Financial Storm Shelter

Someone recently suggested that we purchase a personal-liability umbrella policy to supplement our homeowners and auto insurance. How does an umbrella policy work, and do we really need it? -- Kim Beitel, Hinckley, Ill.

An umbrella policy is a cheap way to protect your assets from potentially devastating lawsuits. Mitch Freedman, a CPA and personal financial specialist in Westlake Village, Cal., recommends that almost everyone purchase an umbrella policy worth at least $1 million to supplement their auto and homeowners liability coverage -- even if they have less than $1 million in assets. That's because in the rare event you are sued, you could be forced to pay a legal judgment from your current assets and future earnings. "As long as you earn a livelihood, you should have an umbrella liability policy," says Freedman.

Although premiums vary, someone with one house and two cars would generally pay about $200 per year for the first million in coverage, and another $100 for the next million, says Bill Howard, an independent insurance agent in Alexandria, Va. Umbrella policies are inexpensive because they have high deductibles -- usually $300,000 or more -- and they kick in only after you've exhausted your other liability coverage on your car and on your home.

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Dump Fannie Mae?

I own shares of Fannie Mae, which was just delisted from the New York Stock Exchange. What should I do? -- J.D., via e-mail

A delisting in itself isn't necessarily reason to dump a stock, but it's usually not a good sign. Shares of Fannie and its cousin, Freddie Mac, were removed from the New York Stock Exchange on July 8 because their prices had languished at less than $1 for several months (the exchange requires listing companies to maintain share prices of at least $1). The mortgage companies now trade over the counter under new symbols (FNMA and FMCC, respectively). The delisting doesn't affect the value of the companies or of the shares you hold. You should still be able to buy and sell shares.

But holding on to your Fannie Mae shares, which traded at 27 cents in mid July, is probably only delaying the final dagger. Fannie has lost unfathomable sums over the past three years because of the collapse of the housing market. And even though the U.S. Treasury has pumped massive amounts of money into the firm, its liabilities exceed its assets. Plus, Fannie -- and Freddie -- will probably need ongoing cash infusions, which will further dilute your claim on the company.

Dorm-room insurance

My son will be starting college this fall. Does my homeowners insurance cover his belongings while he's living at school? -- C.P., Detroit

If your son lives in a dorm, then your homeowners insurance should cover his personal property, up to a certain limit. Allstate, for example, will extend 10% of your home's total contents coverage to dorm-room possessions. (Rules vary, so check with your insurer.) If you have a $100,000 homeowners policy with Allstate, for example, it would cover your house up to that amount, plus an additional $70,000 for its contents. So your son's possessions in his dorm room would be insured for up to $7,000.

But your homeowners-insurance policy will probably not cover your son's possessions if he lives off campus. In that case, you may want to buy a separate renters policy, which typically costs about $16 per month.

Don't overlook a big potential saving: If your son leaves his car at home and his college is at least 100 miles away, you may be able to save some money on auto-insurance premiums. The insurer could rate him "restricted," which reduces your rates but still provides coverage when he comes home to visit. And he may qualify for a good-student discount if he maintains at least a B average.

Splitting a Roth tax bill

My wife and I plan to convert our traditional IRAs to Roths this year. Can one of us opt to pay the tax when we file our 2010 return and the other spread the tax bill over 2011 and 2012? -- Russ Myers, Bloomington, Ill.

Yes. One special benefit of converting a traditional IRA to a Roth in 2010 is that this is the only year you have a choice: You can spread the tax bill over your 2011 and 2012 returns, or you can elect to pay the taxes all at once when you file your 2010 return. Because each spouse owns his or her IRA separately, one can pay the taxes on a conversion for 2010, and the other can delay paying taxes, says Mark Luscombe, principal tax analyst with CCH, a tax-publishing company.

Splitting your tax bill and spreading it over three years can minimize the increase to your income in a single year and possibly avoid moving you into a higher tax bracket -- which could affect your eligibility for certain tax credits and deductions. The downside to spreading out the tax bill is that you must pay the tax rate in effect at the time, and you could end up paying a bigger tax bill if rates rise after 2010.

Elder financial abuse

My mom went to a free-lunch seminar about retirement income a few weeks ago, and now a salesman is making persistent phone calls asking her to invest with him. What can we do? -- Name Withheld

Tell him to stop calling and report him to your state securities regulator (you can find links to state regulators and other helpful information at www.nasaa.org under "Senior Investor Protection").

Unfortunately, your mom is not alone. Scam artists and high-pressure salespeople often target vulnerable seniors who are likely to have large balances in their retirement accounts and are looking for ways to stretch their savings.

You can learn how to identify the common tactics of scam artists, where to check out an adviser's record, and how to avoid investment fraud at the Financial Industry Regulatory Authority's site for senior investors.

Property-tax deduction

Can I deduct my property taxes if I don't itemize my deductions? --D.K., via e-mail

At the moment, no, but don't give up hope. Non-itemizers were able to add up to $500 ($1,000 for married couples filing jointly) to their standard deduction for real estate taxes they paid in 2008 and 2009. Legislators' attempt to extend that deduction and several other expired tax breaks for 2010 failed in June. But there are several tax issues Congress must still take up before the end of the year, including extending income-tax rates that expire this year and reviving the estate tax that expired last year. So lawmakers will have another opportunity to reinstate the property-tax deduction for 2010.

My thanks to Mary Beth Franklin and Elizabeth Ody for their help this month.