In all of my years helping families make decisions as a financial advisor, I have witnessed my fair share of unfortunate situations. One story in particular is worth sharing.
We once had a client who was the proprietor of an established small business. He was married and had three young children with bright futures on the horizon. Unfortunately, my client passed away very young and quite unexpectedly.
Aside from the obvious emotional pain stemming from losing a loved one, our client’s family was also burdened with figuring out how to support themselves financially. Against our advice, he had not purchased a life insurance policy, because he had assumed the value of his business would support his family for the rest of their lives. This turned out not to be the case when his business sold for much less than he had hoped.
His wife returned to work full time, earning far less than the family had grown accustomed to, and they all had to make some major life adjustments.
The ensuing financial turmoil could have been avoided with the right preparation. While no one likes to talk about the possibility of an unexpected death, creating a financial plan can avoid years of financial distress for the loved ones left behind.
Here are a few precautionary steps everyone needs to take today:
Purchase adequate life insurance coverage. Making sure your life insurance policy covers the expenses your family will need to continue living a comfortable lifestyle is perhaps the most important step in ensuring your family’s financial stability after you’re gone. Life insurance is inexpensive, and there are a bevy of calculators online to help determine how much coverage your family would need.
“The easier you make it for those left behind to locate and access your assets, the faster they can financially get back on their feet.”
Add disability coverage. Disability insurance is an important coverage that is often overlooked. Disability insurance will replace a portion of your income if you are unable to work due to an illness or injury, and you are much more likely to become injured or too sick to work than pass away unexpectedly. The best disability policies can replace up to 70 percent of your income, which will come in handy if you’re unable to work.
Keep estate plans up to date. Your will, trust, power of attorney and medical directives are all incredibly important documents that need constant reevaluation. Review this information every time you experience a major life event, such as marriage, a new baby, buying a house, switching careers and so on, or following changes in estate tax laws.
Sign a buy-and-sell agreement. For business owners, it is imperative to have a buy-and-sell agreement in place. The agreement can be structured in a manner that transfers ownership of the business to a predetermined party while ensuring a fair payout for the surviving spouse. If you’d like to keep the business within the family, spell out your intentions to do so in your estate plans.
Keep in mind, there is a difference between management and ownership of a business. Instructions for determining who takes over both must clearly be delineated in your will.