We’ve all heard the horror stories of people winning millions in the lottery only to squander everything three or four years down the line. Similarly, the payout from a life insurance policy can disappear just as easily if the beneficiary doesn’t have sound financial knowledge.
Life insurance is accessible to almost anyone who wants to make sure that, should something happen to them, their dependents are cared for and can continue to live their lives with little disruption.
It has also earned the title of the ‘ultimate gift’ for loved ones we leave behind as it provides an avenue for family members to continue building their lives and staying on course of their wealth creation ambitions, by either investing in assets like property or stocks, or even someone’s education. This foundation could then have significant positive impact on the financial futures of generations to come.
However, poor financial education and the lure of consumption can often erode this foundation, leaving nothing from which future generations can build their way up from. Part of having sound financial knowledge is understanding the tradeoff between instant gratification and a long-term plan that yields better results.
According to the Williams Group Wealth consultancy, about 70% of America’s Wealthiest families lose their wealth within the second generation, sometimes the third. Now, in South Africa where 90% of earners get only 35% of total income, with most still lacking basic elements like houses and assets, this adds an extra layer of pressure. Added to this reality, is that the basic levels of financial literacy are among the lowest in the world. Few people appreciate or understand financial matters, which creates the potential for misspending and mismanagement when coming into large sums of money.
So, how can you ensure that what you leave behind will be preserved for the benefit of future generations?
- Ensure access to education
There is a saying that goes: those who know better, generally do better. It is about ensuring that you teach your kids about money and start having open conversations about finances. As a country, we can do a lot more to educate each other on financial matters, to improve the overall financial literacy of South Africans. This has been acknowledged by the financial services industry as a whole.
There are a number of avenues to explore to get financial education. With the huge drive by financial services companies to improve levels of financial literacy, there are various free-to-access digital platforms that offer financial modules for you to start learning from, like Metropolitans FinEazy and Metropolitan Kickstarz (www.momentummetropolitan.co.za/en/social-investment/funding-focus/financial-literacy).
This knowledge can be passed on to future generations to help prepare them better for their own financial futures.
- Explore appropriate structures to preserve funds
As a way to mitigate the loss of wealth when transferred from one generation to the next, some families put rules in place for the inheritance. In the absence of rules, you are then relying on the person who inherits the money to manage it appropriately. Trust structures provide a way to implement rules for the inheritance, and to ensure that the needs of those who inherit the money and the needs of individuals who come after that are considered.
Some families might dictate, through the trust structure, that beneficiaries can only access a portion of the money upon turning 21 or only after completing tertiary studies. These rules help to ensure the sustainability of the inheritance over the long term.
- Put a Will in place
Drafting a legal Will is another way to protect the intention of a leaving a legacy behind. The importance of having an up-to-date Will cannot be understated, as it serves to spell out who inherits assets such as property, and how these assets should be distributed to beneficiaries. You could also opt to elect someone to execute the Will – an independent professional, for example – instead of beneficiaries who stand to inherit as a way to ensure the assets are divided according to what the Will stipulates.
Lastly, the importance of partnering with a reputable financial advisor cannot be understated. They will look at your needs as an individual, your family’s needs and financial life goals, and help you to budget and plan to meet these goals and to ensure the money is preserved and sustained for generations to come.