Market graphs

Some telling graphs accompany the story.

Wicked plunge in Americans' net worths

(Welcome to those visiting from the Carnival of Personal Finance #195. Read more about the Carnival of Personal Finance. Subscribe to this site.)

Recently released Fed data on consumer finances paints a picture of how bad things are. In the Fed's report, their assumption of the average drop in net worth from beginning of 2008 to October 2008 is 22.7% (see them on page 12 of the PDF), and their assumption of the median drop in net worth is 17.8%. Since the median is less than the average, it is the wealthier families that saw greater drops in net worth. (The BusinessWeek slide show that I linked to seems to be using the adjusted net worth on page 12, since it quotes about a 13% drop in median net worth.)

If you look at the BW slide show, you can see that only the top decile of households had less than 40% of their entire net worths tied to their primary homes. Housing price declines would tend to disproportionately affect the less well off.

Some other nuggets I've pulled out (keep in mind these, unlike the net worth numbers above, only cover up to the end of 2007, before the financial crisis really hit):

• Capital gains went from 3.2% of income (across all families) in 2004 to 6.7% in 2007. Wages decreased from 69.7% of income in 2004 to 64.5% in 2007.
• 'Education' given as an answer to the 'reason for saving' question decreased from 11.6% in 2004 to 8.4% in 2007. 'Purchases' increased as an answer from 7.7% in 2004 to 10.0% in 2007.
• 59.7% of families use the Internet for financial information or financial services
• Vehicles are the most commonly held nonfinancial asset. From 2004 to 2007, the share of families that owned some type of vehicle rose 0.7 percentage point, to 87.0 percent.

One thing that our government does well is provide economic data after the fact. Economics isn't everyone's cup of tea, but if you're an arm chair economist, read this one.

Protecting life insurance

The last issue of Fortune ran a blurb on what happens to your life insurance policy if your insurer goes bankrupt. (Unfortunately, the story is not available online.) In the event of an insurer's bankruptcy, the guaranty association for the state in which the insurer is located takes over the failed insurer and either pays the claims or transfers policies to a solvent insurer.

Since insurance is regulated by the states, the amount insured varies, but the story states most benefits are capped at $300,000. The National Organization of Life and Health Insurance Guaranty Associations has more information. As an example, in 2004, when a Pennsylvania insurer went bankrupt, the state guaranty association transferred most policies to stable Pennsylvania insurers.

The story also notes that in the case of AIG, it's the parent company and not the life insurance subsidiary that is experiencing problems. It might be a good idea to check on your insurers corporate structure to know what your insolvency risk could be.