Many Australians cringe at the thought of insurances, let alone considering what the actual personal risk is that the insurance covers. Who really wants to think about the impact an accident, illness or, worse, death is going to have on you and your family?
It’s natural to avoid this because thoughts like how will you pay the mortgage, or school fees or maintain your current lifestyle if something happens to you or a loved one is quite painful.
However on a day to day basis if you’re underinsured, or worse uninsured, then you may be living with stress or anxiety because you haven’t dealt with the situation, like having a niggling pain every single day.
For this reason, with the growing wealth in the Baby Boomer generation, there has been a tendency by younger cash-strapped Australians to assume that their aging parents will be the financial backstop to protect against this risk.
“My folks will help us out”
The problem with this situation is that often there is great uncertainty around the actual financial risk that is being transferred to parents.
And likewise many parents may be unaware of the expectation being placed on them and what the potential financial risk being unknowingly transferred to them, is actually worth.
The risk with this is that if you, the adult child, suffer a major health event, then it may create a substantial imposition on everyone’s financial situation and lifestyle.
Even if your parents are “Wealthy”, it doesn’t mean that it is sufficient. In fact, an incident may result in them having to make significant sacrifices now and in their retirement to accommodate this. This may not just be financial, it may also affect both of your lifestyles.
Wouldn’t it be better to have an understanding of the risk?
How big is the financial risk you’re transferring
Not knowing the financial risk that you are potentially shifting to parents can be very risky for all involved.
Simply taking the time to assess what the financial impact of an event like death or disability on your family may be, will create some clarity for everyone involved.
It also helps you to establish how you want other aspects of your life to look if say you were disabled and couldn’t walk or work again.
What you may want, and what parents can afford to provide, may not be the same which can create tension in what is already quite a fragile situation.
What is the cost of protection?
Many Australians are unaware that parents can actually insure their own children for events such as death and disability. This can occur in circumstances where the impact of these events will place a financial responsibility back on the parent, because the parents are the insurers.
The potential impact of an event on a family may result in a substantial drain on your parent’s capital and income from the time of the event forward. Your parents may prefer to insure you and transfer this risk to an insurer and instead pay the insurance premium.
Therefore by obtaining information about the potential costs from reputable insurance companies, parents can get an estimate of what it may cost each year to transfer this risk out.
Parents who know the risk, as previously established, can then choose to pay regular premiums to cover the risk to them, knowing that if something goes wrong that the insurer has their back.
The downside is that premiums will be paid annually until either a claim is made, you decide to take over the payment of the premiums or you decide you no longer need the cover.
What else will your parents get in the deal?
Something that is often overlooked, and a vital part of the risk management and insurance process, is identifying and establishing other important estate planning objectives.
When you ask what you want to insure and why the answers often reveal other responsibilities you may initially overlook.
For example, if considering the financial impact of death of you and/or your spouse i.e. you may decide you need $500k for your kids’ education and trust fund.
But who is going to look after your kids?
Guardianship suddenly becomes an important objective which means you also need to look at your Wills.
What about the need to repay your debts and cover lifestyle changes in the event of a permanent disability striking your spouse? Then you may ask who is going to be able to make Financial and Health decisions for your spouse if this does happen.
Suddenly, Enduring Powers of Attorney and potentially Power of Guardianship become important.
By evaluating and planning the potential transfer of risk to your parents, you will be able to avoid surprises occurring which could further strain relationships during an already stressful time.
Discuss the situation with your parents
Parenting is for life which means generally they will do their very best to help out their children whenever possible. However, having some form of plan or an understanding of expectation is still important for everybody involved.
Unless you’ve told them, your parents may not know what your mortgage debt is, your cost of living, or the fees you’re paying for your kids schooling each year. Even assuming that your parents will be willing, or able to cover these, might create an unwelcome tension when you least need it.
As previously mentioned by simply assessing the risk, knowing what it would cost to insure the risk and then discussing this with your parents, you may be surprised at the outcome that can be achieved.
If nothing else at least everyone is on the same page in the event of something happening.
Will estate planning thwart your parent insurance policy
Insurance policies get more expensive year on year as we get older. This is why starting earlier is always beneficial because of the impact of medical underwriting and the possibility of locking in some cheaper premiums.
If however you are reliant on your parent’s wealth and capital for insurance and they pass away then you could find yourself short on cover.
Should their estate plans fail to distribute sufficient wealth to reduce your financial risk and you suffer an incident like a permanent disability you may have a serious problem.
Even if you don’t need to claim, trying to insure yourself after age 50 can be very challenging and expensive.
Your parents are entitled to distribute their estates as they see fit and they may already have plans in place, which may not account for insuring your financial risk.
It’s therefore important to have an open discussion with them so that you can ensure you are all on the same page.
Regularly review your personal risk
Everyone’s circumstances change from time. A change in job, a new addition to the family or a serious sickness or injury is endured. What’s key when managing your personal risk is knowing what the true financial and personal risk is and feeling confident that you have some plans in place to address these.
If however, your wealth strategy is somewhat constrained by tight cash flow, large debts or maybe a sudden change in circumstances (who knows what’s going to happen in the near future), then it’s important that you regularly review your risks.
In total it takes only a couple of hours of your time every couple of years, or when a change occurs, to assess your personal situation, establish your levels of risk and take some action on making a provision for them.
An RSM risk specialist can assist you with this process to smooth the evaluation of your needs and risks and to determine the appropriateness of your existing plans so that you can feel confident that you are protected should tragedy strike.