Buying a life insurance policy appears fairly straight forward, but have you really considered, and articulated, what should happen to your payout if something were to happen to you? Buying the most appropriate life insurance cover is only part of the story. Read on for the important ‘next steps’ you need to take.
A recent White Paper[1] published by a leading insurance company indicates that the underinsured gap for life insurance is closing in Australia. While this is an encouraging sign, there is still more to be done in educating consumers on the role of life insurance within their estate planning as a whole. This is especially important when considering the complexities of estate planning needs for family farming businesses. In other words, what happens to insurance funds in the unfortunate event of a claim?
In many ways, purchasing life insurance is just the first step in a process that ultimately results in the distribution of funds to achieve specific purposes. These may include supporting the lifestyle of surviving family members, settling debts associated with the family farm or business and perhaps even providing a windfall for chosen beneficiaries. Whatever the purposes are, they need to be reflected in the paperwork.
While television advertisements suggest how affordable it is to directly purchase life insurance, and with simplicity as a key reason for the increase in take up, the appropriateness of the cover for your circumstances should nevertheless always trump both price and convenience.
If the cover is not suitable, or if during the process of the application, you fail to understand the need for full disclosure and neglect to supply information required by the insurance company, despite paying years of premiums, your entitlements may not be paid at the time of claim and that can result in financial stress.
Seeking advice for buying the most appropriate cover for individual needs is an important first step. The second is to clearly plan and formalise what should happen to the money in the event of a claim.
If you don’t have a plan, your entitlement – which could amount to several hundred thousand dollars – could find itself languishing in legal battles. Or, loved ones could miss out on a share of the funds if there are no clear instructions around nominated beneficiaries or if those instructions have been superseded as your situation has changed.
There are a number of important considerations, such as what happens to the claim monies if you divorce or if your beneficiary dies at the same time as you do. Another is how you manage issues of tax and distribution of funds if your beneficiaries’ circumstances include disability or legal incompetence. Matters such as these need to be explicitly addressed so that upon your death the proceeds from your life insurance policy are handled according to your requirements.
Buying a life insurance policy appears fairly straight forward, but in reality it’s just the first step in an important financial planning process that should articulate a clear purpose for the lump sum payment at the time of death that meets both the obligations and wishes of the deceased. To achieve your intended objectives, you need advice from a financial planner, one that has experience in risk insurance as it applies to estate planning, and the complex needs of farming businesses, as well as coordinating with your accountant and solicitor to implement a seamless estate plan that aims to deliver the outcomes according to your intended purposes.
For further information about risk insurances and estate planning please contact me on 0438 946 638 or email phillip@financialservicessa.com.au
[1] Zurich Insurance, Research Whitepaper, February 2014, ‘Australians and life insurance: misinformed, misinsured?’ Accessed 20 May 2015 at http://www.zurich.com.au/content/dam/australia/life_insurance/zurich-australia-whitepaper_australians-and-life-insurance_misinformed-misinsured.pdf
Phillip Dibben is a financial adviser at Active Financial Management. Active Financial Management and its advisers are Authorised Representatives of Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306 trading as Fortnum Financial Advisers.
This information (including taxation) does not consider your personal circumstances and is of a general nature only. You should not act on the information provided without first obtaining advice specific to your circumstances.