In this report
Overview

Protecting your assets

Make sure you're prepared if disaster strikes

Last reviewed: May 2011

You've worked long and hard to accumulate your assets, and keeping them safe also takes effort. You can count on the government and sometimes your employer for help, but much of the burden of safeguarding your finances still falls on your shoulders.

This checklist can help you find and fill any holes that exist in your financial safety net.

Your earning power

Your ability to make money is essential to your financial security. Fortunately, most workers can rely on government programs and their employers to help them and their dependents to some extent if they become disabled or die prematurely. If you're affluent, however, you should plan to supplement that protection.

If you are disabled, you can count on:

Social Security disability insurance

This coverage is important, but it only pays if you're unable to do any type of work because you have a medical condition that is expected to last at least one year or result in death. You must have worked long enough—and recently enough—to qualify for disability benefits. They depend on your salary and the number of years you've worked, and they rise with inflation. Certain members of your family might also qualify for payments based on your work record. To find out how much you and your dependents would collect, check the statement you receive from the Social Security Administration each year.

State workers' compensation benefits

You'll collect only if a work-related illness or injury caused your disability.

You might have:

Employer-sponsored disability insurance

Most employers offer some sick leave, or short-term disability coverage, that might last from a few days to as long as six months. By law, employers in Hawaii, New Jersey, New York, and Rhode Island must provide coverage for up to 26 weeks. Some employers are more generous.

About half of medium- and large-sized companies offer long-term disability coverage. Generally, you must be disabled three to six months before you can collect. Then you can receive up to 60 percent of your income for a period that might last from five years or until you reach age 65.

Additional safeguards to take:

Buy an individual policy for long-term disability insurance

This advice applies primarily to high-earning self-employed people. Individual disability policies are expensive. You'll probably have to pay five to 10 times the cost of a group policy, which averaged $238 a year in 2009. "Individual disability coverage is an upscale product," says James H. Hunt, an insurance actuary and former Vermont state insurance commissioner. Few insurers sell the product, and you won't find price quotes online because coverage options are complicated. Hunt recommends shopping for coverage from large mutual insurance companies with a history of paying dividends, such as Northwestern Mutual, MassMutual, and Guardian.

If you die, your family can count on:

Social Security survivors benefits

To find out how much your dependents would collect, check the annual statement that you receive from the SSA.

You might have:

Employer-sponsored life insurance

About eight in 10 employees at midsized and large companies have it. Check with your benefits department.

Additional safeguards to take:

Buy more life insurance

Social Security survivors benefits and your group life insurance might not meet your family's needs. Ideally, you should create a comprehensive financial plan so that you know how much life insurance you need to provide for your survivors. If you need insurance now but don't have time to draw up a financial plan, estimate how much coverage you should buy using an online calculator like the one at www.lifehappens.org.

Term insurance gives you the most coverage for the lowest cost. You can get premium quotes online at such sites as AccuQuote, FindMyInsurance, LifeInsure.com, and SelectQuote, although the price you'll actually pay will depend on a detailed application and medical exam.

Stick to insurers rated tops for financial strength by leading ratings services, such as A.M.Best, FitchRatings, Moodys, Standard & Poors, and TheStreet. If an insurance company goes bust, you might get some help from your state's guaranty fund. For instance, the Pennsylvania Life & Health Insurance Guaranty Association covers life insurance death benefits for up to $300,000 per insured person. For links to state insurance departments, go to the National Association of Insurance Commissioners website, at www.naic.org.

Your savings

Your emergency fund should consist of six to 12 months of living expenses held in a liquid account. Those funds are your lifeline, so you shouldn't take risks with them.

You can count on:

Coverage by the Federal Deposit Insurance Corporation

Within limits, your deposits are safe if an FDIC-insured bank or savings and loan fails for any reason. The basic coverage is $250,000 per depositor at each insured bank and for each account ownership category, such as single accounts and certain retirement accounts.

Insurance from the National Credit Union Administration

This coverage protects your credit-union deposits up to $250,000 per individual account holder, per federally insured credit union.

Additional safeguards to take:

Make sure your deposits fall within coverage limits

You can check if any portion of your money exceeds coverage limits using the FDIC's Electronic Deposit Insurance Estimator, at www.fdic.gov/edie. For NCUA's Electronic Share Insurance Calculator, go to www.ncua.gov/resources/shareinsurancetoolkit.aspx.

Do business with healthy financial institutions

Even though your funds are protected as long as they fall within the coverage limits, you probably still want to avoid doing business with a shaky financial institution. If it fails, your money will usually be transferred to another bank, and it might not be to your liking. So before you open an account, check Bankrate.com's "Safe & Sound" ratings, which gauge the relative financial strength and stability of U.S. commercial banks, savings institutions, and credit unions.

Your investments

Investing has risks. If you gamble and lose, no one is going to bail you out. You can't rely on anyone but yourself for protection, with one exception.

You can count on:

Securities Investor Protection Corporation coverage

The SIPC will within certain limits work to return your cash, stocks, and other securities if your brokerage firm closes because of bankruptcy or other financial problems. Make sure your broker is registered with the SIPC by checking the corporation's member database on its website, at www.sipc.org. Keep in mind that the SIPC doesn't protect you from investment losses or bad advice.

Additional safeguards to take:

Do background checks before you invest

The Financial Industry Regulatory Authority, the Securities and Exchange Commission, and state securities regulators license financial companies and professionals, and track complaints and disciplinary actions against them depending on the type of business they conduct.

You can check up on a broker or brokerage firm by using FINRA's BrokerCheck, at www.finra.org. That database contains information from the Central Registration Depository on about 1.3 million current and former FINRA-registered brokers and 17,000 current and former FINRA-registered brokerage firms.

To check on an investment adviser—an individual or a firm that gives advice about securities—go to the SEC's Investment Adviser Public Disclosure website, at adviserinfo.sec.gov. There you can view a company's Form ADV, which contains information about its business operations plus disclosures of certain disciplinary actions.

Call your state securities regulator to verify that an adviser is licensed to sell the investments he wants you to buy. You can also find out if an adviser has any complaints or disciplinary actions on record. To find your state regulator go to www.nasaa.org, the website of the North American Securities Administrators Association.

Your home

Homeowners know that Mother Nature can destroy their dwellings in a heartbeat, but many fail to realize they can put their homes at risk by taking on too much housing debt. You need to protect your home from natural and self-inflicted disasters.

Safeguards to take:

Buy the right amount of homeowners insurance

You need replacement-cost coverage—enough to rebuild your home at current costs. For a quick estimate, multiply the total square feet by local building costs per square foot. You can get that number from real-estate agents, builders' associations, or insurance agents. You might have trouble getting this type of policy if you own an older home with architectural details that would be costly to replicate. Instead, shop for a modified replacement-cost policy, which will cover the cost of repairing or replacing old features with modern materials. Tell your insurer when you make major improvements to update your coverage.

Buy an umbrella policy

Home and auto policies include liability coverage to protect you against lawsuits, but you might need more coverage to adequately safeguard your assets. An umbrella policy will pay liability claims above the limits in your homeowners and auto policies. You can buy an umbrella policy from the same company that insures your home and car.

Borrow prudently

You can probably find a mortgage lender who will let you spend 28 percent or even more of your pretax pay on housing. Don't do it, warns Charles Farrell of Northstar Investment Advisors in Denver. Farrell, author of "Your Money Ratios: 8 Simple Tools for Financial Security" (Avery, 2010), argues that mortgage payments shouldn't consume more than 15 to 20 percent of your gross income. Moreover, he says you should plan to have your mortgage paid off by the time you retire.

For example, if you're 30 years old, Farrell recommends a 2.0 mortgage-to-income ratio, meaning that if you earn $80,000 a year, the maximum mortgage you should carry is $160,000. If you borrow more, he contends, you'll struggle to pay your other bills and probably won't be able to save much for your retirement and other goals.

You might have:

Flood insurance

The standard homeowners policy doesn't include it, but mortgage lenders generally require homeowners who live in areas at high risk for flooding to have a separate policy. This coverage is available through the National Flood Insurance Program. For information, go to www.floodsmart.gov.

Your retirement

Once you stop working, your challenge is to preserve what you've managed to accumulate and make your money last for as long as you do.

You can count on:

Social Security

Yes, you will get a payment from Uncle Sam each month. Examine the annual statement you get from the SSA to find out how much you're likely to collect at age 62, your full retirement age, and age 70. Don't forget that your benefit will also increase with inflation.

Coverage by the Pension Benefit Guaranty Corporation

If your former employer terminates its defined-benefit pension plan and doesn't have enough money to pay you what was promised, the PBGC guarantees that you will receive the benefits you've earned up to certain limits. The maximum amount is set each year by law. To check current limits, go to www.pbgc.gov and search for "Maximum Monthly Guarantee Tables."

Help with your 401(k) plan from the Department of Labor

There's no PBGC for 401(k)s, but if you suspect your employer is mismanaging or misusing your plan's assets, you can contact the DOL's Employee Benefits Security Administration (EBSA), which conducts investigations, informally resolves benefits disputes, and files lawsuits when necessary. The agency can also help you get benefits you're due if your employer abandons its 401(k) plan because of a bankruptcy, merger, or acquisition. If your employer has gone out of business and you're unable to reach your plan's administrator, call EBSA at 866-444-3272 or go to www.askebsa.dol.gov.

Coverage from state insurance guaranty associations

If you buy an annuity from an insurance company that goes broke, your state's insurance guaranty fund will cover your loss up to certain limits. In most states, coverage is limited to $100,000 in withdrawal and cash values.

Protection from creditors for retirement accounts

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 protects tax-deferred retirement accounts, including IRAs, from potential creditors, up to $1 million.

Additional safeguards to take:

Consider delaying Social Security benefits

You can generally take benefits as early as age 62, but you'll get a bigger check each month if you wait until you're 70, when benefits are highest.

Monitor your 401(k)

Take action if your statement is consistently late or comes irregularly, or if your balance seems inaccurate. First, question your plan's administrator. If you can't get your complaint resolved, call the EBSA. In a worst-case scenario, you have the right to sue your plan and its fiduciaries to recover benefits.

Stick to a smart spending plan

Resist the urge to splurge early in your retirement so that you don't run out of money if you live into your 80s, 90s, or longer. Most financial advisers agree that your savings will probably last if you withdraw no more than 4 percent a year.

This article appeared in Consumer Reports Money Adviser.

Posted: May 2011 — Consumer Reports Money Adviser issue: May 2011