How to make ends meet without the sole breadwinner

How to prepare for the loss of the breadwinner

Preparing for unexpected twists and turns is an important part of any breadwinner’s financial planning. This does not mean that the dependents do not have a role in this. Do not do your financial planning in isolation.  It should be a family discussion where everybody should be on board as to what is going to happen. The very first step is sitting down to compile a comprehensive budget that includes all your family’s primary expenses such as vehicle finance, mortgages, school fees and more. This will assist in determining what lump sum is needed upon death.

They need to know where to find your Last Will and Testament and who the nominated executor is, as well as the contact details of such a person or institution. Ideally, you should have an updated documented list available with all assets, liabilities, policy information, passwords and any other information that you deem relevant for those you leave behind.

How much cash do you need on death?

In the ideal world, a cash lump sum must be available on death to cover all financial obligations. The needs of the surviving family must be established if the breadwinner would pass on. Fortunately, the lump-sum calculation can be relatively simple. The remaining dependents will need an income to survive.  It should be common knowledge that a breadwinner does not want to leave their family behind with any type of debt. Taxes must also form part of the planning, for example Capital gains tax (CGT) and Estate duty. Determining the value of the cash lump sum is an accounting exercise.  First: Pay all debts and last expenses and settle all costs and taxes in winding up the estate. Then the remainder should provide a cash lump sum that should be invested to provide an income for your financial dependents. Simple? Afraid not, and this why financial planning should always involve a financial advisor.

Consider the following:

• Do you know how to calculate all taxes and expenses in the winding up of the deceased estate?
• How do you determine the size of the lump sum to cover your financial dependents needs, and what factors must be taken into consideration when you calculate such an amount?
• What is a sufficient income for your financial dependents and what about other needs like tertiary studies or the regular replacement of a vehicle?
• Is capital protection on the lump sum necessary?
• Do you want them to live on the interest of the lump sum or do you want them to erode the lump sum over time?
• What if there are minors involved, how do you protect them?
• What about pensioners, will the breadwinner’s pension continue to pay to the surviving spouse or family?
• Does your Last Will and Testament mirror with your “cigarette box” financial planning?
• What is the difference between provision for an income or financial support and the ultimate distribution of the capital? How do you utilise a testamentary trust for this purpose and if you use the trust, who will be the trustees?

These are just few of the issues that can derail all the initial financial planning and there are more. “How much” is a function of your needs and wants.

The role of life insurance

The death of the breadwinner can be devastating to the financial dependents that remain behind. We have highlighted the need for capital on death but how do you go about it? For a lucky few, cash and liquid assets on death are not that big of an issue. However, for the rest of us, if you do not have sufficient cash, you need to create it.

Most of us do not have the financial ability to tackle life's crises head-on. Life insurance is a way to mitigate this risk. Sufficient life cover will ensure that your executor can settle all debts, last expenses and taxes of your deceased estate.

Where needed, this cover may also secure the financial security of your dependents:

• For the average person on the street, it is almost impossible to be financially ready for life’s uncertainties
• By using insurance and insurance companies, you pass the risk onto them by means of a monthly insurance premium
• These financial institutions are financially strong enough to carry the risk
• Insurance is a means to protect you and your family financially through the risks or crisis

Taking out life Insurance should not be postponed until you’re 50 – it is something that you should take up as soon as possible in order to ensure protection for yourself and your family. It also gives you a base from which to work when planning for the unexpected.

Life insurance and financial planning

The two main ingredients to insure the financial stability of the breadwinner’s family on his or her death are sufficient cash and proper financial planning. Therefore, the review of the personal financial plan on a regular basis is crucial. Make sure that the existing financial provisions and the ever-changing needs on death are aligned.

For the insured, it is best to keep your beneficiaries updated. But how often should you revise them? Beneficiaries should be updated at least once a year and don’t forget – all of this preparation is worthless if the documentation is nowhere to be found when it’s needed. As such, be sure to keep all financial and legal documents in a single, secure area and back them up digitally whenever possible.

What is the first thing you should do as a surviving family member?

The fact of the matter is that as a surviving member, you will have sleepless nights – life goes on in the sense that your expenses will not come to a sudden halt. The least we can do in our financial planning is to make sure there is a valid Will in place. The family needs to know where the Will is and needs to contact the nominated executor as soon as possible.  The executor will report the death to the Master of the High Court and a letter of executorship will be issued within four to five weeks.

However, what do you do while you wait, especially since it may be months – sometimes years – before you start seeing the estate wrapped up? Surviving members should take control of whatever they can which is not executor-related, such as the changing of medical aid, pension and so forth.

Submitting claims on any life insurance policies where there is a nominated beneficiary should be a high priority. These policies will normally pay in a couple of days and are not subject to any executor’s intervention. This creates immediate liquidity, which is necessary for the day-to-day expenses in that interim period whilst the executor is winding up the estate. Be careful not to spend the money you receive as a beneficiary too quickly, for it could happen that the executor would need cash to settle the bond for you as a beneficiary to become the new owner of the house that has been bequeathed to you. (If that is the case.)  If the bond can’t be settled, it could happen that the property will be sold on auction just to settle the debt, and far below fair value.

Getting the paperwork - including the issuing of the death certificate - in place is also crucial because this will be needed to submit any claims or to change any details of the deceased. The nominated executor will also need a certified copy of this document as part of the reporting of the estate to the Master of the High Court.

Another step for the family is to contact the deceased’s former employer to provide them with the necessary details and information. There may be retirement benefits and group life cover available. When you do your financial planning, make sure that you consider these benefits when doing your calculations.

Picking up the pieces

As sad as it is to consider, life must (and will) go on after a loss. Since the breadwinner is no longer there, it is pivotal that the family and financial dependent gets sound financial advice. There will be funds available that needs to be invested to secure their financial wellbeing. Their own personal financial plan most likely will need some adjustments.  An established relationship with a trusted financial advisor may come in very handy because steady hands are necessary to steer the ship in times like these.

The passing of a breadwinner can be catastrophic, but by taking a few simple responsible steps, both he or she and their dependents can live every day knowing that there is a plan in place to help the family stay afloat no matter what the future may hold.

Get your Personal Financial Plan created and managed by an Absa Insurance Financial Advisor, who can assist you in speaking to the right people about other investments and policies to ensure your dependents are cared for. Send an e-mail to AdviceGurus@absa.co.za or call 011 225 1797 and start your journey of financial planning success.

*Note: Finances are important but your emotional health is also a priority in such trying times. Contact the South African Depression and Anxiety Group if you would like to talk about managing your grief.