If I utter the phrase “Estate Planning” does it call anything to mind? Maybe you envision the little guy with the monocle from Monopoly, or picture some grand country property with manicured grounds, a butler, and an eight-car garage. But the reality is that estate planning is for all of us, not just the wealthy.
Of course, not even the wealthy always get it right, as the title of this article suggests (Go google “Prince Estate” and spend some time reading for some examples of why at least a basic Will is very important). But you really don’t have to be rich to have a need for doing some basic planning that can make the difference between having your wishes followed after you are gone, or leaving behind a tangled mess that can cause conflict, stress, and just plain work for your family.
The most fundamental document used in estate planning is the simple Will. This isn’t a complicated, or even expensive, piece of planning for you to take care of. It’s simply a document you sign that states how you want things to be taken care of after you die. This is where you’ll spell out who gets what, from the savings account to the silverware, and also directs who you want to take care of your children, if you have any. If you die before preparing this basic document, you are essentially asking your county’s probate judge to make these decisions for you. At best, it delays your heirs from being able to take care of your affairs, even things as simple as paying for your funeral can be delayed by a lack of planning. At worst, there is not agreement among your family members about what they interpret as your final wishes, and strife may ensue.
You can even prepare a will yourself. There are many software programs or DIY websites that can give you guidance. You can simply draft the document using the template language from these services, and then sign it in front of at least two witnesses. (They need to sign, too.) Some states will also require that the Will be notarized. Of course, if you aren’t confident in flying solo, you can probably get an attorney to draft one for you for a couple hundred bucks, depending on where you live.
One key component of a Will is to name your Executor. This is simply the person you are authorizing to see that your will is carried out after you are gone. The probate court will supervise this person in the execution of your will, including such things as paying your bills and dealing with debt collectors. Your Executor should be a living adult that you trust to handle your affairs. If your financial situation is simple, it can be a trusted friend, a spouse, or an adult child, but if your wishes are more complicated, consider naming your attorney as your executor.
Once you’ve completed and signed your Will, keep it in a safe place. A waterproof and fireproof safe in your house is a good option. If you’ve hired an attorney to draft the Will for you, often they will also offer to keep a copy on file. It’s best not to choose to keep your Will in a safe deposit box, since it can sometimes take a court order to be able to open your box after your death. It also makes sense to give a signed copy to your Executor, or, as mentioned, your attorney, just in case your copy is lost or destroyed.
Finally, remember that your Will is a living document. Make sure you pull it out, dust it off, and review it every once in a while. A good rule of thumb is to review it every two to three years, or during or after any major life events, such as a marriage, a divorce, or the birth of a child. Updating your Will is easy. Simply write a new one, or amend the existing one with a document known as a codicil. Like before, make sure your updates are signed, dated and witnessed.
Anyone can benefit from having a Will, and it doesn’t need to be a complicated or expensive process. If you haven’t yet taken the time to prepare yours, go do it now! If you have, maybe now is a good time to review.
Consumers who have purchased a permanent life insurance policy — such as whole life or universal life — are familiar with a distinctive number on their regular account statements from their insurance carrier. Unfortunately, many people are confused about what this number truly means...and even worse, many of their financial advisors are unaware of important information they need to place its value in its proper context.
Understanding Cash Surrender Value
The number I am referring to is Cash Surrender Value (CSV). Cash surrender value refers to the funds that will be due a policyholder should they choose to surrender, or "cash in" their policy. With permanent policies, it's the savings component that's built up by paying premiums above the cost of the insurance in the earlier years of the policy.
In other words, CSV is the cash that an insurance company will pay to a policy owner for terminating the policy and relinquishing his beneficiaries’ claims to the benefit that they would have received upon the insured’s death. The amount of this cash payout will change from year to year based on premiums paid, interest earned, the cost of insurance charges determined by the life insurance company, and other various carrier-imposed fees.
Receiving the cash surrender value can be very tempting if the policy owner no longer wishes to continue making annual premium payments. It is a guaranteed and immediate cash transfer into a designated bank account - sign some papers, terminate the policy and the carrier will issue the CSV check.
The problem is that cash surrender value has no correlation to the only way of properly evaluating the value of a life insurance asset – Fair Market Value (FMV). Most consumers associate this metric with other assets, such as houses cars, but rarely apply such association to a life insurance policy.
Understanding Fair Market Value
Fortunately, FMV has a common understanding because it is a mainstream term that is clearly defined by the Internal Revenue Service. According to the IRS regulations, “[T]he fair market value is the price at which (1) the property would change hands between a willing buyer and a willing seller, (2) neither being under any compulsion to buy or to sell, and (3) both having reasonable knowledge of relevant facts.”
So how does this definition apply to the challenge of determining the FMV of an asset like a life insurance policy? It means that the policy needs to be exposed to an open market consisting of qualified potential buyers, as part of a no-pressure and no-obligation process, and that both the owner and prospective buyers have full knowledge of the facts related to the policy and its value.
The FMV of a life insurance policy is determined by the current market conditions of supply (number of policy owners seeking to sell their policies) and demand (number of investors interested in buying policies), but there are a few common variables that influence how much cash a policy is worth to prospective buyers:
If an investment fund can earn an attractive return on the purchase of a policy, it will offer to buy the policy for an amount that is greater than the CSV; in some cases, the payout could be multiple times higher than the CSV offered by the insurance company.
How Do You Know the True Value?
So how is the true market value of a life insurance policy determined in order to learn whether the CSV or the FMV is the best financial option?
The only practical way to arrive at the FMV for a life insurance policy — based on the three considerations contained in the IRS definition above — is to work with a professional firm who has a duty to act in the policy owner’s best interest and will gather and present relevant facts about the asset to buyers and sellers. With life settlement transactions, the only duty as described above, according to state regulations, is fulfilled by a licensed life settlement broker.
Life settlement brokers take policies to the open market of qualified and licensed life settlement providers and share information to policy owners in an honest and ethical manner. The FMV of any policy is determined in real-time as the competitive marketplace determines what the policy is worth, from the first bid to the final bid.
Before a policy owner even explores the market, the prudent course of action is for him or her to receive an objective appraisal of the policy’s value. Crossroads Financial Group can prepare a no-cost, no-obligation pre-market pricing valuation for each insurance policy, leveraging more than 20 years of experience in the industry. This confidential assessment provides immediate insight into whether the policy is likely to command offers and whether the FMV is likely to exceed the CSV.
Greg Stadler is a veteran life insurance agent and marketer, located in Green Bay, WI.