Today, most states require car owners to purchase auto insurance coverage. Whether you already have auto insurance or are considering buying some, you may be wondering how much is enough and which types of coverage you need. Here are a few tips to get you started.

A is for Auto Policy
When you purchase auto insurance, you enter into a written contract with your insurance company. The contract states that you agree to pay a certain amount of money (the premium) and that the insurer agrees to provide a certain dollar amount of protection (coverage limits) for a specified amount of time. Read this policy carefully when you get it, and ask your insurance agent to clarify any terms and conditions that you don't understand. And remember to review your policy periodically. Your life will change, and so will your coverage needs.

B is for Bodily Injury Coverage
Bodily injury and property damage make up the portion of your policy known as liability coverage. This is mandatory in most states. If you cause an accident, you may be liable for some or all of the damages. Liability coverage protects you from potential lawsuits by providing coverage to individual(s) injured as a result of your negligence. The amount of protection (coverage) that you choose, beyond state requirements, is up to you. In many states, you can purchase as little as $20,000 per injured person and $40,000 per accident. However, this may not be enough to adequately protect you. For instance, if you own a home or have any other valuable assets, you'll want to protect those assets by choosing higher limits. We typically recommend limits of at least $100,000 per injured person and $300,000 per accident.

C is for Collision and Comprehensive
Collision, as the name implies, covers your auto when it strikes an object (e.g., a tree or a telephone pole). Comprehensive covers your auto against other physical damage that is not covered by collision (e.g., fire and theft). Although these coverages are optional under state insurance laws, that doesn't mean you should forgo them. Collision and comprehensive can be valuable because they can limit your out-of-pocket expenses.

But if your car has a low resale value (e.g., under $1,000), collision and comprehensive coverage makes little sense--the premium cost may be more than the cost of repairing/replacing the car yourself. However, keep in mind that dropping these coverages is not always up to you. If you finance your car, your lender may require you to carry collision and comprehensive coverage.

D is for Deductible
Think of your deductible as self-insurance. It's the amount of money that you're willing to pay out of your own pocket if there's an accident. You can save money on your premiums by choosing a higher deductible, but watch out--if you get into an accident, you'll need to come up with that amount up front before your insurance pays a dime.

For example, say you choose a $1,000 deductible. You get into a minor accident, and the damages total $950. You'll end up footing the entire repair bill, because your insurer pays for damage only above and beyond your deductible amount. But if your deductible was lower, say $500, you would have to come up with only that amount--your insurer would pay the remaining part of the bill, in this case $450.

E is for Exclusions
Exclusions are why it's so important for you to read your auto policy. Most people purchase "open peril" (also called "unnamed peril") policies. These policies cover all risks...except for those specifically listed in the exclusions section of your policy. For example, insurers do not cover "willful and wanton misconduct". This is conduct that is intentional and reckless or in disregard of the law. You never want to end up in an exclusionary situation, because it will then be up to you to pay the bills--both yours and those of anyone you injure.

F is for Filing a Claim
You've been in an accident--now what? You need to notify your insurer. Your insurer will have you fill out an incident report in which you state what happened in the accident. You may also need to give a recorded statement to the adjuster. If you file a claim for property damage, you'll need to get an appraisal. Some insurers will send an appraiser to you, while others require you to come to them. If you are injured, your insurer will require you to have a physical exam. In general, you can see your own doctor, but the insurer may also ask that you see a doctor of its choosing.

G is For Getting it Done
Most insurance policies contain a clause regarding late notice. If you fail to notify your insurer of the accident in a timely manner, the company can disclaim coverage. This means that the insurer will not pay. What is considered late notice? This question continues to be battled out in courtrooms across the United States, so if you are planning to file a claim, the best advice is to notify your insurer as soon as possible.

As financial advisors, we are privy to a great deal of inside information, industry secrets, and promotional gimmicks within the world of financial planning. Our regular attendance at various marketing workshops, association conferences, and other soirées gives us special insight into the sacred myths and half-truths that many financial advisors continue to peddle to their less-informed clients.

As twenty-somethings ourselves, we get a special kick out of revealing the dirty tricks and tactics of the old financial establishment. It's a new day, and the time has come to revive the honesty and integrity that this profession deserves and demands.

We hope you enjoy our observations and opinions as they relate to the darker side of the financial planning industry. Our intent is to educate and to assist you in making informed decisions concerning the fulfillment of your financial future.

Without further ado, here are Five Things Your Financial Advisor Knows (...But Will Never Tell You):



1. "You can repair your own credit history for $50 - and most of that is postage."

Young people generally prefer the quick & easy solution. Whether it’s weight loss, dating, or credit repair, there's always a segment of the market that will pay for instant gratification. Many so-called “credit repair specialists” know this, and they have no problem lifting the heavy load of bad credit (along with several c-notes from your wallet) in order to correct erroneous information asap. The problem with this solution, aside from its tremendous price tag, is that it often results in the credit specialist advising you to halt all payments your creditors--and in some cases, threaten them with your imminent bankruptcy. With creditors desperate to salvage some form of repayment, your “credit specialist” then instructs you to negotiate settlements with each creditor in order to repay debts on your terms (i.e. for pennies on the dollar.) The problem with this “solution” is that, even though you may no longer owe any creditors, your credit file will be destroyed from all of the delinquencies and non-payments. Sure, you won the battle but you’ve lost the credit-repair war.

A much better solution is for you to first understand your rights as a borrower. You should know that creditors have no right to hassle, threaten, or intimidate you in any way. Also understand that it is the creditor's burden to prove that you legally owe them. And this burden is more than a verbal “You owe us money” over the phone. The creditor must produce for you the original credit agreement containing the terms as well as your handwritten signature on it. Additionally, they must provide a record of the charges for which they are trying to collect. Again, all of this information should be in writing, and if a creditor is unable to produce these documents, then by law they must remove the information from your credit report. If they give you any flak, then you have Uncle Sam’s Federal Trade Commission on your side. Creditors are weary of the Feds (and their stiff penalties), so your complaints to the FTC tend to miraculously find resolutions.

Our ongoing experience with clients and credit repair has shown that most clients really only need a post office (to mail certified letters to creditors, collectors, and credit bureaus), time, and patience. Because the truth is, credit repair is a slow, gradual process which can take anywhere from 2 to 6 months, and the prudent consumer shouldn't even attempt to make repairing a damaged credit history “quick & easy”.

2. "The title 'Financial Advisor' doesn't necessarily mean that I have any formal education, licenses, certification, ethical code, or domain knowledge. In fact, I could be anybody from off the street."

The government has not yet established any legal requirements which must be met in order to use the title of Financial Advisor or Financial Planner. In fact, it is estimated that there are more than 200,000 personal financial advisors working in the United States today.

It is vital, as a client, to thoroughly research the credentials and background of your potential advisor. Ask questions about his/her educational background, work experience, special coursework, etc. Look for specific designations such as CERTIFIED FINANCIAL PLANNER™, Chartered Financial Analyst®, and Personal Financial Specialist. These various credentials illustrate a planner’s determination and devotion to the field as he/she has invested the time and energy into rising above the "general planner" fray. Moreover, each of these designations signifies a moral and ethical code of conduct that these practitioners have promised to abide by. Deviating from this code can result in severe professional sanctions and penalties to the advisor.

Also, don't hesitate to ask a potential planner for his/her personal references. A good planner will gladly provide you with the contact information of satisfied clients. After all, building and maintaining positive relationships is what financial planning is truly about.

3. "Investing is not the sole purpose of Financial Planning...in fact, it's not even in the top five."

Many clients confuse the phrase “Financial Planning” with “Investing”, but the two terms are not synonymous. In fact, investing doesn’t really enter the picture until many other milestones have been reached including: understanding cash flow, selecting appropriate checking & savings accounts, eliminating bad debt, establishing an emergency fund, and maintaining proper financial records.

Many clients are taken back to learn that a sound financial plan is holistic, and it encompasses every component of personal financial including: insurance, estate planning, debt management, budgeting, and record keeping.

4. "I am not ethically or legally required to act in YOUR best interest."

Unlike physicians, lawyers, and CPAs, who are bound to act in an ethical manner, financial advisors must not make any such promises to clients. The good news, however, is that many advisors have taken it upon themselves to proactively join organizations which promote the highest standards of professional conduct. Along with those listed above, NAPFA-registered advisors adhere to some of the highest, most consumer-friendly principles of any organization in existence. Their new Focus on Fiduciary campaign is rapidly raising awareness--and raising the bar--on planner/client relationships.

Some of you may be wondering why an advisor would not expressly act in your best interest at all times? The answer, of course, is money.

Most financial advisors are not compensated the way many consumers think. In fact, an advisor's personal motives often conflict with what’s best for his/her client. Commission & fee-based planners often earn a significant percentage of their paycheck from selling loaded mutual funds, annuities, and insurance products. These products generate the largest kickback (i.e. commission) for the advisor. But as everyone reading this blog already knows, the average consumer can beat the pants off of 95% of mutual funds by simply constructing a Lazy Portfolio consisting of no-load, low-fee Vanguard index funds.

On the other hand, Fee-Only® advisors do not have this built-in conflict of interest. Similar to your family accountant or lawyer, many Fee-Only® financial advisors now charge by the hour (or by the project) with no special commissions for recommending certain products to the client.

5. "Because you're young and largely uneducated about your finances, I can easily take advantage of you."

It’s no secret that the financial planning industry has some bad apples, who seek nothing more than to defraud and deceive their clients. In oder to counter act this unfortunate truth, we are fierce advocates of consumer education. An informed client will ask informed questions...and these informed questions result in the creation of more meaningful financial goals.

A financial advisor is just that--an advisor, and we can only work with what we’re given. Any successful professional relationship is founded upon honesty, integrity and communication, and with the absence of any one of these key elements, the relationship quickly breaks down.

Potential clients sometimes say to me, “I don’t know anything about money.” My first thought often is to postpone taking that client on, and then simply referring him/her to some of my favorite personal finance books at the local library. In my opinion, this client cannot fully benefit from the advice that I have to give because he/she is not yet able to communicate with me using the basic language of personal finance.

Make no mistake, I don’t expect every client to wax poetic on Warren Buffet’s witticisms or to be able to explain the FOMC policy as it relates to national GDP, but it is necessary to understand the fundamental concepts of money management. Look at it this way...you wouldn’t spend hundreds of dollars on a trip to Costa Rica without first brushing up on a little Español, would you? Por supuesto que no!

The short answer is: It depends. If a scholarship is used to pay for tuition, fees, books, or required equipment, then it's not taxed. But if it's used to cover other expenses like room and board, travel, or optional equipment, or if it's awarded as payment for teaching or research, then it's taxable.

But keep this in mind: Scholarships used to cover tuition, fees, or books (making them nontaxable) may impact your ability to claim the Hope or Lifetime Learning credit. That's because these tax credits are based on the amount of tuition and fees you pay, and any tuition and fees paid with a tax-free scholarship can't be counted when calculating your credit.

This rule has the most impact on your ability to claim the Lifetime Learning credit, worth up to $2,000. Because this credit is calculated as 20% of up to $10,000 in tuition and fees, a hefty scholarship applied to these expenses may leave you with less than $10,000 in eligible tuition and fees to count toward the credit. By contrast, the maximum $1,650 Hope credit is based on up to $2,200 in tuition and fees, so even with a scholarship, you might not use up all your tuition and fee expense eligibility.

However, if the scholarship is taxable (for example, in cases where its terms specify that it can't be applied to tuition and related expenses), then the entire amount of tuition and fees can be counted when calculating the Hope or Lifetime Learning credits.

Which type of life insurance is better--term or cash value? Insurance buyers have been asking this question for generations. When deciding between these two fundamentally-different alternatives, you must think about the coverage you need, the money you have to spend, and the length of time you need the coverage to continue. In some cases, you may not need life insurance coverage at all. But if you decide you do, then here are some general guidelines to follow.Term Insurance
Term policies provide life insurance coverage for a specified period of time. You can typically buy term insurance for periods ranging from 1 to 30 years. If you die during the policy period, your beneficiary receives the policy death benefit. If you don't die during the term, your beneficiary receives nothing. At the end of the specified policy term, your coverage simply ends. You may be able to renew your policy without a physical exam, but (usually) at a higher premium. Once you reach a certain age, typically 70 and older, you may find it difficult to get term insurance coverage--and if you can, the premiums will be very expensive. There are several variations of term life. You can buy a level death benefit or a decreasing death benefit with premiums that increase annually, or that are level for a period of years (5,10,15, 20, 25, or 30).

Cash Value Insurance
Many different types of cash value life insurance are available such as:

• Whole life
• Variable life
• Universal life
• Variable universal life

Cash value insurance, often called "permanent" insurance, is designed to have you pay a "level" premium throughout your life. In some cases, you may fund a cash value policy in a way that the cash values can be used in later years to pay future premiums. As long as you continue paying your premiums by whatever means, cash value life insurance continues throughout your life, regardless of your age or your health. As you pay your premiums, a portion of each payment is placed in the cash value account. The cash value continues to grow--tax deferred--as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges.

Making a Choice Term insurance coverage typically costs less than cash value insurance coverage when you're younger, but because the cost of a term policy is based on your age, the cost may eventually exceed that of cash value if you continue to renew your term policy. In contrast, these factors are taken into consideration when cash value insurance premiums are set. As a result, certain cash value policy premiums typically remain the same throughout the life of the policy.

In some cases, the choice may be clear. For instance, your insurance need may be so large that the only way you can afford to meet it is by purchasing lower-premium term insurance. Or, you may need the coverage only for a few years, again making term insurance the logical choice.

The Lightship Way
We generally steer our clients into term insurance, due to the lower monthly premium payments. If the client has long-term investment goals, we will recommend investing the difference (the extra dollars that would have been spent on a similar cash value policy) into a Roth IRA or other investment account. This solution accomplishes the insurance and investment goals of the client with minimal fees, limitations, and potential penalties down the road.

However, if you don't think you can stick to a term policy/Roth IRA plan, and you would prefer to simply have one large account to accomplish your insurance and investing goals, then a cash value insurance option should be considered.

An Individual Retirement Account (IRA) is a personal savings vehicle that offers specific tax benefits. IRAs are one of the most powerful retirement savings tools available to you. Even if you're contributing to a 401 at work, you should consider opening an IRA and other accounts as well.

It is important to point out that an IRA is an account that holds investments such as mutual funds, stocks, and bonds. An IRA, in itself, is not an investment, so it would be incorrect to say that "I bought $500 worth of IRAs". The correct statement would be "I bought $500 worth of mutual funds within my IRA account."

What Types of IRAs are Available?
The two major types of IRAs:

1. Traditional IRA
2. Roth IRA

Both allow you to contribute as much as $4,000 in 2006 and 2007. You must have at least as much (taxable) earned income as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to make additional "catch-up" contributions. They can contribute up to $5,000 in 2006 and 2007.

Both traditional and Roth IRAs feature tax-sheltered growth of earnings. And both give you a wide range of investment choices. However, there are important differences between the two, and you must understand these differences before you can choose the type that's best for you.

Note: If you were affected by Hurricanes Katrina, Rita, or Wilma, or if you are a reservist called to active duty after September 11, 2001 and before December 21, 2007, special rules may apply to you.

Learn the Rules for Traditional IRAs
Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount that you earned. The tax implications can get tricky, but here is a quick overview of the benefits...

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pretax) contributions lower your taxable income for the year, saving you money in taxes. If neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual contribution. If one of you is covered by such a plan, your ability to deduct your contributions depends on your annual income and your income tax filing status. You may qualify for a full deduction, a partial deduction, or no deduction at all.

Withdrawing Money From a Traditional IRA
Any portion of a distribution that represents deductible contributions is subject to income tax because those contributions were not taxed when you made them. Any portion that represents investment earnings is also subject to income tax because those earnings were not previously taxed either. Only the portion that represents nondeductible, after-tax contributions (if any) is not subject to income tax. In addition to income tax, you may have to pay a 10 percent early withdrawal penalty if you're under age 59½, unless you meet one of the exceptions.

If you wish to defer taxes, you can leave your funds in the traditional IRA, but only until April 1 of the year following the year you reach age 70½. That's when you have to take your first required minimum distribution from the IRA. After that, you must take a distribution by the end of every calendar year until you die or your funds are exhausted. The annual distribution amounts are based on a standard life expectancy table. You can always withdraw more than you're required to in any year. However, if you withdraw less, you'll be hit with a 50 percent penalty on the difference between the required minimum and the amount you actually withdrew.

The Roth IRA
Not everyone can set up a Roth IRA. Even if you can, you may not qualify to take full advantage of it. The first requirement is that you must have taxable compensation. If your taxable compensation for the year is at least $4,000 (for 2006 and 2007), you may be able to contribute the full $4,000. But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your adjusted gross income and your income tax filing status. Your allowable contribution may be less than the maximum possible, or nothing at all.

Your contributions to a Roth IRA are not tax deductible. You can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely income tax free, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply:

• You have reached age 59½ by the time of the withdrawal
• The withdrawal is made because of disability
• The withdrawal (of up to $10,000) is made to pay first-time home-buyer expenses
• The withdrawal is made by your beneficiary or estate after your death

Qualifying distributions will also avoid the 10 percent early withdrawal penalty. This ability to withdraw your funds with no taxes or penalties is a key strength of the Roth IRA. And remember, even non-qualifying distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made.

Another advantage of the Roth IRA is that there are no required distributions after age 70½ or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution. Also, as long as you have taxable compensation and qualify, you can keep contributing to a Roth IRA after age 70½.

Which IRA is Best for You?
Sometimes the choice is easy. The Roth IRA will probably be a more effective tool if you don't qualify for tax-deductible contributions to a traditional IRA. However, if you can deduct your traditional IRA contributions, the choice is more difficult. The Roth IRA may very well make more sense if you want to minimize taxes during retirement and preserve assets for your beneficiaries. But a traditional deductible IRA may be a better tool if you want to lower your yearly tax bill while you're still working (and probably in a higher tax bracket than you'll be in after you retire). A qualified financial planner or tax advisor can help you pick the right type of IRA for you.

Note: You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot be more than $4,000 for 2006 and 2007 ($5,000 in 2006 and 2007, if age 50 or older).

Self-employment. The opportunity to be your own boss. To come and go as you please. Oh and we can't forget...the opportunity to establish a lifelong bond with your accountant. If you're self-employed, you'll need to pay your own FICA taxes and take charge of your own retirement plan, among other things. Here are some planning tips.

Understand Self-Employment Tax and How It's Calculated
As a starting point, make sure that you understand (and comply with) your federal tax responsibilities. The federal government uses self-employment tax to fund Social Security and Medicare benefits. You must pay this tax if you have more than a minimal amount of self-employment income. If you file a Schedule C as a sole proprietor, independent contractor, or statutory nonemployee, the net profit listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your federal Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.

Make Your Estimated Tax Payments on Time to Avoid Penalties
Employees generally have income tax, Social Security tax, and Medicare tax withheld from their paychecks. But if you're self-employed, it's likely that no one is withholding federal and state taxes from your income. As a result, you'll need to make quarterly estimated tax payments on your own to cover your federal income tax and self-employment tax liability. You'll probably have to make state estimated tax payments, as well. If you don't make estimated tax payments, you may be subject to penalties, interest, and a big tax bill at the end of the year. Oh, and if you do have employees, you'll have additional periodic tax responsibilities. You'll have to pay federal employment taxes and report certain information.

Employ Family Members to Save Taxes
Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn't seem reasonable, considering the services actually performed. Also, when hiring a family member who's a minor, be sure that your business complies with child labor laws.

As a business owner, you're responsible for paying FICA (Social Security and Medicare) taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won't be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as certain taxes in some states.

Establish an Employer-Sponsored Retirement Plan for Tax (and Non-Tax) Reasons
Because you're self-employed, you'll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan, which can provide you with a number of tax and nontax benefits. With such a plan, your business may be allowed an immediate federal income tax deduction for funding the plan. You can also generally place pretax dollars into a retirement account to grow tax deferred until withdrawal. You may want to use one of the following types of retirement plans:

• Keogh plan
• Simplified employee pension (SEP)
• SIMPLE IRA
• SIMPLE 401(k)
• Individual (or "solo") 401(k)

The type of retirement plan that your business should establish depends on your specific circumstances. Explore all of your options and consider the complexity of each plan. And bear in mind that if your business has employees, you may have to provide coverage for them as well. For more information about your retirement plan options, consult a qualified tax professional.

Take Advantage of Business Deductions to Lower Taxable Income
Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled. You may be able to deduct a variety of business expenses, including rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. To be deductible, business expenses must be both ordinary (common and accepted in your trade or business) and necessary (appropriate and helpful for your trade or business). If your expenses are incurred partly for business purposes and partly for personal purposes, you can deduct only the business-related portion.

If you're concerned about lowering your taxable income this year, consider the following possibilities:

• Deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction
• Buy supplies for your business late this year that you would normally order early next year
• Purchase depreciable business equipment, furnishings, and vehicles this year
• Deduct the appropriate portion of business meals, travel, and entertainment expenses
• Write off any bad business debts

Self-employed taxpayers who use the cash method of accounting have the most flexibility to maneuver at year-end. See a tax specialist for more information.

Deduct Health-Care Related Expenses
If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040 (i.e., "above-the-line") when computing your adjusted gross income, so it's available whether you itemize or not. The portion of your health insurance premiums that is not deductible there can be added to your total medical expenses itemized in Schedule A.

Contributions you make to a health savings account (HSA) are also deductible "above-the-line." An HSA is a tax-exempt trust or custodial account you can establish in conjunction with a high-deductible health plan to set aside tax-free funds for health-care expenses.

Nearly 45 million people today receive some form of Social Security benefits, including 90 percent of retired workers over age 65. But Social Security is more than just a retirement program. Its scope has expanded to include other benefits as well, such as disability, family, and survivor's benefits.

How Does Social Security Work?
The Social Security system is based on a simple premise: Throughout your career, you pay a portion of your earnings into a trust fund by paying Social Security or self-employment taxes. Your employer, if any, contributes an equal amount. In return, you receive certain benefits that can provide income to you when you need it most--at retirement or when you become disabled, for instance. Your family members can receive benefits based on your earnings record, too. The amount of benefits that you and your family members receive depends on several factors, including your average lifetime earnings, your date of birth, and the type of benefit that you're applying for.

Your earnings and the taxes you pay are reported to the Social Security Administration (SSA) by your employer, or if you are self-employed, by the Internal Revenue Service. The SSA uses your Social Security number to track your earnings and your benefits.

Finding out what earnings have been reported to the SSA and what benefits you can expect to receive is easy. Just check out your Social Security Statement, mailed by the SSA annually to anyone age 25 or older who is not already receiving Social Security benefits. You'll receive this statement each year about three months before your birthday. It summarizes your earnings record and estimates the retirement, disability, and survivor's benefits that you and your family members may be eligible to receive. You can also order a statement at the SSA website, at your local SSA office, or by calling (800) 772-1213.

Social Security Eligibility
When you work and pay Social Security taxes, you earn credits that enable you to qualify for Social Security benefits. You can earn up to 4 credits per year, depending on the amount of income that you have. Most people must build up 40 credits (10 years of work) to be eligible for Social Security retirement benefits, but need fewer credits to be eligible for disability benefits or for their family members to be eligible for survivor's benefits.

Your Retirement Benefits
If you were born before 1938, you will be eligible for full retirement benefits at age 65. If you were born in 1938 or later, the age at which you are eligible for full retirement benefits will be different. That's because full retirement age is gradually increasing to age 67.

But you don't have to wait until full retirement age to begin receiving benefits. No matter what your full retirement age, you can begin receiving early retirement benefits at age 62. Doing so is often advantageous: Although you'll receive a reduced benefit if you retire early, you'll receive benefits for a longer period than someone who retires at full retirement age.

You can also choose to delay receiving retirement benefits past full retirement age. If you delay retirement, the Social Security benefit that you eventually receive will be as much as 6 to 8 percent higher. That's because you'll receive a delayed retirement credit for each month that you delay receiving retirement benefits, up to age 70. The amount of this credit varies, depending on your year of birth.

Disability Benefits
If you become disabled, you may be eligible for Social Security disability benefits. The SSA defines disability as a physical or mental condition severe enough to prevent a person from performing substantial work of any kind for at least a year. This is a strict definition of disability, so if you're only temporarily disabled, don't expect to receive Social Security disability benefits--benefits won't begin until the sixth full month after the onset of your disability. And because processing your claim may take some time, apply for disability benefits as soon as you realize that your disability will be long term.

Family Benefits
If you begin receiving retirement or disability benefits, your family members might also be eligible to receive benefits based on your earnings record. Eligible family members may include:

• Your spouse age 62 or older, if married at least 1 year
• Your former spouse age 62 or older, if you were married at least 10 years
• Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled
• Your children under age 18, if unmarried
• Your children under age 19, if full-time students (through grade 12) or disabled
• Your children older than 18, if severely disabled

Each family member may receive a benefit that is as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member's benefit will be reduced proportionately. Your benefit won't be affected.

Survivor's Benefits
When you die, your family members may qualify for survivor's benefits based on your earnings record. These family members include:

• Your widow(er) or ex-spouse age 60 or older (or age 50 or older if disabled)
• Your widow(er) or ex-spouse at any age, if caring for your child who is under under 16 or disabled
• Your children under 18, if unmarried
• Your children under age 19, if full-time students (through grade 12) or disabled
• Your children older than 18, if severely disabled
• Your parents, if they depended on you for at least half of their support

Your widow(er) or children may also receive a one-time $255 death benefit immediately after you die.

Applying for Social Security Benefits
You can apply for Social Security benefits in person at your local Social Security office. You can also begin the process by calling (800) 772-1213 or by filling out an on-line application on the Social Security website. The SSA suggests that you contact its representative the year before the year you plan to retire, to determine when you should apply and begin receiving benefits. If you're applying for disability or survivor's benefits, apply as soon as you are eligible.

Depending on the type of Social Security benefits that you are applying for, you will be asked to furnish certain records, such as a birth certificate, W-2 forms, and verification of your Social Security number and citizenship. The documents must be original or certified copies. If any of your family members are applying for benefits, they will be expected to submit similar documentation. The SSA representative will let you know which documents you need and help you get any documents you don't already have.

Liability insurance protects individuals and businesses in the event they're held financially responsible for injuring someone or causing property damage. You probably already have this important protection, but do you have enough?

Personal Liability Insurance
Despite the common belief that only people with substantial wealth or assets are the targets of lawsuits, that's not necessarily the case. Accidents can happen anywhere, to anyone, and even people of modest means may be at risk. For example, here are some common situations that might result in a liability claim:

• Your dog escapes from the house and bites a delivery person
• A neighbor's child is hurt while jumping on your backyard trampoline
• Your vehicle broadsides another, injuring the driver

Unfortunately, if you're sued, your assets are potentially at stake--your savings, your investments, and in most states, even your home. Even if the claim is eventually proved groundless and you're not held liable for damages, the cost of mounting a defense can be high.

That's why personal liability insurance is so important. Not only does it cover any court awards you're required to pay as a result of damage or injury caused by you, your family members, or your pets, but it also covers your legal bills, up to policy limits.

You Probably Already Have Some Coverage
Homeowners, renters, and auto policies all contain liability coverage, so you may already have a basic layer of protection. However, you may not have enough, especially if you have only the minimum required. For example, liability limits for homeowners insurance generally start at $100,000, while required minimum limits for auto insurance in most states range from $30,000 to $60,000. Often, you'll need far more liability coverage than this to adequately protect your assets.

Ask an insurance professional to review your liability limits and help you decide how much you need, based on factors such as your age, assets, income, and lifestyle.

If You Need More Coverage
What if you have the highest available coverage limits but you still need an additional layer of protection? Consider purchasing an excess liability policy, also called an umbrella liability policy. Because it offers higher coverage limits (often starting at $1 million) than basic personal liability insurance, an umbrella policy will cover you for larger losses.

You'll need to have a certain level of underlying liability coverage (generally between $100,000 and $500,000) in order to purchase an umbrella liability policy, because the umbrella coverage kicks in only after you've reached the limits of your underlying policy. For example, if you have an auto policy with a liability limit of $300,000 per accident and a $1 million umbrella policy, your auto policy would cover the first $300,000 of a $700,000 claim and your umbrella policy would cover the remaining $400,000.

Business and Professional Liability Insurance
The widely publicized case of a dry-cleaning business that was sued for $54 million over a lost pair of pants illustrates the importance of business liability protection. Although the owners of the business prevailed in the lawsuit and were awarded court costs (not including attorney's fees), they did not have liability coverage, and they may never recover the tens of thousands of dollars they spent mounting a two-year defense against this lawsuit.

While businesses can't always prevent such liability claims, they can purchase coverage for the special risks they face. One option is commercial general liability insurance, which is often part of a business owners policy. Business umbrella liability policies that offer higher liability limits are also available.

However, some liability risks are unique to certain businesses or professions, so you may also need specialized coverage. For example, if you work in an occupation that is particularly vulnerable to professional liability (e.g., law, medicine, day care), you may also need a separate professional liability policy, usually called malpractice coverage or errors and omissions coverage. Many other types of specialized liability coverage are also available.

Talk to an insurance professional who can help you determine the types and amounts of liability coverage that are appropriate for your business or profession.

Wouldn't it be great if you could reduce your portfolio's risk by some means other than simply reducing or eliminating your investments in highly volatile asset classes? Well, that's the goal of absolute return investing. However, as with all investments, there's a trade off. To try to reduce market risk, you'll probably increase your exposure to other types of risk.

Benchmarks and Absolute Return
An investment typically is measured relative to its benchmark's performance. For example, a negative return might still be considered successful if the loss was less than that of the benchmark to which it is compared. And an investment might have positive returns simply because its asset class is doing well.

By contrast, absolute return, or market-neutral, strategies attempt to make money each year--or at least not lose it--no matter what's happening with the market. An absolute return portfolio's performance benchmark might be the risk-free return on cash. For example, a manager might aim for a return equal to that of a short-term bank deposit plus three or four percentage points. (Of course, as with any investment, there's no guarantee that it will achieve its goal.)

The Long and Short of Investing
Many absolute return investments attempt to eliminate market risk--that is, be market-neutral--by adopting so-called long-short strategies, which rely on the difference between being "long" and selling short. Short selling involves borrowing shares or other securities and selling them, in the belief that the price will drop and you will be able to buy them for less when you must replace them later. The difference between the price you got when you sold the shares and the price you paid to replace them is your profit. However, you also can lose money if the price rises and you must pay more to replace the borrowed shares than you got for them.

A short sale is bearish. By contrast, being long--buying a security outright--is a bullish position; if you think an investment will decrease in value, you probably won't buy it.

Trying to Have it Both Ways
Market-neutral strategies try to have the best of both worlds by investing in both long and short positions, typically in equal proportion. For example, a manager might buy a security he or she considers undervalued, and sell short an equal dollar amount of a similar security that appears overvalued. The opposing long and short positions are designed to neutralize the ups and downs of that particular market--hence the name--and reduce a portfolio's volatility. Because it strives to be independent of market behavior, a market-neutral portfolio's performance is based almost exclusively on its manager's ability to identify and trade under- and overvalued securities.

But wait--isn't that exactly what an actively managed mutual fund does? Yes, but the typical mutual fund manager who's concerned about a particular security or sector either invests less in it or avoids it. A market-neutral manager might actually short that sector or security, actively attempting to take advantage of its problems. In some ways, a market-neutral fund is the mirror image of an index mutual fund. Because an index fund is designed to replicate a particular market, it is 100% exposed to market risk; a market-neutral portfolio takes the opposite approach.

If It's Not One Thing, It's Another
Of course, even if a portfolio manages to be independent of market risk, that doesn't mean it's eliminated other risks. A market-neutral portfolio's manager can misjudge which securities to buy or short, or the timing of those trades; also, there are specific risks associated with each individual security. Any of the above can have as unexpected and dramatic an impact as overall market movements. Though absolute return investing attempts to lower volatility and achieve a positive return, there are no guarantees it will do so, and it may not be appropriate for all investors.

Seeking Absolute Return
Hedge funds and institutional investors often rely on absolute return investing. However, in recent years, mutual funds with similar strategies have expanded the concept to a broader range of investors. A fund may focus on a single asset class, or include multiple asset classes as well as global investments.

If you're considering an absolute return fund, you'll need to pay attention to costs; a greater level of complexity can increase trading expenses. Consider also how a given strategy has fared in both up and down markets. Consult a financial professional to see if absolute return investing makes sense for part of your portfolio.

Special rules can apply when your child has unearned income. These "kiddie tax" rules may tax a portion of your child's unearned income at your (presumably higher) marginal tax rate. Legislation signed into law in May expands the potential reach of the kiddie tax rules to college-aged children, prompting many parents to rethink gifting strategies.

Kiddie Tax Basics
Generally, the kiddie tax rules apply when a child has unearned income exceeding $1,700 (2007 figure). What's unearned income? It's income other than wages, salary, professional fees, or any other compensation for services. Interest and investment earnings are considered unearned income, as is taxable gain that results from the sale of an asset.

Prior to the Small Business and Work Opportunity Tax Act of 2007, the kiddie tax rules applied to children under the age of 18. Beginning in 2008, however, the new legislation expands the kiddie tax rules to apply to children who are under age 19, and to full-time students under age 24. There's an exception carved out for any child who earns more than one-half of his or her own support.

Why the Change?
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the tax rate on long-term capital gains and qualifying dividends. Specifically, the act established a 15% tax rate for individuals in the higher tax brackets and a 5% rate for individuals in the bottom two tax brackets. Even more significant is that, beginning in 2008, the tax rate on long-term capital gains and qualifying dividends drops to zero for individuals in the lowest two tax brackets (this zero tax rate remains effective for tax years through 2010).

The zero tax rate applicable to individuals in the lower tax brackets presented a real planning opportunity: transfer appreciated investment assets to your child attending college. Since your child would likely be in the lower two tax brackets, he or she could then sell the assets in the year he or she turned 18, and use the resulting proceeds--tax free--to pay college expenses.

Impact of the New Legislation
By expanding the kiddie tax rules to include full-time students under age 24, the Small Business and Work Opportunity Tax Act of 2007 eliminates or greatly limits this planning opportunity for most families. Starting next year, if your child is a full-time student (who does not earn more than one-half of his or her own support), the kiddie tax rules will kick in if your child sells an investment asset before the year in which he or she reaches age 24. The resulting income--at least the portion that exceeds $1,700 with an adjustment for inflation--will be taxed at your (presumably higher) tax rate, eliminating most or all of any potential tax savings.

A Final Word
The new rules aren't effective until 2008 for most people. So, if you've already transferred investments to a child, or intend to do so, you have a limited window to operate under the old rules. If you have questions, be sure to discuss your situation with a tax professional before the end of the year.

When investing in a mutual fund, you may have the opportunity to choose among several share classes, most commonly Index, Class A, Class B, and Class C. The differences among these share classes typically revolve around how much you will be charged for buying the fund, when you will pay any sales charges that apply, and the amount you will pay in annual fees and expenses. This multi-class structure offers you the opportunity to select a share class that is best suited to your investment goals.

The Index Way is the Only Way
Let's be very clear up front. Our advisors only recommend no-load index funds to clients. With their minimal annual costs and tax efficient structures, index funds are an easy favorite at Lightship Mutual.

So you ask, if index funds are so great, then why do we need Class A, Class B, and Class C mutual fund shares anyway? Great question! Well, it all has to do with a little something called "commission". In the old days, you had to pay a sharply-dressed stockbroker to purchase your mutual fund shares for you. And in exchange, you paid him/her a commission of 5-10% to do so.

But then then the whole Internet revolution came along, and what do you know...now we can purchase our mutual fund shares directly from the fund companies and cut out the middle man (and his $2000 Italian suit). Ain't life grand? At any rate, it is still important for you to know what the other various classes of funds are, just in case someone ever tries to pitch them to you.

The Costs Associated with Mutual Funds
Typically, mutual fund costs consist of two different fees: the initial sales charges and the annual expense. The sales charge, often called a "load", is the broker's commission, deducted from your investment when you buy the fund, or when you sell it. The annual expenses cover the fund's operating costs, including management fees, distribution and service fees (commonly known as 12b-1 fees), and general administrative expenses. They are generally computed as a percentage of your assets and then deducted from the fund before the fund's returns are calculated. (To better understand what these charges are, you should review the Fees and Expenses section of the fund's prospectus.)

Class A Shares
When you purchase Class A shares, an up front sales charge, called a front-end load, is typically deducted, thus reducing the actual amount of your initial investment. For example, suppose you decide to spend $1,000 on Class A shares with a hypothetical front-end sales load of 5 percent. You will be charged $50 on your purchase, and only $950 will be invested. You lost fifty dollars just like that...Ouch!

Class B Shares
Unlike Class A shares, there is no up-front sales charge, so all of your initial investment is put to work immediately. However, Class B shares do have a back-end load, often called a contingent deferred sales charge (CDSC) that you pay when you sell your shares. The load usually decreases over time (typically 6 to 8 years), although this varies from fund to fund. By the end of the time period no charge applies. At that stage your shares may convert to Class A shares.

For example, suppose you invest $5,000 in Class B shares, with a 5 percent CDSC that decreases by 1 percent every year after the second year. If you sell your shares within the first year, you will pay 5 percent of the value of your assets or the value of the initial investment, whichever is less. If you hold your shares for 6 years, the CDSC will be reduced to zero.

Class C Shares
When you purchase Class C shares, a front-end load is normally not imposed, and the CDSC is generally lower than for Class B shares. This charge is reduced to zero if you hold the shares beyond the CDSC period, which for Class C shares is typically 12 months.

Do Your Homework
Don't just take our word for it. Grab and pencil and paper and check out the National Association of Securities Dealers (NASD) at www.nasd.com. You can also find information on the Securities and Exchange Commission (SEC) website at www.sec.gov.

As you consider how best to invest in mutual funds, remember that there's no guarantee any mutual fund will achieve its investment objective. You should discuss all of your investment goals with a qualified financial professional.