How Your Credit History Affects Insurance Rates

Did you know that insurance companies typically consider your credit history–whether positive or negative–when you apply for automobile or homeowners insurance? Insurers may use your credit information not only when deciding whether to approve your insurance application but also in determining the premium you’ll pay.

Why Does Your Credit History Matter When You Apply for Insurance?
Studies by independent researchers and industry consultants have convinced insurance companies that a strong correlation exists between your credit history and the likelihood that you’ll file an insurance claim. Using information contained in your credit record, an insurer calculates your “insurance score”. If this score is low, the insurer may consider you to be less of a risk than if your insurance score is high.

How is Your Insurance Score Determined?
Although methods vary, an insurance company typically calculates your insurance score by applying a mathematical formula to statistically significant factors on your credit record. These factors may include the amount of debt you have outstanding, whether you have serious blemishes on your credit report (such as past-due amounts, collection accounts, and bankruptcies), and the number of times you’ve applied for credit within the past year.

Will a Low Insurance Score Prevent You From Buying Insurance?
Not necessarily. Because your insurance score is generally just one of the factors insurers use to decide whether or not to offer you coverage, an insurer may decide to approve your application even if you have poor credit. However, a low insurance score often places you in a higher risk category, and you may end up paying a higher premium for insurance.

Keep in mind, too, that every insurance company has its own underwriting standards. Even if one insurance company rejects your application due to poor credit, another insurance company may issue you a policy.

What if You Have Little or No Credit History?
For today’s young professionals, having little or no credit history automatically places you into the “average” risk category. Other states prohibit insurers from even using credit as an underwriting factor if you have little or no credit history.

Can Your Insurer Cancel or Refuse to Renew You Based on Credit?
In many states, an insurer can cancel or refuse to renew your insurance policy if your credit has deteriorated. However, some states have passed legislation prohibiting insurers from using your credit report as the sole basis for making decisions about cancellations and renewals.

Is There Anything You Should Do?
Insurers must tell you if they look at your credit history when they consider your insurance application or when they determine the rate you’ll pay for insurance. To find out if your credit history has affected your ability to get insurance or your insurance premium, contact an insurance company representative. Here are some other things you can do:

• Since laws vary from state to state, contact your state’s insurance department if you have questions about the regulation of credit-based insurance scoring in your state.

• Know your rights. Under the Fair Credit Reporting Act, insurers must inform you that they’ve turned down your insurance application based on information in your credit report, and notify you that you have a right to request a free copy of that credit report.
• Shop around for insurance coverage. Different insurers have different policies regarding the use of insurance scores. The cost of insurance premiums may also vary, so comparison shop for the best deal.
• Check your credit report once a year. Order copies from the three major credit bureaus and make sure they contain correct information. Dispute any errors with your creditors and with the credit bureaus.
• Ask your insurance company to rerun your credit score if you feel that doing so would improve your insurance rating (many states allow consumers to request this once per year). But check insurance regulations in your state first–some states allow insurers to take adverse action against current customers based on downturns in their credit scores.

Why You Should Get a Qualified Appraisal

For years, Congress and the IRS perceived that taxpayers were overstating the value of donations for tax deduction purposes. As a result, the rules regarding valuations of charitable contributions have recently become more stringent, and they include harsher penalties for excessive valuations.

Although the new valuation rules are currently focused on charitable contributions (including conservation easements), it is widely believed that Congress and the IRS will expand the new rules to all tax valuations in general. Cautious taxpayers may want to apply the new rules to any tax-related transactions involving appraisals, such as valuations required for non-charitable gifts or a buy-sell agreement.

New Rules
The new rules generally require that you obtain a “qualified appraisal” from a “qualified appraiser” for donations of property worth over $5,000 (other than cash and publicly traded securities), and you must attach an appraisal summary (IRS Form 8283) to your tax return. These rules apply to valuations for income, gift, and estate tax purposes.

What is a Qualified Appraisal?

Generally, a qualified appraisal is:

• Made no earlier than 60 days before the donation is made, and no later than the due date of your tax return (including extensions), and
• Signed and dated by a “qualified appraiser”

Who is a Qualified Appraiser?

Generally, a qualified appraiser is an individual who:

• Has earned an appraisal designation from a recognized professional appraiser organization, or has otherwise met “minimum education and experience requirements” for valuing the type of property subject to the appraisal, and
• Regularly performs appraisals for pay

“Minimum education and experience requirements” include:

• Successfully completing college or professional level coursework that is relevant to the property being valued, and
• Obtaining at least two years of experience in the trade or business of buying, selling, or valuing the type of property being valued

The Plain English Explanation
More simply stated, to get a qualified appraisal, you must retain an appraiser who holds a professional designation, such as ISA (International Society of Appraisers), ASA (American Society of Appraisers), or AAA (Appraisers Association of America), or someone who has received the requisite schooling and experience.

While these stricter standards are meant to improve the appraisal industry, they have actually shrunk the world of qualified appraisers, for the time being at least. For example, a knowledgeable and skilled expert with years of experience at Sotheby’s, but no professional designation or time in the classroom, may no longer be qualified to make appraisals under the new rules.

Further, because the meaning of the new rules needs some clarification, some appraisers may be unsure about whether they’re qualified, and they may be unwilling to risk incurring potential penalties. Needless to say, finding a qualified appraiser has become a more daunting task.

Practical Guidance
Your best bet is to hire an appraiser who holds a professional designation related to the property being appraised. Contact the societies listed above for referrals. However, while it may be easy to find such an appraiser for certain types of property, like real estate, it may not be so easy for other types of property.

Here are some other tips:

• Talk to a financial or tax professional for more information
• Obtain documentation about the appraiser’s education and experience, and how often he or she conducts appraisals for a fee
• Most importantly, make sure the appraiser is aware of the new appraisal rules, including what is required and the potential penalties

10 Easy Financial Resolutions for the New Year

New Year’s resolutions don’t all have to be about going to the gym, eating five fruits & veggies a day, or spending less time with Dr. Phil. Here are ten financial resolutions to consider.

1. Get Organized
Set up a records center, perhaps a fireproof file cabinet sectioned into financial categories. Determine how long you need to keep each type of document (it depends on what it is) and make up a master list detailing what’s where. Then, tell someone else you trust where to find the list in case of an emergency.

2. Learn More About Your Money
Visit the local library and find the personal finance shelf. While you’re at it, pick up a 1-year subscription to a personal finance magazine and enjoy 12 months of education and enlightenment. Also, be sure to frequent the top personal finance websites such as Yahoo Personal Finance, USA Today Money, and Lightship Mutual (a cheap plug, we know.)

3. Analyze Your Cash Flow
Every financial plan begins with a thorough understanding of where money is coming from, and where it is going. In order to be successful–whether you are a struggling young professional or a multi-national corporation–cash flow monitoring is critical. Many banks now provide online spending/budgeting tools for you to use at no additional cost. Actually, it doesn’t have to even be that complicated. Many people still use a computer spreadsheet or paper journal to keep track of the money trail.

4. Improve Your “Soft Skills”
This one doesn’t seem to fit at first, but your ability to earn income is the lifeline of your financial being. Without income, how can you purchase investments, insurance, and other needs? As a result, you must find ways to increase your professional appeal by improving the skills most employers want. Speak, listen, lead, collaborate…master these traits, and find yourself indispensable to the team.

5. Create an Emergency “Rainy Day” Fund
Aim to establish an emergency fund equal to 3 to 6 months of your living expenses in case you experience a sudden loss of income. You might accomplish this by increasing income with a second job and/or decreasing discretionary expenses. Be sure to find the best savings account to stash this cash.

6. Increase Your Retirement Savings
If you participate in a retirement plan such as a 401(k) or a 403(b), contribute the most you possibly can–particularly if your employer matches some or all of your contribution. Salary deductions are made on a pretax basis, and any investment earnings grow tax deferred until they’re withdrawn. And if your 401(k) or 403(b) plan allows after-tax Roth contributions, qualified distributions of your contributions and earnings will be completely tax free.

IRAs also feature tax-deferred growth of investment earnings. Traditional IRAs may help lower your present taxable income if you’re eligible to make deductible contributions. Withdrawals (unless you’re withdrawing nondeductible contributions) are taxed as ordinary income, however. Roth IRA contributions are not deductible but, like Roth 401(k)s, qualified distributions are entirely tax free.

7. Review Your Investment Portfolio
Is your asset allocation still in line with your investment goals, time horizon, and risk tolerance? Is it time to rebalance your allocation in light of changing market conditions and/or your changing needs? Are you taking appropriate advantage of new investment products? Reviewing your portfolio periodically can help you stay on track.

8. Check Your Insurance
You may want to review the terms of your insurance coverage–not just your life insurance, but also your auto, health, disability, and homeowners insurance. Are you adequately protected, given your circumstances? Is there coverage you really ought to have (such as personal umbrella liability or long-term care insurance), but don’t?

9. Update Your Estate Plan
If you have children or a large estate (over the applicable exclusion amount of $2 million for 2008), you should consider reviewing your estate plan. (If your estate is smaller, you should review your plan at least every five years.) Your estate plan should be reviewed in light of certain life events, such as changes in employment, changes in family circumstances (marriages, divorces, births, illness or incapacity, and deaths), or even significant changes (greater than 20%) in the valuation of the estate.

10. Seek Assistance
There are many reasons to work with a financial professional. Ultimately, a qualified financial planner can help you keep all these resolutions–giving you more time to focus on your health, career, friends, and family.

Organizing Important Records and Documents

A record-keeping system is a systematic approach to retaining and filing documents in a way that makes them easy to find when needed, even if it’s several years later. Record-keeping systems range from simple to elaborate and from basic to comprehensive. The ideal system is designed to fit your personal and family situation and lifestyle.

Good Record Keeping is Important
The most important thing to know about record keeping is that doing it well will save you a lot of time and money during your lifetime. Conversely, poor record keeping is sure to cost you in terms of money, time, and aggravation, perhaps dearly. For instance, assuming that you’ve been generally honest with the IRS, the only reason to fear a tax audit is that your records are incomplete or in disarray. If so, the IRS could find that you owe more tax than you paid. Insurance and legal claims frequently require supporting documents as well.

Record keeping is also important for estate planning purposes. After you pass away, your family and the executor of your estate will be grateful to find your records complete and in a meaningful order.

Decide What Your Record-Keeping System Will Include
The items you decide to retain in your record-keeping system will depend on several factors, including:

• Your personal and family situation
• The nature of your assets and investments
• Your household’s number and type of income sources
• Your tolerance for risk
• The time you’ll realistically devote to keeping records systematically

In addition to financial documents, you’ll probably want your system to retain other types of important documents, such as insurance policies; health and employment records; property titles; certificates of birth, death, and citizenship; and product and service guarantees. Today, it is also common to videotape personal property for potential use as evidence in an insurance claim.

Create a System that Works Best for You
If throwing all your receipts, bills, and paycheck stubs into the proverbial shoe box until tax time is the best you can manage, then it will have to do. However, devising a systematic approach to retaining and filing your important documents will bring rewards you will appreciate in the future. If you can find little time for record keeping, then a simple system may be the answer. On the other hand, a more complex system that retains and files all potentially necessary documents on a weekly or monthly basis assures that when a need arises, you’ll be able to retrieve whatever you need promptly and without fuss. You might view this as pay now or pay later.

Accessibility and Security Should Determine Where You Store Records
It is usually best to store original documents that you must or want to protect from harm in a safety-deposit box, typically rented at your local bank. This provides important protection against fire and theft. Keep a reference copy of the documents in your more readily accessible files and note on them the location of the originals.

Older files that will likely require infrequent access can be stored in any relatively secure place provided that they will not be prone to damage or destruction. Files pertaining to the last 6 to 12 months should be readily accessible.

Caution: Never store your will in a safety-deposit box unless you’ve left a copy elsewhere or you lease the box jointly. Otherwise, the box may be sealed at the time of your death, leaving your spouse or executor searching for another copy.

2007 Year-End Tax Planning Considerations

For the most part, the window of opportunity for 2007 tax year planning closes on December 31. Here are a few points to consider as you contemplate any year-end tax moves and then look forward to the 2008 tax year.

New Zero Percent Tax Rate
Currently, the maximum federal income tax rate for most long-term capital gains and qualifying dividend income is 15%. Individuals in the lowest two tax brackets receive the benefit of an even lower 5% maximum rate. Beginning January 1, 2008, however (and continuing through 2010), the maximum rate drops all the way to zero for individuals in the lowest two tax brackets.

This presents an important planning opportunity. Make year-end gifts (up to $12,000 per individual gift tax free) of appreciated assets to family members currently in the lowest two tax brackets, who would then be able to sell the assets after January 1, 2008 without any resulting federal income tax. There’s one big catch, though: the new “kiddie tax” rules.

New “Kiddie Tax” Rules
Generally, the kiddie tax rules apply when a child has unearned annual income (e.g., interest, investment earnings, taxable gain resulting from the sale of an asset) exceeding $1,700 (in 2007).

In 2007, the kiddie tax rules apply to children under the age of 18. Beginning in 2008, however, the kiddie tax rules apply to children who are under age 19, and to full-time students under age 24. (There’s an exception for any child who earns more than one-half of his or her own support.)

So, if you want to take advantage of the zero tax bracket in 2008 by transferring appreciated assets to a low-tax-bracket family member, make sure the kiddie tax rules won’t apply. Otherwise, the resulting income–at least the portion that exceeds $1,700–will be taxed at your (presumably higher) tax rate, eliminating most or all of any potential tax savings. For the remainder of 2007, though, the old rules apply–a child who will reach age 18 by year end is able to sell appreciated assets and potentially pay tax on any resulting income at the (still low) 5% rate.

AMT Uncertainty
Legislation signed into law in early 2006 brought the most recent in a long series of temporary “fixes” for the alternative minimum tax (AMT), which continues to reach further into the ranks of middle-income families. This temporary fix, in the form of increased AMT exemption amounts, expired at the end of 2006. If Congress doesn’t act, the number of taxpayers subject to AMT is projected to increase from 4.24 million in 2006 to 23.19 million in 2007 (Source: Joint Committee on Taxation, March 5, 2007). Some action regarding the AMT is likely, but the form it will take is uncertain, making it important to stay up to date on any new developments.

Other Important Considerations
Unless there is additional legislative action, 2007 is the last year that a taxpayer age 70½ or older is able to make charitable contributions of up to $100,000 directly from an IRA to a qualified charity.

• 2007 is also the last year for other deductions, including the option to deduct state and local general sales tax (instead of state and local income tax) and the above-the-line deduction for qualified higher education expenses.
• For small businesses, legislation this year increased the Section 179 expensing limits.

Talk to a Professional
A qualified financial professional can explain how these issues, and others, might affect your 2007 tax situation.

Merging Your Money When You Marry

Marriage is an exciting life event, but it brings many challenges. One such challenge that you and your spouse will have to face is if (and how) to merge your finances. Planning carefully and communicating clearly are important, because the financial decisions that you make will have a lasting impact on your future.

Discuss Your Financial Goals
The first step in mapping out your financial future together is to discuss your financial goals. Start by making a list of your short-term goals (e.g., paying off wedding debt, new car, vacation) and long-term goals (e.g., having children, your children’s college education, retirement). Then, determine which goals are most important. Once you’ve identified the goals that are a priority, you can focus your energy on achieving them.

Prepare a Budget
Yes, the “B” word. You should prepare a budget that lists all of your income and expenses over a certain time period (e.g., monthly, annually). You can designate one spouse to be in charge of managing the budget, but both of you should take turns keeping records and paying the bills. And since the two of you will be involved in the marriage’s finances, you should develop a record-keeping system that both of you understand. Also, be sure to keep your records in a joint filing system so that both of you can easily locate important documents.

Begin by listing your sources of income (e.g., salaries and wages, interest, dividends). Then, list your expenses (it may be helpful to review several months of entries in your checkbook and credit card bills). Add them up and compare the two totals. Hopefully, you get a positive number, meaning that you spend less than you earn. If not, review your expenses and see where you can cut down on your spending.

Bank Accounts–Separate or Joint?
At some point, you and your spouse will have to decide whether to combine your bank accounts or keep them separate. Maintaining a joint account does have advantages, such as easier record keeping and lower maintenance fees. However, it’s sometimes more difficult to keep track of how much money is in a joint account when two individuals have access to it. Of course, you could avoid this problem by making sure that you tell each other every time you write a check or withdraw funds from the account. Or, you could always decide to maintain separate accounts.

Credit Cards
If you’re thinking about adding your name to your spouse’s credit card accounts, think again. When you and your spouse have joint credit, both of you will become responsible for 100 percent of the credit card debt. In addition, if one of you has poor credit, it will negatively impact the credit rating of the other.

If you or your spouse does not qualify for a card because of poor credit, and you are willing to give your spouse account privileges anyway, you can make your spouse an authorized user of your credit card. An authorized user is not a joint cardholder and is therefore not liable for any amounts charged to the account. Also, the account activity won’t show up on the authorized user’s credit record. But remember, you remain responsible for the account.

Insurance
If you and your spouse have separate health insurance coverage, you’ll want to do a cost/benefit analysis of each plan to see if you should continue to keep your health coverage separate. For example, if your spouse’s health plan has a higher deductible and/or co-payments or fewer benefits than those offered by your plan, he or she may want to join your health plan instead. You’ll also want to compare the rate for one family plan against the cost of two single plans.

It’s a good idea to examine your auto insurance coverage, too. If you and your spouse own separate cars, you may have different auto insurance carriers. Consider pooling your auto insurance policies with one company; many insurance companies will give you a discount if you insure more than one car with them. If one of you has a poor driving record, however, make sure that changing companies won’t mean paying a higher premium.

Employer-Sponsored Retirement Plans
If both you and your spouse participate in an employer-sponsored retirement plan, you should be aware of each plan’s characteristics. Review each plan together carefully and determine which plan provides the best benefits. If you can afford it, you should each participate to the maximum in your own plan. If your current cash flow is limited, you can make one plan the focus of your retirement strategy. Here are some helpful tips:

• If both plans match contributions, determine which plan offers the best match and take full advantage of it
• Compare the vesting schedules for the employer’s matching contributions
• Compare the investment options offered by each plan–the more options you have, the more likely you are to find an investment mix that suits your needs
• Find out whether the plans offer loans–if you plan to use any of your contributions for certain expenses (e.g., your children’s college education, a down payment on a house), you may want to participate in the plan that has a loan provision

Before You Say “I Do”
There are also many important financial steps that should be taken before the wedding day arrives. You and your future spouse need to openly discuss any outstanding debt obligations (credit cards, student loans, delinquencies, etc.). There are also some legal considerations you need to address such as pre-nuptial agreements, wills, and trusts.

ABCs of Auto Insurance

Today, most states require car owners to purchase auto insurance coverage. Whether you already have auto insurance or are considering buying some, you may be wondering how much is enough and which types of coverage you need. Here are a few tips to get you started.

A is for Auto Policy
When you purchase auto insurance, you enter into a written contract with your insurance company. The contract states that you agree to pay a certain amount of money (the premium) and that the insurer agrees to provide a certain dollar amount of protection (coverage limits) for a specified amount of time. Read this policy carefully when you get it, and ask your insurance agent to clarify any terms and conditions that you don’t understand. And remember to review your policy periodically. Your life will change, and so will your coverage needs.

B is for Bodily Injury Coverage
Bodily injury and property damage make up the portion of your policy known as liability coverage. This is mandatory in most states. If you cause an accident, you may be liable for some or all of the damages. Liability coverage protects you from potential lawsuits by providing coverage to individual(s) injured as a result of your negligence. The amount of protection (coverage) that you choose, beyond state requirements, is up to you. In many states, you can purchase as little as $20,000 per injured person and $40,000 per accident. However, this may not be enough to adequately protect you. For instance, if you own a home or have any other valuable assets, you’ll want to protect those assets by choosing higher limits. We typically recommend limits of at least $100,000 per injured person and $300,000 per accident.

C is for Collision and Comprehensive
Collision, as the name implies, covers your auto when it strikes an object (e.g., a tree or a telephone pole). Comprehensive covers your auto against other physical damage that is not covered by collision (e.g., fire and theft). Although these coverages are optional under state insurance laws, that doesn’t mean you should forgo them. Collision and comprehensive can be valuable because they can limit your out-of-pocket expenses.

But if your car has a low resale value (e.g., under $1,000), collision and comprehensive coverage makes little sense–the premium cost may be more than the cost of repairing/replacing the car yourself. However, keep in mind that dropping these coverages is not always up to you. If you finance your car, your lender may require you to carry collision and comprehensive coverage.

D is for Deductible
Think of your deductible as self-insurance. It’s the amount of money that you’re willing to pay out of your own pocket if there’s an accident. You can save money on your premiums by choosing a higher deductible, but watch out–if you get into an accident, you’ll need to come up with that amount up front before your insurance pays a dime.

For example, say you choose a $1,000 deductible. You get into a minor accident, and the damages total $950. You’ll end up footing the entire repair bill, because your insurer pays for damage only above and beyond your deductible amount. But if your deductible was lower, say $500, you would have to come up with only that amount–your insurer would pay the remaining part of the bill, in this case $450.

E is for Exclusions
Exclusions are why it’s so important for you to read your auto policy. Most people purchase “open peril” (also called “unnamed peril”) policies. These policies cover all risks…except for those specifically listed in the exclusions section of your policy. For example, insurers do not cover “willful and wanton misconduct”. This is conduct that is intentional and reckless or in disregard of the law. You never want to end up in an exclusionary situation, because it will then be up to you to pay the bills–both yours and those of anyone you injure.

F is for Filing a Claim
You’ve been in an accident–now what? You need to notify your insurer. Your insurer will have you fill out an incident report in which you state what happened in the accident. You may also need to give a recorded statement to the adjuster. If you file a claim for property damage, you’ll need to get an appraisal. Some insurers will send an appraiser to you, while others require you to come to them. If you are injured, your insurer will require you to have a physical exam. In general, you can see your own doctor, but the insurer may also ask that you see a doctor of its choosing.

G is For Getting it Done
Most insurance policies contain a clause regarding late notice. If you fail to notify your insurer of the accident in a timely manner, the company can disclaim coverage. This means that the insurer will not pay. What is considered late notice? This question continues to be battled out in courtrooms across the United States, so if you are planning to file a claim, the best advice is to notify your insurer as soon as possible.

Term vs. Cash Value Life Insurance

Which type of life insurance is better–term or cash value? Insurance buyers have been asking this question for generations. When deciding between these two fundamentally-different alternatives, you must think about the coverage you need, the money you have to spend, and the length of time you need the coverage to continue. In some cases, you may not need life insurance coverage at all. But if you decide you do, then here are some general guidelines to follow.Term Insurance
Term policies provide life insurance coverage for a specified period of time. You can typically buy term insurance for periods ranging from 1 to 30 years. If you die during the policy period, your beneficiary receives the policy death benefit. If you don’t die during the term, your beneficiary receives nothing. At the end of the specified policy term, your coverage simply ends. You may be able to renew your policy without a physical exam, but (usually) at a higher premium. Once you reach a certain age, typically 70 and older, you may find it difficult to get term insurance coverage–and if you can, the premiums will be very expensive. There are several variations of term life. You can buy a level death benefit or a decreasing death benefit with premiums that increase annually, or that are level for a period of years (5,10,15, 20, 25, or 30).

Cash Value Insurance
Many different types of cash value life insurance are available such as:

• Whole life
• Variable life
• Universal life
• Variable universal life

Cash value insurance, often called “permanent” insurance, is designed to have you pay a “level” premium throughout your life. In some cases, you may fund a cash value policy in a way that the cash values can be used in later years to pay future premiums. As long as you continue paying your premiums by whatever means, cash value life insurance continues throughout your life, regardless of your age or your health. As you pay your premiums, a portion of each payment is placed in the cash value account. The cash value continues to grow–tax deferred–as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you’ll be entitled to receive the cash value, minus any loans and surrender charges.

Making a Choice Term insurance coverage typically costs less than cash value insurance coverage when you’re younger, but because the cost of a term policy is based on your age, the cost may eventually exceed that of cash value if you continue to renew your term policy. In contrast, these factors are taken into consideration when cash value insurance premiums are set. As a result, certain cash value policy premiums typically remain the same throughout the life of the policy.

In some cases, the choice may be clear. For instance, your insurance need may be so large that the only way you can afford to meet it is by purchasing lower-premium term insurance. Or, you may need the coverage only for a few years, again making term insurance the logical choice.

The Lightship Way
We generally steer our clients into term insurance, due to the lower monthly premium payments. If the client has long-term investment goals, we will recommend investing the difference (the extra dollars that would have been spent on a similar cash value policy) into a Roth IRA or other investment account. This solution accomplishes the insurance and investment goals of the client with minimal fees, limitations, and potential penalties down the road.

However, if you don’t think you can stick to a term policy/Roth IRA plan, and you would prefer to simply have one large account to accomplish your insurance and investing goals, then a cash value insurance option should be considered.

Do You Need More Liability Protection?

Liability insurance protects individuals and businesses in the event they’re held financially responsible for injuring someone or causing property damage. You probably already have this important protection, but do you have enough?

Personal Liability Insurance
Despite the common belief that only people with substantial wealth or assets are the targets of lawsuits, that’s not necessarily the case. Accidents can happen anywhere, to anyone, and even people of modest means may be at risk. For example, here are some common situations that might result in a liability claim:

• Your dog escapes from the house and bites a delivery person
• A neighbor’s child is hurt while jumping on your backyard trampoline
• Your vehicle broadsides another, injuring the driver

Unfortunately, if you’re sued, your assets are potentially at stake–your savings, your investments, and in most states, even your home. Even if the claim is eventually proved groundless and you’re not held liable for damages, the cost of mounting a defense can be high.

That’s why personal liability insurance is so important. Not only does it cover any court awards you’re required to pay as a result of damage or injury caused by you, your family members, or your pets, but it also covers your legal bills, up to policy limits.

You Probably Already Have Some Coverage
Homeowners, renters, and auto policies all contain liability coverage, so you may already have a basic layer of protection. However, you may not have enough, especially if you have only the minimum required. For example, liability limits for homeowners insurance generally start at $100,000, while required minimum limits for auto insurance in most states range from $30,000 to $60,000. Often, you’ll need far more liability coverage than this to adequately protect your assets.

Ask an insurance professional to review your liability limits and help you decide how much you need, based on factors such as your age, assets, income, and lifestyle.

If You Need More Coverage
What if you have the highest available coverage limits but you still need an additional layer of protection? Consider purchasing an excess liability policy, also called an umbrella liability policy. Because it offers higher coverage limits (often starting at $1 million) than basic personal liability insurance, an umbrella policy will cover you for larger losses.

You’ll need to have a certain level of underlying liability coverage (generally between $100,000 and $500,000) in order to purchase an umbrella liability policy, because the umbrella coverage kicks in only after you’ve reached the limits of your underlying policy. For example, if you have an auto policy with a liability limit of $300,000 per accident and a $1 million umbrella policy, your auto policy would cover the first $300,000 of a $700,000 claim and your umbrella policy would cover the remaining $400,000.

Business and Professional Liability Insurance
The widely publicized case of a dry-cleaning business that was sued for $54 million over a lost pair of pants illustrates the importance of business liability protection. Although the owners of the business prevailed in the lawsuit and were awarded court costs (not including attorney’s fees), they did not have liability coverage, and they may never recover the tens of thousands of dollars they spent mounting a two-year defense against this lawsuit.

While businesses can’t always prevent such liability claims, they can purchase coverage for the special risks they face. One option is commercial general liability insurance, which is often part of a business owners policy. Business umbrella liability policies that offer higher liability limits are also available.

However, some liability risks are unique to certain businesses or professions, so you may also need specialized coverage. For example, if you work in an occupation that is particularly vulnerable to professional liability (e.g., law, medicine, day care), you may also need a separate professional liability policy, usually called malpractice coverage or errors and omissions coverage. Many other types of specialized liability coverage are also available.

Talk to an insurance professional who can help you determine the types and amounts of liability coverage that are appropriate for your business or profession.

Where To Keep Your Cash

In today’s volatile economy, it is vital to maintain an adequate cash reserve. You need to have short-term money stashed away ‘just in case’. Look at it this way…you never know when a pen will leak all over you new suit, or when that iPod will slip out of your hand and break on the sidewalk. But no matter what the situation, it is a wonderful feeling to know that you have money in the bank to cover that inevitable situation when you will need money in a pinch.

The term “cash equivalents” refers to financial instruments with a short-term maturity (typically less than a year). With most cash equivalents, the four major factors in deciding whether to purchase the instruments are (1) the financial strength of the issuer, (2) the maturity date of the instrument, (3) any early withdrawal penalties, and (4) the yield to maturity.

The financial strength of the issuer indicates the probability that you will be repaid when the instrument matures. The maturity date refers to how long you must wait before you will be repaid. An early withdrawal penalty is the amount of money you must forfeit if you surrender the instrument before the maturity date. Finally, the yield to maturity is the amount of interest (and possible gain in principal amount) you will receive for holding the instrument until it matures. The following discussion looks at how to analyze the various cash equivalents that are available to an individual investor in today’s marketplace.

Checking and Savings Accounts
Probably the most widely used cash equivalents are checking and savings accounts at a bank, credit union, or other financial institution. Even though most checking accounts pay little or no interest, many online banks now offer (our favorite cash equivalent) high-yielding savings accounts with full FDIC insurance. These savings accounts offer upwards of 5% interest as well as fast, convenient access to your money at all times.

The analysis you should do before opening a savings account is similar to what you should do before buying a certificate of deposit. You should make certain that the institution is financially sound and has federal deposit insurance. This means that if the financial institution collapses, your deposits will be protected by the federally backed deposit insurer, up to a certain amount (usually $100,000; $250,000 for retirement accounts).

Treasury Bills
When you analyze Treasury Bills, the financial strength of the issuer and early withdrawal penalties are usually not considerations. Treasury bills (sometimes called T-bills) are backed by the full faith and credit of the U.S. Treasury–these are among the safest investments you can make. Early withdrawal penalties are also usually not a factor because T-bills can be sold in the secondary market at any time, and there is a very active market for them. You don’t have to hold them until maturity. (Of course, you may have to pay a small commission if you want to sell T-bills on the secondary market before they mature.)

The only considerations, therefore, are the yield and the maturity date of the instruments. Because they are among the safest investments, T-bills almost always yield less (for a comparable maturity) than other more risky cash equivalents, such as commercial paper. Thus, the most important issue in analyzing T-bills is whether you want to accept a slightly lower yield (compared with other cash equivalents) in return for the assurance that there is almost no possibility that the issuer–the U.S. Treasury–will default on the repayment when the bills mature. The only other consideration is how long a maturity you want. T-bills are issued in 13- or 26-week maturities (although, as noted, you do not have to hold T-bills until maturity).

Certificates of Deposit
A short-term certificate of deposit (CD) issued by a bank is also considered a cash equivalent. Repayment of the CD is backed by both the issuing bank and the bank’s deposit insurer (e.g., the FDIC). Therefore, when analyzing CDs, you should consider the financial strength of the issuing bank (or other financial institution) and make certain the institution has federal deposit insurance. This insurance will usually cover up to $100,000 of an individual’s deposits in one financial institution (retirement accounts are generally insured up to $250,000). If the financial institution defaults on its obligation to repay the CD, the federally backed deposit insurer will cover the bank’s obligation. Another consideration in analyzing CDs is whether there are early withdrawal penalties. Many financial institutions impose a penalty if you cash in the CD before its maturity date, so plan to hold the CD until maturity.
Repurchase agreements

A repurchase agreement (known as a “repo”) is a type of cash equivalent created when a lender (usually a large financial institution) sells marketable securities to a buyer and agrees to buy back the securities a short time later for a higher price. The time period between the initial sale and the buyback may be as short as overnight or a few days. Usually, only large institutional investors (such as money market mutual funds) purchase repos. However, individuals may purchase repos if they have enough money to invest. Like commercial paper, repos are usually issued in denominations of $100,000.

The analysis for the purchase of repos is similar to the analysis you should do before you buy commercial paper. You want to research the financial strength of the issuer to make certain that the company can repay the repo amount to you when it becomes due. (When you buy a repo, you are essentially lending money to the issuer for a short period of time.) When you buy a repo, therefore, there is a slight risk of default if the buyer or seller has financial troubles. Another consideration when buying a repo is the maturity date of the instrument, whether it is a short- or a longer-term agreement. You should also compare the yield on the repo with the yield on similar instruments.

Other Cash Equivalents
In addition to the cash equivalents previously discussed, there are other money market instruments, such as Eurodollars and Banker’s Acceptances. Like commercial paper and repurchase agreements, these instruments are purchased almost exclusively by large institutional investors because they are usually issued in large denominations. However, an individual with enough money could purchase them. The analysis you should do before purchasing these types of instruments is similar to what you should do before buying repurchase agreements or commercial paper. You need to research the financial strength of the issuer to make certain that the institution can repay the amount you invest. Be aware, too, of the maturity provisions, and compare the yields with those of similar instruments.
Money market mutual funds

One of the most popular cash equivalents is a money market mutual fund, a type of mutual fund that invests solely in cash equivalents and other money market instruments. A money market fund may purchase T-bills, commercial paper, repos, Eurodollars, and similar types of instruments. An individual can then buy shares in that fund. There are also subcategories of money market funds, such as those that invest only in T-bills or commercial paper. There are also
funds that require very large minimum deposit amounts. These are just a few of the varieties of money market funds.

The two main considerations when analyzing a money market mutual fund are the safety of the fund and its yield. In general, all money market funds have been very safe. However, if your primary concern is the safety of your money, then you should invest in a money market mutual fund that invests only in government securities (such as T-bills).

The yield on a money market fund will depend, in part, on the type of securities in the fund–a money market fund with only T-bills will yield slightly less than a fund with more risky money market instruments. Furthermore, because the money market fund takes an annual management fee, the yield on a money market fund tends to be less than if you bought the money market instruments directly.

Money Market Deposit Accounts
Another type of cash equivalent is a money market deposit account. This is a type of federally insured savings account that banks, savings and loan associations, credit unions, and other financial institutions offer to their customers. The financial institution pools the money it receives from depositors and then invests the money in high-yielding, short-term debt instruments such as T-bills and commercial paper. The money market deposit account usually pays a higher rate of interest than that paid by other savings and checking accounts. Although technically a savings account, a money market deposit account usually allows the depositor to write a limited number of checks against the account each month.

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