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Life Insurance/Wills? I’m 27 and have $60,000 in life insurance through my employer. I have $120,000 in student loans ($60,000 private, $60,000 government) plus a $9,000 car loan. I have no credit card debt. I’m single and live alone and that’s not changing any time soon, if ever. Right now, I have my life insurance split 50-50 between my parents as my primary beneficiaries. I have my only sibling as a contingent beneficiary to get 100%. Is this right? Should I change it? I don’t have a will. Should I get one? Who do I go to? Does it cost money to get one? What’s the difference between a living will vs. a regular will?
This question is great because it’s common for younger people (and, sadly, older and more established people) to not create an estate plan. It’s not easy to think about what should happen to your assets when you die, but proper planning will make it so much easier on your grieving relatives. And yes, even if you’re young, single, and don’t have kids, the time to think about estate planning is now. You can always update your plan as your life changes, too.
For guidance, I turned to Lindsey Drake, an Elder Law attorney at Drake Law, PLLC, in Austin, TX. Financial planners like me help our clients formulate their estate plan, and we connect them to attorneys to draft the necessary legal documents. As you’ll see with her answers, Lindsey’s a pro!
Let’s go through the each of the issues you bring up in your question.
I don’t have a will. Should I get one? Who do I go to? Does it cost money to get one?
Lindsey says: “Every adult needs a will, even if you don’t think you have property to give under a will. Having a will gives your family a much wider range of tools for handling assets and property you collect over time, and significantly decreases both emotional and financial costs. There are ways to create a no-probate estate using beneficiary designations on insurance, financial accounts, and real estate deeds, but it is so easy to overlook an asset. The most frustrating call I take is from the family whose relative didn’t leave a will but had a low-value asset like a small bank account or a modest house. There isn’t much money to recover in probate and it could cost several thousand dollars to do so. If the person leaves behind a minor child, the costs increase to the tens of thousands because of the amount of work involved in passing property to a child.”
My Two Cents: I’ve heard from estate attorneys that wills made with online legal kits sometimes don’t hold up in court, so consider working with an estate attorney. It usually costs a few hundred dollars to create a will, depending on the complexity of your situation, but the value and peace of mind an estate attorney provides is priceless.
Many employers offer a group legal plan where you pay a nominal amount and get access to legal services. This is one of the most cost-effective ways to prepare your estate planning documents.
By the way, a will is crucial if you have kids, because that’s where you name your children’s guardian.
Also, let’s briefly dive into probate, which Lindsey mentioned. Probate is a legal process that begins after a person dies, when their assets are distributed to heirs according to their will (if they have one) or the state (if they don’t). During this time, a will can be contested, and the probate process can be lengthy, expensive, and painful to grieving loved ones. For this reason, many people try to structure their estate to reduce the amount of assets that must go through probate.
What’s the difference between a living will vs. a regular will?
Lindsey says: “A living will is better described as a directive to physicians or an advance directive. You are instructing your family and your physicians on whether you want to receive life-sustaining treatment. It is not a do-not-resuscitate order, which is an order to emergency personnel regarding out-of-hospital treatment. It is where you tell your loved-ones if you want treatment like a feeding tube or a breathing machine. There is no right answer to those questions and a young adult may answer very differently than an older person. If you choose not to sign a directive to physicians, your medical power of attorney will make the decision on your behalf. This document is a gift to your family and removes the uncertainty around end-of-life decisions.”
How do I pick primary and contingent beneficiaries? How often would I need to update them? What happens if you get divorced and your ex-spouse is still your beneficiary? What about if you remarry?
Lindsey says: “You should update your primary and contingent beneficiaries any time life circumstances change in a way that affects who you wish to receive your property after your death. I recommend reviewing your estate documents and beneficiary designations after any birth, marriage, death, or divorce, and at least every two years.
“If you marry, you need to change your beneficiary designations if you wish to include your new spouse. However if you divorce, state law automatically disqualifies your ex-spouse from receiving life insurance, bank accounts, or inheriting under a will. The gift to the ex-spouse lapses and is treated as if your spouse died before you; the will or contract will then look to contingent beneficiary designations.”
My Two Cents: So, to answer your specific question, you should list the beneficiaries you’d like to inherit your assets, and update this list as your family situation changes. One of your beneficiaries may pass away, you may marry and have children, or have a niece or nephew you’d like to include. You may even have a falling out with a relative and not want them to inherit your money! Anything can happen, so it’s good to look over your beneficiaries on a regular basis.
For some accounts, like bank accounts or brokerage accounts, you can specify that the money is Payable on Death (POD) or Transferable on Death (TOD). This means the beneficiaries will receive the money immediately, without it going through probate. This can provide loved ones with liquid cash to cover immediate expenses, like funeral costs.
When is it necessary to have supplemental life insurance outside of what your employer gives you?
Lindsey says: “Life insurance may be purchased for many reasons but as an estate planning tool, it is most important when providing support for a dependent or spouse. If someone else relies on you for support, you should have enough life insurance to either replace your income or pay for the services you provide. If you have no dependents now but you are in good health, it is wise to buy coverage while it is lower in cost.
“A secondary use of life insurance is to provide an inheritance, especially if you don’t own much property. Life insurance passes to your beneficiaries by contract and is therefore not part of your probate estate, and there are only a few instances where a creditor of your estate can demand payment out of a life insurance policy. If you do not name a beneficiary or your beneficiary dies before you do, your insurance pays to your estate, which makes it available to repay creditors.”
My Two Cents: Generally, single people and dual-income couples without kids don’t have a strong need for supplemental life insurance. If you home a home jointly with your spouse and it would be hard for one of you to afford the home on your own, then I would also recommend life insurance. I will add that for couples with kids, I suggest non-working spouses consider life insurance, too. They often think that they’re not earning an income so it’s not necessary, but think of all the work you do to care for your children and maintain your home that your spouse may need to hire help for if something happened to you.
I always recommend term life over whole life (or universal life) insurance policies. It will cover your family’s needs for a specified period (like when your kids are still financially dependent on you). While a term life policy won’t accumulate a cash value, the significantly lower premiums give you more cash flow for other financial goals.
Check out LadderLife to run a term life insurance quote. Their well-designed site and easier process make life insurance less cumbersome to look into (they don’t pay me to say that, I just like them and recommend them because they’ve streamlined the process for millennials!). For readers who have young children or plan to start a family soon, consider locking in a 20 or 30 year term life insurance now, while you’re in your 20s or 30s to make sure your family is protected.
Often you can add additional term life insurance through your employer so if you need a small amount of additional coverage, this may be the easiest option if you don’t want to go through the underwriting process. However, if you lose your job, you might also lose the life insurance coverage you have through work.
In your specific situation, since you have 1x your salary in life insurance through work, I would consider increasing your life insurance to 2x your salary during open enrollment to address your debt, which we’ll talk about in the next section.
How debt can affect your estate plan? What debts may end up the responsibility of family members?
Lindsey says: “Your debts must be paid from your estate assets BEFORE any beneficiary or heir receives a distribution. Debts are paid out in a very specific order beginning with funeral and lasts illness expenses and ending with unsecured creditors. Many student loan contracts specify what happens at the death of the debtor, whether the obligation ends at death or whether the loan continues as a debt of the estate. Government loans typically end at death and do not become debts of a person’s estate.
“Your family will only be obligated to pay a debt if it is attached to property that the beneficiary wishes to keep. For example, if a house has a mortgage, the beneficiary who will receive the house will pay the mortgage. If a car has a lien against it, the recipient must pay off or refinance the loan in order to keep the car. Where an asset is upside down, the secured creditor can choose whether to take the collateral property in exchange for the debt or attempt to recover the deficit out of other estate assets. Most secured creditors accept the car or house back and don’t sue for more. If a person dies insolvent, a family may be wise to take no action.”
My Two Cents: One thing that many people don’t realize is that Federal student loans are forgiven in the case of death. Your family would not have to pay back the $60,000 in Federal student loans if you pass away. However, they would be on the hook for your private student loans, which your life insurance would pay off. In addition, your family would likely sell your car and use the proceeds to pay off the balance of your car loan. If you don’t have much money in your checking, savings, or retirement accounts, it might be hard for your family to afford a funeral, which might be a reason to increase your life insurance through work from 1x your salary ($60,000) to 2x your salary ($120,000).
Is there anything else people should consider or unexpected roadblocks to prepare for?
Lindsey says: “Hiring a lawyer is the best way to identify potential roadblocks. Our job is to think up the worst possible outcome and then try to craft a plan to minimize the fights. An experienced lawyer has a wealth of war stories, positive family interactions, and scenarios to draw on and our value is helping you answer questions you aren’t aware you need to ask. While many of the forms and documents we prepare for clients are available on the web, using forms without professional guidance is an easy way to cause your family greater heartache, headaches, and hurt feelings. One of the worst kept secrets in the law is that we make significantly more money cleaning up messes from poorly drafted documents than we charge to prepare them for clients.”
My Two Cents: Thinking about what happens when you die is never a topic people want to talk about. It’s uncomfortable and brings up a lot of emotions. But anyone reading this who has a relative or friend who has had to clean up an estate mess left behind by a family member knows that a well crafted estate plan is one of the best gifts you can give your loved ones.
*Lindsey’s advice and My Two Cents are for educational purposes only. Consult an estate attorney for guidance regarding your specific estate plan.