If today was your last day

What a thought to think that today might be your last day on this earth. If today was your last day, are you ready to leave your family behind? Have you made arrangements to protect your loved ones once you’re gone? Do you have your financial matters in order?

These are some serious questions that we all need to ask and answer. In order to ensure that we have our financial house in order. Before we die, we need to ensure that we have done the following:

  • We need to have term-life insurance in place in a sufficient amount to provide for them.
  • We need to have a will and a revocable living trust.
  • We need to have a financial guide (FG) prepared.

In another post in this site, I address the life insurance aspect. Therefore, I won’t address that again. The same goes for wills and revocable trusts.

FINANCIAL GUIDE

Now, let’s look at a financial guide. A financial guide can be kept on your computer, a notebook, a CD, or even a video. It is a written or recorded record that lists the location of your life insurance policy, will, trust, an advanced directive and durable power of attorney for health care, and a financial power of attorney, passwords for bank accounts and investment accounts, passwords for your email accounts, and the other information I’ll discuss below and which your loved ones will need when you die. It is better to have that guide in a place where your loved ones can easily find it.

When you prepare an FG, the first step is to assess your finances. You need to have an honest assessment of how your finances currently stand, the potential income for your survivors, and their potential future financial needs. The first thing you’ll need is to determine your net worth.  Your net worth is your total assets minus your total liabilites. Don’t worry I won’t leave you high and dry and expect you to create your own documents. I am going to post a link for you to download this and the other documents you’ll need in my download section.

MEETING YOUR OBLIGATIONS

Moving on, the next step is to determine your survivors’ monthly support obligations. Prior to settling your estate, all your debts must be paid. Your executor will use your liquid assets to settle your debts. Hopefully, it will not deplete your liquid assets and deprive your survivors of them. You need to estimate the debts that will exist if today was your last day and what sources would be exist to pay them off. You also want to have your joint debts paid off. These are items like home loans, car loans, etc. basically any loan for which you are both responsible/liable. Add up the total amount of these debts and subtract them by any life insurance that you have in place. This tells you exactly how much of that life insurance you’ll need just to cover your debts. The remaining life insurance would go helping your survivors continue to pay their day-to-day living expenses, your funeral expenses, property taxes, insurance, etc. If you want any of your liquid assets to go towards paying these debts off, you can reduce the amount of the insurance being used to cover these debts. Let me give you an example:

  1. Home mortgage $400,000
  2. Car loan $25,000
  3. HELOC $35,000
  4. Other debt $20.000

Life Insurance: $1,000,000

Liquid assets: $15,000

Therefore, your total debt is $480,000. The amount available to pay them off is $1,015,000. If you use the life insurance to pay them off and don’t touch the liquid assets, that will leave $520,000 on which your family will survive plus the $15,000 in liquid assets. A million dollars was sure cut down quick wasn’t it?

SURVIVORS’ FINANCIAL NEEDS

Your financial assessment should include determining whether there will be sufficient life insurance death benefits available to meet your estate’s obligations, while ensuring that an adequate amount of funds remains to meet the monthly expenses of your survivors; whether the plans you have in place provide funding for a college education for your children and if college educations are still economically possible; and whether there are adequate provisions available to meet the other needs of your survivors. It is always good to eliminate as much debt as you can, so that it does not eat up your estate. You don’t want to be paying credit card debt with interest rates of high rates, like 20% or higher, when your investments are earning lower rates. After you estimate the amount of money needed for settling your estate, if a significant amount of lump sum insurance payment proceeds will still be available, it should be designated for this purpose.

You can see how important it is to have the proper amount of insurance in place. If the couple in our example had only a $300,000 policy in place, the surviving spouse would still have $100,000 mortgage, plus $80,000 in other debt and funeral expenses.

 

 

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