Emergency Preparedness for Your Finances
Recent catastrophic events have demonstrated that the homes and livelihoods in which we
have invested over many years can be unexpectedly destroyed in a matter of hours. Once displaced, many victims of disasters struggle to get back on their feet financially. While there is no way to prevent a disaster, there are steps you can take to protect yourself and your family from financial devastation should you be forced to evacuate your home in an emergency.
Here are some strategies to prepare your finances for potential disasters:
Store important documents in an “evacuation box.” Gather and make copies of all your key financial and per- sonal documents, including passports and birth certificates, marriage licenses, wills, property deeds, insurance policies, mortgage records, car titles, and stock and bond certificates. Make copies of the front and back of all credit cards and driver licenses.
Then make a list of all your account and credit card numbers, as well as a written and photographic inventory of all your valuables. Also, prepare an envelope with enough cash or travelers checks to last your family about three days.
All essential documents should be stored in a bank safe deposit box located some distance from your home or in an airtight, waterproof, and fireproof safe or container that can be easily taken with you in an emergency evacuation. Inform family members or trusted friends of the location of the box in case you are unable to personally retrieve it.
Make sure you have access to cash. Avoid tying up all of your assets in real estate or investments that cannot be tapped without incurring significant penalties. Maintain funds equal to three to six months’ income in a savings or money market account. You may also want to have on hand several credit cards with high available balances or arrange for a line of credit that could be used in an emergency. If you have a 401(k) account with your employer, find out whether your plan allows you to take a loan out against your savings. Consider making contributions to a Roth IRA, which carries fewer penalties for early withdrawal than most other tax advantaged retirement accounts.
Protect your property. If you live in an area that is vulnerable to natural disasters, consider ways to mitigate potential damage to your property. Depending upon the type of disaster likely to strike in your geographic location, you may want to take precautionary measures, such as anchoring the foundation and roof, installing hurricane shutters on windows and glass doors, adding fire-resistant siding,
securing items that could fall or blow away, moving electrical panels and furnaces to upper levels, installing smoke detectors, and clearing brush from around the house. If you are uncertain about the most effective improvements, ask a building inspector to recommend structural or other types of changes. By taking measures to protect your home, you may also be able to negotiate a reduction in your homeowners insurance premiums.
Purchase necessary insurance coverage and review your policies regularly. Many people who have lost their homes to disasters find that their insurance policies do not cover the cost of rebuilding. If you have homeowners insurance, review your policy annually to ensure that it reflects the actual replacement cost of your home and its contents. This is especially important if the value of your home has risen significantly or if you have made improvements to the property. Be aware that your policy may not cover damage due to specific causes, such as flooding. If the insurance you need is not available through private companies, find out if state or Federal insurance pools would provide coverage.
In addition to home- owners insurance, consider disability income coverage to protect yourself and your family in case you are injured in a disaster and unable to work for a period of time. If you receive health benefits through your employer but lose your job, you can keep your coverage in force under a Federal law known as COBRA. You should also ensure that your life insurance coverage is sufficient to meet the needs of your family. Keep in mind that it may be possible to withdraw some or all of the cash value from a permanent life insurance policy, if necessary. However, access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, can increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Your individual circumstances will ultimately determine what steps to take to protect yourself and your family from a possible disaster. You may choose to consult an attorney about the potential benefits of additional legal protection, such as trusts, powers of attorney, or living wills. Don’t wait until disaster strikes—the time to prepare is now.
Customizing Life Insurance with Policy Riders
When most people think of life insurance, the first question that usually comes to mind is, “How much do I need?” However, there are other aspects of life insurance policies that provide important benefits and are also worthy of consideration.
A rider is a provision that may be available at an additional cost to be added to an insurance policy in order to alter or expand the policy’s conditions or terms of coverage. Riders essentially allow policy- owners to obtain extra protection in certain situations for themselves and their beneficiaries. Some examples of life insurance riders include the option to purchase additional insurance without having to provide evidence of insurability; the accelerated death benefit, which allows the insured, under certain circumstances, to receive the policy proceeds before death; and the accidental death benefit, which provides an additional benefit if the insured is killed in an accident.
Another frequently utilized option among the large number of riders that life insurance companies offer is the waiver of premium rider. This option provides protection in the event that you become disabled and can no longer afford to pay your insurance premiums. With this provision added to your policy, not only does the insurance company pay your premiums according to the terms of the contract if you suffer a disability, but if you own a whole life policy, the policy’s cash values and non-guaranteed dividends also generally continue to grow.
These increasing policy values can be a ready source of income to help pay your expenses if you can no longer work. You could access these values through loans or surrenders. However, you should be aware that loans and withdrawals may result in adverse tax consequences and may carry interest. Cash values and death benefits may also be affected.
Like an applicant’s insurability, the availability of the waiver of premium rider may also be based on certain risk factors, such as general health and medical history. Once issued, most policies contain important eligibility requirements before the waiver of premium rider will take effect. Policies generally contain a specific waiting period (e.g., six months) before premiums begin to be paid under the rider. Some policies also apply waiver of premium coverage differently for a disability occurring prior to age 60, compared to one occurring between the ages of 60 and 65. Under many policies, the waiver of premium provision terminates at age 65. While the waiver of premium rider on term and whole life policies will generally cover the entire premium, the waiver may work a little differently on other types of policies, separating the premium waiver for the cost of insurance from that associated with the cash value or investment fund.
The definition of “disability” in your policy is also crucial when considering a waiver of premium rider because it determines when your obligation to pay premiums ends. The key is usually whether you are “totally disabled” under your policy’s definition. While some policies consider total disability to mean that you are no longer able to work in your profession due to illness or injury, other policies may contain a clause that states you must be unable to perform any type of work.
Policy riders tend to take a “back seat” when planning insurance needs because so much of the initial focus is on how much coverage is necessary to provide adequate protection. However, part of the process of determining adequate protection involves taking advantage of the opportunities to accounted for about two- thirds of the economy, many forecasters look to “pocketbook” issues in search of primary clues as to which way the economy may be heading.
While consumers don’t usually cut back first and cause a recession, buying more on credit translates into greater monthly pay- ments, and consumers, at some point, can do only what their incomes will allow. With personal debt historically on the rise, monitoring consumer debt levels is particularly important because of the impact of total consumer spending on our economy. However, it may be wise to also focus on Federal decisions that lay the foundation for our overall economic climate.
The Role of the Federal Reserve Bank (the Fed)
Even the casual observer of business news knows that “Fed watching” is a serious activity in the financial and business sec- tors. You may be wondering, “What makes the Fed so important?”
While consumers can affect the economy by spending according to their own situations and pocketbook pressures, Federal policy decisions, such as fiscal and monetary measures, can also affect the economy. Fiscal policy, enacted by Congress in the form of tax and/or spending legislation, is the result of the political process and the prevailing political climate. In contrast, monetary policy is the responsibility of the Fed, whose role is to evaluate all factors influencing the economy (individual, market, and governmental) and to take the action it believes will keep the economy on an even keel.
The Fed can manipulate the flow of money in order to obtain a desired effect over time. However, the Fed’s most effective short-term policy decisions with which to manipulate the economy involve short-term interest rates. Consequently, the Fed can realistically have only one target inflation. If the Fed perceives that prevailing forces will increase inflation, it will attempt to slow the economy by raising short-term interest rates. This is based on the assumption that increases in the cost of borrowing money are likely to dampen both personal and business spending. Conversely, if the Fed perceives the economy has slowed too much, it will attempt to stimulate growth by lowering short-term interest rates. The assumption is that lower costs for borrowing will likely stimulate spending.
In maintaining this balancing act, the Fed walks a fine line. If it doesn’t tighten the reins soon enough (by raising interest rates), it runs the risk of inflation getting out of control. If it fails to loosen soon enough (by lowering interest rates), it can plunge the economy into recession. Indeed, one might argue that the primary goal of the Fed is to keep inflation low enough so that it is not a factor in business decisions.
Up, Down, or Sideways?
By looking at your own spending outlook and debt burden (and that of your friends, relatives, and business associates), you may gain some insight into the short-term future of the economy. While by no means the whole story, it does represent a large chapter since it is the one over which individuals can exercise the greatest control. When combined with a little judicious Fed watching (e.g., several interest rate moves in the same direction may be an indication that the Fed is on a mission), you may have a fairly good basis for making sound financial decisions.