What happens after I die?
It's as certain as tax, yet so many of us are unprepared for it. While tax can be minimised, comes around the same time every year and we are usually prepared for it, the consequences of dying without a will or adequate insurance can be more far reaching.
At a glance
- Having the right amount of death cover involves assessing your value.
- There are three different types of beneficiary nominations.
- Estate planning will help you plan tax effective strategies.
What is the right amount of death cover?
You may already have death cover through your super, but it's vitally important to ensure you have the right amount. You need to consider things like your family's financial needs, debt and what insurance cover you already have. The answer will be different for each person.
Let's look at an example.
John is 41 years of age, has three dependent children aged two, four and eight and plans to retire at age 60. John is employed as an accountant earning a salary of $70,000. His wife, Jenny, is employed looking after their children. Their living expenses are $42,000 per annum. They have a $150,000 mortgage, a personal loan of $15,000 and credit card debt of $5,000. John has $50,000 invested within his employer super fund with life and Total and Permanent Disablement (TPD) cover of $100,000 attached and they have no other assets. What is an appropriate level of insurance cover for John?
|Life insurance need||Lump sum required|
|Extinguish all debt||$170,000|
|Dependants' education expenses||$120,000|
|Lump sum required to provide dependant income support1||$500,000|
|Funds needed for specific legacy commitment||$50,000|
|Funeral costs and other final expenses||$15,000|
|Less cover already in place||$100,000|
|Less superannuation benefit||$50,000|
1 Determined by: PMT=3500, Period/Year=12, Total payments over 19 years=228, Conservative Return Rate (CPI + 3%) = 5.4%, Future Value =0, Present Value =$498,350 rounded to $500,000.
John's TPD cover and super are not going to be enough for Jenny and their three children to maintain their current lifestyle and do the things John and Jenny wanted to do.
You can find out how much death cover you have through your super on your annual statement.
How can I increase my level of cover or add other types of cover through my super?
Most superannuation plans provide insurance cover and allow you to add different types of cover. When applying for additional insurance cover, you may need to undergo a medical examination.
Who does my money go to if I die?
If you were to die while a member of your super plan, your beneficiaries (see below) would be entitled to your superannuation death benefit.
If your superannuation benefit is a 'defined benefit', your death benefit will be calculated according to a formula, which may be based, for example, on your years of service and salary. Otherwise, your death benefit will usually include your super account balance (subject to any vesting requirements being met) plus any insured death cover you have through your plan.
You can nominate one or more beneficiaries to receive your superannuation death benefit. Beneficiaries must be either:
- a dependant (under superannuation law), or
- your estate (also known as your 'legal personal representative').
Dependants who you can nominate include:
- your spouse (including de facto spouse and same sex partner)
- your children (including adopted children, stepchildren, and ex-nuptial children)
- anyone who is financially dependent on you, and
- any person with whom you have an 'interdependency relationship' (as defined in superannuation law).
You'll generally have three options for choosing your beneficiaries (depending on the rules of your plan):Complete a binding nomination: If you provide a binding nomination that satisfies all legal requirements, your benefit must generally be paid to the beneficiaries you have nominated and in the proportions you have specified*.
Complete a non-binding (or preferred) nomination: The trustee of your super plan will determine which of your beneficiaries will receive your death benefit and in what proportions. The trustee will take your nomination into account in making its decision. However, your benefit may be paid differently to your nomination, depending on your circumstances at the time of your death.
Make no nomination: If you don't make a nomination or you withdraw your existing nomination and do not replace it, your benefit will generally be paid to your estate.
* If your nomination is considered invalid then it is usually treated by the trustee as a non-binding nomination. A court may order the trustee to pay your death benefit differently to your binding nomination.
More information on nominating beneficiaries is available in the product disclosure statement for your plan, or you can talk with your Myrtle Ridge adviser.
Your annual statement will show your nominated beneficiary(ies).
How can I ensure my beneficiaries will receive the benefits I intend for them?
There are two key factors you must address to ensure your beneficiaries get the benefits you intend for them.
Keeping your superannuation death benefit nomination up to date
You may need to make changes to your nominated beneficiaries as your circumstances change, such as if you remarry. Remember, unless your nomination is a binding nomination, the trustee may distribute your death benefit differently to your nomination.
You can make a new nomination, or cancel or change your existing nomination at any time by completing a death benefit nomination form.
Planning your estate
Estate planning helps to ensure that the right money goes to the right beneficiaries at the right time. It's more than just dividing up your assets between your loved ones.
The basic principles of estate planning are:
- Deciding how you want your estate divided.
- Writing a legally binding will.
- Empowering and providing for your executor to carry out your will.
- Reviewing your estate plan, regularly.
Benefits of trust
One advantage of estate planning is that you will be encouraged to plan your finances much more tax effectively. For example, by setting up a testamentary trust your beneficiaries may receive tax advantages and the assets you leave them will be protected if they later become bankrupt. They are also useful in controlling how and when funds are distributed to beneficiaries, ensuring that they receive the right funds at the right time.
As estate planning is so complex and vital to the welfare of your family, you may find it worth seeking professional advice from a lawyer, accountant or financial planner, and in some cases perhaps all three.