Costly Insurance and Financial Planning Mistakes

It has been said that anyone who earns an income and pays bills does financial planning. This is true, but only in the broadest sense. When you start looking at the details, you find there's a lot more involved than just earning and paying. And though you aren't a financial planner, nor an investment advisor, you can be alert to the nine worst, potentially most costly insurance and financial planning mistakes in managing finances. Here they are:

Mistake 1
Failure to Plan
Most people spend more time planning their vacation than they do planning their financial future. To the extent most people have done any planning, it's typically been on a piecemeal basis, and usually they receive different advice from different people at different times, with none of them referring to what the others may have done. It's recommended one person act as coordinator and catalyst.

Mistake Two
No Systematic Investment Plan
One should try to save and invest ten percent or more of one's gross income monthly. The older people get, the closer they are to retirement, the greater the "more" should be. Most people are about three months away from bankruptcy. After setting aside three to six months' income in liquid assets or cash value as a cash cushion to fall back on, a fixed amount should be invested every month to take advantage of dollar cost averaging.

At younger ages, this is often best accomplished using mutual funds or a variable annuity. At older ages fixed annuities often make a lot of sense.

Mistake 3
Insufficient Diversification
"You shouldn't put all your eggs in one basket." It's generally considered wise to diversify investments and not to be dependent, for example, on one company's stock, etc.

Mistake 4
Inadequate Disability Insurance
Your most valuable asset is earning power. Group disability insurance is seldom adequate, so one should acquire individual disability insurance, which is "portable," and, if personally owned, provides income tax free benefits under current tax laws.

Mistake 5
Inadequate Life Insurance
As a rule of thumb, for each $100,000 of income earned about $1,000,000 of income-producing capital is needed to produce $60,000 annually for a family. For most people, this means life insurance, since they don't have other large amounts of income-producing assets. TIME (Taxes, Inflation, Mistakes, and Emergencies) makes the amount of capital needed much larger than most people would imagine. You should not become overly dependent on group term life Insurance. It is costly, inflexible, not portable, and probably won't be available when it's most likely to be needed — after age 65.

Mistake 6
No Estate Plan
Most people do not have a will or trust, or what they do have is out of date. It is important to note it's not how much is left to heirs, but how much is left for heirs. Estate taxes and related costs may ultimately take forty to fifty percent of an estate unless arrangements have been made to use life insurance proceeds to pay them.

Mistake 7
No Business Continuation Plan
If you own a business, whether as a sole proprietor, a partner, or a shareholder in a closely held corporation, a business continuation plan should be in place to off-set any complications that may occur in the event you retire, die, or become disabled.

Mistake 8
Not Utilizing Selective Compensation Plans
For business owners and key executives, there are many selective compensation plans that can be tailored to provide supplemental pension and family protection benefits.

Mistake 9
Depending Too Much on Employer Sponsored Plans
The only real security is that which we provide for ourselves. To count on lifetime employment with one company is foolhardy, regardless of the company's stability.

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