From my experience, the single person is generally oblivious to the need for owning life insurance and consider themselves “bullet-proof” so far as long-term disability is concerned. This article will focus on life insurance and a future article on disability insurance.
I believe single people have a need to consider life insurance for the following reasons:
(i) It costs money to die! If the young single person is killed in a car accident, who pays for the funeral expenses? Who pays the outstanding debts on the credit cards, car loan, and (possibly) an investment property mortgage? What if the parents had gone guarantor for one or all of these debts?
(ii) If a single person dies intestate – who picks up the legal costs for the Letters of Administration? If there is a will, who pays the legal costs for Probate to be granted?
(iii) Some single people can be in the position of providing vital financial support for aged parents ( or others). In one situation I met a 30-year-old single male who lived at home with his aged parents. I asked him if his parents were financially dependent upon him. He advised they were both pensioners and, yes, he regularly paid some bills when their finances were tight. I then asked him how that financial assistance would continue in the event of his death?
As a result of this line of questioning, he subsequently took out life insurance to provide a capital sum which could be invested to generate an additional source of income for his parents.
Another situation related to a single thirty-year-old male doctor who had his own home and a large mortgage. He also had a will which left his home to his brother and sister, both of whom were married with young children. In the course of our discussion I asked him ‘if you had died yesterday, what do you think your siblings would do with your property?’
His response –‘I guess sell it, pay out the mortgage and share whatever was left.’ I suggested that if they pursued that option, depending on when they sold it they might also be up for capital gains tax. In other words they would sell the property, pay out the mortgage, possibly pay capital gains tax and then split the residual. Doing his own calculations on that particular example he agreed there would not be much residual!
He then asked me what I would suggest. I told him there were two other options that would place his siblings in a far greater financial position, provided he was open to my suggestion of a “funding mechanism” called life insurance. In other words, if he insured his life for the total of the mortgage and in his Will indicated that the proceeds of the policy were to be used to pay off the mortgage, then his siblings could have the choice of (a) selling the property unencumbered, which would provide a greater split with the residual; (b) retain the property, rent it out and share the rental proceeds whilst allowing the property to grow in capital value each year.
His decision was that if the debt could be paid out on his death, then he would affect the necessary life insurance, amend his will directing payment of the mortgage and provide his siblings with the choice of selling or retaining the unencumbered property.
QUESTIONS to ask in the fact-finding meeting to open up these sorts of conversations:
1. Are you financially responsible for anyone other than yourself? For example, aged parents, siblings etc.
2. In the event of your death, what provision have you made for the payment of outstanding debts e.g. car loan, credit cards, mortgage. Have your parents, or any other person gone guarantor in relation to any of these debts? What would happen to those guarantees?
3. Do you have a will? If not, are you aware that the government has a will for you – it’s called the Will of Intestacy!
4. If you do have a will, what instructions have you left in relation to funeral arrangements etc? Who would be responsible for the expenses related to the funeral service arrangements? What does your will provide for in relation to distribution of your assets? Payment of debts?