Make Your Mantra ‘the Power of Simplicity’
By John Spoto
In my last article, I discussed how simplicity can improve your ability to make better financial decisions and talked about the importance of being properly insured. Let’s continue to talk about life insurance and also examine the role estate planning plays in simplifying your financial affairs.
Two additional points are worth making about life insurance. First, keep your analysis of how much insurance to buy, simple. No formula can yield the precise amount of coverage that you’ll need. Complicated calculations will not produce an insurance amount any more accurate than a straight-forward, common-sense approach.
Second, stick with a product that you understand -- in most cases that means a simple, reasonably priced term policy, where you pay a premium for a certain number of years and for a specified death benefit. If you die during the term of the contract, the insurer will pay your heirs the death benefit. If you live until the end of the term, the insurance company pays nothing.
Be aware that instead of a term policy, commission-driven insurance agents may push to sell you what is known as cash value or permanent insurance. These policies come in multiple forms including “whole-life” and “universal life” contracts.
These are some of the most complex financial products sold to consumers today and nearly impossible for an ordinary person to understand. They require sophisticated computational and analytical skills to determine the true policy costs, rates of return, and how the contract needs to be managed to get the maximum value. You can assume when you are dealing with an insurance company; you’ll be on foreign territory and facing a very sophisticated adversary. Unless you have a specific need that only cash value insurance can address, and a clear understanding of the policy mechanics, move on.
Estate Planning. Estate planning is a process designed to protect you and your family if you become incapacitated and are unable to make decisions for yourself, and upon your death. The purpose of the plan is to ensure that your wishes, not those of a probate judge, are carried out in either of those situations.
For most people, with a modest amount of assets, four basic and inexpensive documents will give you and your family members the protections you need. The first two, the “financial power of attorney” and “healthcare proxy,” allow you to designate someone to make financial and medical decisions on your behalf if you become incapacitated. Once you recover, you take over again. The third is a form authorizing your health care proxy (and anyone else you choose) to access your medical records so they can work with your doctor to make better decisions regarding your care. Anyone over 18 should have these three documents in place.
The final document is a will, which goes into effect when you die. Once you have started a family, accumulated some money or own a house, you need a will. Its main purposes are to name a legal guardian for your minor children or dependents with special needs, appoint the person who will manage and settle your affairs and disburse your property to the people you want after your death.
As your family and financial situations become more complicated, and if you or your estate planning attorney see the need, you can add some additional protections to your plan.
Just as the principle of simplicity has driven Apple’s meteoric rise, it has the power to improve our daily lives by making them easier and better. Just like “decluttering” improves your home (and your health!), decluttering can also improve your finances, allowing you more time to spend doing what you love and less time worrying about your future.
“Simplicity” is a powerful concept. Make it your mantra.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com .