The Certainty You Must Prepare For: Death

The following is adapted from Keep It Simple, Make It Big.

Especially when you’re young, it’s easy to put off thinking about your death, but death is a certainty. Whether you like it or not, you will eventually die. At that point, you will lose all control over what happens to your estate—unless you prepare ahead of time.

If you want to have a say in what happens with your money, you can’t wait until you die or become otherwise incapacitated. You need to act now. Preparing for your death is not the most enjoyable task, but it is necessary.

Specifically, you need to create a last will and testament, a durable power of attorney, and a plan for any potential taxes.

Last Will and Testament

Everyone should have a will. Your will is the basic document in which you determine how your estate will be distributed and to whom. 

In creating your last will and testament, you will want to consider:

• Who will take care of any minor children

• Who will get what percentage of your assets

• Who will receive any collectibles or special items

• Who will be the executor of your estate

Don’t die without a will. The government then will decide who gets what, including the care of your children.

Every financial plan I complete tells clients to get a will if you don’t have one or make sure that it reflects your wishes if you do have one. I recently lost a client who had a stroke less than a year after retiring. Last time I saw her in my office, I said, “You need to marry your twenty-five-year life partner.” I recommended a will many times. 

I got the call from her partner after she died. All the beneficiary forms were in place, and the corporate pension had a certain period payment on it that protected the partner. The problem: her house, owned solely by her, was to go to her father, who happened to be spending down assets, suffering from dementia, and would likely hit a nursing home.

Get a will!

Durable Power of Attorney

Everyone should also have a durable power of attorney. This document allows someone to make decisions on your behalf and take care of your finances should you become unable to do so for yourself. It can be a general power of attorney, allowing a person to do pretty much anything you could do, or a limited power of attorney, which limits them to, say, paying the light bill.

If you don’t have a durable power of attorney and become incapacitated, a court will appoint a person. Your affairs can be contested and will become public. Don’t let this happen. Get a durable power executed and in place.

You will need a healthcare directive and a living will as well. A healthcare directive is a durable power of attorney that grants someone the power to make healthcare decisions for you should you be unable to do so for yourself. A living will documents your intentions regarding end-of-life issues.

A Tax Plan

There are two types of taxes that might need to be paid after death: estate tax and income tax.

Most people no longer face federal estate taxes thanks to recent legislation that raised the amount an individual could pass tax free to $11,580,000. It’s double for couples. In addition, a husband and wife can transfer an unlimited amount of assets to each other. Taxes will be due on the second death.

However, nineteen states have estate or inheritance taxes, some as low as $1 million. So it still may be an issue at the state level.

Any assets over the set amount are subject to an estate tax, payable by the estate. The estate is valued on the day of the person’s death, and the tax is due nine months later. 

The way to reduce estate taxes has always been to minimize one’s estate. There are several ways you can do this:

• Each person can gift $15,000 a year to as many people as they choose, without any tax implications.

• Qualified education expenses do not count as a gift for tax purposes. For example, Grandpa Tom could pay Harvard tuition for grandchildren Jane, Jennie, and John at $70,000 apiece and still gift them $15,000 each in the same year.

• Charitable contributions are fully tax deductible in the year in which the IRS deems the contributions given, subject to limits as a percentage of taxable income.

Aside from estate taxes, your heirs may need to pay income taxes when withdrawing money from yet-untaxed assets, like traditional IRAs, the investment gains in annuity contracts, and the untaxed value in employer plans. Strategies to address this include Roth conversions and life insurance to replace the income tax owed. 

For most people, this will be an issue for the next generation to figure out. Still, if splitting assets equally among children or other beneficiaries, you should consider the taxes due on certain assets to determine and adjust inheritances.

Stop Procrastinating

Too many people put off creating a will, durable power of attorney, and tax plan. “I’m not going to die tomorrow,” they think. “I still have time.” 

They keep saying that, until they run out of time. Then it’s too late. Their loved ones are left to pick up the pieces. I’ve seen too many people whose wishes weren’t honored after their death, for the simple reason that they didn’t take the time to get the right legal documents and plans in place. It’s heartbreaking every time.

Don’t wait until it’s too late. Stop procrastinating, and get a will, a durable power of attorney, and a tax plan in place now.

For more advice on financially preparing for your death, you can find Keep It Simple, Make It Big on Amazon.

Michael Lynch is a CERTIFIED FINANCIAL PLANNERTM professional with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC.  6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN202709-7715132

You Need Life Insurance

The following is adapted from Keep It Simple, Make It Big.

If someone you love depends on you or your income, chances are you need life insurance.

From the start of your working years to the end of your life, life insurance serves an important purpose.

Early in life, when mortgages are large, children need to be educated, and retirement plans are in the building stage, life insurance funds these unfunded liabilities should something happen to a breadwinner. It allows a family to accomplish its goals.

Later in life, the focus shifts to protecting the assets one has acquired. Should a spouse die, life insurance can make up for the loss of a pension, reduced Social Security payment, the depletion of investments for long-term care services, and more. 

We must protect that which we can least afford to lose. So no matter your age, you need life insurance to take care of your loved ones should you pass.

How Much Life Insurance Do You Need?

There are various rules of thumb about how much life insurance you need—such as two times, ten times, or twenty times salary—but everyone’s needs are unique. It’s best to do your own personal math.

There are two basic methods of calculating how much life insurance you need. 

The first is referred to as the human life value. This straightforward method simply figures what a person would earn until retirement, subtracts out taxes and what the person would consume, and then figures out how much money that would be in current dollars.

The second approach is often called a basic needs analysis. This method examines the actual expenses that would be involved if one died, the things a family would want to take care of, such as education for the children, paying off mortgages and other debts, and income replacement. It then calculates a figure based on these basic needs.

If a family is living on 100 percent of their income, which is often the case, these two approaches will produce similar results. One difference is that expected future salary increases can be built into a human life calculation. 

The value of one’s services must be protected as well. When a primary earner dies, income needs to be replaced but expenses will generally go down. When a homemaker dies, though, expenses will increase, due to the need for things like childcare.

For retirees, the focus is on replacing income that will be lost, such as Social Security and pension. Wealth replacement is also an issue. If a long-term care need strikes, assets earmarked for income may have to be expended. A prudent life insurance program can replace this wealth when a person passes away.

The Types of Life Insurance 

Insurance comes with many features and many names, but there are two fundamental types: temporary and permanent.

Temporary Insurance

Temporary insurance is called term insurance. These contracts cover a person for a set number of years: one, ten, fifteen, twenty, and thirty. It can have adjustable premiums or level premiums over a period and then adjust. It is pure insurance, like auto and home. If you don’t get unlucky and use it, there is no residual value.

Over the last few decades, it has consistently gotten better and cheaper. If you are healthy, you can now purchase term that does not expire until you are in your eighties.

As with anything, term life has advantages and disadvantages. The primary advantage is price. Young healthy people can purchase big blocks of insurance for low premiums. It allows young families to cover temporary needs with temporary insurance. 

The primary disadvantage is that premiums increase over time, which makes it unaffordable for older people. Each contract term has a level premium, but one will likely outlive this contract and then face higher prices. This means that very few policies pay a death benefit, roughly 1 percent. If a family has permanent needs, this will not provide the protection it needs.

If you obtain life insurance through your employer, it is most likely group term. The advantages are that it’s easy to get in open enrollment, and the premiums can be fairly inexpensive. However, the disadvantages are that an employer usually does not offer enough face amount to cover a person’s need, and the insurance is usually not portable at low prices. Changing jobs means changing insurance or losing insurance. 

Permanent Insurance

Permanent insurance is designed to last a person’s lifetime and ultimately pay a death benefit. It combines term insurance with an investment account in which premiums grow on a tax-free basis. 

These cash values are owned by the contract owner and can be accessed for use while the person is alive for such things as college funding, cash reserve, and retirement funding. Some policies allow the cash to be accessed as a withdrawal of premium. Others require the cash to be loaned.

Permanent policies differ based on how the cash value is invested, who controls the investment, whether the premiums are flexible or fixed, and whether the death benefit is flexible or fixed.

Whole life is the name for traditional permanent life insurance. The cash values are invested by the insurance company in its general account, which is comprised mostly of fixed-income investments. Premiums are fixed, as is the death benefit. Participating policies will pay dividends that can be used to offset premiums or purchase additional insurance.

Universal life policies are similar to whole life in that the cash value of this policy is invested conservatively by the insurance company. It differs from whole life in that it never pays dividends. Its premiums are flexible as is its death benefit. Modern contracts can offer lifetime guarantees for death benefit regardless of cash value.

Variable universal life is a contract in which the cash value is invested by the contract owner in variable subaccounts that provide access to professional money managers. These are generally equity, fixed income, and a guaranteed interest account. Premiums are flexible as is the death benefit. Some modern contracts offer guarantees for death benefit that are not dependent on cash values.

Survivorship policies, often called “joint life” or “second to die” policies, are single contracts that cover two lives and pay a single benefit upon the second death. They are permanent contracts and can be whole life, universal life, or variable universal life. 

Choosing the Life Insurance Right for You

There is no “best” life insurance contract or type. The type that best fits a family’s needs will depend on many factors. 

Start by calculating the amount of life insurance you need, and then look at your various options. It can be worth consulting a professional.

Everyone should think of life insurance as a necessary expense. There are some risks in life that simply can’t be invested for; they must be insured against. 

It’s far better to have life insurance and not need it, than to need it and not have it. With life insurance, you can ensure that your loved ones are financially taken care of after you’re gone.

For more advice on life insurance, you can find Keep It Simple, Make It Big on Amazon.

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Michael Lynch is a CERTIFIED FINANCIAL PLANNERTM professional with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement. Michael has contributed to the Wall Street Journal and Investor’s Business Daily, and hosted Smart Money Radio for a decade. He’s served as an adjunct faculty member at Fairfield University and currently teaches financial planning to employees of corporations like Madison Square Garden and Yale New Haven Health Systems. Michael is a five-time Financial Planner of the Year for MetLife and a 2019 inductee to the Barnum Financial Group Hall of Fame. You can enjoy his latest articles and videos at www.michaelwlynch.com.

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC.  6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000.

CRN202709-7715132