Life insurance can play an important role in estate planning which is often overlooked. By reference to life insurance I am referring both to the conventional death cover and the various other policies which now form part of a complete life insurance suite including trauma/disability insurance and income protection.
This paper is written from the point of view of the uses that life insurance can play in estate planning from a legal perspective and obviously financial planning/tax advice should be sought where relevant.
At its simplest pure life cover can provide protection for most families in the event of the untimely death of a partner particularly if that partner happens to be the main breadwinner.
The majority of families (particularly during years when children are young) carry significant debt which can result in catastrophic outcomes on the death of a partner. Life insurance (particularly when the life insured is relatively young) can be a cheap protection to ensure that the passing of a partner does not cause financial downside on the remaining family.
Death cover can be used to ensure that major assets such as a dwelling for the family can remain for the family’s benefit without significant debt.
Discrete insurance policies can be established to provide protection in respect of discrete liabilities or to provide payments to nominated beneficiaries in an estate. If the payment was intended to a third party, a relative or a dependent, then a discrete insurance policy could be established to fund that payment without effecting the balance of the estate which could be retained for the family.
Insurance also has significant role to play in respect of blended families where often there are two sets of children. Estate planning can be particularly difficult in determining entitlement to an asset where a partner deceases leaving the estate to the surviving partner. Significant disputes often occur where the deceased’s children might see themselves as being disadvantaged by such an arrangement. An appropriately valued insurance policy can assist in those circumstances to provide protection for either side of the blended family.
Insurance policies are also very important in respect of business interests whether in partnership or a corporate structure.
An appropriately established buy sell agreement with an appropriately valued insurance policy can provide protection for a deceased’s partner’s interest in the business.
The terms of the buy sell agreement would record that a deceased’s partner’s interest would automatically be sold to the surviving partner on death, with the deceased’s partner’s family to receive the proceeds of the life insurance policy in payment for the business interests.
These arrangements need to be properly structured and will require tax advice as to who owns and pays for the policy.
Life insurance should also play a significant role in most superannuation funds. There are tax advantages to establishing elements of life insurance within superannuation. There can be significant estate planning benefits with the proceeds from life policies being kept within the superannuation. The question of ownership of life insurance policies including trauma/disability and income protection is particularly important as these may have tax and other planning consequences.
This paper only identifies some of the myriad benefits available from appropriate life cover in its various forms.
In short, everyone should review their life insurance protection and see if it is adequate for their circumstances, consider its flexibility to meet potential liabilities or bequests, consider the tax effectiveness of same and ensure that it is appropriately planned in respect of ownership.