How Life Insurance Can Help Protect Your Children's Future
When you have children, your financial decisions start to look a little different.
The mortgage is no longer just a mortgage. Your income is paying for school shoes, groceries, sports fees, birthdays, childcare and all the ordinary things that make up family life.
Most parents naturally plan for the future they expect.
Insurance and estate planning are about putting some thought into the future you hope never happens.
If one or both parents were no longer there, there are two very different questions to consider:
Who would help make important decisions for your children?
And:
How would the people caring for them afford everything your household currently provides?
What Does Appointing a Testamentary Guardian Mean?
In New Zealand, a parent can appoint a testamentary guardian in a will or deed to become a guardian after that parent dies.
There is an important distinction here.
Being appointed a testamentary guardian does not automatically give that person day-to-day care of the child.
A testamentary guardian can become involved in guardianship decisions, but if there is a surviving guardian, they may continue to have an important role. A testamentary guardian who wants day-to-day care may need to apply to the Family Court.
That makes it important to discuss both your wishes and the legal arrangements with a lawyer rather than assuming that naming someone in your will automatically means your children will live with them.
Think Beyond "Who Would Take the Kids?"
Parents often approach guardianship by asking who they trust most.
That matters, but there are practical considerations too.
Imagine asking your sister and her partner to care for your three children. They love them and would step in without hesitation.
But suddenly their household may need:
- Another bedroom
- A larger vehicle
- Additional childcare
- More groceries
- School uniforms and fees
- Sports and activity costs
- Reduced working hours
- Eventually, help with tertiary education
Love and willingness do not automatically create the financial capacity to take on another family.
That is where life insurance can play an important role.
If you have nominated someone to be involved in your children’s future, ask yourself another question: would you also be leaving enough financial support to help them do it?
Life Insurance Can Help Fund the Life Your Children Already Have
Life insurance usually provides a lump-sum payment following an eligible claim.
Depending on the amount of cover and the way it is structured, that money could help a surviving parent, family member or estate meet costs such as:
- Paying down the mortgage
- Everyday household expenses
- Childcare
- Education
- Medical costs
- Household debt
- Future financial needs
The amount required is different for every family.
A family with a large mortgage and three preschool-aged children may need a very different level of cover from a family whose children are almost financially independent.
Don't Only Insure the Highest Earner
One of the easiest things to underestimate is the financial value of the parent who earns less or does not currently earn an income.
Imagine one parent earns $120,000 while the other works part-time around three young children.
At first glance, it may seem obvious that the main income earner needs significantly more insurance.
But think about what the other parent may be doing every week.
School drop-offs. Daycare. Cooking. Appointments. Cleaning. After-school care. Holiday care. Transport to sport. Managing the household.
If that person suddenly was not there, some of those responsibilities may need to be paid for or the surviving parent may need to reduce their working hours. The financial contribution of a parent is not limited to their payslip.
Make Sure the Pieces Fit Together
Insurance is only one part of planning for children.
Your insurance arrangements should be considered alongside your will and wider estate planning.
Questions worth discussing include:
- Who are your children’s current legal guardians?
- Have you appointed a testamentary guardian?
- What do you want to happen regarding day-to-day care?
- Has your lawyer recorded your wishes appropriately?
- Who would manage money intended for your children?
- Is your life insurance amount still appropriate?
- Who owns your life insurance policy?
- Would your mortgage or other major debts be manageable?
- Does your partner know what insurance you have?
The legal arrangements need to be addressed with a lawyer, while Halo can help with the insurance side.
When Did You Last Revisit the Plan?
Many parents arrange insurance when they buy their first home.
Then another child arrives.
The mortgage gets bigger.
One parent changes jobs.
Someone starts a business.
Five years later, the family may look completely different, while the insurance remains untouched.
A review after a major family change gives you an opportunity to check whether the financial support you planned years ago still makes sense today.
It can also uncover benefits in your existing policy that you may have forgotten about.
Protect the Future You're Building for Them
Planning for your children’s future is not only about what you can give them while you are here.
It is also about making sure there is a plan if circumstances change unexpectedly.
Halo Advisers can help you calculate the financial impact the loss of either parent could have and review whether your current life insurance reflects the family you have today.
For wills, testamentary guardianship, trusts and legal estate arrangements, seek advice from an appropriately qualified lawyer.