Whether one is rich or poor, everyone needs an estate plan. If you have older friends or relatives, it’s time to speak to them about making an estate plan. How can you have a successful conversation with your older parents, without making your family members feel uncomfortable? The key to a successful discussion depends upon the right approach.
Try making suggestions, rather than demands. One great way to start the conversation with family members is to mention that you are already doing your own estate planning. You might say something like, “Have you done anything? I just did my own estate planning. Maybe we should talk about it.” That might get the conversation rolling.
Many people believe that, as they get older, they need a will. However, that’s just one piece of the puzzle: core estate planning documents include a will, power of attorney, health care proxy, and asset protection.
For most of us, the asset we most want to protect is our home. One of the best ways to do that is through an irrevocable trust. This trust may have tax advantages, could protect your home during a healthcare crisis, and protect your home from your children’s creditors.
You also need to find people you trust to help with finances and health care. A power of attorney is a legal document in which you grant a person the authority to handle finances on your behalf.
Similarly, a healthcare proxy is an individual who makes healthcare decisions, if you get sick or are in an accident and can’t make decisions for yourself.
You can use one person to do both or separate individuals for each role. You can opt for a family member or a trusted friend. However, either way, it should probably be a younger person, who won’t be dealing with the same aging issues as you. You should also note that your will doesn’t cover everything. Make certain that any beneficiaries designated in your retirement plans or life insurance and any additional names on joint bank accounts are current. The beneficiaries you appointed by a designation form will get the money in those accounts, no matter what it says in your will.
An estate planning attorney will be able to sort through all of your questions and concerns. Your best choice is one in your area, as estate and trust laws are governed by your state’s laws. The attorney’s office will offer guidance as to what you need to bring with you to the first meeting, and may even have a checklist for your convenience.
Term policies are cost-effective and can be specifically designed to be in place when you need the coverage, like paying your mortgage or college tuition for children: Of course, the downside with term policies is that they’re only for a set duration. They’re not forever. People wait until the end of their term policy to get another one. Instead, they should buy a new policy as early as possible. Otherwise, you wind up paying more for the same amount of coverage later. Another negative about term policies is that if you go to renew after the term, the premium will increase.
Permanent policies span your whole life and have cash value. They also grow tax-free, and the savings can be borrowed from the policy tax-free after a certain number of years. For higher-income earners, this can be a good way to have tax-free income in retirement and have greater tax diversification.
Another benefit of permanent policies is that they can be used to pass down an inheritance tax-free. When someone dies, there may be an estate tax on their assets. Purchasing a permanent policy to alleviate this cost is an effective way to pass down your wealth.
However, permanent life insurance policies are expensive. Returns in a life insurance policy are highly debated, with some believing in the tax advantages, and others counseling to “buy term and invest the rest.” Everyone’s situation is different. You can assess your needs by taking the “DIMEF” test:
- Debts: Look at all of your debts, except your mortgage
- Income: Lost income from a spouse or a partner is the primary reason to buy life insurance and maintain the current lifestyle
- Mortgage: Life insurance can pay off a mortgage, so your family can remain in the same home
- Education: College costs for children or a spouse
- Funeral expenses: These expenses add up quickly and your life insurance proceeds can pay for them.
Experts say you should have at least five times your annual income and enough to pay for 100% of your debts. You can calculate it with the following approach:
- Take the total of your liabilities and debts, income to be replaced, final expenses, and education or extra goals
- Subtract the savings or assets your family would use immediately if you passed away, and
- Subtract any current life insurance you own, excluding coverage offered through your work.
The cost will differ, based on factors such as age, health, lifestyle, gender, type of insurance, and amount of coverage. You may also need to take a physical exam. If you’re ill, the cost will be more, or you may not be eligible for life insurance. The older and less healthy you are, the shorter your life expectancy is and the more expensive the policy. To get a solid quote, you’ll need to undergo underwriting. The insurance companies can pull medical records or order a full physical. If you take prescription medications, the likelihood of paying a higher premium also increases.
Life insurance is something that people tend not to think about until they have children or purchase a home. The younger you are when you purchase a policy, the less expensive it will be. That’s something today’s millennials need to start thinking about. More than half of all millennials don’t own a life insurance policy. That may catch up with them in the future.