As is the case with many forms of insurance, it’s unfortunately true that many people are grossly underinsured. When it comes to life insurance, it’s doubly so. Making sure you are adequately covered is the first step. The next step is making sure the type of policy you take out and the way your estate is structured gives your family more benefits than the taxman.
Time to review your life policy
Before even taking out a life insurance policy, it’s best to take a sobering look at what will be left behind if a family member suddenly dies.
Andy took out a life insurance policy when he was 24. At the time, he had no children and no debts. Now, at 35, he is married with three young children, and has mortgage and car repayments each month. Unfortunately, Andy hasn’t updated his insurance policy since, so the $100,000 life cover pay out is clearly no longer enough should anything happen to him.
When updating his insurance Andy might want to consider term life versus a permanent life policy. Term life builds no cash value and applies for a set timeframe. Permanent life (such as whole of life, universal life and variable universal life) do build in value and have a cash value at the time of death, assuming the policy is kept current. The value of permanent life insurance can be passed to an estate when the policy holder dies.
Tax effective structures
There are several people Andy can discuss his insurance with before updating his policy – his broker, a financial planner and his accountant. A financial planner can be a good place to start, but though they can assist you to structure your affairs they can also recommend products that may not be suitable for your needs and goals. Make sure that any financial planner you employ is endorsed by the Financial Planners Association.
A Certified Practicing Accountant (CPA) may also be able to offer good financial-structuring advice, but not necessarily good financial planning advice. There are strict laws in Australia concerning the licensing of financial planners, particularly when they are also CPAs. Many CPAs will work in conjunction with financial planners though.
A valid Will
It also makes sense to revise your Will at this time. If your estate is complicated, an attorney can assist with this or, for simpler affairs, you can do it yourself using a Will pack from your newsagent. A Will is particularly important if you have a more complicated family arrangement – for example, step-children and de-facto or same-sex relationships. If no Will exists, the beneficiaries are simply the Next of Kin.
Deceased estates and the ATO
The Australian Taxation Office (ATO) does not impose death duties in Australia. However, the Income Tax Assessment Act 1997 does require tax to be paid on certain income or capital transactions in the event of a person’s death (for more information, see: http://www.ato.gov.au/individuals/content.asp?doc=/content/31669.htm ).
In many cases, the family home is the largest asset and, if life insurance does not provide adequate cover, the sell-off of the family home can add to the family’s financial troubles, as capital gains tax will be applied (the ATO can provide further information about this). One way to ensure the tax burden is lessened is to place assets in a trust. This can also be arranged with some life insurance policies, which means in the event of death, these assets and policy payouts, which were technically never owned by the deceased, will not become part of their taxable income or capital gains. Another is to make sure large assets are jointly owned, in which case the surviving partner becomes the sole owner of the asset.
Your financial advisor, lawyer and accountant are the people best placed discuss your personal situation with and help you to structure your affairs.