Which financial planning documents do you need?

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Improving your financial situation isn't as easy as resolving to save more or eliminate debt. One less-thought-about aspect: having the right financial planning documents in place.

On that front, most Americans are woefully unprepared. Just 39 percent of adults have a budget, according to the National Foundation for Credit Counseling, while industry group Limra found only 44 percent have an individual life insurance policy. Somewhat more have a will—54 percent, says publisher Nolo—but of those, 20 percent are outdated due to a major life event.

"There's a built-in reluctance," said Gail Cunningham, a spokeswoman for the foundation. Many of the important documents in question force consumers to confront—head on—intimidating aspects of their health, mortality and overall financial situation. Yet being prepared helps to avoid some truly scary situations. "It's really an act of love," she said.

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The list of must-haves isn't one size fits all. Which documents you should have can be confusing. "As life happens, needs start to branch off," said Frank Paré, a certified financial planner and the president of PF Wealth Management Group in Oakland, California. A single 20-something won't require the same plans in place as a 30-year-old married couple or a widower in his 50s. (For help figuring out where your needs fall, use our tool below.)

  1. How old are you?

    • 20s
    • 30s
    • 40s
    • 50s
    • 60s
  2. What’s your household income?

    • Under $50K
    • $51K-$100K
    • $101K-$150K
    • $151-$200K
    • $201K+
  3. Do you have a spouse/partner?

    • Yes
    • No
  4. Do you have dependents (kids, elderly parents)?

    • Yes
    • No
  5. Do you own a house?

    • Yes
    • No
  6. How’s your health?

    • Great
    • Average
    • Poor
  • You’re in your 20s or 30s, single, with limited financial assets and obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, disability insurance, health-care directives

    Maybe: Power of attorney.

    Probably not: Long-term care insurance, life insurance.

  • You’re in your 20s or 30s, with a family and some financial obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, disability insurance, life insurance.

    Maybe: Health-care directives, Power of attorney.

    Probably not: Long-term care insurance.

  • You’re in your 20s or 30s, with significant financial assets and obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, disability insurance, life insurance.

    Maybe: Health-care directives, power of attorney.


    Probably not: Long-term care insurance.

  • You’re in your 40s, single, with limited financial assets and obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, disability insurance, health-care directives.

    Maybe: Long-term care insurance, power of attorney.

    Probably not: Life insurance.

  • You’re in your 40s, with a family and some financial obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, disability insurance, life insurance.

    Maybe: Health-care directives, power of attorney

    Probably not: Long-term care insurance.

  • You’re in your 40s, with significant financial assets and obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, disability insurance, life insurance.

    Maybe: Long-term care insurance, health-care directives, power of attorney.

  • You’re in your 50s or 60s, single, with limited financial assets and obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, long-term care insurance, health-care directives.

    Maybe: Disability insurance, power of attorney.

    Probably not: Life insurance.

  • You’re in your 50s or 60s, with a family and some financial obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, long-term care insurance, life insurance, health-care directives.

    Maybe: Disability insurance, power of attorney

  • You’re in your 50s or 60s, with significant financial assets and obligations.

    Yes: Cash-flow statement, will, letter of instruction, beneficiary designations, long-term care insurance, life insurance, health-care directives.

    Maybe: Disability insurance, power of attorney.

There's more work to be completed after that. "You can't just create the documents and go, well, I'm done," said Pamela Sandy, a certified financial planner and chief executive of Confiance in Cleveland. Regularly reassess and update them, especially after a major change in your life or financial situation. (After all, you wouldn't want to have an ex-spouse listed as the primary beneficiary of your 401(k), or a deceased parent as the agent on your health-care proxy.)

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Think about storage, too. Make sure your financial planner or attorney has copies of important documents like your will and life insurance policies, and prepare a "go box" with another set that you can grab if evacuating for an emergency, said Cunningham.

Some of the documents and policies that you might need:

Cash-flow statement

Whether you call it a budget, a cash-flow statement or something else, a document detailing your assets, liabilities, income and spending is key to understanding where your money is going. "That would be something I'd suggest everyone have," said Paré. Most other big financial planning decisions stem from that. Spotting areas where you can cut back could make buying life insurance seem more doable, for example. (Limra reports that of people who know they need insurance, 86 percent haven't because they think it's too expensive.) A list of assets would result in a more comprehensive will.

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Will

Consider drafting one once you turn 18 and are self-sufficient, said certified financial planner Catherine Seeber, principal for Wescott Financial Advisory Group in Philadelphia. It's worth having a will even if you don't have a complex financial situation or much to bequeath. Without one, state intestacy laws determine who gets your assets, which may not be whom you'd prefer. Basic wills can often be done very easily using software, said Sandy. Ask your lawyer about including a digital asset provision to grant your executor online access to bank accounts, email and other accounts, said Seeber. Some entities may balk at allowing that, otherwise.

Letter of instruction

Typically, this document goes along with your will, providing details like your preferred funeral arrangements. But planners suggest including more details, particularly log-in information for your online accounts and locations for important physical documents like insurance policies and deeds for a home. "In the old days, you used to be able to go through somebody's office drawer and piece these things together," said Seeber. "You can't do that anymore because everybody is doing it electronically."

Such a list ensures that online-only accounts, like PayPal, don't go unnoticed. It also ensures your heirs can manage accounts in the way you might wish, said Paré. Some companies won't allow access otherwise, and policies can vary widely. For example, terms for Yahoo accounts say they are nontransferrable: "Upon receipt of a copy of a death certificate, your account may be terminated and all contents therein permanently deleted."

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Beneficiary designations

"People typically focus on having wills in place, but if your assets are beneficiary-type assets, it's not as important," said certified financial planner Becky Krieger, senior director for wealth management teams at Accredited Investors in Edina, Minnesota. Those include life insurance policies, many kinds of retirement plans and annuity contracts, among others. Listing a beneficiary allows the assets to transfer automatically to that person when you die. (Otherwise, the default beneficiary is your estate, sending the assets through probate, which can be a lengthy and expensive process.) Make sure to keep designations up to date, she said. They trump even your will, meaning those life insurance proceeds will still go to your ex-spouse so long as he or she is listed, even if you'd prefer otherwise.

Life insurance

Having a policy in place becomes important once your passing would cause financial harm to others. "Typically, we think about that for people when they get married and buy a house," said Krieger. Think of it this way: If you died, you wouldn't want your spouse to struggle to pay a jointly obtained mortgage that was suddenly less affordable without your income. Having kids adds to the need for insurance. Single parents and stay-at-home parents should have insurance. How much you need varies; financial advisors often recommend having enough to zero out debts and replace your missing income for your heirs.

Planners don't usually recommend that young, single people have life insurance. But it can make sense in select situations, said Sandy. Parents might consider taking out a small policy on an adult child for whom they have co-signed student loans. "You do leave that debt behind," she said. "Life insurance closes your obligations."

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Disability insurance

So long as you're working, this is a policy to consider, said Steven Weisbart, a senior vice president and chief economist at the Insurance Information Institute. Should an injury or illness limit your ability to work, the policy pays out a percentage of your income. The odds aren't as long as you might like: Someone who is 20 years old now has a 1 in 4 chance of becoming disabled before they retire, according to the Council for Disability Awareness, an industry group. Having an ample emergency fund could reduce the need for short-term coverage, but most Americans don't have enough savings, said Weisbart. "If you're J.K. Rowling and you have royalties coming in, you can probably get by without it," he said.

Some companies offer short- and long-term disability policies to employees. But even then, it's important to assess the terms to make sure coverage is adequate, he said.

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Health-care directives

Once you turn 18, you should have a health-care proxy in place giving a trusted adult the right to make health-care decisions on your behalf if you're incapacitated, said Seeber. Without one, single adults (and even same-sex married couples) may have to get a court order to be consulted on care. If you have health concerns, you may also want to consider advance medical directives or a do not resuscitate order to specify your wishes in the event life-sustaining treatment is necessary, she said.

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Long-term care insurance

These policies cover the cost of caregivers, nursing home stays and other services to help you meet your personal care needs. "The industry expects that most people would not be looking to acquire a policy until their late 40s, early 50s," said Weisbart. That's late enough in life that the odds of long-term care needs increase, but not so old that rates will be significantly higher.

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Power of attorney

A springing power of attorney gives the person of your choosing the right to act on your behalf on financial matters should you become incapacitated. Powers can be broad or limited, depending on your needs. A married individual might want a power of attorney if their spouse would be unable to step in to act on their behalf financially, said Paré. (Say, for accounts that are in your name only.) Single individuals may benefit from one so that there is someone able to step in in an emergency.