Not having enough in your estate to look after your family is a common problem with many Australians given that most of us have mortgages, motor vehicle payments, credit card payments, bills and taxes to pay, not to mention the cost of looking after the kids who seem to devour more food than a pack of hungry hyenas. When you do the exercise of calculating your nett worth (total assets minus total liabilities) then the balance sheet may not look all that healthy.
You may however be one of the minority whose nett asset position is looking pretty good, but before making any assumptions it is wise to work out exactly what your family will need if you and/or your spouse get hit by the proverbial ‘London Bus’. It is important to remember that if you pass away your family also loses your income, so that will need to be replaced if they are to maintain their standard of living. No one wants to see their family thrown out of their home because bills can’t be paid.
A common response by people, when addressing this issue is “if I died my spouse would still work” or “my parents would step in to look after the kids”. In reality though, if you die this Friday your spouse is not going to work on Monday (unless he/she hates you of course). In fact we have found that most of our clients who experience a death in the family actually take months to get back into some sort of a normal routine.
I know some of you are vehemently arguing the fact that your parents or in-laws would step in and look after the kids but if you think about this logically, full-time parenting is a huge personal & financial responsibility for anyone let alone someone who was looking forward to, or is currently enjoying their retirement years. It is often said that one of the best things about being a grandparent is that you get to give the kids back at the end of the day. If money was not an option I know that we would all prefer not to thrust that burden upon our aging parents.
So let’s work out what your family needs if you and/or your spouse pass away (only fill in the rows that are appropriate to you). Obviously if you would prefer to clear 100% of the debt on your premature death then the family probably would not require 100% of your income to continue coming into the home (most of our clients allow for an income to continue coming into the family at least until the children have completed their tertiary education or obtained a trade).
Motor Vehicle payout figure
Other debts (credit cards, loans etc.)
Income required $_________ x _____years
Housekeeper $_________ x ____ years
Nanny $_________ x _____years
Day Care Fees $_________ x _____years
After School Care $_________ x _____years
Primary School Fees $_____ x ___children x ____ years
Secondary School Fees $______x ___children x ____ years
Tertiary Education Fees $_____ x ___children x ____ years
Emergency Fund (any unexpected bills)
Funeral Costs $ 15,000
Less (available cash, superannuation, life insurance proceeds etc.)
Are you shocked? In a good or bad way? It’s a bit scary when you look at how much you are worth to your family and how much it is going to cost them simply to maintain their standard of living. So what are your options?
- You could simply say that it is not your problem – you will be dead and it will be up to your family to sort it all out. Over the last thirty or so years of assisting clients with these issues I can honestly say that I have met one or two people who actually think this way. Thank God it is only a very small percentage.
- Your family may be able to sell some assets but you would certainly hope that they did not have to do this at ‘fire sale’ prices when the market was down.
- Perhaps you could lower the expected ongoing income requirements or enrol the kids in less expensive schools, but this may not be the best strategy for them given that they have also just lost a parent.
- Often the best option is simply to cover the shortfall with Life Insurance. You will be pleasantly surprised just how inexpensive it is. If you do choose this option then it is vital to arrange it through a trusted adviser. Questions to that adviser should include: ‘What options are available regarding the ownership of the policy & what are the advantages/disadvantages of each option?’;‘What options are available regarding the beneficiaries of the policy & what are the advantages/disadvantages of each option?’; ‘What are the tax consequences of each of the ownership & beneficiary options?’.
If you purchase your life insurance online or via a Direct Insurer they will only give you one option. No consideration whatsoever is given to the aforementioned questions as their business model is built on selling as many products as possible, to as many consumers as possible, in the shortest period of time.
Obviously this is great for their bottom line, but not so good for you particularly when you discover that the policy that you have been paying for for all those years will be underwritten when you submit the claim forms, not when you/your spouse originally applied for the insurance. Too many decent Australians have been left short-changed by dodgy institutions due to ‘so-called’ Non-Disclosure issues. Be very careful if you choose, or are coerced to go down this path!
Please don’t hesitate to connect with me if you need some assistance.