Tara (00:51):
Oh my goodness, it is episode 50 of the Art of Estate Planning podcast. I am your host, Tara Lucke. I am so delighted to have made this milestone of 50 episodes and so grateful to have you all listening to me for so many.
(01:11):
So thank you so much. I just appreciate all of your feedback and our loyal listeners for making your support of the podcast known. Obviously, I wouldn't keep doing it if I was just talking to nobody, so thank you so much. It really means so much to me that you all indulge me, letting me just do a big brain dump of what I'm thinking about in the estate planning space. And today I want to talk about why I love life insurance, which might seem like a pretty weird topic for an estate planning podcast, but I actually think life insurance is such a huge underrated estate planning tool. It's so strange that in a lot of estate planning, education and university courses, it hardly gets any emphasis. No one spends any time on it because in my experience, life insurance is such a powerful estate planning tool that we have in our toolkit.
(02:18):
So in this episode, I want to shine a light on where I see life insurance to be really helpful. So look, sometimes there's that saying more money, more problems, but I think when it comes to life insurance and estate planning, I feel like more money can really grease a lot of estate planning issues and make them go away. Obviously, the more money there is to go around, the easier it is to make adequate provision for people and to make sure everybody who needs to be taken care of is looked after and is set up in a way. So I feel like when we are looking at an asset pool, if there's not enough assets to go around or achieve the objectives, sometimes life insurance can be the perfect solution. I guess what we've got to do whenever I'm doing an estate planning strategy exercise, and we do this all the time in the TT precedents club, weekly hot seeds, people will bring their generalised client scenarios to our group and we will all workshop our ideas for the best strategy and identifying pitfalls and risks.
(03:37):
But we always begin by firstly looking at the family tree and then secondly, looking at the assets, the quantum, the debt, how they're owned, what's going to pass as an estate asset and what's a non-state asset. And then we look at the test status objectives and try to get that pie going out to make everybody happy. How can we cut up the pie or divide the orange so that our objectives are achieved, the people who need the money get it and everyone's happy. We're not eroding the estate through unnecessary risks and challenges or tax expenditure. So particularly where I think this can be challenging is blended families. So I nearly always save a blended families if we don't have enough money in the asset pool to go around, which can often be the case, right? Because we've got children from a prior relationship who need to be provided for.
(04:45):
We've got usually a surviving spouse, maybe there's new children of a new relationship we've got a lot of the time I see all the money is tied up in the family home. Perhaps one spouse has sold their house and contributed all their equity and sales proceeds into a house the other one owns or they've bought a house together. But we've got this intermingling and mixing of assets in a illiquid, jointly owned asset that can't usually be sold. If one spouse dies, everyone still needs a roof over their head. So it can be really hard when one spouse of a blended family dies and they want to make sure that their children from a prior relationship is looked after. When the main asset is a family home, then we're looking at okay, the children from the first relationship are sitting there waiting for their stepparent to die or sell the house.
(05:56):
We need to make sure that their surviving spouse has a roof over their head, has assets available for their aged care costs. They will also have their own objectives for their estate plan. The more time that elapses between both of those spouses dying, the harder it gets to sort of trace or keep track of the contributions from the spouse who died first. If the surviving spouse enters a new relationship, we've got further intermingling and mixing and it can be really hard to make sure that the children from the first relationship actually receive anything from their parents' death. So I find a really straightforward solution to that can be insurance, especially where the test data is young enough to get an affordable policy. In terms of policy affordability, and I am not giving any financial advice here, I barely know what I'm talking about. This is probably just my anecdotes from seeing it discussed with financial advisors and also my own experience as a consumer having a financial advisor helped me get my life insurance sorted is for younger people, it seems like the younger you are, the more affordable the life insurance is.
(07:33):
That is of course if you don't have any preexisting conditions that can prevent you being eligible for life insurance or not having huge premiums. And then obviously the older you get, the more expensive it is to take out. So my understanding is that if you get your policy early in life and you can sort of keep it, then your premiums for life insurance aren't going to increase that much. You can also get life insurance through super where the premiums are paid from the super. So for a lot of people that kind of doesn't feel as expensive because it's not directly out of their pocket or out of their personal budget. I dunno about you, but I kind of feel like the money I have in super, it's my money, but it's not really my money and I don't really look at it that much and I don't really notice the expenses coming out of it.
(08:28):
Thankfully my financial advisor is on top of that. So that can help ease the pain. You also get automatic life insurance when you usually have a super account. So people might have life insurance when they don't even realise that they have it. So I am not saying that everyone can get life insurance, but where life insurance is an option for our blended families, it can really help. And in that scenario I was talking about where we've got a blended family, two spouses, one spouse dies and they've got children from a prior relationship. If we can have something like life insurance or an extra life insurance policy that's just designed to pay out those children, then everybody's got peace of mind that the children are receiving a benefit from their parent, it's cash, it's illiquid, it's ready to go. We can set the quantum, they're getting paid.
(09:27):
They're not waiting on their stepparent to die. We don't have their relationship with their stepparent affected by money and everybody knows that those children have been provided for. And our surviving parent spouse or the stepparent of the children isn't under financial stress trying to provide for them either or having a joint asset like their family home being co-owned with their stepchildren or anything like that. So I love life insurance for blended families where it works. There's other options too. Blended families, you might use life insurance for the surviving spouse just to make sure that the surviving spouse is going to have enough money to get a suitable accommodation need perhaps where the children are older, maybe the surviving spouse doesn't necessarily need to stay in the large family home and they could downsize or there is sentimental value in the property or something. And we don't necessarily have the surviving spouse inheriting the residents, but we know that we can give that surviving spouse a big summer money that they can go off and get a suitable residents or provide for their accommodation needs, whatever that might be down the track.
(10:51):
So I do really love life insurance in those blended family scenarios. Usually I find a lot of problems can be solved by having more money in the pool to divvy up between people. Obviously it's going to depend. I feel like with blended families it's harder to take a formulaic approach and we really do need to come up with a custom solution each time. So I'm really just speaking in generalisations, but hopefully those examples have sort of illustrated the point also with young families, especially with families where you might have a homemaker and I'm actually, this is quite timely really because I'm calling back to our very first podcast episode which was about estate planning where one of the spouses is a homemaker and how so often those homemaker roles are undervalued and not planned for appropriately in the estate plan. And I particularly think where you've got young families, usually there's a big mortgage or debt, we've got a lot of dependents, they might have all their schooling ahead of them and the surviving spouse, their income earning potential can be limited because they've got all these caring responsibilities for young kids.
(12:18):
So you might have to drop back to part-time or if you're going to keep working full-time, pay for extra services to replace the labour and role that the deceased spouse was doing. So cleaner food delivery, housekeeper, a taxi driver, all of those things. It is just where you've gone from two parents to one parent, it's a lot. So I feel like having life insurance for both spouses irrespective of who is earning the income for the family really just helps take the pressure off for the surviving spouse and the children. And in that scenario where you've got younger families, often the life insurance is really quite affordable. So I know for me personally, I've got insurance in place for death and this is the same for my husband as well. Our financial advisors set it up. They helped us work out the right amounts and structuring the policy and the right policies for us.
(13:29):
So always work with the financial advisor to do that. This is just my personal situation, but we've got death, TPD, trauma and income protection and the death or life cover is so cheap compared to the other policies. We need them all of course, but the most, I've got $1.2 million, maybe more $1.3million and so does my husband. So if we both died, there'd be like $2.5 million dollars of insurance coming in to sort everything out, pay off the debts and set up our children for life. But most importantly, if one of us died, then I know that I've just got a lot of options with a big cash injection of $1.3 million, could sort out our debt. I could keep the debt but take time off and use it to pay the mortgage and do whatever I want. I just know that there's going to be in what would be one of the most horrible events of my life where I'm going to need a lot of support and a lot of cotton wool around me that that life insurance policy is going to give me a lot of grace and a big buffer to sort of get it together and take the pressure off everything so that I can devote my time to being there for the kids and us regrouping and adjusting to our new life.
(15:07):
So I just think for young families particularly where there's no barriers to getting life insurance, it is just such a wonderful thing. And even when it comes to estate planning, I really think it's important as lawyers that we do just check in with our clients about how much life insurance they have in that scenario and encourage them to get financial advice to check if it's enough because it's usually very, very affordable to increase it, especially if it's through super, they won't even notice that they've increased it. And the more you have, the more grace that you're going to have in a really difficult time. And obviously we are not giving any financial advice. I have to be so clear about that. That's the financial advisor's role. But one thing we can do to sort illuminate whether there's a need to go and speak with the financial advisor is what I call back of the envelope calculations.
(16:14):
So we've talked about this on the podcast before, what's the role of an estate planning lawyer? Is it just to be a mouthpiece and to write down will what the client is telling us or is it to actually help them craft and sense test a estate plan that will really work for their legacy objectives and their family if they die? And of course I think it's the latter and I think doing these back of the envelope calculations or diagrams on the cashflow on death can really shine a light on where we might need more funding. So I really love going, okay, I'm going to pick on you. You are dead. This is who's left, this is the money coming in, this is what's going to happen with the mortgage, this is what's going to happen with our surviving spouse. They might have to drop to part-time.
(17:14):
What's your weekly budget going to look like? Is there enough money? Are they going to be forced to sell an asset that they don't want to because someone's died or can we increase life insurance? And I think once people really look at the practical detail, you don't have to tell them they can see it for themself or it will go, yeah, this is perfect. We have enough, everyone's going to be okay. So I really love showing that off. Also, I guess in terms of debts, I sort of touched on that with the mortgage. It is a big in terms of understanding, yes, here's the assets, but here's the debts that we have in the estate plan as well and what are we actually going to do with them. You do have to be careful if you are using life insurance specifically to pay off debts under the will in section 205 of the Life Insurance Act 1995, you need an express direction in the will that the money from the life insurance proceeds can be applied specifically to payment of debts.
(18:25):
So you do need to have that direction in there if you want it to be paid off. But even without that direction, it just gives a spouse an option in terms of restructuring their financing with the bank. So for instance, as I said in our scenario, I'm not setting in our wills a direction that the money has to be used to pay off the mortgage of the house. My intention if my husband died would be that I would go straight. I mean obviously I'd be really upset once I'd dragged myself out of a dark room and got on with things. I'd be talking to my financial advisor and we would be looking at everything in terms of cashflow, what we can maintain, what are we doing with the house? Do we want to stay in this house? Do we want to sell it? Can we sustain the debt without it?
(19:19):
What are I capable of doing with respect to my work and negotiating with the bank in terms of can I make use the life insurance proceeds to sustain the mortgage repayments? Does it set up the change our loan agreements and all of that? But I don't necessarily have to just use it to fully pay it off. I've got options. And if I was using a testamentary trust, those proceeds are actually going to be in the testamentary trust, which of course I am using in our wills. So it might be that we loan some or all of those proceeds from the testamentary trust to me and I use those proceeds to pay off the mortgage and then substitute the bank with the secured loan from the testamentary trust. Or we might be better off investing those proceeds in the testamentary trust with other assets. If I don't need to pay off the mortgage, I've got no idea, my financial advisor will do those calculations and work it out for me.
(20:26):
But what I love is it gives me flexibility and it gives me options. So I guess the main takeout I also want to have from this conversation is the importance of financial advisors and collaborating with them on giving advice. So there's so much that goes into the practical side of an estate plan in terms of superannuation life insurance. So I really encourage you to check in with your clients and see if they do have a financial advisor already and if they do to make sure that the financial advisor is on top of what's happening with the estate planning strategy. I personally love having financial advisors in the client meeting with the estate plan. Not every financial advisor wants to do that, but if they do, they are super welcome. I also used to do a lot of work where the financial advisor actually made the referral to me as the estate planning lawyer.
(21:32):
So obviously they had been really proactive and thought a lot about these things in advance. And so you probably, if you are in that type of arrangement where you do get referrals from financial advisors, then you're probably all across this. But if you are not, then I would be making sure you ask the question of your clients and maybe even just recommending to them that they do go seek out of financial advisor. It's obviously going to depend on your client demographic, but I really think they can add a huge amount of value and collaborating between the estate planning lawyer and the financial advisor. It's just a huge win win-win win for the clients. In terms of the final outcome, I also wanted to just mention, so if you have got life insurance in super and that super and life insurance proceeds are being paid into the estate to go into a testamentary trust, then you'll need a super proceeds trust in addition to the testamentary trust so that you are not paying any unnecessary tax on the receipt of those amounts.
(22:47):
So we cannot get into super proceeds trust today. I actually dive into it in a lot of detail in our online course, testamentary Trusts, the Essential Guide for Australian Lawyers, and we go into exactly how it works and why you need it. So this is really just a flag for you of your getting into that space to remember that because I just wanted to make sure the discussion was complete. Another thing in terms of this isn't life insurance, but even before I had children, before I had a mortgage when I was younger, I still had additional TPD trauma and income protection insurance, and I actually felt that it was almost more important to have those policies in place back then when I was a single woman in my twenties than now. It's still obviously so important now, but back then I didn't have a spouse to look after me and I have parents who I probably would've had to relied upon if something happened to me.
(23:59):
So total and permanent disablement or disability is where you can't work anymore. You really can't look after yourself. Yeah, you're totally and permanently disabled. And in that scenario, I really thought, who is going to take care of me? I am going to have to go back to my parents. They finally retired, get to enjoy their life, and suddenly they've got a severely disabled adult child living with them in their golden years where they should be travelling and enjoying that last chapter of their life. So it was really important to me not to be a burden on them, both in terms of care but also financially as well and who's paying for the care that I might need and never having to wanting to put my parents in a situation where they had to drain their super, which was intended as their retirement fund to pay for my care.
(25:01):
So I really wanted to make sure that there was enough money to put me in a nice care facility if that's what I needed, or to give them the choice to be able to take care of me at home or if they weren't able to do it, whether that's mentally or physically due to age or in ferment, that they could put me in a nice place where I could get a high quality care. And that was all paid for with my insurance. The same with trauma in terms of if I had cancer or something like that and I had to stop working that I didn't have to necessarily move home or give up my apartment or anything like that because I'd stopped earning and I was sick that I had money available to me to take care of my health needs and also income protection if I'd stopped working due to illness as well.
(25:59):
So even when you are dealing with individual clients who don't have dependents or don't even have a lot of debt, just making sure they've got those types of insurances in place as well so that if something happens to them while they're still alive, that there's enough money to support their goals in terms of their treatment plan and what they think their needs are. And I hate to say it, but not being a burden on their loved ones because again, more money gives more flexibility and more options for people to make the right decisions at the right time and just makes everything easier. So in my experience, those policies are more expensive, but they're worth every cent. If you can get them without a huge loading or if you've got preexisting conditions, then it may be more challenging. But yeah, in my experience, I just think it's worth having that conversation too.
(27:10):
They may say, oh, I don't need any life insurance and that could well be right, because they don't have dependents that they've got to provide for. So we don't need more money in the plan on death. It's the lifetime unexpected issues that we want to protect them for. So I hope this episode got you thinking. I've been wanting to talk about this for a while because I think it's such an underrated topic and it rarely comes up in estate planning education, but it's so powerful in terms of building effective legacies and estate plans and contingency plans, and I wanted to just hopefully put it front of mind again. So thank you so much for tuning in. Thanks for listening to our first 50, and I can't wait to celebrate our 100th episode with you in about one year's time. In the meantime, I'll talk to you next week.
