July 2009 - Personal Planning

Last year certainly reminded everyone that life is full of surprises, some pleasant and some not. Of course, last year’s lesson applied most obviously to financial markets, and it particularly highlighted the importance of risk management in investing. But similar considerations need to be constantly made in other aspects of one’s financial life, and basic precautions can and should be taken to manage various other kinds of personal financial risk and exposure—whether this involves injury to oneself or someone else. While there are many complex insurance and estate planning techniques available, the following five essential documents can go a long way toward helping anyone prepare for the unexpected.

Medical directives, or advanced-care directives, are not just for people over a certain age. Anyone should sign one who wants to make sure that certain wishes are carried out even if they are unable to communicate with a doctor at some point. The directives refer to two separate documents: a living will and a medical health-care proxy. The living will explains how one wishes to receive care in different situations, while the medical health-care proxy names the person, perhaps a spouse or parent, who could make decisions on your behalf. Without these, family members could disagree and fight over who has your best interests in mind.

Unlike a living will, which focuses on health care matters, a basic will explains an individual’s plans for the disposition of assets; without one, the state is likely to decide who receives what assets. Even a single person can benefit from having a will, but it is especially important for individuals who are married with children in order to make sure that their basic (and most likely presumed) intentions are upheld and thus not left to the strict dictates of state law.

Personal liability, or umbrella, insurance is particularly important in the litigious society that we live in. Such insurance provides catastrophic coverage for one’s home and auto, and protects other hard-earned assets like investment portfolios. Without it, people are essentially exposed to potential outcomes similar to the adverse effects of extremely bad financial markets each and every day, since one wrong turn of the car wheel could result in a loss of wealth similar to or greater than the decline in value that can occur during severe bear markets. Typically, for most people, significant and adequate umbrella insurance coverage can be achieved at reasonable (premium) expense.

Since most life insurance is typically sold, as opposed to being deliberately purchased for a particular need, it is often something that many people have—but not always in the right proportions. Except for more complex estate planning considerations, which are beyond the scope of this article, most life insurance policies should only be considered by those with dependents, including spouse and children; and coverage should be designed to replace expenses (and thus not necessarily income). If children are involved, even non-wage earning spouses should consider life insurance since the absence of that individual could result in greater expenses, such as the need for a nanny.

Although life insurance is based on the premise of an ultimate guaranteed outcome, if one considers using it sensibly as described above—that is, only for a specific period in life—then physical disability is statistically more likely to cause trouble for most people and their financial plans. While many people get some kind of disability insurance coverage through their employers, it is often inadequate; and extra coverage should always be considered to make sure that potential major gaps do not exist in one’s presumed source of income.