Personal Finance Topic #28 - If you really love your spouse and children (financially speaking)

If you really care about your spouse and children...

This article addresses how the primary income earner can financially protect his/her family from major illness, disability, or death. Financial calamity has a low probability of happening, but if it does happen, there usually follows a devastating financial consequence that can affect the loved ones for many decades to come if unprepared. So being prepared is a very loving and caring act for the primary wage earner (Real Man) to think about. To a lesser extent, a job loss, divorce, and major illness by another member of his/her family can also have a debilitating affect on family finance as well. Even good events, such as windfall profit or inheritance, warrant a review of your estate plans.

In a typical wedding vow, you promise to take care of each other, “… for better or for worse, for richer or for poorer … as long as we both shall live.” Have you kept your promises to each other, especially the financial part? I hope you have, but what would happen if you’re not in the picture? Many spouses may find themselves in a financial crisis after the primary wage earner succumbs to disability, death, or even divorce. Many single moms live from paycheck to paycheck, not being able afford the simplest of comfort because even her family’s basic needs cannot be met. What can one do to make sure your spouse and children are financially secure in case something unexpected happens to the primary wage earner? To be totally prepared for all situations is not really practical due to myriad of possible circumstances that can precipitate the unforeseen events – but here is a short list of big items that one can prepare for so that survivors can live "happily ever after" (sort of). Corresponding methods could be used for parents, step children, or a domestic partner (of course, not everything will apply).

· Before something bad happens, prepare the following:

1. Reduce debt burden on surviving family, and stop creating new debt that would burden them later.
2. Create an emergency fund (in a joint money market account) equal to 3 to 6 months of expenses.
3. Create a will, durable power of attorney, living will, and instructions for burial and financial data.
4. Review your group life insurance and beneficiaries for you and your family annually, and establish a level term insurance policy outside of group policy. With only your group life insurance, you become ill and lose your job (and medical/life insurance) and if death follows, the group insurance will not pay. Have enough insurance coverage outside of group life insurance to pay off all family debts, mortgage, and children’s education funds. Total life insurance coverage should be 8x to 10x your annual pay.
5. Pay for group disability insurance -This income is mostly taxable as ordinary income. Pay the extra premium to get the extra 10% in coverage. It’s worth it.
6. If you are remarried or have children from previous marriage, review inheritance scenario.

· Review beneficiaries for 401(k), Traditional and Roth IRA. These can be rolled over into your new IRAs soon days after death without any tax penalty. Total retirement funds should add up to 10x to 20x your annual pay at the beginning of retirement, depending on the amounts for pension and Social Security.

· Know that insurance payouts, 401(k) and IRA distributions do not go through probate, but they are still included in the deceased’s estate. Consult an estate lawyer if the spouse’s assets will increase to more than $2M, as her estate tax (up to 45% above $2m) could affect her estate after her death. Income tax (up to 35%) can be very high as well. Make sure the right beneficiary names have been selected (not your ex).

· Know your Social Security benefits for surviving spouse and child.

1. Your widow or widower may be able to receive full benefits at age 66 to 67. Reduced widow or widower benefits can be received as early as age 60.
2. A surviving spouse can receive benefits at any age if she or he takes care of your child who is entitled to a child’s benefit and is younger than age 16 or disabled. Your unmarried children who are under age 18 (or up to age 19 if they are attending elementary or secondary school full time) also can receive benefits. Your children can get benefits at any age if they were disabled before age 22 and remain disabled. Nothing is offered by the Social Security until you are 60 if your children are 18 or older.
3. Your dependent parents can receive benefits if they are age 62 or older. (For your parents to qualify as dependents, if you ­provide at least 1/2 of their support). There is a one-time payment of $255 death-benefit that can be made when you die if you have worked long enough.
4. If you have been divorced, your former wife or husband who is age 60 or older (50-60 if disabled) can get benefits if your marriage lasted at least 10 years.

I recommend that survivors should put the insurance distribution (suggest a lump sum payment) in a money market fund and not make any major financial decision (invest, sell/buy house/car or anything of high value, etc.) until 6 months after spouse’s passing. Emotional decisions could cloud your judgment soon after his death.

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