Planning for dependents II

LAST week, we talked about the need to plan the financial welfare of our dependents. We listed six main areas we should be paying attention to – education planning, health insurance, estate planning, life insurance, retirement planning and financial literacy. We have discussed the first three; we will discuss the last three in today’s article.

Life Insurance – Some regard this as another “morbid” topic but in fact it is a great dependents’ planning tool for responsible guardians. A life insurance policy is a legal contract with an insurance company to pay to pre-designated beneficiaries. A pre-agreed sum on the death of the insured. It has a unique advantage of providing immediate cash directly to beneficiaries without the need to wait for probate registry approvals.

However, if the insured does not die within a designated time, he collects the policy proceeds. So, a life policy is also a savings investment tool. If a parent does a life insurance with the intention that the proceeds would cushion the financial burden on his dependents if he dies, he can structure the policy to mature at a time that he expects all his dependents to have become financially independent. If the insured then outlives the policy maturity date, he collects the proceeds and could spend it on a retirement annuity or anything of his choice.

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Retirement Planning – How is this dependents’ planning? If a parent has made adequate financial provision for himself so that he has enough money to spend even after he has stopped working, that parent will not be a financial burden to his dependents. So, whilst planning your own retirement may not give your dependents money, it would also not take away what they have.

In our society today, children are expected to honour their parents with regular cash gifts. If we plan our retirement properly, these gifts would not be our source of livelihood but an icing on the cake we have already baked. With double-digit inflation, high unemployment and low disposable income, it is unwise to expect that this generation of youths will be able to shoulder their parents’ financial requirements 100 per cent and still meet the needs of their young families.

Retirement planning involves more that just having a Retirement Savings Account (RSA) with a Pension Fund Administrator (PFA) and depositing the minimum contributions into it. Using the multiple streams of income principle, retirement planning involves creating various sources of passive income for oneself against a time when one can no longer work. It involves investments on the stock exchange, money market and commercial real estate so that one can earn passive incomes e.g. dividend from company shares, rent from shops outside one’s house and interest from FGN treasury bills etc.

Proceeds from RSAs could also be moved to an insurance company upon retirement because the insurer pays you the pension until you die but the PFA stops paying once your savings are exhausted.

Financial Literacy – Perhaps the best way to prepare for your dependents financially is to ensure they get a sound financial education. Otherwise, they cannot manage their own money nor the one they inherit from you. As the saying goes, “a fool and his money are soon parted”. Many ask, how did the fool get the money? I dare say, he inherited it. There is little or no financial education in our schools, therefore, it is our duty as guardians to teach our dependents how to earn, spend, save and invest. Regular pocket money would teach them how to budget, give to charity, save and spend prudently. Getting a holiday job would teach them how money is obtained, the finiteness of money and good work ethics. Opening and operating a savings account would introduce them to how banks work and teach them delayed gratification, the magic of compound interest and how to manage a bank account.

There are also fun games like Pay Day, Thrive Time and Monopoly that teach the principles of money management and investment. So, the children can gain financial literacy whilst having great fun. We as guardians owe it to our dependents to ensure they get the best education and that includes financial education.

Let us go ahead and secure as best a financial future for our children as we can, God helping us.