This is part 3 of a series on Building a Financial Plan. We’ll continue to explore a few more areas I’ve included in my financial plan:
Living Will and Last Will
A last will and testament dictates the way that your assets will be distributed and utilized following your death. A living will states your wishes regarding life support in the event that you are in a vegetative state and cannot communicate your wishes. My wife and I decided to create a will when we had our first child. We wanted to ensure our children were taken care of in the event that we both died early. We used a corporate legal benefit to find an attorney and take action. The process was very simple. In fact, the attorney had canned forms that he customized based on your requests. After reviewing the final draft, we signed and notarized the documents. Here’s a rundown of the three final documents:
- Last Will and Testament – contains instructions for the establishment of trusts, designation of trustees, and how property and trust funds should be distributed. Designation is also made for parental guardianship for surviving children.
- Durable General Power of Attorney – designates individual to be authorized to perform all acts on your behalf when you become incapacitated.
- Health Care Directive – indicates whether you would like to remain on life support and have your life artificially prolonged in case of a terminal or permanent unconscious condition.
While these documents are generally recognized in all states and jurisdictions, it is recommended that you review with an attorney if you move to a new location. This is because the execution of these documents is up to the local jurisdiction where you live at the time of death.
These documents are an absolute must for every individual. The biggest favor you can do your family members is to have clear, unambiguous instructions for your estate and avoid leaving the important decisions to a judge in probate court. Also, properly written wills safeguard against unintended beneficiaries and other horror stories.
Life Insurance
The purpose of life insurance is to replace income for dependents and protect them from financial loss or hardship. A few important decisions to make in your plan is how much coverage you want and whether you want term insurance or whole life insurance. I decided to opt for a term insurance policy that is 10X my income for several reasons. First, I want my children to become self-sufficient and I expect that they will enter the workforce and earn their own income 15-20 years from now. I also expect that my wife will be covered by our retirement savings and thus there isn’t a need to replace income at a later stage of my life. Another reason I chose term insurance is that whole life insurance conflates insurance and investing into a complex vehicle with huge upfront commissions for insurance agents. I’d rather invest my funds in a cost efficient, optimized portfolio that is separate from an equally cost efficient term life insurance policy.
I chose 10X my income to ensure that our mortgage would be paid off and that there would be sufficient funds available to cover long-term expenses for my wife and children. I also factored in current savings (including college 529 savings).
There are many reputable companies that provide competitive term life insurance policies. I have mine through a group discount policy with my employer. The downside of this is that I lose the policy if I move on to another employer. At that point I’ll either opt into the new employer’s group policy or sign-up for a third-party term insurance plan.
Stay tuned for part 4 of Building a Financial Plan.