Okay so admittedly the title of this post is extremely morbid for a personal finance blog. However I really wanted to draw attention to this subject and have the title hit straight at the point. Over this past weekend I went to a memorial service for a family friend that was 43 years old when he passed. He choked on some food that he was eating one evening. That’s it. That’s how simple and quick it was. He left a 24-year-old son and many family and friends. Seeing all of this got me thinking about what it takes to prepare for death. It is very important that you realize you need to get things in order for the day that you are no longer a living member of our world. This applies to adults of all ages and family situations. If you do not make preparations, you leave it in the hands of grieving friends and family or worse yet, the government.
- Your will and testament
- Life insurance
- A listing of all your accounts
Will and Testament
According to Wikipedia, a will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his estate and provides for the transfer of his property at death. Informally a will is a set of instructions for how to distribute your assets after your death. Having a will is important because if you do not, distributing your assets falls into probate court where a judge decides how to divide up your estate. Read this post from Fortune Watch to learn more about what happens when you die without a will.
Do I need a lawyer?
The short answer is no. You can draw up your own will using examples found online. There are even free services that will draw up a basic will for your state. Legally you need at least two uninvolved witnesses to witness your signing. These witnesses must not benefit from any asset within the will. The trouble with not having a lawyer involved is that you may leave errors or technical pitfalls in the will by mistake. If so, your will may still end up in probate court and have to go through that whole process.
Make sure that you name an executor in your will that is responsible and willing to handle tough situations. Dividing up assets combined with grief is a horrible combination. Make sure you appoint someone with a strong and confident personality. You might want to strongly consider someone outside of the family to handle your estate. Whomever you choose, ask them and verify that they are willing and able. There is nothing like throwing a huge curve ball to an unsuspecting family member or friend after you die. When you are speaking to them about being your executor, make sure to explain your will and how your will work.
Insurance in general is a big gamble. You pay your premiums betting that you are going to need money when something bad happens, and the insurance company is taking your premiums betting that nothing bad is going to happen (or that they have some loophole that you didn’t notice). I love Chris Rock’s slogan for insurance. In case shit happens.
Now there are all kinds of crazy life insurance choices out there, but they all boil down to two categories, cash value or term. Cash value promises to pay out a certain amount when you die and that your “investment” accumulates value during your lifetime that you can use later. Term life insurance covers you for a given term (typically 20 or 30 years) and you pay a premium the entire time. If you live beyond the term, you get nothing. Remember one major concept when you are speaking with any insurance salesman or agent. They make much bigger commissions from selling you cash value policies. So if you find yourself wondering why the cash value option sounds so much better than term, that’s why.
If you read up on the two different types, you will find that almost all financial advisers will tell you to buy a term policy. Cash value policies are a joke. First of all the amount of coverage in cash value policies is about a tenth of what you can get for the same price in a term policy. Second off, life insurance is not an investment to expect a return from. If you want a return on investment, invest in the stock market or real estate. Buy life insurance to do exactly that, insure your life.
Buy only what you think you will need. I went with a 20 year term when I was 30 because I figured that in 20 years, my kids will be adults and I will have accumulated enough assets to self insure. I got more coverage and a lower price for the shorter term. If your financials are not in order yet or you are very young, buy a 30 year term policy. Also the younger you are when you buy a policy, the cheaper the premiums.
Make sure you cover generally 8 to ten times your annual income. Look to your bank, online research, or your employer to find the best options for term life insurance.
Start now gathering a listing of all your accounts and how to get access to them. If you die and you have 15 different accounts that no one knows about, that is a nightmare for your family to track down. At least you should have a complete listing showing what institution holds the account, the account number, your username and password, a phone number for the institution, the name of any contact there that you prefer, and an online access URL.
Dave Ramsey actually takes this concept further and lists all the items you should include in a Legacy Drawer. I like his advice here and am going to start working on this collection myself.
Any preparations you make now save one more thing that your family and friends will not have to decide on. What are your thoughts? Have you made any preparations? Did I cover all the basics? Have any questions?