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Those who take the time to do end-of-life planning can save their heirs a great deal of time and inconvenience.
When it comes to end-of-life planning, those who take the time beforehand to do it right can ensure that their assets will pass to their heirs in the manner that they desire, and other end-of-life wishes are fulfilled.
In some cases, this can be as simple as adding a beneficiary to each of your financial accounts. However, this cannot be done very easily with real property such as your house, vehicles, and other material possessions. End-of-life planning almost always requires the predeceased to create one or more legal documents, such as a will, trust, advance directive, or powers of attorney.
End-of-life planning comes with many serious considerations. You will need to decide who will get your prized possessions, who will get your liquid assets, and who will get your other real property (if you decide not to sell it). In many cases, it may be hard to determine how to distribute your assets in an equitable manner.
Of course, distributing equal shares to each of your heirs might be the best way to do it, but equal does not necessarily translate into equitable. For example, what if one of your heirs puts considerable time and expense into caring for you and/or your spouse during your final years? You may want to reward that person extra generously. Knowing how to do that the right way can save your heirs from eventual legal spats and family hassles.
- End-of-life planning defined
- Step 1: Letter of instruction
- Step 2: A last will and testament
- Step 3: Healthcare and medical care directives
- Step 5: Funeral arrangements
- Step 6: Disposition of assets
- End of life planning: Final thoughts
End-of-life planning defined
In a nutshell, end-of-life planning is the preparation that you’ll need to take to live out your final years in relative convenience and according to your desires. This type of planning can spell out the kind of end-of-life care you want to receive and for how long, and it can also stipulate the medical conditions under which you would not want to be resuscitated.
End-of-life planning can also provide very specific directions to the dispersion of your assets. For example, if you were to pass away when your kids are still in college, then you may want to pass on a third of your assets to each child when they are in their twenties, a third in their thirties, and the rest in their forties.
Planning for end-of-life is just as much about your heirs and loved ones as it is about you. It can save your loved ones from having to make difficult healthcare or medical decisions about you at the end of your life. Medical directives and living wills can remove the ambiguity from these decisions for caregivers in many cases.
An end-of-life plan can also prevent unnecessary litigation between relatives after you’re gone because you left specific, incontestable instructions regarding the dispersion of your assets. You can essentially view end-of-life planning as one of the last gifts that you can bestow upon your heirs.
Step 1: Letter of instruction
One of the first and most sensible things to do when it comes to end-of-life planning is create a comprehensive letter that lists all of your assets, where they are located, and the keys to any properties or vehicles that you own. A list of the assets that you own could include:
- Stocks, bonds, mutual funds, or other taxable investments
- IRAs, 401(k)s, annuities, or other tax-deferred assets
- Checking and savings accounts and other bank accounts, CDs, cash, savings bonds
- Life insurance policies
- Real estate
- Corporate assets, such as a nonqualified plan
- Art/stamp/coin/sports cards collections
- The locations of important papers and planning documents, such as the deed to your home and your medicare paperwork
You can give the location of all of your titles to this property and other important documents so that they can be easily found. You can also include all of your user IDs and passwords to online accounts along with the location of the key to your safe deposit box. And be sure to include a list of your debts as well, such as mortgages, credit cards with outstanding balances, and other obligations that will need to be repaid.
It is also wise to include the names and contact information of all of the financial professionals that you use, such as your…
- Financial planner
- Insurance agent
- Tax preparer
- Real estate agent
Then you can give this letter to the person you have selected to execute your estate after you’re gone. This letter has no legal weight, but it can greatly simplify and accelerate the estate planning process for your executor or executrix. They will know exactly what you have, where everything is, and who to get hold of to move things along.
Step 2: A last will and testament
Once your letter of instruction is complete, it is time for you to enlist the services of a lawyer and draw up a will. This must be done while you are still of sound mind. A will can guide your assets through the probate process and also dictate the following factors:
- Who will care for your minor children
- Who will manage the assets you leave for your minor children
- Who will execute your estate plan
- How you want any debts that you owe to be repaid
- How you want to treat any debts that are owed to you
A will is the only legal document that provides for the care of minors. A revocable living trust or power of attorney cannot do this.
Step 3: Healthcare and medical care directives
The next step you should take is to provide clear directions for your own medical treatment and long-term care. Having clear healthcare decisions and medical power of attorney can make caring for you a great deal easier.
A living will specify the conditions under which you would want to be taken off of life support. For example, you could stipulate that you only want to be put on life support in the event that you need a one-time surgery or are temporarily ill. You could do this with a physician-ordered life sustaining treatment order (POLST). You can also ask to be taken off of life support for health conditions from which you will likely never recover.
This is important because your health insurance company cannot make these choices for you. A simple healthcare proxy that has been properly created can avoid difficult decision making on key issues in many cases. Healthcare providers and healthcare agents will know exactly what they will need to do under any circumstances.
Other medical directives such as a healthcare power of attorney can legally dictate the conditions under which you would not want to be resuscitated (DNR), transported or removed from a hospital, and the donation of your organs.
A good estate planning attorney can help you to cover all of the bases here; you don’t have to imagine every conceivable possibility on your own. But these documents can make your final days and hours much, much easier for your loved ones. There will be no gut-wrenching decisions for your family to have to make when your time comes.
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You can also specify which doctors, hospitals, nursing homes and hospice care facilities you want to use beforehand so that there is no uncertainty there either. These quality of life decisions should be made before the need arises so that you and your heirs can think clearly about them and do advance care planning before it is needed.
Step 5: Funeral arrangements
If you have not done so already, create a detailed plan for your memorial service and the disposition of your remains. You can specify what type of service you want held and where to hold it, whether you want to be buried or cremated, where you want to be buried and other details.
This is one of the most important aspects of end-of-life planning, as it may be particularly painful for your loved ones to have to make these decisions without any direction from you beforehand.
Step 6: Disposition of assets
As mentioned previously, you can dispose of your liquid assets quickly and cheaply by naming a transfer on death beneficiary for all of your accounts. But most tangible property cannot be transferred this way. A will can stipulate who will get what, but it will have to go through the probate process, which can be expensive and drag on for weeks or months. There are several factors to consider when it comes to disposing of your assets, listed below.
Revocable living trusts
If you don’t like the idea of having your assets pass through probate, you can draw up a revocable living trust and retitle all of your assets in the name of the trust. Then, after you die, all of your assets will be passed directly to your specified heirs without going through the probate process.
Living trusts can provide many benefits, such as protection from creditors and the ability to disperse assets according to specific wishes that cannot be provided for in a will. The creation of one or more trusts is usually considered one of the fundamental elements of financial planning.
If one or more of your beneficiaries is a minor child, then you’ll need to make special arrangements for the assets that they inherit to be managed for them in some fashion until they reach the age of majority. You can name a minor as the beneficiary of an IRA, but there must be an adult overseeing the assets until he or she reaches adulthood.
Durable powers of attorney
Having a durable power of attorney allows a trusted loved one to make financial decisions on your behalf. This can be a godsend for you if you become incapacitated and need someone to manage your affairs while you are still living. Just be aware that it is usually better to use a limited power of attorney as opposed to a general power of attorney, because bestowing the latter type of document on someone can be viewed as a taxable gift by the IRS. Your tax or financial advisor or attorney can show you how to avoid this trap.
Recent tax laws only allow IRA beneficiaries to stretch out the distributions from an inherited IRA for ten years at most. But even this relatively short amount of time can still allow the assets inside the account to grow somewhat before being depleted. Stretching your IRA distributions to your heirs may be a good idea in many cases, although there can be exceptions.
Consult with your financial planner about the most efficient way to disperse your retirement assets. He or she can show you the tax implications of doing this so that your heirs pay as little tax as possible. Remember that the tax treatment of all traditional IRA distributions is as ordinary income, which means that they are taxed at your top marginal tax rate. Tax implications are always important to consider.
The Roth factor
If you can afford it, consider converting some or all of your traditional IRAs or qualified plan balances into Roth IRAs before you die. You can pay the taxes by drawing money out of the account, but it’s better if you can leave all of the money in and pay the taxes out of your own pocket. There are no mandatory minimum distributions with a Roth IRA, so if you have no need for the money while you’re living, you can just let it grow and leave a larger nest egg to your heirs.
If you own shares of stock in a retail brokerage account, you may be tempted to sell them and leave the proceeds to your heirs. But this can result in a large and unnecessary tax bill. Your cost basis in the stocks will step up to their current price on the date of your death, so your heirs won’t have to pay any income tax on those shares you’ve held onto for the past 20 years. Talk with your financial advisor about which assets you may want to pass on in kind this way in order to minimize your capital gains taxes.
If you own any type of life insurance, the death benefit will be paid directly to the beneficiary without going through probate, regardless of whether the policy is housed inside a trust. Your heirs may need the proceeds from your policy to pay off debts or taxes on your estate, so this can be a good way to provide some liquidity for this purpose. If your estate is large enough to use up your entire unified credit (or credits if you’re married), you may need to set up an irrevocable life insurance trust in order to minimize the amount of estate taxes that you’ll pay. Your financial advisor and/or estate planning attorney can best advise you on how to do this.
If you don’t have any term life insurance and you have young children, then it’s probably a good idea to apply for some coverage. If you are relatively young and in good health, it shouldn’t be too hard to find a good 20-year term policy with a face value of at least $500,000 at a reasonable price.
Term vs. permanent coverage
You may also want to apply for some permanent coverage at some point so that you’ll still have it when you die. An indexed universal life insurance policy can provide this and also build up cash value that you can access tax-free whenever you need to. A whole life policy is another option if you want a more conservative type of policy. But the cost of the insurance premiums for either type of policy will be greater than that of a term life policy. Premium payments are a major consideration for any type of insurance, so be sure to factor in the cost of insurance when you shop for coverage. The greater the amount of the policy, the higher the premiums will be.
Accelerated death benefits
When you shop for an insurance policy, it is a good idea to get one that has accelerated benefit riders. These riders can pay out cash upfront to you if you become disabled or need some form of long-term care. The trigger for payout is usually the inability to perform at least two of the six activities of daily living (ADLs). Policyholders get several different forms of protection this way in one convenient vehicle. The big advantage is that the policy is guaranteed to provide a payout in one form or another, regardless of what happens to you. This can be a much cheaper option than having to pay for care expenses with cash payments out of pocket.
Accelerated benefit riders can provide an effective alternative to purchasing an expensive long-term care insurance policy or doing a spend-down strategy so that you can qualify for Medicaid. And ABRs generally have no tax consequences either.
Viatical settlements and life settlements
If you become terminally ill and you are a large life insurance policy owner, you may be able to sell your life insurance contract using a viatical settlement. Your life expectancy must be less than two years, and you must be terminally ill to qualify. You must also sell your policy to a qualified viatical settlement provider. The proceeds from this sale can then be used to cover your palliative care.
The Viatical Settlements Model Act governs these transactions and how they can affect ill policyholders. This legislation provides for an orderly secondary market for life insurance policies for the terminally ill.
The National Association of Insurance Commissioners (NAIC) also helps to regulate this market with further directives for viatical settlement companies. Viatical settlement offers are more commonly used in areas where there is a high population of older people, such as New York, Rhode Island, Wyoming or Florida. In most cases, you’ll need to enlist the help of a tax advisor when it comes to settlement taxation. Your settlement broker may also be able to show you how your viatical settlement proceeds will be taxed.
But you can still sell your life insurance policy if you meet certain conditions even if you are in the bloom of health. This can be done with a life insurance settlement transaction, where a life settlement provider buys your policy from you.
With life settlement transactions, your settlement proceeds will be less than your full policy’s death benefit, but more than your policy’s cash surrender value. As with viatical settlements, there are companies out there that purchase policies for profit. Your financial advisor can tell you more about how they work.
End of life planning: Final thoughts
Creating a comprehensive estate plan will take some time and thought, but it is well worth the effort. A superbly-crafted estate plan allows your heirs and family members to focus on their loss instead of getting caught up in your worldly affairs. As mentioned several times here, one of the keys to building a sound estate plan is to find a good, competent financial advisor and estate planning attorney that you feel comfortable with. These two professionals can advise you about a wealth of details relating to your estate plan and can also assist with investment management, income tax avoidance and other factors that determine how much you can leave to your heirs. And if you have a life insurance policy that you’d like to sell, you can easily find out what it’s worth. How much is your life insurance policy worth? Find out in seconds with our free life settlement calculator.