Giving blended families greater peace of mind
In today's world, family structures are becoming increasingly complex, creating unique challenges for life insurance advisors. Blended families and multiple inheritances require careful navigation of delicate family dynamics, spanning both financial practicalities and the desire for fairness.
As an advisor, you know how important it is to listen to your clients. When blended families are involved, there may be many more people to consider, each with their own needs and concerns. When all family members feel heard and understood, you can build relationships of trust, develop a plan that reflects their reality, and help them achieve greater peace of mind.
Case study: No inheritance for Eric’s kids
Eric and Melissa were recently married, and each has two children from a previous marriage. They bought a house together, which they hold jointly, and they’ve named each other as direct beneficiaries of their RRSPs and life insurance policies.
Although both parents would like to know that their children will be cared for if they were to pass away, here are three possible scenarios where Eric’s children could be blocked from receiving an inheritance:
- If Eric dies first, Melissa will inherit everything. Their house, his RRSP, and the death benefit from his life insurance will bypass Eric’s estate and go directly to her. His children will not receive an inheritance.
- If Melissa later passes away and her will says to divide her assets among her children, it will likely be interpreted as referring only to her biological children. If that happens, Eric’s kids will miss out again.
- If Melissa remarries and structures her affairs the same way she did with Eric - owning a home jointly with her new spouse and making him the direct beneficiary of her RRSP and life insurance - her assets will go directly to him if she dies, again leaving nothing for Eric’s kids.
If Eric wants to be certain that his kids will receive an inheritance, he needs to have a more rigorous strategy.
Life insurance: The great equalizer
When clients are concerned about equalizing their estate and making sure that specific people will benefit, whether it’s children, stepchildren, or a spouse, there is one strategy that can put them in control: life insurance.
If Eric had named his kids as beneficiaries of a life insurance policy, they would have received the proceeds upon his death without question. They would not have to worry about what it said in Melissa’s will or think about how her legal decisions or changing priorities might impact them years down the road. Nor would they face potential challenges from her children or future spouse.
If Eric’s children were minors and he was concerned about how they would be able to handle an inheritance, he could mitigate this concern by creating an insurance trust. The trust could be managed by a family member and dispersed to his children when they reached the appropriate age.
How to manage the process as an advisor
Here are some principles to help you and your clients manage the complexities of insurance and estate planning for a blended family:
Have candid conversations. You need to make sure that your clients understand what’s at risk and why it’s important to plan proactively. You also need to set expectations with the beneficiaries. Family conflict after the death of a loved one is an all-too-common occurrence. Helping families avoid this outcome is a highly valuable aspect of your advice.
Align the wills. When a couple brings their individual wills and estate plans into a new family unit, it’s essential to make sure they are aligned. Is the couple on the same page in terms of what they wish to leave for their own children, their partner’s children, and any new children who might come along? And what if one of the partners passes away and the survivor remarries? These scenarios must be discussed and planned for.
Review beneficiaries and clauses. As we saw with Eric and Melissa, joint ownership and beneficiary designations make it possible to pass significant assets to someone outside of a will. Couples need to make sure they have named the right primary and secondary beneficiaries to ensure that their plans will be fulfilled.
Consider taxes. Inheriting a $300,000 vacation property that comes with a $100,000 taxable capital gain is not the same as inheriting a $300,000 RRSP account tax-free. Help your clients consider the after-tax impact of their planned giving. Life insurance can be a powerful way to even out any potential disparities.
Coordinate legal assistance. As you work through these issues with your clients, you may find that they need to update their wills, create new trust structures, or draw up contracts. By helping to coordinate these activities with a qualified estate and trust lawyer, you can cement your status as a trusted family advisor.
There’s no one-size-fits-all solution for blended families. You’ll need to adopt a personalized approach to assess the unique needs and expectations of each family member. You’ll also need to maintain regular communications to prevent misunderstandings and conflicts. However, the reward can be a deep client relationship that spans generations.
Many risks, opportunities, and inequities can arise in blended families, and life insurance can be a powerful tool to help clients equalize outcomes, protect loved ones, and live life with greater peace of mind. As you guide them on this journey, Beneva will be here to support you with the right life and health insurance solutions.