Background
We recently completed an Estate Plan for a client who was concerned about how his son would be financially provided for should anything happen to him. As this is a common problem that we address for a number of our Clients, we asked if he would be willing to share some details about his particular situation and the advice that we had provided.
The three main concerns he expressed to us as his financial advisor were:
- How do I provide a safety net for my son if I am not around to support him?
- What can I do to protect my income if I were suddenly unable to work?
- How much life insurance do I actually need?
“With a seven-year-old son and the current economic climate I have started to become concerned about my lack of safeguards,” explains Tim, a 47 year-old father. A recent divorce and the subsequent sale of the family home in a weak property market has devastated Tim’s finances. He earns around the average wage, so going from a situation where all living expenses were shared to now paying all his ongoing costs such as rent, utilities, and living costs on his own, he is finding it much harder to save for a rainy day – and for this reason he needs a substantial safety net to protect himself and Jack should the unexpected occur.
Our Advice To Tim
“Now that you are the sole provider for Jack he is more than ever reliant on you to support him. Understandably, your main concern is to look after him and fortunately there are a number of things that you can do to safeguard his future.
“The first step to planning for this is to do a realistic budget to determine what costs you absolutely need to cover now, and into the future. With a budget completed, you can then protect against disability by putting in place an Income Protection or Salary Continuance policy that will provide up to 75% of your salary in the event that you are unable to work due to illness or injury.
“By doing a budget and also looking at your existing assets, you may determine that you don’t need the full 75% – or alternatively you may actually need all of your income supplemented, in which case you need something to fill the gap. This is usually where Total and Permanent Disability (TPD) insurance comes in. This will provide a lump sum in the event that you are unable to go back to work. Both Income Protection and TPD can be placed inside superannuation to save on your cash flow, however Income Protection is tax deductible to you if owned outside superannuation.
“Significant consideration needs to be given to how much Jack will need on an ongoing basis, but also how his finances would be looked after. You would need to cover and provide for Jack’s living costs and education up to when he would be independent. A way to do this would be to have a Life Insurance policy inside superannuation. By placing the policy inside your superannuation fund, you not only receive a tax deduction inside superannuation and remove the premium from your personal cash flow, but you also have an in-built management arrangement. With the current superannuation rules, Jack can now be paid a pension up until the age of 25 from your superannuation account – including the life insurance benefits – if he is under 18 when you pass away.
“Alternatively, this protection could be provided by a Testamentary Trust in your Will, however by using superannuation it achieves a similar result without the legal fees incurred to set up a Testamentary Trust, and would be appropriate in your situation as the majority of your assets are currently in superannuation.”
If you would be interested in reviewing your own Estate Plan, or if you just need some general advice tailored to your unique situation, contact us on 07 3209 2300 or by email.
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