How can you make sure your family receive your fortune?
Super fund balances are a preoccupation of all Australians, especially given the recent share market volatility. Yet people tend to focus less on what happens if you die before you retire. How can you make sure your family receive your fortune?
Now that most of us have it, even though the amounts we have vary greatly, superannuation is a common topic of conversation, rivalling what is happening in the real estate market. We talk about how much our super nest egg earns from investments, how much we will need to retire comfortably, whether we will have enough to last us into our 90s and, most of all, what we will do with it when we get our hands on it.
Less is said about the death cover included in the super package. All employer-funded and retail super funds have this second string to their bow: an attached death benefit that pays out if we don’t last the distance to retirement. But this tends to get scant attention, even though it can make a big difference to our dependents if such a death does occur. All too many of us forget to ask these two important questions when we join a super fund:
- Will I have sufficient super savings, including life insurance, to cover my family’s needs should I die before retirement?
- Who can receive the death benefit paid from the super fund?
Importantly, it is often assumed that the death benefit payable from a superannuation fund automatically forms part of our estate and is treated the same way as other assets. This is not the case. Two characteristics that distinguish it from estate distribution are the taxation benefits arising from superannuation, and the fact that superannuation benefits generally enjoy protection from any creditors a member may have at his or her time of death. So it is that super-related death benefits receive special treatment.
What will be ‘sufficient’?
Each employer-operated, industry and retail superannuation fund usually includes a minimum-insured death benefit, the premiums for which are paid from your super contributions. The amount of cover can be a flat amount or it can be a multiple (e.g. three times) of your annual salary.
This cover is automatic and does not require you to undergo a medical examination, although you should look out for any exceptions that may disqualify your family from receiving the benefit (e.g. a pre-existing medical condition). Generally if you want to increase the amount of your insurance coverage you will need to complete a health-related questionnaire. When completing such a questionnaire, you must answer all the questions accurately and honestly, otherwise the insurer can refuse to pay out the benefit.
But will the minimum benefit be enough? While it is impossible to calculate the exact figure that is needed for ‘sufficiency’, for most Australians, the answer to this question is ‘no’. The benefit received will be helpful but it will probably not provide sufficiently for your family’s needs – particularly if the family is young and the mortgage large.
Furthermore, most automatic policies provide for the amount cover to decrease with age, so that the death benefit at 65 years of age provided by insurance is zero and is replaced by the accumulated benefit that would be payable at either death or retirement at that point. It is assumed that, with age, your savings will have grown and consequently the need for life insurance coverage will have diminished. However, this is not always the case, especially where there is a large mortgage and where remarriage or re-partnering occurs and a second family is formed.
If you do opt for higher insurance cover it involves higher premium payments, which again come out of your super contribution.
Who can benefit?
As the money you pay into superannuation is taxed at a lesser rate than other income, the government has limited the people to whom a superannuation benefit is payable. It may only be paid to your spouse (which includes a de facto spouse), your children, any person who depends on you for financial support, the executor of your will, a person in an ‘interdependency relationship’ with you or, if none of these apply to you, any other individual. That individual will, however, receive a benefit only if it is payable to others with a higher payment priority.
Most usually, payment will be made to a husband or wife and for children under the age of 18, although older children can receive a benefit if they are in full-time education. Financially independent children may, but are unlikely to, receive a payment, because dependents are given priority.
Within the above categories your fund may provide for you to either:
- make a binding nomination of one or more beneficiaries, or
- nominate your preferred beneficiary or beneficiaries, which is more common.
The information booklet provided by the fund will tell you if it provides for a binding nomination. If it does, and you make such nomination, then the trustee of the fund must pay the benefit in accordance with that nomination, regardless of who else makes a claim on your benefit. A binding nomination needs to be signed before two witnesses, neither of whom is a beneficiary, and must be renewed every three years. This means it involves more effort than the nominated beneficiary option, but it also ensures your wishes are carried out.
However, not all funds provide for binding nominations. If your fund does not permit binding nominations you will be asked to nominate your preferred beneficiary, from the categories mentioned above. The fund trustee will then generally take into account your nomination and:
- who would have been likely to receive the benefit from your income had you not died, and
- who you had a moral or legal duty to continue supporting.
A super-related death benefit paid to a spouse, infant child, financial dependent or to someone in an interdependency relationship is tax exempt up to the upper limit of the deceased’s RBL (reasonable benefit limit, the maximum amount of super than be accumulated with tax concessions). By contrast, if the benefit is left to your executor to be distributed under the terms of your will, unless the recipient is on of those mentioned, it will not be tax free.
Financial disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.