Wednesday, March 26, 2008

Three Events That Can Cause Wealth Destruction

Building wealth is often a long process, easily taking several decades to achieve one's goal. The destruction of wealth can happen much faster, through poor judgement, or bad risk management. However, there are sometimes uncontrollable events that can also lead to wealth destruction. Here are three types of events that have potential to cause wealth destruction:
  • Death - This is not surprising, especially if the person is the only or major earner in the household. Having the household income reduced by over 50% can become a major issue, especially if there is significant debt. However, death can sometimes be an issue even if it happens to the secondary wage earner.

    Here is what we did to protect against death being a financial issue. While I was working, we had sufficient term life insurance on me to pay off our debt, which was only our home mortgage. In addition, I purchased survivor income insurance, which would cover the different between Social Security survivor benefits and my take home pay. Fortunately, we never needed to use the survivor income or life insurance benefits.

  • Disability - Not being able to work due to medical reasons can be another wealth destruction event. Many people may not have enough funds to cover the 90 days before Social Security disability benefits take effect. In addition, Social Security disability benefits will not cover all lost income.

    Our solution was to carry disability insurance while I was working. Now that I retired in my forties, we do not carry additional disability insurance, since sickness won't reduce our income. However, both of us carry long term care insurance our health situation requires nursing home care.

  • Divorce - Wealth can sometimes be cut in half through divorce. In many cases, retirement account contributions and property obtained while married will be split equally in a divorce. I saw several colleagues have their retirement accounts and marital assets cut in half when a divorce happened. How divorce hits your 401k at summarizes how this event can affect your retirement account.

    There is no monetary insurance against this type event. Good judgement is the main defense, i.e. marry the right person the first time:-)
  • For the first two events of death and disability, proper insurance may help protect one's wealth. For divorce, there are not many solutions, except for not getting divorced :-)

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

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