Protect Estate Planning

HerMoney Podcast Bonus Mailbag #24: Life Insurance, Wills & Dependents

Kathryn Tuggle  |  December 28, 2020

It's been a crazy year, and you've got questions. (Thankfully, we've got answers.)

At the risk of sounding like The Queen of ‘Putting It Mildly,’ let me just say: It’s been quite the year. These are strange and uncertain times we’re living through, and so many of us have questions. This week, we’re tackling some of your bigger financial questions with a special Mailbag-only episode dedicated to your questions around life insurance, wills and dependents.

First, Jean dives into a question about how much life insurance a couple with a grown child really needs, then we tackle the topic of Dependent Care FSAs and what happens to the money we don’t use during 2020. Next, Jean advises a listener who’s considering setting up a will or living trust but is unsure where to start, and counsels another woman who is curious what the “5 year lookback” that we’ve all heard about for Medicaid really means (and what that means for setting up a trust, or planning for what to do “once the money runs out.”) Lastly, Jean advises a woman who’s considering getting a will even though she’s only 24. 

Despite the heartbreak and challenges we’ve seen over the last few months, we want to extend a big thank you to all our listeners for making 2020 so filled with love and community. We can’t wait for better and brighter things in the New Year. As always, if you have a question you’d like Jean to answer, write us at mailbag@wordpress-549352-1763130.cloudwaysapps.com.

This podcast is proudly supported by Fidelity Investments. Life is full of big moments—both the planned and the unexpected. Fidelity can help you navigate both with confidence. Learn more at Fidelity.com/HerMoney. Fidelity Brokerage Services LLC Member NYSE, SIPC.

Editor’s note: We maintain a strict editorial policy and a judgment-free zone for our community, and we also strive to remain transparent in everything we do. Posts may contain references and links to products from our partners. Learn more about how we make money.

Transcript

Jean Chatzky: (00:00)
HerMoney is supported by Fidelity Investments. Whether you’re celebrating a milestone or adjusting to the unexpected, Fidelity’s there to help you navigate life’s important moments with confidence. Visit Fidelity.com/HerMoney to learn more. Hey Everybody. I’m Jean Chatzky. Thanks so much for joining us today. This is the third mailbag special we have done over the past few weeks. There are more that we are hard at work on because so many of you have questions right now. Even those of you who are still fully employed and whose families are doing just fine have questions. Just yesterday, our producer, Kathryn Tuggle, and I were chatting about refinancing our mortgages – mortgages that she and I just got less than a year ago – because these are uncertain times. These are strange times and we are all having to learn so many new things on the fly. I, and I know Kathryn echoes this, I am so thankful every day for those of you who write in to us. It means a lot to us that you trust us with your big financial decisions. And I want you to know that I, and everybody here at HerMoney, we all have your back. So on that note, we don’t want to delay diving in and tackling as many of your questions as possible. Let’s say a big hello to Kathryn Tuggle. Hey Kathryn.

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Kathryn Tuggle: (01:29)
Hey Jean. Nice to see you.

Jean Chatzky: (01:31)
It’s nice to hear you too. I know it’s been way, way, way too long since we have been together, but I’m excited that I’m going to see you next week for our social distancing dinner outside.

Kathryn Tuggle: (01:44)
I can’t wait. I’ve been telling everybody. I get to see Jean next week.

Jean Chatzky: (01:48)
Excellent. Well, let’s dive in.

Kathryn Tuggle: (01:50)
Our first question comes to us from a listener signed, your biggest fan in Charlotte, North Carolina. Dear Jean and Kathryn. I’ve been a huge fan since the beginning so thank you for all that you do. Podcast, Facebook group, AARP and your books. I just can’t share this resource enough to all the women in my life. We’re reviewing our household expenses in detail, and the question of life insurance has come up. I’m 52 and I get a life insurance benefit through my employer at one times my salary. My husband is 50 and does not receive benefits with his current employer. For years, we’ve been paying into term 80 policies with a $500,000 death benefit for each, and monthly premiums are now $180 combined. Now that our children are both young adults on their way to independence and our mortgage is paid off, we feel like it makes sense to reduce the monthly life insurance premium. When we first bought into this life insurance, the question was, what would I need if something happened to the other parent. Now that we don’t need to pay the mortgage, hire childcare, or even pay for college expenses, it seems so much less valuable to us. We’ve been very focused on retirement planning. We pay for our cars in full, pay off our credit cards every month, and have no other debt. Our emergency fund could be much stronger. And our aging parents all seem to be well enough prepared financially. I do worry about a medical catastrophe, even with good high deductible medical insurance. This economic exercise has forced us to look at every expense and so our question is, do we reduce the life insurance benefit to $250,000 for each of us? Or do we cancel it all together? Thanks again for your insights and education.

Jean Chatzky: (03:23)
First of all, thank you so much for the compliments. Thank you for writing. And let me just say, you’re asking the right questions. Life insurance is for the living. It is to provide for those expenses of living that an income would ordinarily cover. In fact, I think it’s often really, really helpful to think of life insurance as income insurance, because that’s basically what you’re trying to replace – the income of the person who sadly would no longer be around. It sounds to me like you are in really, really good shape. The medical catastrophe that you worry about probably wouldn’t be paid for by life insurance because if you’ve got a medical catastrophe that sort of says to me that you would both still be living and life insurance would not step into cover that. What I am wondering is if one of you were to pass away and the other was no longer there to care for that person, how are you situated for long-term care? You may want to keep some of this insurance in place in order to provide for that possibility. On the other hand, if your retirement funds are fully funded, if you believe that you’ve got enough in there to cover for a long-term care event, you might be totally fine. Right now, I would probably cut back rather than get rid of it entirely. But I do think that this is the time in your life when you can start looking and when adults who have taken all the right steps, as you have, can start looking to reduce

Kathryn Tuggle: (05:27)
Such great points. Thanks Jean. Sure. Our next question comes to us from Nicole. She writes, hi Jean and Kathryn. Thanks for continuing to bring us great episodes in the time of quarantine. I can’t believe I’m saying this, but I’ve actually been missing my commute where I’d listened to your weekly episodes. So I’ve had to get creative and find new alone time for listening. My question is regarding dependent care FSAs. With my children’s school, we haven’t gone virtual. I no longer am spending money on after-school care and therefore won’t use all the dollars I’d set aside in my dependent FSA before our plan ends. With all the new acts being passed, have you heard about any provisions that address this, or am I just out the money I’ve elected to be taken out of my paycheck for this plan year? Thanks so much for the guidance and inspiration you continue to provide.

Jean Chatzky: (06:12)
Thanks so much for the question. Again, a really, really good one. The answer is, there is some new guidance here from the IRS, but you’re going to have to talk to your employer. So what happened was the IRS issued what they call a notice and it offers greater flexibility to employers in terms of how they can allow their employees to handle their flexible spending accounts for both healthcare and for dependent care. When it comes to those dependent care, flexible spending accounts – and usually people use these for childcare, but they can also use them for money that they need to take care of adult dependents – the employee does have the ability to do a number of things. You can decide to dial back on your contributions. You can pause your contributions, because usually they are made through paycheck withdrawal. So even though you elected to put a certain amount of money into the account for the year, you haven’t put all of that money into the account for the year. You can also increase the money if that’s something that you want to do. And your employer has the ability to allow you a longer grace period. They can allow you to extend the deadline to submit expenses until March of next year. But you’ve got to ask your employer if they’re willing to make these changes to allow you to take advantage of what the IRS is providing because again, it’s an employer by employer thing. I hope that clears it up. And everybody else out there, if you’re having the same questions with flexible spending accounts, both for dependent care and for healthcare, there is this flexibility, but you’ve got to talk to your employer. Talk to your benefits department.

Kathryn Tuggle: (08:17)
For sure. So many of the questions that we’re hearing, the first stop is your company’s HR department.

Jean Chatzky: (08:22)
Yeah. And you know, they are learning on the fly, just like everybody else. So it may be that in some companies they’re not up to date with this and you can just say, I know that the IRS has issued some new guidance on this. Could you look into it for me?

Kathryn Tuggle: (08:37)
Yup. Amazing. Our next note comes to us from April. She writes, hello HerMoney. I love the show and listen regularly. A recent brush with illness got me thinking, it’s time to set up a will or living trust. I don’t have a lot of funds to hire a lawyer to help me with this setup and I’m considering the DIY approach. Do you have a recommendation on a website to use or perhaps another approach? Thanks so much. P.S. I’m happy to report. I have recovered from the illness.

Jean Chatzky: (09:04)
Well, April, I’m very happy that you’ve recovered from the illness as well. Let’s just talk about the differences between a will and a living trust. A will can be a very, very simple document that basically lays out what happens to your belongings if you were to die. A living trust is more complicated and more expensive. It is a document for people who, for one reason or another, want to avoid probate, which is a court process of handling your assets. And not everybody needs them. In fact, I would say the vast majority of people don’t need them. And so, if you are really trying to figure out how do I make sure my stuff gets into the right hands if something were to happen to me, and you don’t have an especially complicated life, you don’t own a business, you don’t have property in multiple states, you don’t have extreme privacy concerns, I’d lead you to the will, rather tend to the living trust. And I think there are a number of places you can do this online. I’m going to send you to two of them. The first is to Nolo.com. That’s a company that used to be called Nolo Press. Now it’s just Nolo. And they have a nice will tool. The other one is LegalZoom.com. And you can use both of these. You can get your will done for way under a hundred dollars. And then if you want to spend just a little bit more money, you can do it yourself and then pay a lawyer just to look it over for an hour of her time. And that is often a really good sanity check.

Kathryn Tuggle: (10:51)
Love the sanity checks.

Jean Chatzky: (10:53)
Absolutely. I love them too. Before we go on, let’s just remind everybody that HerMoney is proudly sponsored by Fidelity Investments. Some of life’s important moments are planned for way in advance, while others we don’t see coming. As always, Fidelity is here to help you navigate both the joyous and the unexpected events with confidence. Their resources, guides, and tools can help guide you through important financial decisions when you need it most. And you can visit Fidelity.com/HerMoney to learn more. Kathryn what’s up next.

Kathryn Tuggle: (11:29)
Our next question is from Tammy. She writes, hi Jean and Kathryn. My friend has an aging father and has become overwhelmed with what to do about the situation from a financial perspective. Could you speak generally about what the five-year look back that we’ve all heard about for Medicaid really means? Essentially, I believe that in order to qualify for Medicaid and be eligible for a no-cost nursing home, you have to prove you’ve not had any assets for five years. But I’m not sure if that’s accurate, or if that’s true in every state. Essentially, should we all just plan to go to an attorney to find out legally what we can do when our parents get to this point? The understanding of what to do “once the money runs out” can be so complicated and any insight that you have would be great. Thank you.

Jean Chatzky: (12:11)
So I am not going to dive incredibly deeply into this question because, if you are doing what is called Medicaid planning, and Medicaid planning is basically the act of moving assets on purpose out of your parents’ names so that they will qualify for Medicaid, that’s where this look back provision comes in, as far as I understand it, you absolutely have to speak to a lawyer. And you want to find a lawyer who specializes in elder care. Because if you go through all of this and you get it wrong, then you have just put yourself back many, many years. There is a National Association of Elder Care Attorneys. I am not an attorney and I’m not schooled enough in the legal minutia here. I don’t want to lead you astray and that’s why I’m not going down this road. But the other alternative is to allow your parent to pay for their own needs and expenses when it comes to nursing care, assisted living, a nursing home. What many people don’t realize is, if you are a self-pay candidate, if you’re actually paying for it, rather than if Medicaid is paying for it, there’s a different set of beds. There’s a different set of rooms. And you’re going to have much, much greater choice in facilities and care if you can pay for it yourself. And these facilities won’t kick you out once you run out of money and go on Medicaid. They may switch you to a different room or a different bed, but it’s an nicer and easier way to transition in. Bottom line, absolutely,100%, talk to an attorney who is a member of the National Association of Elder Care Attorneys. Talk to an accountant as well and proceed very, very carefully from there.

Kathryn Tuggle: (14:28)
That’s great advice, Jean. We actually went through this process with my mother-in-law and found an attorney here in New York state. And it really does vary on a state by state basis, according to the kind of trusts that you get set up and exactly the moves that you need to make. So she should definitely do exactly as you suggested.

Jean Chatzky: (14:47)
Yeah, it’s complicated. It’s legal. I mean, there are just so many different state-by-state permutations and it’s easy to go wrong. And so none of us want that to happen.

Kathryn Tuggle: (14:59)
For sure. Our last question is from Beth. She writes, hi Jean. I’m a big fan of the podcast and look forward to listening every week. I want to apologize in advance because my question is somewhat morbid. Should I consider making a will, even though I’m only 24. Around this time, last year a friend of mine unexpectedly passed away. As the anniversary approaches, I’ve been thinking about how overwhelming it was. I started thinking about creating a will and I’ve also likely been in quarantine for far too long and maybe slowly losing my mind. I have a net worth of about $40,000 and I know that I would want a portion donated to charity. I graduated debt-free two years ago and my only other major expenses is my car, which will be paid off before the end of the year. My company offers an automatic life insurance policy of two times my annual salary, which would be $110,000. I’m single and do not have children, but I have a niece and nephew and I’d want to support their 529s. So should I consider creating a basic will? Would an online service be enough for a simple will for me? Thank you so much for your help.

Jean Chatzky: (16:01)
First of all, I think a, this is not a morbid question. It’s a really, really good question. And I think we’re all slowly losing our minds in quarantine. I know I am. Yeah. You should absolutely make a will. As soon as you have assets that you care about distributing in a thoughtful way, should something happen to you, you make a will. Cause it’s not difficult and it’s not expensive. And it’s just one of those things that you do it. You’ve done it. You let people know that it’s done. You put it in a drawer so somebody could find it if something happens to you, which I’m sure it won’t, but it’s one of those adults steps that we take. And so I think this is a really, really smart move on your part. I think an online solution is absolutely sufficient for this. Again, Nolo is a place to go. Legal Zoom is a place to go. And then I would also make sure that you’ve named beneficiaries for that life insurance policy. It sounds like you may want your niece and nephew to be the beneficiaries, or to arrange for that money to go into their 529 accounts. But that is absolutely something that you could provide for, both through the insurance policy and in a will. And the other reason for doing this, and I think people understand this, but perhaps not. So let me just explain it. If you don’t have a will, the state basically decides for you where your assets go. If you’re married, they go to your spouse. If you’re not married, they go to a hierarchy of relatives based on how close those relatives are to you. So your parents, your siblings, your niece and your nephew are going to be pretty far down the list. And so the fact that you want to provide for them, you know you want to provide for them, as well as a charitable bequest, is reason enough to get this done. So I would say, go for it. And I would also just say, I’m really, really sorry about the loss of your friend.

Kathryn Tuggle: (18:25)
Absolutely. But it’s so nice that she’s thinking about this because it’s just, like you said, the adult step. Good to be prepared.

Jean Chatzky: (18:32)
And a lot of people don’t get to it until they have kids or they get married. I mean, I remember my ex-husband and I made our first will right before we got on a plane without our child for the first time. We had never done it which was just wrong. You know, we should have done it a long time before. We should have done it before he was born because a will is the only document that allows you to name guardians for a minor child. But that’s the way a lot of parents do it and we did it in a big rush. We went over to a friend’s house. He was an attorney and his wife witnessed it and we got it done. But it’s much better to be able to do it in a thoughtful and not rushed way.

Kathryn Tuggle: (19:18)
Totally agree. I actually remember going with my parents to the attorney’s office to do this with them, like, as you said, as they were about to get on a plane for vacation. So better to be prepared more in advance.

Jean Chatzky: (19:30)
Kathryn, thanks so much for bringing these questions together. I liked the theme today.

Kathryn Tuggle: (19:34)
Thanks Jean.

Jean Chatzky: (19:35)
And everybody else, thanks so much for joining us today on HerMoney. Thank you for the wonderful questions and the stories that you share with us. We love hearing from you. So please keep writing to us at mailbag@wordpress-549352-1763130.cloudwaysapps.com. If you liked what you hear, I hope you’ll subscribe to our show at Apple Podcasts. Leave us a review. We love hearing what you think. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Video Helper and our show comes to you through Megaphone. Thanks so much for joining us. We’ll talk soon.


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