While we can't control nature or the ravages of climate change, there are things you can do to safeguard your financial future. True catastrophic coverage is comprehensive and protects more than your assets; it protects your well being in the future. In addition to reviewing all of your insurance policies to see what they cover and how much your out-of-pocket expenses will be, you need to do more to prepare for the future.
There may not be an optimal time to review your catastrophic coverage, but the worst time is when something bad happens. You may want to huddle with your trusted advisers before the end of the year.
Here's what you need to know and do:
1) Review all of your estate planning before the end of the year. This is particularly essential, because Congress may be raising estate taxes when the current rates expire at the end of the year. You will need to have a plan if that happens, which may involve a shift of assets and gifts to children and relatives. Estate plans also include a will, a living trust or a living will. All three give specific directions to survivors on what you want done in the event of your passing. A living will gives medical directives if you are permanently incapacitated and on life support.
2) Are you covered for disability? Damaged homes and apartments can be repaired over time. Your body isn't always easily fixed. Today, about one in four 20-year-olds will become disabled before they retire, according to the Council for Disability Awareness, which says that accidents aren't the major cause of missing work. Disability insurance covers a loss of income for a specified period of time - and that includes missing work for cancer, heart disease, back injuries or other illness. It's expensive to buy on your own, so ask your employer if they offer a policy. It may also be possible to buy a disability insurance plan through a group like a college alumni association, which often offers group rates.
3) Is there such a thing as portfolio insurance? Not exactly, but there is an institutional investing term that means you can work to protect your nest egg from financial catastrophes like the crisis of 2008. Your main goals are to ensure that you have inflation and stock-market downside protection by adding Treasury-Inflation Protected Securities (TIPS) to your portfolio, along with a mix of commodities, real estate investment trusts and foreign bonds and stocks. While you can't ensure that your portfolio is protected from all perils, an investment policy statement will outline the various risks you face and how you plan to allocate among different assets to reduce volatility.
4) Have an emergency savings fund. Avoid tapping retirement funds in an emergency. For millions, the retirement kitty represents the entirety of their savings. But draining these resources means you will take a nasty tax hit -- a 10 percent penalty for drawing on funds before age 59 ½. You will also pay income tax on the withdrawal. It's better to have separate emergency cash savings accounts outside of individual retirement accounts and 401(k)s. One option that my family uses is a federally insured money-market account for short-term needs like taxes and emergencies. We have a second tier account that I keep in a short-term bond fund. In the first fund, I aim to set aside enough money to cover a year's worth of property taxes and insurance premiums. In the short-term bond fund, I keep a year's worth of expenses.
5) Do some worst-case scenario planning. This is a really tough thing to do, but I know how my family will fare if I die, if I have a crippling illness or I can't work. You can keep most of your property insurance in one place and disability and life insurance policies in a fireproof strong box. Let loved ones know where important papers and safety-deposit box keys are.
Most catastrophe planning is difficult. Fortunately, one of the upsides of getting older is that you become more aware that life and lifestyle can be fragile, so this step of the process becomes more accessible.
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