Alice and Robert Smith have just won the lottery. The Smiths are in their late 50s and hope to retire as a result of this unprecedented good fortune. Unfortunately, they have always lived beyond their means and have some debts to pay off. Their plan is to pay off their debts immediately, but they will still have $1.5 million of after-tax lottery winnings to invest. They promise you, their personal financial planner, that they will be extremely responsible from now on and live strictly within their means.

The Smiths do seem dedicated to living within their means because they have decided that, rather than making any large purchases with their winnings, they will keep the main assets they already have. Those assets are just their modest home (worth $250,000) and two automobiles they purchased a couple of years ago.

Now that they have “real” money, though, they are concerned about losing it. Robert’s cousin David recently lost most of his savings after being sued, as the result of some reckless (although not wreckless) driving. The Smiths worry about being sued themselves, whether it is for an automobile accident or a slip and fall event at their home. Their automobile insurance provides for the lowest mandated limits in their state, and their homeowners insurance has only $50,000 of liability coverage—the lowest their insurance ...

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