How life insurance can be a good Estate Planning tool
Putting your Estate Plan in place provides an opportunity for you to review your current insurances to check whether they are adequate for your current circumstances. Those of you who have a financial advisor would most likely go through this process on a regular basis as part of their service offering.
Life Insurance can also be a useful tool to look after your family when you are no longer here, and can be used in a number of ways depending on your circumstances at the time of putting your Will in place.
One motivating factor for many people putting life insurance in place is to cover their children’s future education costs, mortgages, debts and living expenses. When looking at these liabilities and expenses, it is ideal to look at them from a perspective that if you were not here tomorrow, how much insurance would your actually need to cover these debts and other costs. It is important to analyse what these costs would be. If you intend to send your children to a private school, what are the yearly school fees and additional expenses, adjusted for inflation. How much would you need to raise your children each year, and what are the associated living costs for your family? What are the outstanding loan amounts payable of mortgages, car loans, credit cards and any other liabilities?
It’s important to also look at the family dynamics. If one partner goes off to work everyday and is the main breadwinner in the family, while the other partner looks after young children and is responsible for running the family household, this is crucial to note when determining the amount of insurance you require.
Let us expand on this further. The partner who has the responsibility of maintaining and running the household passes away. Instantaneously their role as the cook, cleaner, nanny, children’s uber driver, ironing person, therapist, school canteen helper, school library and classroom helper is gone. Who then will fulfil these multiple roles? Who will ensure that your children wake up each day and are fed and dressed ready for school? Who will take them to school, collect them from school and take them to an array of after school activities that seem to populate their afternoon schedules these days. Who will then take them home and ensure that they complete that their homework is done, that they are fed and feel a sense of security as they are tucked away in bed for the evening.
You may be fortunate in that you have close family or friends who could step in and help you out, particularly in the initial stages. Are the initial stages sustainable long term and what if you don’t have close family or friends who would be able to come to the aid of the surviving partner if something happened to either of you. What if they had to do their full time job and all of the above.
By looking closely at what it would effectively cost to run your household if something happened to you it would allow you to effectively determine an amount that you feel comfortable with that would help you maintain your status quo. By obtaining insurance in this amount, it would prospectively allow the surviving partner to obtain the services of a nanny if required, or prospectively a housekeeper, cleaner or someone to assist with the ironing.
Having such insurance proceeds would allow you the financial freedom to engage the services that you may prospectively require to keep your family unit running smoothly subsequent to the loss of a partner. It would also allow you the financial security of paying off or substantially mitigating mortgages and other liabilities.
Insurance has also been used as a tool by those who may have blended families. Let’s say that you have young children with your current partner and you also have adult children from a previous relationship. Prospectively your current assets that you own may only sustain and look after your current partner and young children after your death.
However, it may be your wish to provide for your adult children as well as you don’t want them to miss out or feel neglected. One way that many people get around this conundrum is by putting in place an insurance policy outside of their superannuation in their own name in which the beneficiaries of this policy will be their adult children. By implementing this people in such situations feel that they are taking care of their young family and current partner however they are also taking care of their adult children too and leaving a legacy to all of their family members.
It is important to note that life insurance is taxed differently depending on which structure it is held. Life insurance that is held in a superannuation fund that is paid to dependant, that being a spouse or dependant children under the age of twenty five years of age is not taxed as the recipients are considered dependants of the deceased. However, if you made a nomination leaving your superannuation and life insurance held by the superannuation fund to your adult children there would be tax implications when it is paid to your adult children as they are not deemed to be dependants, unless you have a disabled adult child.
It is prudent to obtain the appropriate financial advice when looking at putting life insurance policies in place so that you can then make an informed decision regarding the best life insurance policy to suit your individual circumstances, where such policies should be held, and the tax implications, if any, relating to the payment of your insurance policies upon your death.
Insurance is an integral consideration when putting your estate plan in place. At the very least a review of your current insurance will reinforce what you currently have in place and such review could be the catalyst in determining whether the level of insurance that you have is sufficient or whether additional insurance is required dependant on where you are in your life cycle and the status quo of your current circumstances.
Disclaimer: The advice provided in this blog is of a general nature only and you should always seek legal advice relevant to your own circumstances.