Lessons from London
by Jill Schlesinger
July 11, 2005 - One of the unfortunate lessons we all took from September 11th, the Madrid train bombing and now the London attacks, is that a random event can change lives in a moment. Families are forced to deal with a myriad of financial and estate issues well before they ever thought they would have to do so. There are steps that you can take to protect you and your family from an unforeseen tragedy, which would severely impact your financial lives in the short and long run.
There are two basic issues to consider with regard to protecting you and your family against catastrophic loss: life insurance and estate planning. Both are difficult topics because they force you to contemplate difficult issues. However, without proper insurance or the appropriate estate documents, you may be subjecting your family to increased levels of risk. Doing nothing is not an alternative!
Estate Planning
First things first, you need a will, regardless of the size of your estate. A will is the most common method of transferring your assets to your loved ones. If you do not have a will, your assets will pass to your heirs according to the laws of the state in which you reside (the laws of intestacy). Ask yourself, when was the last time that your state made a decision that was 100% in line with your wishes? Do you really want a relative you don’t even like to potentially receive property intended for a close friend? That’s why you need a will. If you have minor children or adult dependents, it is imperative that you make guardianship decisions.
In addition to a will, most people should create two other documents: a health care proxy and a durable power of attorney. The former assigns someone the power to make a health care decision on your behalf while the later assigns someone the power to make a financial decision on your behalf. All of these documents must be reviewed periodically (usually every 2-3 years).
Many people ask whether they should include a living trust as part of their estate plans. Let’s start with the basics: a Revocable Living Trust is a legal document that looks like a will, in that it includes instructions for who you want to handle your affairs and who you want to receive your assets after you die. But, unlike a will, a living trust avoids probate, and, in some cases, can even save you in estate taxes. For individuals with less that $1 million in their estates, the probate process is the main difference.
Probate is the legal process through which courts make sure that your will is valid, your debts are paid and your assets are distributed. It is also the only legal way to take your name off the title of an asset and put the new owner’s (your heir’s) name on after your death. The problem is that lawyers have led people to believe that the probate process is awful. While it can be if your estate is complicated, it is not always expensive and time consuming.
A living trust avoids the whole probate process. When you establish a living trust, you transfer ownership of your assets from your name to the name of your living trust. During your life you still control the assets the same way as if in your own name. Technically, by doing this you no longer own anything and everything is in the name of your trust. So there is nothing for the courts to do when you die because assets do not have to be re-titled.
There is no right or wrong answer in deciding what type of document should be part of an estate plan, however, many factors should be weighed in determining what is best for your specific situation. Consult a reputable estate attorney to determine your needs and remember that doing nothing is not an option.
Life Insurance
Life insurance provides financial security for your family by protecting your financial resources, such as your present and future income, against the uncertainties of life. Combined with investments, education, retirement and estate planning, life insurance is often a fundamental part of a sound financial plan. Chances are if you have dependents, you probably need life insurance!
Life insurance provides cash (called a death benefit) to your family after your death, which replaces the income you would have provided. In addition, it can meet many important financial needs like helping to pay the mortgage, running the household, sending your kids to college, ensuring that your dependents are not burdened with debt and allowing your survivor to enjoy a comfortable retirement.
There are two types of life insurance: term and permanent. Term is exactly what it sounds like—coverage that is only in force for a specific period of time, or term. Conversely, permanent insurance is coverage that lasts for your entire life. Term insurance is usually a cheaper and often a better choice than permanent insurance because most people do not have a permanent need for life insurance.
There are various formulae to determine how much life insurance you need. The easiest way to get a ballpark figure is to use one of the many financial calculators available on the web. In addition, you want to meet with a financial planner or insurance professional to discuss your options, but be mindful that many of these people will be trying to sell you something, so ask how they are compensated.
The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors. For more financial information visit
www.strategicpoint.com.
