Estate Planning is all about planning for risks such as ill health, inability to earn income, untimely death, etc. It is also about the transfer of property, either during life or death, the methods used, and the risks associated with those methods.
In 2014, the Enhancing Financial Innovation and Access (EFInA) survey studied household dynamics in Nigeria and listed the financial risk with the greatest impact on household finances to include: serious illness of a household member (33.6%) and death of a relative/household member (27.7%). A household’s biggest financial risks are the “breadwinner” falling ill or dying.
How to protect income, and how to transfer of assets
Let’s start with protecting income. The most common way to hedge against a loss of income is to buy insurance. You can buy insurance to cover your assets; for example, you buy a home or car insurance. You can even insure your home appliances.
Meanwhile, insurance has a cost, that is the premiums paid. Therefore, do not insure what will become obsolete within the lifetime of the cover or pay to insure when the premium is more than the value of the assets. This is simple enough. The main risk here is to choose an insurance company that will pay premiums when the insured event eventually occurs. One of the most important assets to protect via insurance is your ability to earn, this is done via disability and life insurance.
Understanding disability or loss of income insurance covers
Disability Insurance or loss of income insurance covers you in the event you cannot work or perform your current occupation because of illness or injury. Disability Insurance is extremely important for a business with a key owner or single owner, as the EFInA study shows the biggest financial risk to a household is the incapacitation of the breadwinner. Getting disability insurance ensures you don’t lose income when you are sick for a long period of time.
If you’re an employee, There is a new Employee Compensation Act that mandates disability insurance. Ask your employer about this.
Health Insurance is another protection to take, especially as you grow older. For a fixed premium, you’re protected from extraordinary health care expenses that will completely distort your budget. Buy health insurance, put the cost of premium in your cash budget that protects your cash flow should you fall ill.
Let’s talk about Life Insurance
Another way to protect against loss of income is to buy life insurance. The whole idea of life insurance is to ensure the income of the breadwinner is not impaired. This is extremely important. You want to buy a life cover that ensures that your dependents do not suffer a loss of income if anything happens to you. You can also buy a life policy linked to an education option that pays the sum assured towards the education of identified wards. If you have a Retirement Saving Account, then your employer must take a Group Life Insurance cover for you of three times your remuneration. Make sure you identify a fit and proper next of kin and ensure the premiums are paid by your employer.
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Now, Let’s Discuss Transfer of Assets
Assets can be transferred from the owner to a beneficiary via many methods. A well-planned asset transfer prevents dissipation of assets. The very first thing to do is to ensure all your assets are properly registered and legal. There are three main circumstances under which assets are transferred;
No Will: This has to do with assets transferred Intestate, i.e. assets transferred without a formal will or instruction of the owner. The assets will then be transferred in line with the governing laws of the state. If you don’t have a will, your assets will be administered and shared to your identified beneficiaries by the court-appointed Administrator. You want to avoid this. Also, not a Next of Kin designation is not enough, be specific how you want your assets to be transferred by writing a proper will.
[READ THIS: Why do I need insurance coverage?]
A Will: Assets can be transferred according to your instructions as stated in a Will. This allows assets to be transferred to beneficiaries according to the wishes of the owner, including the appointment of an Executor to the Will
A Trust: A trust is an arrangement whereby assets are transferred by an individual or a corporate, to a Trustee, to be held by the Trustee for the benefit of certain beneficiaries. Trust can come in effect even when the owner of the assets is still alive, this is called a Living Trust. The Trustee can also be a corporate Trustee.
The cost of a Trust is usually more expensive than a Will. However, a Trust offers the advantage of avoiding Probate, are more private and cannot easily be challenged. Trusts are also more flexible than wills. Other methods to transfer assets are the making of gifts to beneficiaries.
Note that Probate is the Court process by which a Will is proved valid or invalid. When a person dies, the estate must go through Probate. This Probate process is overseen by a probate court.
When you do your Net worth review exercises and there is an increase in your Net worth, always update your will or Trust to capture the new assets.
To close, remember that what you’re protecting is not only your ability to earn money but to protect your budget from extraordinary events. Not buying vehicle insurance, for instance, can expose your budget to irreparably loss should anything happen to your car.
To summarize, from income, you first protect, then create an emergency fund then you can invest.
Question: Have you written a Will or Trust for your assets?