Protecting your entire family (especially in retirement)

You’ve saved hard to build your retirement nest egg.You should be able to spend the money on a well-earned relaxing lifestyle. But all this could be put at risk if your adult children don’t have their own financial affairs well managed, particularly adequate insurance protection.

It’s human nature to assume that bad things only happen to others. Unfortunately this approach means that many people are unprepared financially for their future if sickness, accident or injury strikes. This often results in other family members having to bear the costs of supporting them.

For those close to or in retirement who are placed in this position, the financial impact can be devastating. 

Could this happen to you?

Let’s consider the example of Gary and Roslyn, both 61, who have one child, a 30-year-old daughter Janet. Gary and Roslyn are retired with an investment portfolio valued at $700,000, paying them an annual income of around $48,000. They also own their home, valued at $650,000.

Gary and Roslyn were enjoying trips away and spending time with their extended family members overseas until their lives dramatically changed when Janet was badly injured in a car accident. Janet was in hospital for almost three months, requiring another nine months of rehabilitation before she was able to return to work. 

Janet’s sick leave ran out after the first fortnight, and as she had no insurance cover in place, she had no income to pay the mortgage on her apartment ($2,500 a month) or other essential costs, including her mounting medical expenses.

As they didn’t want Janet to have to sell her apartment, Gary and Roslyn needed to draw on investment capital from their portfolio to pay Janet’s mortgage and meet her expenses for the year she was off work. This ultimately reduced Gary and Roslyn’s investment portfolio by almost $70,000 (or 10%). 

While Janet fortunately made a full recovery, the cost to Gary and Roslyn of supporting their daughter in her time of need meant a dramatic change in their long-term retirement prospects; ultimately their income was reduced by $7,000 per year for the rest of their lives (a 15% reduction), plus their travel plans were significantly affected.

What can you do?

Believing that unfortunate events only happen to other people isn’t a responsible solution and is a terrible way to jeopardise your retirement. As part of looking after your own financial future, make sure that others who could affect your plans, such as family members, havealso taken the right steps for their own lives.

Talk openly to your adult children about their insurance cover and if they are putting themselves or you at risk, recommend they talk to a licensed adviser or let us know and we can talk them with you.

 

To find out more about insurance and the protection of your family, get in contact with our Wealth Protection Specialist Anthony Kane by calling 07 3245 5466 or email anthony.kane@morgans.com.au who can tailor a protection program for both you and your family.

 

 

 

SMSF - Don't forget to protect your backside (and your family's)

With almost 500,000 Self Managed Super Funds (SMSF) being set up in Australia, there is an increased concern within government and industry that some clients may not know the extent to which they need to be compliant.

One area in particular that is of concern is that of adequate protection within your SMSF. When moving super out of the retail funds such as industry funds, the automatic insurance that was linked to the account is lost. To some, this may not worry them, but if borrowing within the super fund, like so many have done thus far, the area of ‘Liquidity‘ becomes a very important factor.

If you have borrowed within your super fund, and you are the main ‘guarantor’ on the loan, then on your death or permanent disability, the bank will ‘Call the Loan’, simply because they want to make sure they are paid when you are no longer here.

What happens when the bank calls the loan on your death?

In order for your family or estate to pay the loan back to the bank, they will need money. This seems simple enough.

But where is that money going to come from? They can do one of two things:

1) Sell the asset in your super fund at that time (This would be at a fire sale rate as the funds are needed immediately, potentially selling for under market value) or;

2) SMSF Insurance – Take the proceeds from a life insurance benefit to pay out the lender, retaining the asset (property, etc) within the fund, to be paid to your estate/beneficiaries, etc)

What if there is more than one person or a couple within your SMSF:

If there are other family members within your SMSF, and the fund needs to pay your portion of the estate out, the remaining members share will drop dramatically.  Insurance for the amount needed to ‘buy out’ your share of the SMSF for your estate is vital in keeping within the laws and must do for the welfare of other members of the fund.

The law says you ‘Must consider life insurance within the fund’. While its not manditory,  taking into account the points above you may find that by not taking into account liquidity issues actually impacts on your compliance of the fund.  You could find yourself in big trouble with a very expensive story to tell to the regulator or worse, leaving those that you love in a very poor position on your death.

How do you know if you are complying with this part of the regulations?

Firstly, get in touch with the accountants who helped you set up your fund, as they are ultimately responsible for the advice you receive on your SMSF.     I can give you some points to consider and some figures to determine whether you can afford  not to have protection within the fund.

If you have an questions, get in touch.

Anthony