Five Financial Protection Essentials
You wouldn't go on vacation and leave your house unlocked, right? Unfortunately, many people take just as big a risk by not paying attention to their financial security. Here are five essential measures you should take to keep your financial house safe and sound:
1. Draw up a will and power of attorney
A will directs the court in your state on the distribution of your assets and other important legal matters upon your death. Without a will, your property will be distributed according to state law, and it could be costly for your heirs to adjudicate. Surveys show that more than half of American adults do not have a will.
Most wills are relatively straightforward — leaving assets to family members, naming a guardian for minor children, and so on — so they're also relatively inexpensive. When drafting a will, many lawyers will also include a power of attorney, through which you give a spouse, friend or trusted family member the right to make financial decisions for you should you become incapacitated. If you do have a will, remember to review it every few years or after a life-changing event such as a marriage or birth.
2. Execute a living will and health-care proxy
A living will is a set of instructions describing how you want to be cared for if you become incapacitated. It can note, for instance, whether you want food, water or breathing assistance withheld if you're in a vegetative state. (Without such a medical directive, these decisions will typically be made by a spouse, parents or a doctor—and conflicts can easily arise.)
A living will should also be accompanied by what's known as a health-care proxy — a type of medical “power of attorney” given to a spouse, family member or friend whom you trust to make any and all medical decisions for you not explicitly covered in the living will. These directives can be given by simply filling out a form and keeping it on file — a lawyer is not needed. You can even download the forms from some websites, though it's always a good idea to have an attorney review your papers. Forms vary from state to state, as do the requirements for validating them. For instance, some states require the presence of witnesses and a notary when you sign the documents.
3. Buy adequate life insurance
Although employee benefit plans often provide life insurance of one or more times your annual salary, that might not be enough; also, if you leave your job, you may lose coverage. One rule of thumb is to have insurance equal to at least five times your annual income, but the actual amount will depend on the future financial needs of your dependents and the amount of savings you have.
There are two general types of life insurance. A term-life policy covers you for a specified period of time, say 20 to 30 years, and pays a benefit only if death occurs during that time. A whole-life policy includes an investment component, allowing you to build cash value over time that can be paid out or borrowed against during your lifetime. Many financial professionals may recommend starting with a term-life policy because they enable younger workers to purchase more coverage for their insurance dollar.
4. Don't overlook disability insurance
Surprise: A 20-year-old worker has a 30 percent chance of becoming disabled before reaching retirement age, according to the Social Security Administration. Would your savings cover you for an extended period without income? If the answer is no, disability insurance is crucial. Disability insurance protects a certain amount of your income if an accident or serious illness keeps you from working for months or years at a time. Many employers provide group disability coverage as an employee benefit, so be sure to find out what you already may have.
5. Protect your net worth with liability insurance
Accidents can affect not only ourselves and our families but others as well. And in a world where lawsuits are always a danger, an unexpected event could put your finances in danger. That's where liability insurance comes in. If you're sued for causing property damage or injury to another person, a liability policy will help cover the costs. Homeowner's insurance and auto insurance offer a degree of liability protection, but to safeguard your assets further, some experts recommend what's known as an umbrella liability policy. It supplements your coverage if other insurance policies fall short.
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