Just as a new year provides the perfect “clean slate” to launch a new physical regimen or personal habit that can positively affect your health and happiness, it also offers an ideal opportunity to create — or perhaps re-examine — the financial regimen necessary to protect the future for you and your family.
Inspired by the need to get their finances in order — or at least a pressing desire to pay off burdensome holiday credit card bills — many people will start 2007 with resolutions to tackle basic financial issues, such as goal setting, budgeting, paying off debt, and saving and investing. They may, however, overlook something just as important — how they protect their family’s financial future.
Asset protection may be a less obvious New Year’s resolution than others this year, but it has the potential to pay off in long-term stability, increased peace of mind and a sense of financial confidence for you and your family. And it is one of the most caring ways to provide for the ones you love. To get started, you will want to consider the “what-ifs” of life, develop a plan for circumstances that seem grim and perhaps improbable today and take action by creating legal documents and finding financial products that meet your personal needs.
Because this planning is based on law that, in most cases, is state-specific, you’ll need the guidance and advice of attorneys, financial planners, tax advisers or accountants. What should you consider as you plan to protect the ones you love?
A will is a legal document that states who gets what when you die. You need one if you want to decide who should receive your assets when you die — even if you only own a car; if you want to decide who will raise your children; and if you want to decide who will take care of your financial affairs, such as paying debts and taxes.
Without a will, you have no say in these and other important decisions; the state will decide for you. So, if you care about the people and the things in your life, get a will. If you already have one, update it and change beneficiaries, if necessary. Although you can make a will yourself by using boilerplate forms from books and software found in your local bookstore, you are always on safer legal ground, say financial advisers, when you use the services of an attorney who has the knowledge and experience to prepare a will for your specific needs. Legal costs can range significantly, depending on where you live and how complex your finances are. Remember to review and update your will periodically, especially if your family circumstances change because of births, deaths or divorces.
REVOCABLE LIVING TRUST
You can save your beneficiaries the costs of a will’s probate (which can be significant) by creating a revocable living trust, a set of documents that specifies who controls your assets while you are alive and directs what happens to them when you die.
While you are alive, you sign the title of your property over to your trust for your own benefit and use. You also specify in the trust where you want each piece of property to go when you die. At any time, however, you can also change your mind about who gets what. When you die, the trust lives on and passes your property directly to the people you want to have it without probate. Trusts are somewhat complex and are not appropriate for everyone, so you must consult an attorney to set one up. Expect costs to range from several hundred to more than a thousand dollars, depending on your location and the complexity of your finances.
If you use a revocable living trust, you will probably still want a will as backup to designate who receives sentimental items and personal effects, which are typically not covered in a trust. Because trusts do not address guardianship of underage children, you will also want a will to designate a guardian if you have young children.
DURABLE POWER OF ATTORNEY
FOR FINANCIAL MATTERS
This document authorizes someone you designate (your agent) to transact business on your behalf in case you are incapacitated. Depending on the scope of your power of attorney document, your agent can perform duties that include writing checks from your bank account, paying bills and signing your name to legal documents.
Potential difficulties you should consider: Some institutions may refuse to recognize a power of attorney that is more than a few years old, so remember to update yours periodically. Other institutions insist that you use their own forms, even if your power of attorney is a statutory form. The IRS, as one example, honors only its own power of attorney form.
DURABLE POWER OF
ATTORNEY FOR HEALTH CARE
A durable power of attorney for health care conveys your wishes about medical treatments and options in case you are unable to make decisions for yourself. Essentially, the document authorizes your agent to determine the kind of care — or lack of care — you receive. You must talk to those you love about how you want to be treated and designate a person you trust to make potentially difficult health care decisions for you. Forms to establish a durable power of attorney for health care vary from state to state and can generally be obtained from a state bar association, local hospital or health service organization. An attorney can also help you complete the necessary paperwork or prepare this document for you.
Without health insurance, just one trip to the emergency room could put your family in debt for years. Health insurance is one of the most important ways you can protect yourself and your family, not only because of the significant debts you could incur without it, but also because you are less likely to seek preventive care or timely diagnosis of an illness without it.
If your employer offers subsidized group health insurance coverage as one of its benefits, taking that coverage is always a better choice financially than buying a private medical insurance policy. You may also be eligible for group health insurance coverage through some other membership organization, such as a professional society or a union.
Private health care insurance, by comparison, can be complex, confusing and expensive. But if that is your only choice, you’ll need to make a place for it in your budget. You have several decisions to make about the kind of coverage to purchase. Most policies offered these days are managed care plans, such as a PPO (preferred provider organization), a POS (point-of-service plan) or, less frequently, an HMO (health maintenance organization). Make your decision about the best policy for you based on how much you can afford to pay in premiums and deductibles, whether or not doctors you want to use are available to you under the plan, what special health care needs you have, and what kinds of services (for example, specialists) you may require.
You’ll want to consider disability insurance to help you keep sufficient income coming into the household if a severe injury or illness prevents you from working. Even if both you and your spouse work, the insurance could be important for each of you; dual-career couples are likely to rely on both incomes to run their households without interruption.
The policy replaces a portion of your income after certain requirements are met. You may be able to get some disability coverage through your benefits plan at work that will cover as much as 60 to 70 percent of your income. Still, you will want to supplement that, if possible. Premiums can be expensive, but the protection of your household income is probably worth it.
When you’re single and have no dependents, life insurance may have little meaning to you. But when you marry and someone depends on you and your income, life insurance begins to make sense. Life insurance is designed to replace the income lost to your beneficiaries if you die. You’ll want to talk to a financial adviser about how much you need to protect the futures of those you love.
And you will want to consider what kind of life insurance, term or whole life insurance, is best for you. Then do some comparison-shopping among insurers for the policy you need. Consider cost, policy benefits, the insurer’s reputation and the insurer’s rating from independent agencies, such as A.M. Best, Standard & Poor’s or Moody’s.
LONG-TERM CARE INSURANCE
You will want to consider the real possibility that some day you will spend time in a nursing home; that time will come at a precious cost and can quickly deplete assets you’ve accumulated over decades. A long-term care insurance policy covers some of the costs of care in a nursing home or home health care.
If you’re a 20- or 30-something, you should regard long-term care insurance as a future expenditure, but as you move into your 40s and 50s, purchasing the coverage should become a priority. Research the options that long-term care insurance offer and review specific policies available to find the one best suited to your needs.
Author: Judy Alexander