by Archie M. Richards, Jr., CFP^®
April 8, 2002

If you happen to insure someone with a car you're driving, are you properly protected against a lawsuit?

Let's say the liability coverage in your auto insurance policy is only $25,000, as is true for many Americans. If you cause an auto accident that injures someone, a $1 million lawsuit could ruin your life.

I suggest purchasing liability coverage of $1 million. The extra cost would be only $200-to-$400 a year. Obtain the maximum coverage on the auto policy itself - something like $500,000. Then acquire an "umbrella" policy for another $500,000 of coverage, totalling $1 million.

If you're sued, the insurance companies would pay for your legal defense, which is no small matter. You'd also be protected if an outsider is injured in or around your home.

To help pay for the more expensive liability coverage, raise the deductibles on your auto and home insurance policies. Say your car suffers $5,000 of damage. Paying this large an amount would set you back, of course. But would it be a disaster from which you couldn't recover? If not, you yourself should pay the first $5,000 of costs.

The higher the deductible, the lower the premium. When the insurance company pays for losses, it incurs administrative costs. But on relatively small losses you pay yourself, administrative costs are avoided, causing the premium to decline.

Do not use insurance to pay for the first few dollars of losses. The proper purpose of insurance is to protect against financial disaster. Small losses you can pay yourself. But if you're sued for big money, you want the insurance company close by your side.

Realign your policies. You need high liability coverage and high deductibles.

Enron employees suffered badly because they held large portions of their retirement funds in Enron stock. In the retirement plans of other companies, employees also hold heavy concentrations of their employer's stock, as follows:

• Procter & Gamble 95 percent

• Abbott Labs 90 percent

• Pfizer 86 percent

• Coca-Cola 82 percent

If you work for one of these companies, diversify your retirement funds as much as you can.

Let's say you're retired, with a comfortable nest egg. Your daughter asks you to lend her $50,000 to help start a business. Your son asks for a loan of $40,000 to help with the downpayment on a house.

These are all worthy causes, but be careful. Loans to family members have a way of turning into gifts. You care about your family, and the borrowers have the best of intentions. But repayments are often not upheld. First they're postponed. Then they're disregarded.

You want to help the members of your family. But excessive loans to them could trim your retirement lifestyle considerably. Try to maintain a balance.

Even the pro's fail at beating the stock market. If they can't do it, can you?

Back in 1972, the Dow had just attained 1000. The managers of private pension funds, optimistic about the market, held a high percentage of their assets in stocks - 93 percent.

The Dow then fell substantially, and the funds lost heavily.

Two years later, in 1974, the Dow was 580. The managers of private pension funds, pessimistic about the market, held a low percentage of their assets in stocks - only 13 percent.

In the next two years, the Dow rose substantially, back to 1000. By holding so few stocks at the bottom, the fund managers missed a profitable opportunity.

On both occasions, the pros were fooled. The market will fool you too if you try to outguess it.

Here's one more example: Let's say you invested $1,000 in the S&P 500 Index at the end of 1980. Twenty years later, your portfolio would have been worth $18,400. But if you were out of the market on only 15 of the best market days, the account value at the end would have been worth only $4,700.

Just 15 days in 20 years made all that difference. No one knows when the big up days will occur. To take advantage, stay in all the time.