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Obtain the right policies to defend against the unexpected

By Aissatou Sidime
Black Enterprise

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Insurance can protect against unforeseen losses, but which type of coverage is best? Experts weigh in to clear the mystery.

The biggest asset a working person has is his or her ability to earn income. Whether young and single or middle-aged and married, workers need to insure their income first, typically between 60% and 70% of after-tax income. For example, if your gross pay is $10,000 a month, but after taxes your net equals $7,000, you'll need a disability insurance policy that provides about $5,000 a month. Many employers provide up to 60% of an employee's base salary (excluding bonuses) in disability coverage. "If you are dependent upon bonuses for living expenses, then buy supplemental coverage to cover just the bonuses," says MetLife financial planner Dwight Raiford. Many insurance companies sell private insurance policies that cover up to 70% of after-tax income.

Next, you should insure the income that would be lost if you die unexpectedly. Life insurance is particularly important for people who have young families.

A standing rule is to buy life insurance equal to six to10 times your current salary to cover outstanding debt, pay off a mortgage, and leave sufficient assets for surviving loved ones to maintain their lifestyle. Raiford stresses that you should take into account your "human life value" and your individual insurance needs. "What you don't want to lose at death is the house because the surviving spouse can't pay the mortgage," says Raiford. "Death is a trauma, and changing schools and lifestyle would just add to it."

Single people who have no heirs should buy insurance to cover burial expenses and estate taxes, says Raiford. People who have more family obligations should calculate their coverage by factoring in yearly earnings until age 65, including the following: inflation adjustments; job benefits survivors would lose in the event of early death, such as company-paid health insurance and 401(k) matching dollars; the value of the household chores they used to perform, minus taxes; and what they would spend on themselves. MetLife's Human Life Value calculator, at www.metlife.com/lifevaluecalculator, will do the math for you. The Life and Health Insurance Foundation for Education has a calculator (www.life-line.org/life_how_ ineeds.html) that estimates life insurance needs by looking at total debt, current income, savings, taxes, inflation, and a spouse's income.

Before age 50, it's unlikely that a person will need long-term care insurance. But beyond age 50, it's "non-negotiable," says Raiford, because 40% of people above that age will need long-term care at some point. State Medicaid programs work best for those who make less than $50,000 a year and have few assets, as long-term care policies can be pricey.

Those with more assets and income will need a policy that protects what they have, something Medicaid doesn't do. Raiford recommends buying enough long-term care insurance to cover at least the typical length of stay in a nursing home, which is about three years, and purchasing an inflation rider because long-term care costs have been rising an average of 4% to 5% per year. Several state legislatures are considering following New York, Indiana, Connecticut, and California by agreeing to cover any expenses beyond three years of nursing home care and six years of at-home care. Find out more about long-term care by visiting the American Health Care Association and National Center for Assisted Living Website at www.longtermcareliving.com.

Protecting your belongings is always a concern. Most homeowners' insurance policies cover personal contents worth up to 75% of the home's value. But some items, such as jewelry, have caps on payouts regardless of policy size. Furs, firearms, gold, silverware, collectibles, fine art, electronic and sports equipment, and tools can eat up a huge chunk of the standard protection.

"If those target items eat up more than half the automatic coverage, we recommend that the policyholder increase the insurance by buying a personal articles policy," says State Farm insurance agent Lou Miller. Personal articles policies have the added advantage of all risk coverage—items can be replaced, regardless of why they were lost or damaged. Regular homeowners or renters policies generally pay out only in the event of fire, wind, storm, hail, lightning, smoke, vandalism, or theft—called "name perils" by those in the industry. Most insurers require a room-by-room inventory of personal items, and appraisals or sales receipts for items valued at more than $1,500.


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