider taking a health plan with a high deductible, which can minimize your premiums. Also consider channeling extra money into a
Health Savings Account (HSA), which provides tremendous tax breaks.
As with a retirement account, contributions provide an upfront tax
break, and money can grow over the years in an HSA without taxation.
You can also tap HSA funds without penalty or taxation for a wide range
of current health expenses.
✓ Adequate liability insurance on your home and car to guard your
assets against lawsuits: You should have at least enough liability insurance to protect your net worth (assets minus your liabilities/debts) or,
ideally, twice your net worth. If you run your own business, get insurance for your business assets if they’re substantial, such as in Manny’s
case. Also consider professional liability insurance to protect against
a lawsuit. You may also want to consider incorporating your business.
✓ Long-term disability insurance: What would you (and your family) do
to replace your income if a major disability prevents you from working?
Even if you don’t have dependents, odds are that you are dependent on
you. Most larger employers offer group plans that have good benefits
and are much less expensive than coverage you’d buy on your own.
Also, check with your professional association for a competitive
group plan.
✓ Life insurance, if others are dependent on your income: If you’re single
or your loved ones can live without your income, skip life insurance. If
you need coverage, buy term insurance that, like your auto and home
insurance, is pure insurance protection. The amount of term insurance
you need to buy largely depends on how much of your income you want
to replace.
✓ Estate planning: At a minimum, most people need a simple will to delineate to whom they would like to leave all their worldly possessions. If
you hold significant assets outside retirement accounts, you may also
benefit from establishing a living trust, which keeps your money from
filtering through the hands of probate lawyers. Living wills and medical powers of attorney are useful to have in case you’re ever in a medically incapacitated situation. If you have substantial assets, doing more
involved estate planning is wise to minimize estate taxes and ensure the
orderly passing of your assets to your heirs.
In my experience as a financial counselor, I’ve seen that although many
people lack particular types of insurance, others possess unnecessary policies. Many people also keep very low deductibles. Remember to insure
against potential losses that would be financially catastrophic for you —
don’t waste your money to protect against smaller losses. (See the latest
edition of my book Personal Finance For Dummies, published by John Wiley
& Sons, Inc., to discover the right and wrong ways to buy insurance, what to
look for in policies, and where to get good policies.)