October 28, 2020 Julie Hyslop

LIFE INSURANCE TO PROTECT YOUR SPOUSE, CHILDREN……. and PARENTS

For over three decades, we have been providing advice about building and protecting the wealth of our clients.  One of our client service offerings is a “family tree” discussion.  On the surface, this discussion addresses the correct transfer of wealth to beneficiaries.  Following the tree imagery, this is the money transferring from the top of the tree down into the branches, or family members.

In this article we want to explore what happens when money flows in the opposite direction, from the bottom branches and works it’s way up to the top of the tree.  This can be a devastating destroyer of wealth that is often triggered by sudden events that are full of emotion.  It can have as much impact upon a client’s retirement as a bad investment decision or an economic downturn.

We often hear of situations where one child suffers from an addiction or illness and grandparents suddenly becoming full time carers for their grandchildren.  Other times, it will be providing financial support for one child who repeatedly makes bad financial decisions and always needs to be bailed out.  Sometimes it might be a child applying emotional pressure on a parent to become guarantor on a home loan or to supply a lump sum for a home loan deposit.    Some of these situations can be avoided others cannot, but they are obvious examples of people placing financial strain on their extended family members and parents.

However, what we often do not hear about is the less obvious which was highlighted when a client contacted Income Solutions to make a withdrawal from their retirement savings.  Their son’s wife had died unexpectedly.  The son and his wife had a mortgage and three small children.  Their son was a stay at home father and as a result, there was no income coming into the family now.  Upon investigation, it was discovered that the son had a medical condition making it unlikely he would be able to secure work.  The son’s income needs therefore extend beyond the time frame of caring for young children and expanded to the full term of his working life.  The daughter in law had earnt an above average salary and was on a steady career projectory, allowing the family to enjoy a comfortable lifestyle.  This had provided our clients with the illusion that their son and his family were financially secure.  As it turns out, the son did not have any significant savings and as a family they had never put in place any additional protection cover.  Their theory was that they would put every spare cent they had into reducing their mortgage and they did not want to be paying money on insurance premiums they’d likely never need.  The wife had a small amount of life insurance held within her employer super fund, based at the default amount of cover for her age, and a modest account balance held within the employer super account.  This was enough to partially pay down the mortgage, leaving a much smaller debt but no ongoing income support for the surviving husband to pay down the remaining balance, let alone cover the family living costs. 

Retired parents should consider asking about the financial protections adult children have put in place for themselves.  This is especially relevant when they have a young family of their own.  Often pride dictates an answer “my son is doing really well, he’ll have that sorted”.  Other times, our clients don’t know, haven’t thought to have the conversation with their children or feel they are over-stepping the mark if they ask their children about their finances.   Our client in this example fell into the “doing well and will have that sorted” category when we asked about their children’s personal protections.  It is not our place to take things further and that’s where it lay. 

The one thing that is commonplace amongst all parents we see is that they love their children and grandchildren.   Of course, our client stepped up to help their child in need.  The result is that our client has steadily withdrawn funds to improve their son’s situation.  The issues that stem from this one, unexpected event are many:

  • Our clients were just on target to meet their financial retirement goals.  They no longer are on target and needed to reduce their personal spending accordingly.  Their living costs have risen however, because they are no longer just supporting themselves but are also buying necessities for their grandchildren, such as new clothes and covering costs for school excursions. 
  • Our client’s lifestyle goals in retirement are now changed because they need to provide additional help to their son and his young children.  They love all of their grandchildren equally and it ways heavily upon them that they have limited time available to spend with their grandchildren from their other children. 
  • Our clients have 5 children in total and always intended to distribute their estate equally between all 5.  However, now they know they have provided a large benefit to one child, which is to the financial detriment of their remaining children.  They are retired and they have no way of replenishing these funds to compensate their remaining children.  They are fearful that this will cause resentment amongst their other children.

Ensuring that you have invested in adequate Life Insurance in its many forms does not just protect yourself, your children and spouse, it protects your extended family members too.   It is important as adults with dependants and financial responsibilities that we do everything within our power to ensure we do not place an unfair financial burden on our older parents or family members.   Taking out comprehensive life cover according to our individual needs is core to achieving we never place our wider family members or parents in a financially precarious position.

Income Solutions offers a 4 step process that is free of charge and allows us to demonstrate the advantages of obtaining financial advice.  If you or a family member would like to find out more, please contact Income Solutions at www.incomesolutions.com.au  

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