In planning for worst-case scenarios, don’t leave your family unprepared.
Recently, a friend passed away suddenly at age 38, leaving behind a wife and two young children. His death was unexpected, tragic, and heartbreaking. He was successful, energetic, and so full of life. It’s inconceivable that he could be gone so soon.
I know first-hand how life can change in an instant. I lost my father when I was 15. He died in a car accident on the way home from work, less than a mile from the house. He was only 40 years old.
Losing my dad was hard enough – it was just devastating to my family. And if he hadn’t financially prepared the way he did, it would have been much worse; on top of the emotional devastation, we could have been destitute and homeless. Basic planning prevented that.
Too often, families don’t take basic steps to prepare for tragedies. They lack proper estate planning documents. They underestimate what it will cost to maintain their household if the primary income earner dies or becomes disabled. Or worse yet, they do nothing.
As a physician, you deal with hard facts in treating illness. You deal with bad news and unexpected outcomes on a regular basis. You know that ignoring or neglecting issues won’t make them go away.
When it comes to your personal finances, you also must face the hard facts to protect your family from potential hardships. And that includes making sure your family will be provided for despite what life may throw your way.
Maybe you are reading this thinking your family will be covered because you have an old life insurance policy with a $1 million death benefit. But $1 million may not be nearly enough.
Will your spouse need to pay off a mortgage, fund college tuitions, or pay off other debts? Do you have aging parents who may need support? How will your spouse replace the income you provided? If your current lifestyle runs $200,000 a year, a million dollars would last only five years.
To stretch the insurance proceeds over a longer time, your heirs might consider investing in an income-oriented portfolio, and living off of the dividends and interest. But in a low-interest-rate environment, such a portfolio will most likely generate less than 4%. Even if you were to bump up withdrawals to 5% --could your family survive on $50,000 a year?
Similarly, if you were to become disabled, is that old policy you took out as a new doctor really going to cut it?
This same inadequacy often confronts us when we look at our investments, thinking that there is enough to cover our heirs-until we factor in taxes. While the proceeds from a life insurance policy typically pay out tax-free, that is not the case for all your other accounts. Let’s say you have $1 million in your 401(k) that you accumulated after years of pre-tax salary deferrals and employer matching. Recall that those dollars are all taxable upon distribution. Yes, the 10% penalty for early withdrawal is waived for death-but taxes are not. So $50,000 in distributions from that retirement account might be more like $35,000 or even less after taxes.
Also, keep in mind that while the life insurance proceeds may be tax-free, once those proceeds are invested, they may become taxable. Many investments can generate taxable income and capital gains.
I have heard horror stories about spouses who didn’t realize that cashing in certain types of accounts would yield large tax bills, and then were unprepared when tax time came around. If you are managing your affairs on your own, you may have a grand plan in your own mind-but does your spouse know and understand that plan?
Have you ever had a patient who just wouldn’t heed your advice? Through their inaction, they were essentially moving towards a dangerous, calamitous, or even fatal result?
Don’t be that patient. Don’t let your inaction inadvertently steer you and your family in the wrong direction.
If you haven’t reviewed your policies since you purchased them, do it now. If you need to make changes or need additional coverage, it is critical to take action while you are in good health. If your health declines, you may find that options that were previously available no longer exist. This could be especially problematic if you find out that a policy has lapsed or is due to lapse, or that premiums are scheduled to dramatically increase.
Planning ahead isn’t just about taking out insurance or building an investment portfolio. Have you named guardians for your minor children? Have you reviewed and updated beneficiary designations? Do you have partnership agreements in place?
If your spouse isn’t in the loop-get them in the loop. It’s hard enough to have some of these planning conversations without the added weight of grief or other difficult circumstances.
Make time now, and your family will thank you later.
Karen Coyne, CFP(R), is a strategic wealth advisor with Raymond James in Hagerstown, Maryland. Email firstname.lastname@example.org.
Raymond James and its advisors do not offer tax advice. All investing involves risk and you may incur a profit or a loss. Opinions are those of Karen Coyne, not Raymond James.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner ™ and CFP® in the U.S.