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  • When You Need (And Don’t Need) Life Insurance

    Most people know that life insurance is an important financial security tool, and for a good reason – it can save your family financially if tragedy strikes. Basically, you pay a set fee for an agreed-upon period of time, and if you die during that time, then the insurance company will give your family a set amount of money.

    But when you do need life insurance?

    The simple answer is that you should buy life insurance if the death of the insured would cause a financial hardship. Common trigger events for buying life insurance include buying a home with a mortgage or the birth of a child. In fact, when each of these events happened to my husband and me, we both acquired a new life insurance policy. With the home purchase, we wanted to ensure that the surviving spouse would be able to pay off the mortgage plus have some breathing room, and with the birth of each child, we wanted to ensure that the kids and surviving spouse would have enough money to pay off the mortgage, pay for educational expenses, and have additional funds for unforeseen expenses.

    Other times you might want life insurance include protecting a business partner who might need funds to keep the business going in the event of your death, if you acquire a dependent such as an aging parent or incompetent sibling, and so on. The question you need to ask is, “Would my death cause a financial hardship on someone I care about?” If the answer is yes, you should consider buying a life insurance policy to relieve that financial hardship.

    On the other hand, you don’t need life insurance if you don’t have any financial dependents. For instance, if you’re single and you buy a home with a mortgage, you don’t necessarily need to buy life insurance to pay it off in the event of your death. After all, these is no surviving spouse who might not be able to make the mortgage payment without the income of the deceased spouse. In the case of the unmarried homeowner, the estate can sell the property to pay off the mortgage, and any profit/equity will revert to the estate for distribution.

    *Previously: How much life insurance do you need?

    This post is sponsored by Genworth Financial. All opinions are my own. Read the full CFO disclosure policy here.

    How much life insurance do you need?

    The sudden death of my friend J.’s husband a couple of days ago has got me thinking about life insurance again, and specifically, whether my husband I each have enough coverage. As much I hate paying the premiums, thinking about how much worse J.’s situation would be if her husband didn’t have adequate life insurance is making me wonder if we should add a policy.

    But how do you decide how much life insurance is enough?

    I remember struggling with this question after our oldest was born. I knew my husband and I both needed to purchase additional policies (we already had policies that we’d purchased after we bought our house) but I wasn’t sure how much coverage to add. I used various online calculators, but I felt the same way about them as I do about retirement calculators: there are too many uncertain variables.

    For instance, perhaps our biggest expense in the next 15 to 20 years will be paying for a private school education for the boys. (We might still send them to public school, but I have a lot to learn about the exemption system in LAUSD before we make a final decision.) The calculators take college expenses into account, but not private primary and secondary education expenses. That’s not really a problem, since there’s almost always a miscellaneous expense category, or the expense can be added into college expenses. The real problem is that it’s hard to predict how much private school tuition will run 10 years from now. It’s equally difficult to predict how high college expenses will be in 15 to 20 years.

    If I assume that tuition will increase at 6% per year, a top private school will cost nearly $480,000 by the time our oldest graduates from high school. A less expensive but still reputable private school will cost nearly $200,000. If our son were to attend USC, SavingForCollege.com says it will cost $524,000 without aid. Attending UCLA will still cost over $250,000. So we’re talking anywhere from $450,000 to $1 million just for educational expenses for each child. Probably. (I figure if the kids have lost a parent, the least we can do for everyone is eliminate these expenses as a source of stress and worry.) At this point, before our oldest has even started kindergarten, it’s simply impossible to know which number is more realistic. For me, this kind of uncertainty is what makes life insurance calculations so difficult. (Ditto for retirement calculations.)

    Another equally important and yet tenuous area of calculations is living expenses. How do you estimate your living expenses for 10 or 20 years from now? The calculators require you to input your current living expenses, and then use a formula to project expenses. But a family’s expenses change through the years. Right now we pay for daycare and an occasional activity. But in a few years, we’ll probably be paying for private school, sports teams participation and maybe lessons of some sort. I’m expecting our living expenses to rise considerably in approximately three years, when both boys are in school and participating in organized sports/activities, yet it’s hard to predict exactly how much those things will cost. Or what if we decide to move? The mortgage, insurance, taxes and utilities would all change. But all I can do is guesstimate.

    And that’s really what it comes down to – your best guesses.

    In the end, the best way to figure out how much life insurance you need is to come up with a range based on your best guesses. And then try to buy as much life insurance as you can afford.

    One thing to note is that if your children are very young, a typical 20-year term policy may expire before your child’s school years are over. You may want to consider a 25-year policy instead.

    Life insurance, like wills, is one of those topics that’s no fun to think about but absolutely necessary to have. Especially if you have family counting on you. Just think of what life would be like for them if you didn’t have life insurance. That should be all the motivation you need to make sure you get those policies in place . . . before it’s too late.

    Writing an End-of-Life Letter

    Last week, I reviewed a book full of practical and legal advice for Baby Boomers and their loved ones called Alive and Kicking. I learned a lot from the book, and the authors were kind enough to send me some columns to use as guest posts. Here’s the first one.

    A Letter to My Family and Doctors Concerning End-of-Life Matters

    I don’t mind the idea of dying. It’s just I don’t want to be there when it happens. – Woody Allen

    Probably you have a Living Will, somewhere around the house. It directs what treatment you want during your last illness, most likely insisting on “no heroics” – the terrifying image, the stuff of countless TV shows, being hooked to machines in ICU for weeks, dying a slow and painful death, bankrupting your family.

    Living Wills aren’t very effective. Studies show that, despite what your Living Will might say, doctors generally do what your family directs. We recommend a letter.
    It may be the most important letter you will ever write. It will improve the odds that your Living Will will be followed and there are even better reasons.

    “Everyone knows they’re going to die, but nobody believes it. Once you learn how to die, you learn how to live.” – Mitch Albom, Tuesdays with Morrie

    How to get beyond denial? Not by checking boxes; but by writing about your final illness.

    Your letter can trigger a meaningful family talk. Parents and their adult children often find it next to impossible to discuss end-of-life matters, matters that fester. “Will I become a burden to my family?” “What should I do if mom can’t care for herself?” The hardest part is starting the discussion. Here a perfect ploy: “I just wrote this letter concerning my final illness. I want you to read it; then we’ll talk.”

    What issues might you address? Hospice (a wonderful choice), cardiopulmonary resuscitation (usually a bad choice: they work best on TV), feeding tubes, organ donations, autopsy, burial, and funeral arrangements (Sitting Shiva or Irish Wake). In our book, Alive and Kicking, Legal Advice for Boomers, we go into these matters in detail.

    What might get in the way of your family and doctors following your wishes? Family members may not agree as to proper treatment and some might insist that “love means keeping our parent alive.” Consider:

    I hope my family will carefully listen to each and come to agreement. If not, I appoint _______________ as the final arbiter and as my health care power of attorney. If _______________ cannot serve, then I appoint ________________. I know your decisions may hasten my death; no one should feel guilty or feel that the only way to show love is to prolong my life. The opposite may be true.

    Fear of legal trouble may prevent your doctors from giving adequate pain medications and may encourage them to pursue heroic, yet hopeless, measures.

    Pain. I want adequate pain medication even if it causes addiction or hastens death. No one should take any action complaining that I received too much pain medication.

    End-of-Life Medical Treatment. I do not want my life extended if my prognosis is grim. No one should take any action complaining that the treatment I received was not aggressive enough.

    Doctors may be reluctant to give a prognosis, particularly a grim one. This leads to tragic results: children for out-of-state may arrive too late and expensive, painful, and fruitless procedures may be followed.

    Prognosis. I want my family to insist upon a prognosis of my condition, even if it is a negative one.

    In any event, be sure to include, at the end of your letter, something for your family to sign:

    We, the author’s family members, have read and discussed this letter with the author. We understand it and agree to follow it. Signed . . .

    Writing the letter will not be pleasant: denial is not for nothing. But there are huge dividends:

    “Once you learn how to die, you learn how to live.”

    End-of-life discussions sound dreadful. But, once beyond the awkwardness, you will find them deeply moving, filled with relief and humor. Details don’t matter. The value is now, not then, the simple message to your family: “I love you, I trust you, and it’s time to spend a few minutes talking about my final illness; it’s really nothing to dread.” And perhaps, “Pass the wine.”

    As to then, when the tough decisions must be made, not to worry; you’ll probably be run over by a bus.

    Kenney Hegland is a Professor of Law at the University of Arizona and has taught at Harvard and UCLA. Robert Fleming is a leading Elder Law attorney. Visit their website at www.legaladviceforboomers.com.

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