Although most of us hope to live to a ripe old age, we never know when illness or accidents may strike, and the blunt truth is that they may prove fatal. Are you financially prepared in case the worst happens? Having your finances in order by doing just a few simple things could make the process of dealing with your estate so much easier for your family.
Everyone is aware that we can’t cheat death. But we still do everything we can to ignore or avoid it.
This contradiction has received plenty of attention in psychology. Some theories, like Terror Management Theory, argue that it is the cause of most emotional conflicts.
Unsurprisingly, and unfortunately, it can also lead to tension within families. That is because if we ignore our own mortality, we are unlikely to prepare for it. And that can have serious consequences for our loved ones.
Being financially prepared for the inevitable should therefore not be seen as something introspective and morbid. Rather, it should be dealt with as being considerate of the implications for those we leave behind.
Getting things in order
You shouldn’t want to compound the trauma of your death with the added anxiety of leaving your family with a financial maze to navigate. No matter your age or circumstances, it is worthwhile to have things arranged so that it is clear what needs to be done should the worst occur.
A simple way of doing this is to have a file or a document saved on a computer that contains all of the important information relating to your finances. This includes insurance policies, bank account details and investments.
It should also have the details of any debts like home loans or vehicle financing, and contracts such as for mobile phones or streaming services. These are all things that need to be transferred or ended if you pass away, and it’s very helpful if your family has them all in one place.
Everyone should also consider these three things to make dealing with their estate as easy as possible:
1. Have an up-to-date will
Research published by unbiased.co.uk in 2018 found that 60% of adults in the UK don’t have a will. Essentially, all of these people face the risk of dying intestate, and therefore letting the law decide who should inherit from them.
The law governing what happens in this instance can lead to devastating outcomes. For instance, it does not recognise cohabiting partners, only those who are married. So even if you have been living with someone for decades, if you die without a will they will inherit nothing.
Writing your wishes into your will allows you to make sure you are providing for your loved ones. It’s also a good idea to tell all of those you have named what they can expect so that there are no surprises.
Also be sure to revisit your will regularly. Your circumstances and wishes will change over time. Make sure that your current will reflects this.
2. Name (and update) your beneficiaries
Many financial products allow you to name a beneficiary in the event of your death. Doing so ensures that the money passes directly to the people you want it to go to.
These payouts are not usually liable for income or capital gains tax, but inheritance tax will be deducted if the total value of your estate is more than £325,000.
A critical consideration is to update these beneficiaries if your life circumstances change. It is not uncommon for divorced partners to receive life insurance payouts long after they have separated and for new spouses to receive nothing because the policies were never changed.
3. Consider final expenses
Unfortunately, dying can be expensive. This is not just because funerals can be costly, but there are services that need to be paid for in winding up an estate. Inheritance tax may also be payable.
Having a funeral policy is a good way to deal with the former. Some life insurance policies may even include this as a separate benefit.
The bigger consideration is however making sure that there will be enough liquid cash in your estate to pay for the probate fees. This refers to the process of dealing with the affairs of a deceased person.
These fees can be 2% to 5% of the value of the estate. An estate valued at £500 000 would therefore see solicitor’s costs of up to £25 000, before VAT. Making an allowance for this, either through a life insurance policy that pays into your estate or a savings account (which could also serve as an emergency fund) will ensure that nobody needs to sell assets just to cover this legal process.
Estates valued at more than £325,000 will also have to pay 40% inheritance tax. Anything left to a spouse or civil partner is, however, not taxable. This is more difficult to provision for, but again having adequate life insurance is a sound way to make sure that your family isn’t left with far less than you would have liked.
Not financially prepared? It’s time to act
Perhaps you’ve been putting off thinking about these sorts of issues. If so, you’re not alone. But remember, being financially prepared for your death it’s not really for your benefit, but that of the loved ones you leave behind. So come on, let’s get on and do it!
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