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Financial Literacy - Planning for your heirs
Preparing for a life event
Jennifer faces several important financial decisions, especially those pertaining to her estate plan.
Planning for your heirs
  The problem

We are concerned about Jennifer's ability to pay the mortgage on her own without causing her undue financial distress. Current home mortgage lenders look for a debt-to-income ratio not to exceed 28 percent of monthly gross income for housing expenses. Jennifer's gross monthly income does not pass this test.

Mortgage lenders do, however, have a second debt-to-income ratio of 36 percent as the maximum allowed for housing plus recurring debt. Because Jennifer has no car loan and only minimal credit card debt, her income passes this second test.

Still, we are concerned that Jennifer's income is insufficient to comfortably pay her mortgage and other bills. Jennifer has almost no cash reserve set aside to pay for any unexpected expense. We believe it's just a matter of time before the house or car needs a major repair, which may cause her to pile up debt.

Regarding risks, Jennifer has two times her salary in employer-provided life insurance and an employer-sponsored disability policy. Through payroll deduction, Jennifer pays for the full cost of her disability policy. This means any income paid due to a claim will be income tax-free. If the employer were paying the disability premiums for Jennifer, any benefits she might claim would be fully taxable as income.

Jennifer and her son have group health insurance. We do not believe Jennifer needs to consider long-term care insurance any time soon. Jennifer also has a $200,000 term policy convertible to permanent. Her risks are well mitigated with insurance.

Jennifer's funding for her son's education, fortunately, has been cared for by a loving aunt. Her son has inherited $25,000 in a trust to pay for college. However, it needs to be carefully invested to ensure that it grows over the next 14 years.

Regarding retirement, Jennifer currently only has $10,000 set aside in her employer 401(k). She has no IRAs or Roth IRAs. This area of her financial life needs to be addressed.

Having reviewed all of the above with Jennifer, her main question really focused on what she should be doing for estate planning purposes. We compliment Jennifer on her desire to get organized and not procrastinate in taking care of this important component of her financial plan.

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-- Posted: Nov. 19, 2007
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