Estate planning and life insurance for the 99%

By Patricia De Fonte

Ultra-wealthy people use life insurance products to mitigate and defer taxes. The rest of us use life insurance as a safety net to take care of the people we love and worry about the most.

A good estate planning attorney helps a client create a plan that reflects their wishes and values and then asks themselves and the client, “Will this plan work? Is there enough liquidity to provide for the beneficiaries and pay final costs such as funerals, creditors and taxes?” The answer is often no.

What is estate planning?

Most people think that estate planning is for the elderly and the wealthy. The truth is, we have all seen the online pleas for contributions when someone dies and the family needs money for funeral costs. We all know someone who lost years of their life to the court system trying to settle a loved one’s modest estate. Estate planning is not necessarily complicated or overwhelming.

Estate planning attorneys generally help clients by creating documents that provide the right people with instruction and authority to take care of those clients in the event of incapacity (health care directives and powers of attorney), documents that state who will receive your assets when you die (wills and trusts), and documents that address who should care for your minor children and how those children should be cared for (guardianship nominations).

Everyone over the age of 18 needs an estate plan. An estate plan might be statutory forms you can find at the library that you then review with your local legal aid society. An estate plan might include a revocable trust that is 80 pages long for a married couple with a home and a baby. Often, the less you have, the more you would benefit from a well-drafted estate plan because the documents help your loved ones avoid the expensive, chaotic and time-consuming court processes.

How often should I review my estate plan?

Statistically, something in your life will change every three years. And since we never know what Congress, voters and local governments may do, it is important to review your documents with your attorney every three to five years. Even if you review your documents and feel that they still reflect your values and distribute your assets according to your wishes, you may not know about new laws that would have an impact on your plan. Estate planning is never a “one and done.”

How much life insurance do I need?

If you are not single, determine how much money your surviving spouse or partner would need if they lost you. Do you want them to pay off a mortgage, pay for college for children, or allow them to retire early? Everyone’s list is different. Then think about who else you would want to care for – an elderly parent or the people you have nominated as the guardians of your minor children. If you take this approach, there will be ample funds for minor children should the worst happen.

Traditional insurance calculators are usually focused solely on income replacement, but that implies that the death of a stay-at-home spouse is less of a financial crisis than the loss of the breadwinner. The cost of replacing the work that a stay-at-home spouse performs is often more than the salary of the breadwinning spouse.

How long should my insurance last? Many people think of life insurance as something to have until the children are out of the house or have graduated from college. But imagine if you lost your spouse or partner and still had a substantial mortgage or other debt. Would your quality of life be diminished without your spouse or partner’s contribution?

What kind of life insurance should I buy?

Never buy an insurance product you do not understand and don’t buy your insurance online. Insurance is complicated and does not cost more if you work with a qualified professional. The insurance professional should ask you a lot of questions about you, your loved ones, your goals, your fears and your debt. Then they can work with you to determine how much coverage you need for the basics and how much more you may want to truly take care of your loved ones.

Some clients like policies that last their entire lives, other clients view life insurance the same way they view auto insurance and hope they never have to use it. Still other clients may feel hybrid policies that address life and long-term care are critical. There is no one-size-fits-all solution.

What about employee benefit life insurance?

A good estate planning lawyer will not be happy with your having only employee benefit insurance and will ask you to look into obtaining independent life insurance. For the estate plan to work, the estate needs liquid assets.

You are not in control of your employee benefit insurance. If you leave that employer, you may not be able to take your coverage with you, and even if you can, it might be very expensive. Also, the employee benefit is often a multiple of base salary, and not a reflection of the employee’s actual annual compensation, leaving the survivors with less than a year’s salary to stretch as long as they can.

Estate planning and life insurance are not concerns for only the wealthy; they are vital tools for anyone who wants to protect their loved ones and ensure their wishes are honored. By working with a knowledgeable estate planning attorney and a trusted insurance professional, individuals can craft a plan tailored to their unique circumstances and priorities.

Regular reviews of your estate plan and insurance coverage are crucial to adapt to life's changes and evolving laws. Remember, the goal isn't only to leave behind financial security but also to provide peace of mind for those you care about most. With careful planning and foresight, you can leave a legacy that transcends financial assets, offering comfort and stability to your family for generations to come.

Patricia De Fonte, JD. LL.M., offers personalized Estate Planning With Heart in California. Contact her at [email protected].