Picture this: you and your spouse have long dreamed of retirement, and here it is finally. Your offspring have long ago left the nest, living lives of their own. You make plans to travel, buy a boat. You’re a self-funded retiree, life is good.
Then disaster strikes. Not to you directly, but to one of your children. Your beloved youngest boy and his wife have had a terrible accident, he’s never going to walk again, she didn’t make it. They have three little children of their own, now with a disabled father and no mother. This family will never be the same again, and it tears your heart out.
Consider the practicalities
Let’s put the emotional side away for a minute and look at the practicalities. If the accident were in a car, Third Party Insurance will not usually cover loss of income, death benefits or mortgage payments, especially for an at-fault driver. See the Green Slips website for more information. Comprehensive car insurance generally covers damage to vehicles and other property, rather than other personal costs.
This young family has a mortgage and the main breadwinner can’t work for the foreseeable future as he is rehabilitating. They had no life insurance, and there is the very real danger they are going to lose their house. Your grandchildren have been through enough, so there is only one thing for it – it is up to you to pick up the pieces.
Cancel your travel plans, you won’t be going anywhere for a while. You pay off the mortgage, and become full-time carers of your grandchildren. Your son’s recovery is going to be long and painful. And expensive. You will be paying for that too. Welcome to your new reality.
Eventually your son may work again, but chances are he’s had a long time out of the workforce and his earning capacity has diminished. He will always need some level of care, the house will need modifications and he will require full-time live in care for his children.
Your retirement is very different to how you planned, and your savings are being depleted by looking after the needs of one of your children. Years pass, your son is working but not earning enough to support the needs of his family. The expenses continue on.
Eventually, your other children are starting to get a bit miffed about the inequity in the situation. Think about the impact this has on your estate planning when your intent was to leave equal shares to your children. They are reasonable people and understand it can’t be any other way, but, they say to each other quietly, things would be very different if he and his wife had insured themselves, wouldn’t it?
This is obviously a dramatisation, but it can and does happen that when uninsured events happen to adult children, retiree and pre-retiree parents have to step in to help, and often for a very, very long time. It can have an enormous impact on retirement plans and on the entire family.
Strategies to minimise the risk
So how can these terrible situations have a better outcome?
Parents need to open up the dialogue with their adult children about risk insurance. By that I mean the four main types of ‘risk’ insurance: death, total and permanent disability (TPD), income protection and trauma. It’s not something that many retirees think about – their children are independent adults, insurance is their problem, isn’t it?
But the scenario above demonstrates that it can very quickly become the entire family’s problem. Think about who it is in your life that could pose a threat to your lifestyle in the event of a significant event such as serious accident or illness. This is often described as your ‘sphere of risk’.
Death and TPD policies can be purchased through super, so most working families should be able to access those even when their cash flow situation is tight. Just a reasonable level of death and TPD in the above story would have significantly changed the outcome.
Income protection and trauma insurance policies, are usually better off being held outside of super, but this should be determined with a financial adviser. Income protection because the premiums are tax deductible if held individually, and trauma because of the preservation rules around superannuation. There are articles written on this topic already on the Cuffelinks website (“The Insurance Essentials” by Rick Cosier dated 17 February, 2013) where the ownership question is dealt with in more detail.
Where cash flow is particularly tight, which is very common for a young family, it might seem impossible for them to add to their commitments by paying insurance premiums. Often they understand how important it is and the risk they take by NOT insuring at least their income, but keep putting it off. Of course they intend to take insurance out as soon as things ease a bit, but let’s face it, that could be years.
An option for you as a retired or retiring parent is to cover the cost of the insurance premiums yourself, at least until the young family can take over. With risk insurance, the younger it is taken out the lower premiums start and stay. As we get older, the starting premiums increase and it gets harder and harder to bite the bullet and take out the insurance.
Whichever way you and your family choose to do it, the important thing is to start talking to your kids and get adequate arrangements into place as soon as possible. Remember this is not about you being an interfering parent; this is about protecting yourself, your spouse, your beneficiaries and your grandchildren. You are their first port of call when things go wrong.
Alex Denham was Head of Technical Services at Challenger Financial Services and is now Senior Adviser at Dartnall Advisers.