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News Bulletin : ADA News Bulletin October 2010
26 OCTOBER 2010 Compiled by Stuart Wemyss Strange title, right? I was going to call the article “six things that can go wrong when you die” but that seemed kind of redundant. Most dentists work hard and invest to attain financial security for their family and themselves. In the event of an untimely demise, people need to make sure their family members are adequately looked after and their wealth is preserved – as much as possible, i.e., minimize taxes and transactional costs. This article looks at the six most common problems caused by you dying – other than the obvious! Whilst it’s not a popular topic of conversation, it is something we all must think about for our family’s sake. The last thing you want to do is leave your family with pile of financial headaches. LEAvInG A bURDEn If you die unexpectedly, how will your partner or remaining family members meet financial commitments such as mortgages, living expenses, children, education costs and so on? A recent internet poll of property investors revealed that over 48% did not maintain income protection or life insurance. I found this astounding given that property investors generally carry above-average levels of debt. Sometimes people respond to this point by saying their surviving partner (family) could just sell the investment property(s) and repay the mortgage(s). Whilst this might reduce the issue of managing debt, it will cause retirement planning problems because now they will no longer have investment assets (which you would have originally purchased with the intention of funding retirement). Therefore, selling investments often isn’t a smart approach. Life insurance is often referred to as a ‘scam’ but truth be told, it’s something most of us need. In my opinion, you are better off to have too much life insurance than not enough. We normally like to see client’s have enough life insurance to cover the repayment of all mortgages, pay for 50% of living expenses (in the case where both partners are working) and pay for child education/care costs. Over time, as a client’s net worth increases and their financial position becomes stronger, we would often deem it appropriate to adjust the level of cover down. You can use your superannuation to pay for your life insurance premiums thereby eliminating the ‘cash flow’ cost of this insurance, i.e., won’t reduce your personal cash flow. If you’re a long way from retirement, you might actually consider your superannuation balance as a ‘risk management fund’ rather than a retirement strategy, i.e., a pool of money that funds your insurance cover while your insurance needs are high. To some degree, I take this approach. I’m happy to use my super to pay for as many of my insurance needs as possible. A common apprehension when people seek out life insurance cover is that it’s often sold by commission-based advisors. Therefore, people are sceptical about whether the recommended level of cover is excessive or not (as the advisor will earn more commission for the higher level of cover sold). It’s also less likely that a commission-based advisor will proactively suggest you reduce your level of cover when it’s appropriate to do so. If you have concerns with this, find yourself a commission-free insurance advisor. Not only will it ensure you receive unbiased advice, the annual premiums will likely be 20 to 30% lower (due to the absence of commissions). vALID WILL AnD LETTER Of WISHES Everyone should have a valid Will – there are no excuses. Wills cover very important issues such as what happens to your assets, who looks after your children, funeral wishes, who is responsible for carrying out the Will (executor) and so on. Wills should be reviewed every three years and a new Will should be drawn up if you become married or divorced. You may also consider drafting a letter of wishes. A letter of wishes provides general guidance to executors. This might be important, for example, if your executor is not particularly financially savvy and you have a considerable investment property portfolio. In this case, you might suggest that the executor sell FOr A hASSle-Free DeAth, do these six things... business perspectives “...it's not a popular topic of conversation, it is something we all must think about for our family's sake.”
ADA News Bulletin September 2010
ADA News Bulletin November 2010