You may think of estate planning as death planning, but it is much more than that. Estate planning includes lifetime planning. The first component of estate planning is: I want to control my property while I am alive and well. One unexpected event to plan for while you’re alive and well, especially in this economy, is a loss of a job.
There are a number of things you can do to soften the blow of a job loss. One thing to do is budget your expenses so you are not using all of your income each month. This accomplishes two objectives. Number one, it allows you to set aside some savings. And two, if you do have a job loss, there will be a lesser amount of expenses to cover. For example, don’t buy the biggest house as you possibly can afford or for which you qualify. Buy a smaller home which you can more easily afford. Then your situation won’t be as much of a strain in the event of a job loss.
You should be setting aside some savings to cover your expenses in the event of a job loss. The experts used to recommend savings to cover three to six months of your expenses. I am now seeing recommendations of six to twelve months coverage or even more.
If you are a married couple with two incomes, try setting up your household to run on one income and bank the other. The blow of losing one income would not cause the loss of your home to foreclosure or otherwise.
For example, way back in my early pre-lawyer career, I lost my job. I had been going to night school, part-time. I decided to go to law school full-time instead so I could finish my law degree in a year. While finishing my law degree, I also did some part-time work. During that one year period, my wife Emily and I had only about 50% of our previous income. We had to make some major changes. Instead of going out to eat at restaurants, which we had enjoyed on a frequent basis, we dined at home. Instead of regularly going to the movies or watching cable, we watched broadcast TV. We just cut expenses and didn’t spend. In that one year period when we were living on about 50% of our previous income, we actually saved more money than we had the previous five years combined when we had two incomes. And we paid for all my law school expenses as the bills came due. We didn’t have to dip into our savings at all or take out any student loans.
The second component of estate planning is: I want to provide for me and my loved ones in the event of my disability. Disability insurance is a lifetime planning tool to protect your income in event of your disability. There are a variety of disability insurance programs available either as group or individual plans. Group plans are generally cheaper than individual plans, but they also usually have lesser benefits and/or longer waiting periods. Although you may have a group disability plan at work, you may want to investigate an individual disability income plan. Not only do individual plans typically offer more or better benefits than group plans, they follow you wherever you are employed.
Both Emily and I have maintained individual disability income policies for over 20 years, paying our premiums every month. Although we have had a few scares in which we thought we might have to use the policies, we never have. I don’t regret the payments though, because if something were to have happened or might happen in the future, we are protecting our family financially.
Another type of insurance to protect you and your loved ones in the event of your disability is long-term care insurance. This also maybe something you would want to investigate, especially if you are younger. Typically, the earlier in your life you get the insurance, the lower your premiums will be. If you start your long-term care policy in your 40s or 50s your premiums will be much lower than if you started your policy in your 60s or70s. If you wait too long, the premiums may not be affordable.
A number of people have asked me why I recommend investigating long-term care insurance, when Medicaid is available to pay for nursing home care. Well the answer is twofold. Firstly, no one has any idea how long Medicaid will be around in its present form. Under the current rules, if you went into the nursing home today and you qualified for Medicaid, it would pay for your nursing home care. However, with all the governmental budget shortfalls at both the state and federal levels, the Medicaid program has a big target painted on it for the budget cutting process.
Secondly, Medicaid for seniors over 65 generally only covers care in a nursing home, except in limited circumstances if you qualify for certain in-home waiver programs which may have lengthy waiting periods. Most long-term care policies you can get nowadays include care wherever you need it, be it in your own home, an adult foster care home, an assisted living facility or other residence. If you can no longer care for yourself, these policies pay benefits to assist you in staying out of the nursing home. Even if you want to plan on Medicaid paying for your nursing home care, you still can have a long-term care policy to pay for your care before you get to the nursing home.
We have discussed planning for when you are alive and well and when you are alive and not so well. We now come the last component of estate planning: When I am gone, I want to give what I have to whom I want when I want and the way I want. Planning for your untimely death includes an investigation of your life insurance needs.
If you are in your primary earning years, life insurance can provide a safety net for your loved ones in the event you die and are no longer providing an income. The life insurance could be used for income replacement. It could also be used to pay off mortgages or other debts. In such instances, your survivors would not be burdened by the monthly loan payments. Sometimes life insurance is used to pay for funeral and burial expenses. Other times, I have seen life insurance used to create an estate to pass on to the insured’s loved ones.
Now does everyone need disability, long-term care and life insurance? The answer is: No. However, don’t you owe it to yourself and your loved ones to at least investigate to see if these types of policies would be applicable or usable for your needs? So, when you are thinking about estate planning, don’t just think about death planning, think about lifetime planning.
By: Matthew Wallace CPA, JD
Published edited March 30, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Making plans for unexpected events