Q&A

Q&A: How much liability insurance do you need?

May 9, 2016 By Liz Weston

Dear Liz: In a previous answer to a question about liability insurance, you indicated that people should normally have enough insurance to cover their assets. Which assets should be included, as it is my understanding that some assets are exempt from creditors, such as 401(k)s and IRAs? Also, how are future earnings or future annuity payments for retirees taken into account when trying to determine how much liability insurance to carry? Should one essentially cover the present value of their future income for 10 years? Twenty years? Life?

Answer: As indicated in the previous column, there’s as much art as science in determining appropriate liability coverage. Liability insurance pays the tab when you face a lawsuit or similar claims. Some people sleep better at night with high policy limits, while others would rather deploy their money elsewhere.

Liability insurance is relatively inexpensive, so getting a lot of coverage typically won’t break the bank. But you also need to make sure you’re adequately covered for disability and long-term care, which you’re more likely to need than your liability insurance.

You’re correct that workplace retirement plans such as 401(k)s are protected from creditor claims. So are IRAs, up to $1 million. Each state has different rules about other property, but typically a certain amount of home equity is protected as well. In Texas and Florida, this so-called homestead exemption is virtually unlimited. In other states, the amount protected is relatively small. (In California, it can be as small as $25,575, according to legal self-help site Nolo.) Similarly, states are all over the map in how they treat annuities.

Social Security income, by contrast, is safe from creditors except Uncle Sam. The federal government can take a portion of your Social Security check if you’ve defaulted on federal student loans, for example.

Financial advisors typically focus on net worth, rather than incomes, when recommending appropriate levels of liability coverage. If you’re a high earner with few assets, though, you might want to take your future income stream into account. Exactly how much can be a discussion between you and your advisor or insurance agent.

Q&A: Another tool to avoid probate

May 9, 2016 By Liz Weston

Dear Liz: You recently cautioned a reader whose mother wanted to add her to a home deed to avoid probate. Please tell readers that they now may be able to avoid probate for a residence by using a transfer on death deed, similar to what’s available for bank accounts and cars. California recently enacted this option and at least 25 other states also offer this tool.

Answer: Thank you for pointing out the availability of this option, which can make it easier and less expensive to transfer a home to one’s heirs. It still would be smart to consult an estate-planning attorney, since probate isn’t the only end-of-life issue to address.

To recap, adding a child’s name to a home deed can avoid probate, the court process that otherwise follows death. But the addition is considered a gift for tax purposes and could cause the loss of a valuable tax break known as a step-up in basis.

In many states, probate is relatively quick and not that expensive, so trying to avoid it may be counterproductive. In other states, notably California, probate is expensive and protracted, which makes probate avoidance something to consider.

Is Saving Pointless?

May 3, 2016 By Liz Weston

Zemanta Related Posts Thumbnail Raise your hand if you’ve ever tried to build an emergency fund, then gave up after an unexpected expense drained away everything you managed to save.

If that’s you, then you’re likely part of the 47% of Americans who recently told the Federal Reserve that they wouldn’t be able to pay an unexpected $400 expense without borrowing or selling something. Some said they wouldn’t be able to come up with the money at all.

In my latest for NerdWallet, how your savings is what stands between you and the financial shocks that could send your life into a tailspin.

Q&A: Co-signing for a student loan backfires

May 2, 2016 By Liz Weston

Dear Liz: My wife and I both had excellent credit scores. Now mine are in the dump. I co-signed for a friend’s daughter’s school loan 10 years ago. I know now this was a bad mistake. I guaranteed $25,000. Now two things have happened: The daughter quit paying the loan and the friendship took a bad turn.

This is seriously hurting my credit. We have already been told when trying to refinance our mortgage that we’ll need to fix the school loan, which is showing more than 90 days behind. The outstanding balance is $20,000. I can pay the loan off. Making payments just adds interest to the problem. Are there any other options to repair my credit that don’t rely on the daughter’s ability to keep the loan current?

Answer: If you can pay the loan off, then do. You are legally responsible for this debt, and the longer it goes unpaid the worse the damage to your credit scores.

If this were a federal student loan, you would have the option of rehabilitation, which can erase some of the negative marks on your credit reports after you make a series of on-time payments. Because it’s a private loan — I know this because federal student loans don’t have co-signers — you probably don’t have a rehabilitation option (although it certainly doesn’t hurt to ask).

Once the loan is paid off, you can proceed with the refinancing but you probably will find that lenders want to base the loan on your battered scores, rather than your wife’s better ones. That means you might not qualify, or you might have to pay a much higher rate. If she can qualify for the refinance on her own, that’s one option. Otherwise, you might have to wait for your credit to heal before you refinance.

Q&A: Questions for a financial advisor

May 2, 2016 By Liz Weston

Dear Liz: I have some investments at a financial investment firm. My advisor said that because I am 62, I can transfer money from my 401(k) at my job into my account with his firm. He says he can do better with the amount I currently have in the 401(k). Of course I will continue to work and put in money into my 401(k). Does this sound like bad advice? The amount I would be trying to transfer would be around $62,000.

Answer: By doing better, does he mean doing such a spectacular job of investing that he rivals the legendary Warren Buffett? Because he might have to do just that to compensate for your giving up years of tax-deferred compounding.

Because you’re over 591/2, you can access your 401(k) balance without penalty, but you still must pay income taxes on any withdrawals. Investments in a regular account would be subject to income and capital gains taxes going forward.

It’s possible he wants you to roll the money over into an individual retirement account instead, which would spare you the tax bill and allow the money to continue growing tax-deferred. But unless you have a truly awful, high-cost plan, it’s hard to see how he can promise better results.

The Labor Department just approved a rule that requires advisors to adopt a fiduciary standard when providing advice about retirement funds. “Fiduciary” means the advisor is required to put clients’ interests ahead of his or her own. You might ask him if this advice aligns with the standards and if he’s willing to put that promise in writing. If not, you could be forgiven for suspecting that he’s more motivated by what he can earn via commissions or other fees than by doing what’s right by you.