Planning for the unthinkable

Insurance and wills are two parts of financial planning that are difficult for most people to confront. In many cases, they involve committing the time and cost to set up arrangements that we hope we will never need to use. However, the results of avoiding this area can cause significant stress to loved ones when they least need it.

If you have been delaying making a decision about these important issues, consider the following scenarios and choose which one you would prefer.

Family with life insurance

A properly constructed financial plan will include an assessment of the risks that something could go wrong. For instance, what will happen if the major breadwinner dies? When the insurance policy pays out, a key question will be to decide how the money should be used. Typically funeral expenses and debts will be paid and the balance invested to provide a replacement income for the family. Some life policies will pay an extra amount to cover financial planning costs.

This makes life a little easier during what is usually a tough time.

Family without enough life insurance

Most working people will have some life insurance through their superannuation fund, but often this is not enough. The amount paid out may just meet final medical expenses, funeral costs and legal fees. If the surviving partner is the major breadwinner they may need to pay for home help and childcare assistance to continue working to support the family.

When the surviving spouse is not the major breadwinner, they may need to return to work or seek government assistance to enable the family to maintain its lifestyle.

That’s not a good experience when also dealing with grief.

Preparing for the inevitable

Sadly, some families behave badly after a death and disagreements over money are not uncommon. A current, signed will is crucial to ensure everyone understands the deceased’s wishes.

One way to make reorganising affairs easier after the death of a partner is to hold assets as joint tenants. This means if one party dies, ownership automatically passes to the survivor. Arranging ownership of the home, vehicles, boats and other lifestyle assets this way can simplify asset transfer on death.

On the other hand, there may be tax and asset protection reasons not to own assets this way and it is an area where getting good advice is recommended.

The effect on age pensioners

The age pension is means tested on asset ownership and income. When one partner dies the surviving partner will receive the lower single age pension which may be further reduced by the more stringent assets test.

Although it is not the most appealing topic, ignoring these issues will cause financial and emotional hardship at some stage. Make your life easier and seek advice before you actually need it.