A recent White Paper published by a leading insurance company indicates that the underinsured gap for life insurance is closing in Australia. However, Wealth Fundamentals’ advisers say that 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. In other words, what happens to insurance funds in the unfortunate event of a claim?
The White Paper [1] by Zurich Insurance indicated that there was an increasing take up of life insurance by Australians due, in part, to easier and increased access for buying insurance. Matthew Lane from Wealth Fundamentals, an Authorised Representative of Fortnum Financial Advisers, warns that while these findings are encouraging, Australians need to align their reasons for purchasing life insurance with the purpose of the funds that will be paid upon their death.
“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 and perhaps even providing a windfall for chosen beneficiaries. Whatever the purposes are, they need to be reflected in the paperwork,” he said.
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 individual circumstances should nevertheless always trump both price and convenience.
“If the cover is not suitable, or if during the process of the application, the applicant fails to understand the need for full disclosure and neglects to supply information required by the insurance company, despite paying years of premiums, entitlements may not be paid at the time of claim and that can result in financial stress,” he said.
Seeking advice for buying the most appropriate cover for individual needs is an important first step. The second is clearly to plan and formalise what should happen to the money in the event of a claim.
For those without plans, the 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share of the funds if there are no clear instructions around nominated beneficiaries or if those instructions have been superseded as your situation has changed.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,” he explained.
“Details such as who owns your policy also need to be specified. That is, will you self-own the policy or will it be owned by someone else: your estate, a trust or a third party such as a partner, adult children or business partners? This will determine where the entitlements from your life insurance claim will be paid: directly to a beneficiary, to your estate or into a trust that has been set up as part of your estate,” he added.
Additionally, options exist for purchasing life insurance through your superannuation fund. This may provide tax advantages along with cash flow convenience, as premiums are paid from the fund. This too requires advice.
While self-ownership of a life insurance policy that is paid to nominated beneficiaries may be an appropriate structure for some people, others may need to manage their life insurance entitlements via their estate and more specifically a testamentary trust. A testamentary trust provides asset protection and can manage the distribution of funds to beneficiaries who may not be capable of managing the funds themselves and this structure may assist both parties to make the most of taxation efficiencies. A testamentary trust is established via a Will and its appropriateness should be discussed as part of the planning process. A testamentary trust only comes into effect upon the insured person’s death.
“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 their intended objectives, Australians need advice from their financial planner, one that has experience in risk insurance as it applies to estate planning, and one who would typically coordinate with the client’s accountant and solicitor to implement a seamless estate plan that aims to deliver the outcomes according to the intended purpose,” he said.
For further information about risk insurances and estate planning please contact Wealth Fundamentals on 07 3720 1299.
Matthew and Chris Lane are financial advisers at Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals. Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Wealth Fundamentals strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.
[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