Joint life cover, a blended family and a bakery guarantee
Grant, 45, and Wei, 43, have been married for eight years. Grant owns 45% of a Christchurch bakery with his business partner, Tom. They have a $650,000 mortgage and two children: Ella, 12, from Grant's first marriage, and Noah, 5. Grant's will leaves his entire estate to Wei, but he wants $300,000 to go to Ella if he dies. Grant proposes a $1 million joint life first-to-die policy owned jointly by him and Wei, with the proceeds paid to the survivor. Wei is a stay-at-home parent; Grant's income is $140,000. The bakery has a $200,000 bank facility personally guaranteed by Grant and Tom. Grant asks whether the joint policy is 'simpler and cheaper' and whether naming Wei as beneficiary is enough.
1. Explain why the proposed joint first-to-die policy is a poor fit and how the cover should be structured for the mortgage, Ella and the business.
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Joint first-to-die is cheap because it pays once, on the first death. That is a poor match for this family. If Wei dies first, Grant receives $1 million, but there is no cover on Grant's life when the mortgage, business guarantee and Ella's $300,000 need are greatest. If Grant dies first, Wei receives the proceeds, but the money is not automatically ring-fenced for Ella. A beneficiary nomination pays to the nominated person; it does not create a trust for a child. Grant's will leaves everything to Wei, so Ella may receive nothing unless Wei chooses to provide.
Better structure: separate policies on each life. The mortgage cover should be owned by the person who needs it, or by a family trust, with clear instructions. For Ella, a policy on Grant's life could be owned by a trust, or the benefit paid to a trust created under his will, so that $300,000 is held for her and not treated as Wei's money. For the bakery, cross-insurance is usually cleaner: Grant owns a policy on Tom's life and Tom owns one on Grant's, funded by a buy-sell agreement, or the company owns key-person cover. The $200,000 guarantee should be reviewed against the business cover. Naming Wei as beneficiary is not enough for Ella or the business.
2. Grant asks whether he can simply own the policy and nominate Ella directly. Advise him on ownership, beneficiary nomination and the limits of the adviser's role.
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Direct nomination to a 12-year-old is not effective in the way Grant expects. Insurers generally pay a nominated beneficiary who is a minor to a parent, guardian or trustee, and the money may not be preserved for Ella. If the policy is owned by Grant and the benefit is paid to his estate, the will gives everything to Wei. If he changes the will to leave $300,000 to Ella, the estate may lack liquidity and the bequest may be affected by relationship property claims or family arrangements. A trust-owned policy, or a will trust with a policy nomination to the trustee, gives control to trustees and can specify age and purpose.
Grant should get legal and tax advice; the adviser should not draft the trust. The adviser should check whether the insurer allows trust ownership, who the trustees are, and whether Tom or the company needs to be a party to the cross-insurance. The adviser should also explain that ownership and beneficiary nomination are different: the owner controls the policy, while the nomination directs the death benefit. The recommendation should be documented, including the reason a joint policy was rejected.