Being among family this week the conversation has revolved around taking care of our loved ones. All of my cousins have families with children, they all work hard to ensure financial security for their family. What I found surprising was that the majority of my relatives didn’t have a will or trust. They presume that if something happens to them their spouse would just inherit everything and take care of the children. They’ve never given thought to the worse case scenario: what if something happens to both of them. They are also uncertain of what type of life insurance they have and the payout amount.
We all don’t want to think of our mortality, but if you truly want to take care of your loved ones you need to have things in place for them when you’re gone. In times of grief you don’t need to be a financial burden on them. Here are the three financial moves that you need to protect your family:
Have at least a will, but preferably a living revocable trust. There is a common myth that trusts are only for the rich. A will designates who gets your assets and custody of your children, you can also designate additional caretakers for your children if something was to happen to both of you. There are two drawbacks to a will: you would go into probate court which costs thousands in court and lawyer fees to execute the terms of your will. Probate is a very long and drawn out process especially if you have a lot of assets. The second drawback is that you can’t leave assets and money to a minor, those assets will automatically go to their guardian. Nothing will tear a family apart more than having a family guardian spend all the money intended for your children.
A living revocable trust costs a little more that a will but in this case it is worth it as it will save you thousands in the long run. This trust is made when you’re “living” and can be changed to keep updated with your life changes. All your assets gets placed in a trust to hold for your beneficiaries bypassing probate court. Another benefit is the trust is named the beneficiary for minor children, it will protect their assets until they’re of legal age. This tool isn’t just for the rich, you should have a trust if you have properties and minor children.
Have a health care directive so that your intentions are known. Health care is often an emotional decision. Although family members have the best intentions there will often be bickering and disagreements on your care. Make your intentions known with a health care directive and designate one person to have final say on your medical care. I witnessed what my father went through in his final years as he had a shitty quality of life, all because he never expressed what kind of care he wanted. There were many family arguments over him, as a result of this my wife and I both have directives.
Have term life insurance that covers at least your home and at least 2-3 times your annual income. You wouldn’t buy an index fund with your car insurance yet people often use life insurance as an investment. Whole life is a terrible investment, you should always get term. There are no steadfast rules of thumbs for insurance but I recommend enough to pay off your house and 2-3X household income (both salaries if you’re in a two family income) My friend who’s a police officer had a $250,000 life insurance policy, enough to pay off the house. I recommended him to increase it because they’re a two income household, if something happens to him his wife would be unable to work for a few months. Losing a full income means they won’t be able to pay off the house and afford to live in their home. As a result they would have to sell the house and uproot the children into a cheaper neighborhood. Having sufficient life insurance allows your family time off to grieve without financial worries.
If you haven’t done these three things what are you waiting for? Do you have a will or trust set up?