MEL POTESHMAN To protect your assets and your family’s financial security, review your insurance coverage. An insurance review will provide you with greater peace of mind and may free up some cash that you can use to build your bank account. Make sure your homeowners’ policy covers the current replacement value of your home (the amount it would cost to rebuild your house), not its market value. Be sure the contents of your home are adequately insured. If you own valuable collectibles, jewelry or expensive antique furniture, you may need additional protection. If you operate a home-based business, check to see if your policy covers the business equipment or inventory you have in your home. Depending on the value of the equipment and inventory, you may need to get a rider to your current policy or obtain a separate policy. Also, be aware that homeowners’ policies do not cover business liability. You’ll need to get separate coverage for that. Generally, you should have a disability policy that replaces at least 60 percent of your monthly earned income in the event that you become sick or injured and are unable to work. If you have an employer-provided plan, check the benefit amount to determine if it would adequately provide for you and your family. If not, you’ll need to supplement your employer’s plan with an individual policy. The best coverage is “own-occupation coverage,” which guarantees benefit payments if you are unable to perform the substantial and material duties of your profession. You’ll want a policy that has: – A waiting period of no more than 60 to 90 days and that provides lifetime benefits or, at a minimum, benefits until age 65. – A cost-of-living adjustment rider that protects future benefits from inflation. – A non-cancellation clause. – A future insurability option to increase insurance coverage if income rises. Disability payments are taxable if your employer pays the premiums but non-taxable if paid by you. You may want to trade off another employer benefit and pay your disability premiums yourself, if possible. If you haven’t taken the time to analyze the costs and benefits of your health care plan, do so now. Take a look at the types of health care expenses you had in the past several years and the extent to which they were covered by your current policy. Then, anticipate medical expenses for you and your family in 1997 and future years. Will your costs be similar to those in 1996? To what extent do you anticipate your current insurance covering these expenses? If you are part of a health maintenance organization or preferred provider organization, are you satisfied with the physicians who participate in the plan? Do you have access to the specialists you need? Does your insurance provide adequate coverage? If you are still part of a traditional indemnity system, ask yourself if the benefits outweigh the higher costs you are paying for this type of coverage. Could you gain access to quality medical care without paying higher deductibles? If you have a growing family, it’s also time to check your life insurance policy and that of your spouse. As a general rule, you should purchase a policy that provides coverage equal to five or six times your annual income. Factors that affect the amount of insurance you need include: expenses, such as burial fees and outstanding debts; the amount of income your survivors will need to live on after you die, minus the income they can expect from other sources; the number of dependents you need to provide for and whether those dependents have special needs or require special care; and estate taxes. Finally, you should determine if the insurer is stable by checking its financial rating with a recognized rating service, such as A.M. Best. Should you refinance? Everyone loves the thought of lower monthly mortgage payments. But before you refinance your mortgage, you should take a careful look at how refinancing fits into your family’s overall financial picture. Homeowners who decide to refinance should be aware of the costs involved. When you refinance, you pay off an existing mortgage and take out a new one. Since, in effect, you are applying for a new mortgage, you’re required to pay many of the same expenses associated with a new mortgage, including fees for application processing, a credit check, appraisal, title search and title insurance, attorneys’ fees, and other related closing costs. In most cases, you’ll also pay points. To determine whether it makes sense for you to refinance, you’ll need to do a few calculations. Start by adding up the costs of refinancing. Next, determine the amount of your new monthly payment by asking your lender or by using one of the many online mortgage calculators available on the Internet. Then, divide your total refinancing costs by your monthly savings. The result tells you how many months it will take for you to reach your break-even point. If you plan to stay in your home for at least the break-even period, it may make financial sense for you to refinance. Before you start shopping around, it’s a good idea to check with your current lender. Your lender might be willing to waive certain closing costs or agree to “modify” your current loan without a complete refinancing. But watch out for tradeoffs; a mortgage with low up-front costs usually comes with a higher interest rate. The right alternative for you depends on your financial situation. If you’re in it for the long term, you’re probably better off going with the lower-rate option. On an after-tax basis, refinancing may not be as good a deal as it appears on paper. Interest on a home mortgage is one of the few significant tax deductions left. When you refinance your mortgage, the lower interest rate translates into a smaller mortgage interest deduction. That means some of the money saved in lower monthly mortgage payments will be offset by the additional tax you may pay on income that is no longer sheltered. Generally speaking, the higher your tax bracket, the more you have to gain from making larger interest payments, and the less you have to gain from reducing those payments. In addition, if you refinance your current mortgage for more than the existing balance, the deductibility of the interest on the excess amount depends on how you use the funds and the amount of the refinancing. When interest rates drop, refinancing can allow you to switch from a 30-year to a 15-year mortgage without a major increase in your monthly payment. Doing so is an excellent strategy for homeowners who want to pay off their mortgage before retirement or before the children’s college tuition bills start rolling in. Mel Poteshman is president of Poteshman Consulting International & Co., a West Los Angeles-based business consulting firm.