Life's Tragedies Take Toll on Finances

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BOSTON (TheStreet) -- Death. Divorce. Disability.

No one wants to think about life's more tragic twists. But these transitions can be devastating to your finances if you are not prepared.

Carole Peck, president of Carole Peck Financial Center, with offices in the Chicago area and Florida, is a certified financial planner and certified divorce financial analyst. She specializes in those crossroads and milestones that can alter one's life, and balance sheet, forever.

DIVORCE

Even in an amicable separation, divorces can be highly emotional and surprisingly complex, she says.

Couples often overlook the financial ramifications of their split, or assume lawyers will hammer things out to everyone's satisfaction. Even a mutually agreed upon, 50-50 split of assets may not be as straightforward as intended, however.

"Very often the woman with the children will say, 'I want the house -- I will take that side of the assets and you can have the IRAs and all those other long-term assets,'" Peck says. "When we do financial modeling, we find that, in most cases, the one who takes the house generally does not have a very good long-term outlook."

A spouse without a comparable work history to his or her ex, lacking their earnings and benefits, may soon discover they are ill-prepared to handle the expensive prospect of homeownership once repairs, maintenance and property taxes start to add up. Over time this "asset," especially in the current market, may prove to be more burden than benefit.

Meanwhile, the other half of the marriage will keep benefiting from the returns on their portfolio, IRAs or 401(k) assets.

"There is a big disparity in 10 or 15 years when you look at the charts," Peck says.

Even alimony and child support agreements may prove inadequate. The spouse, for instance, could pass away or become disabled, leaving those dependents cash-strapped.

Preventing this requires some upfront planning.

At the time of a divorce, the more financially secure spouse can take out a life insurance policy that includes children as beneficiaries until they are of a certain age.

"If they are not insurable, then that's where you have to get a little creative," Peck says, suggesting an approach where children, or the ex-spouse, are named beneficiaries of retirement plan assets.

"That's not a great way to go about it because, as we know, beneficiaries can be changed at any time. So you'd really have to stay on top of it," she says. "In a friendly situation, that is probably fine. In an unfriendly divorce, however, somebody might say they will do that, then decide to just not do it anymore and change it."

WIDOWS AND WIDOWERS

One challenge when a spouse dies is determining where all the assets are invested and finding the needed paperwork to transfer them.

"I recently had a new client come in who was recently widowed," Peck says. "She had savings bonds that needed to be re-issued and retitled, but they happened to be not only in the name of her deceased husband, but also of one of his deceased parents. We had to go back a couple of generations and pool death certificates to prove who was deceased and when. It can be difficult when somebody doesn't have those records."

Stock holdings, to a once financially inattentive spouse, can also pose a problem.

"Years ago, you used to actually get physical stock certificates and you could keep track of them," Peck says. "They did away with that, and all of the shares are held by transfer agents. A lot of people just don't understand where that $56-a-year check they get is coming from. What we have to do is backtrack through tax returns, find the 1099, find the transfer agent and try to find where it is coming from."

A greater challenge comes when a mystery security in question doesn't pay dividends.

"A client will come to us and say, 'I thought this was all over and I just got this notice from the IRS saying I owe taxes ... how could I possibly owe taxes on something I don't know anything about?" she says.

DISABILITY AND LONG-TERM CARE

Peck points out that many people over the years, of all ages, have had to declare bankruptcy because of a disability. Many are young and ill-prepared. "It can't happen to me," they think.

Especially given the bureaucracy, delays and rejections common with Social Security claims, disability and long-term care insurance is important to consider, Peck says.

"I know nobody wants to pay for insurance, but when you look at the 'what if' scenarios, especially if you are single or you are widowed, there are a lot of reasons where you can't expect another income source to help cover your expenses," Peck says.

Long-term care insurance tends to be pricey because people are living longer, and insurance companies are increasing their premiums in response.

It was recently announced that MetLife (Stock Quote: MET) would no longer issue long-term care policies. The risk of backing these policies amid an aging marketplace of baby boomers makes rate increases likely for companies in the space, such as Prudential (Stock Quote: PRU), Genworth (Stock Quote: GNW), Unum (Stock Quote: UNM), Manulife (Stock Quote: MFC), State Farm and New York Life.

A policy with a higher deductible can bring down upfront costs. The duration of benefits is also worth evaluating to make a policy more affordable.

Peck also suggests making sure beneficiary information is kept up to date, as are power of attorney documents.

"When most people think of estate planning, if they are going to do anything at all, they have a will," she says. "But the power of attorney gives the privilege of managing accounts or making withdrawals to another person if you become disabled."

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