Estate Planning and Insurance
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Articles by Steve Munro - Guest Contributor.
Key Takeaways
- A large lump sum payout can attract unwanted family attention or be eroded by a new partner's bad investments.
- Placing the family home in a trust and using a lump sum to clear its mortgage protects it.
- A life income policy paying a monthly sum into the trust keeps money directed toward its intended purpose.
- Life income cover is typically inflation-adjusted, so payments keep pace with the cost of living.
- A TPD trigger can be added so the policy also pays out on total permanent disability
When we think about life insurance, our minds often go straight to a one-off lump sum payout designed to pay off the mortgage, ensuring that your family won’t be left without a roof over their heads if you or your partner were to pass away. However, life insurance can offer far more than just debt coverage.
Extended Support for Your Loved Ones
There are policies available that offer extended support beyond just paying off the family home, providing a vital safety net for your loved ones. These policies can provide additional funds to cover lost income, children’s education costs, and other essential expenses. Instead of a one-off lump sum, these policies can be structured to pay a monthly amount to cover family expenses. While it might seem logical to opt for a larger lump sum payment for these needs, that approach can come with potential risks.
The Risks of a Lump Sum Payout
Let's consider a scenario: you pass away, and your surviving spouse suddenly finds themselves with a substantial sum of money. In some circumstances, this windfall can attract unwanted attention from both close and distant family members, eager to lay claim to a portion of the newfound wealth. Maybe down the track, your spouse might also be susceptible to ill-advised investment schemes from a new partner, potentially jeopardising the financial security you intended to provide. Unfortunately, a large sum can evaporate quickly under such pressures.
Protecting Your Family with a Family Trust and Life Income Cover
So, how do you protect against this situation? One effective strategy in New Zealand is to structure your estate for family protection through a family trust. By placing the family home within the trust, you ensure its protection and security (as long as the trust is set up correctly). The lump sum life insurance policy can then be used to clear the mortgage on the home.
Additionally, a life income policy can be set to pay a monthly sum into the family trust account. This approach ensures that the money is used for its intended purpose, providing ongoing financial support for living expenses while safeguarding against ill-conceived schemes from family members or new acquaintances, thus ensuring the financial security of your loved ones.
Life income cover is typically inflation-adjusted, ensuring that the sum insured isn't eroded over time. This means that the payments keep pace with the cost of living, maintaining their value and continuing to meet your family’s needs in the future. Additionally, with this strategy, you can incorporate a Total Permanent Disability (TPD) trigger. In the event of becoming totally and permanently disabled, the policy would pay out, providing crucial support when it’s needed most.
Conclusion
In conclusion, while a lump sum life insurance policy might seem like the simplest solution, considering a more structured approach through life income cover within a family trust can provide enhanced protection and peace of mind. This method ensures that your legacy is preserved and used wisely, safeguarding your family from potential financial pitfalls and ensuring their continued stability and security.
If you’d like to know more about life income insurance, contact Steve at Risk Direct for a no obligation discussion. We can also refer you to our preferred structing specialists, Gilligan Rowe & Associates, for trust setup and asset protection advice.
FAQ
What are the risks of a lump sum life insurance payout to a surviving spouse?
A sudden lump sum can attract unwanted attention from family members seeking a share of it, or exposure to ill-advised investment schemes from a new partner, and can be eroded quickly under this kind of pressure.
How can a family trust protect life insurance proceeds for my family?
By placing the family home in a correctly set-up family trust and directing a life income policy's monthly payments into the trust account, the money stays protected and directed toward its intended purpose rather than being paid out as a vulnerable lump sum.What is a life income insurance policy and how is it different from a lump sum payout?
A life income policy pays an ongoing monthly amount rather than a one-off lump sum, which helps ensure the money is used for ongoing living expenses instead of being spent, contested, or invested away quickly.Does life income cover keep up with inflation?
Yes, life income cover is typically inflation-adjusted, so the payments maintain their value and keep pace with the cost of living over time.Can I add a Total Permanent Disability (TPD) trigger to a life income policy?
Yes, a TPD trigger can be incorporated so the policy also pays out if the insured becomes totally and permanently disabled, not just in the event of death.
Guest Contributor
Invited guest writer
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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Hi Juliette, Just want to say thank you for all the work you have done and advice you've given. Definitely tricky during these Covid times and still getting the job done. Want to wish you and your team good fortune, and hopefully in the future work together to get another property.
- Arthur W, September 2021
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