Insurance Basics

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Personal Catastrophic Casualty Policy (PCAT)

Go Figure

Many insurance companies provide maximum liability coverage under your homeowner's policy of $500,000. If your neighbor falls down your steps and sues you for $750,000, you're likely to be in for some sleepless nights.

Your auto and homeowner's policies provide liability coverage up to a certain amount. What happens, however, if someone sues you for more than the limitations of your policy?

We live in an extremely litigious society. If you have a pool, a trampoline in your yard, or a dog with a nasty temper, you may need liability coverage that is more than that provided on your homeowner's and auto ­policies.

A PCAT policy comes in $1 million increments. If you've got sizeable assets, it's good to think about getting one. A PCAT policy supplements other policies that you have and is not overly expensive (usually about $150 a year). Such a policy should cover damages from accidents at your home and automobile accidents.

Life Insurance

Money Morsel

If your kids are out of college and pretty well settled on their own, a term life plan might not make as much sense for you as it used to. This might be a good time to think about exchanging your term life policy for a cash value plan.

Nobody likes to think about needing life insurance. If you're a source of income for your family, however, it really is necessary. If you're single, you probably don't need much life insurance. If you're married or in a relationship, but don't have children, you should have life insurance if your spouse or partner would have to make a drastic change in financial lifestyle if you were no longer around. If you have kids, you need life insurance.

Life insurance should be purchased according to income replacement need and should be five to eight times the amount of your current salary. There are two types of life insurance policies: term and cash value.

  • Term life insurance. This type of policy pays a predetermined amount of money to your beneficiaries if you die during the term in which you're insured. All you have to do, of course, is keep paying your annual premium. The trick is that the premium increases as you get older, and may eventually become prohibitive. Term insurance is invaluable for your family if you die prematurely. It can be a source of college money, cover the cost of a mortgage, and generally provide financial security. This type of policy is intended to be used for a limited time period and is generally for younger persons. Most people can't afford to keep the coverage as they get older because the cost increases so much.

  • Cash value life insurance. If the cost of your term life insurance policy has been creeping up, it might be time to consider trading it in for a cash value policy. Under a cash value life insurance plan, part of the premium is used to provide death benefits, and the rest is used to earn interest. It's both a protection plan and a savings plan that can actually provide some income in your later years. There currently are two types of cash value insurance. One invests your money in an assortment of mutual funds, while the other invests it in something similar to a certificate of deposit, with a fixed interest rate. Ask your insurance agent for more details about cash value life insurance policies.

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Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


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