The ‘underinsured’ gap for life insurance is closing in Australia, and while this is an encouraging sign, there is still more to be done in terms of education, particularly when it comes to knowing what happens to your insurance funds in the unfortunate event of a claim.
A recent White Paper1 by Zurich Insurance indicated that there has been an increasing take up of life insurance by Australians due, in part, to easier and increased access for buying insurance. However while these findings are encouraging, Australians need to align their reasons for purchasing life insurance with the purpose of the funds that will be paid upon their death.
Appropriate for your purpose
In many ways, purchasing life insurance is just the first step in a process that ultimately results in the distribution of funds to achieve specific purposes. These may include supporting the lifestyle of surviving family members, settling debts and perhaps even providing a windfall for chosen beneficiaries. Whatever the purposes are, they need to be identified and the resulting policies structured accordingly.
While television advertisements suggest how affordable it is to directly purchase life insurance, and with simplicity as a key reason for the increase in take up, the appropriateness of the cover for individual circumstances should nevertheless always trump both price and convenience.
If the cover is not suitable or if during the process of the application, the applicant fails to understand the need for full disclosure and neglects to supply information required by the insurance company, despite paying years of premiums, entitlements may not be paid at the time of claim, resulting in inevitable financial stress. Seeking advice for buying the most appropriate cover for individual needs is an important first step. The second is clearly to plan and formalise who should receive the money in the event of a claim, for what purpose, and the method via which this should occur.
For those without plans, the entitlement - which could amount to several hundred thousand dollars - could find itself languishing in legal battles. Or, loved ones could miss out on a share of the funds if there are no clear instructions around nominated beneficiaries or if those instructions have been superseded as your situation has changed.
There are a number of other important considerations, such as what happens to the claim monies if you divorce or if your beneficiary dies at the same time as you do. Another is how you manage issues of tax and distribution of funds if your beneficiaries’ circumstances include disability or legal incompetence. Matters such as these need to be explicitly addressed so that upon your death the proceeds from your life insurance policy are handled according to your requirements.
Buying a life insurance policy can appear to be fairly straight forward, but in reality it’s just the first step in an important financial planning process that should articulate a clear purpose for the lump sum payment at the time of death that meets both the obligations and wishes of the deceased. In order to achieve your intended objectives, you need advice.
For further information about risk insurances and estate planning please contact Pacesetter Financial Services on 07 3808 2808.
Malcolm Jensen is a Financial Adviser at Pacesetter Financial Services. Pacesetter Financial Services and its advisers are Authorised Representatives of Fortnum Private Wealth Pty Ltd ABN 54 139 889 AFSL 357 306 trading as Fortnum Financial Advisers.
This information does not consider your personal circumstances (including taxation) and is of a general nature only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances.
1 Zurich Insurance, Research Whitepaper, February 2014, ‘Australians and life insurance: misinformed, misinsured?’ Accessed 20 May 2015 at http://www.zurich.com.au/content/dam/australia/life_insurance/zurich-australia-whitepaper_australians-and-life-insurance_misinformed-misinsured.pdf