Like shrapnel from an explosion, the housing-market bust has destroyed many people's lives and finances. Many will find it difficult to rebuild their lost fortunes. Sadly, many could have protected themselves by following a few basic rules.
The once white-hot Florida real estate market was featured in a recent New York Times column. One woman, whose husband had died unexpectedly, forlornly noted, "We're probably going to lose the house." Like many people, she and her late husband had used the equity in their home for other purposes -- in this case, to finance some business ventures. Now, disabled and without any prospects, she's expecting foreclosure in the near future.
As you can imagine, this story raised red flags in my mind:
Red Flag No. 1: Using home equity to finance a risky venture isn't much different from taking the mortgage payment to Atlantic City. If equity appears magically, it can vanish just as easily.
Red Flag No. 2: Why didn't this family have life insurance? Insurance is essential when large debts could destroy a survivor's finances. This couple overlooked a basic tool of financial planning, and tragedy resulted.
Red Flag No. 3: The woman will get Social Security disability but apparently didn't have any other disability insurance. Relying solely on Social Security benefits limits your ability to make mortgage payments. Many of us forgo adequate and appropriate disability insurance. Premiums can be expensive, but according to some sources, almost half of all foreclosures occur because of a mortgage holder's disability.
No one can predict the future. But proper insurance and planning can enable you to overcome or avoid unforeseen obstacles.
Fool contributor Buz Livingston, CFP, appreciates your feedback. As a fee-only financial planner, he sees too many instances of inappropriate or incomplete insurance coverage. The Fool's disclosure policy has a smoke alarm with fresh batteries.