There are some things in life you shouldn’t go without. A power of attorney is one of them. Also known as a POA, a power of attorney is a legal document that gives someone else (or a few people) the authority to act on your behalf and make financial or healthcare decisions. When you create a power of attorney, that person is named your “agent” or “attorney-in-fact.”
So why would you want a POA? The answer is simple: creating a power of attorney can ensure your life wishes are carried out if you’re unable to make decisions on your own. Unfortunately, this could happen if you become disabled or incapacitated due to an injury or illness.
If you have life insurance, you may want to grant your agent authority over your policy. This way, you can protect your beneficiaries if something happens to you. In addition, some life insurance policies allow you to tap into your policy to pay for end-of-life care. If you’re incapacitated, an agent can help you access this cash.
Creating a power of attorney is a big decision. It’s imperative that you pick the right person, or group of people, as your agent. You’ll also want to work with an experienced lawyer to designate timing and other characteristics. Whether you’re ready to create your first power of attorney or revise an old POA, here are four key considerations.
#1 Choose someone who has the right skills for the job.
Your attorney-in-fact should be someone you know well and trust. Even though this person has a fiduciary responsibility to act in your best interest, you should still be careful who you choose. The wrong person could put your best interests, and the best interests of your beneficiaries, at risk. In fact, we recommend having a candid conversation with a potential agent ahead of time.
During this conversation, you may want to ask:
- How comfortable are you with being an attorney-in-fact?
- Do you think you could deal with banks and legal professionals, if needed?
- Do you plan to live nearby for the foreseeable future?
- Can I trust you to carry out my wishes?
- Do you know enough about financial matters to handle my estate?
By the end of the discussion, you should have a good idea whether or not you should choose this person as an agent. Remember, you can also name more than one person as an agent. For example, an aging parent with two children may want to declare both heirs as agents on the power of attorney. There are benefits and drawbacks for doing so. If you decide to name more than one person, consider:
- Will my agents get along and act in my best interest?
- Do I trust all parties equally and believe they will work well together?
- Do both people have enough time and interest to be agents?
Sometimes naming more than one agent offers a checks and balance approach, ensuring the power is divided and your wishes are carried out. Other times, it may cause delays. The bottom line: make sure you pick the right people for the job.
#2 Think about what authority you'd like to give.
There are a couple types of POAs, and they each grant different levels of authority to your agent. When you create a power of attorney, carefully consider which type is right for you.
- Limited power of attorney: An agent is granted authority on your behalf as soon as you sign the agreement. The document remains in effect until you become incapacitated. Someone might choose a limited POA to allow an agent to buy a car or sell a home while they’re traveling out of the country, for example. In general, you wouldn’t choose a limited POA to manage end-of-life care or your life insurance policy.
- Durable power of attorney: A durable POA is a popular choice because it allows an agent to make financial decisions on your behalf if you are incapacitated. A durable power of attorney also lasts your entire lifetime unless you cancel the document. In most cases, if you’d like to protect your life insurance policy quickly and avoid legal disputes, you should create a durable power of attorney.
#3 Consider when you'd like a POA to take effect.
As you create a power of attorney, you’ll learn that you can decide when the document takes effect.
A “springing power of attorney” doesn’t begin immediately, but rather at a future date if/when you are declared incapacitated. With a springing power of attorney, your agent has to prove to the bank that you’re incapacitated, which can take time—and sometimes leads to disputes in court. For this reason, many people choose a durable power of attorney which takes effect immediately after you’re incapacitated.
#4 Think about how you'd like your finances to be managed.
If you have a whole life insurance policy, you may be able to use accrued funds to pay for end-of-life care. It’s important that your agent-in-fact knows that you’d like to use your benefit in this way, as well as the type of care you’d like to receive.
Here’s an example. Let’s say you become incapacitated and are unable to make decisions on your own. Your agent should act on your behalf and release funds for you to receive the medical care you need—whether it’s care in a facility or in your home. If you pass away, your agent should direct the rest of your policy’s benefit to your beneficiaries and ensure the money appropriately.
These are big decisions, so take your time.
Creating a power of attorney can feel overwhelming, but it’s well worth your time and effort. A good legal professional should guide you in the right direction and draft the document, so it carefully outlines your wishes.
Unfortunately, you never know when could change, so it’s imperative to be prepared. If you have a life insurance policy now, make sure you have a power of attorney, and your agent has authority over your policy. Doing so will protect your wishes, as well those of your loved ones.