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You can change your family's life by creating generational wealth and setting your loved ones on the road to financial independence. But the opposite can happen too! You can leave your family with generational debt, which puts their wealth building plans on a backfoot that they may never recover from! So, step 1 in creating generational wealth is to make sure you don’t leave future generations in debt. Here’s how to make that happen.
How generational debt works
This is why your debt is your loved ones’ problem
Generational debt is the debt your loved ones have to deal with when you pass away. Your debts can be anything from a personal loan, home loan and car finance contract, to credit card debt and student loans, even unpaid taxes! If you have debts outstanding when you pass away, they will have to be paid out of your estate. Which could mean your assets have to be sold. As a result, your loved ones can end up with much less than you wanted, perhaps even nothing!
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Are you creating any generational debt?
You can do a quick check to work out if you have generational debt.
Using the example below, list all your debts, the amount outstanding for each, and if it is covered by insurance such as credit life insurance when you pass. Next, add up all your debts that will have to be paid by your estate to get a total due after death. This total is the amount by which an inheritance could be reduced.
| Debt | Amount outstanding | Is the debt paid when I pass on? |
|---|---|---|
| Student loan | R235 000 | No, my estate would have to pay the debt |
| Home loan | R560 000 | Yes, my bond is covered by a life cover policy |
| Overdraft | R13 000 | No, my estate would have to pay the debt |
Why your generational debt might be more than you think
In the example above, you could assume that because the home loan amount is covered by insurance, which means any outstanding balance will be paid on your death, your loved ones will inherit your home.
However, there is the R235 000 student loan that has to be paid, as well as the R13 000 overdraft, R248 000 in total. In addition, there are costs involved in settling your estate such as executor fees and Master of the High Court fees that need to be paid. Before your assets are distributed to your heirs, your debts and any costs of managing your estate have to be paid first. Only when these are paid, can your heirs inherit. To raise the R248 000 needed, your home or other assets may have to be sold or your family will need to take out a new home loan. In short, your debts have left your loved ones indebted and their wealth building plans will be put on hold till they pay the debts.
How to eliminate generational debt
1. Use credit life insurance to cover debts
Credit life insurance will pay outstanding balances in the event of the debtor’s death, and may also have a disability and retrenchment benefit. Many institutions, such as banks and stores, automatically include credit life insurance when they offer you credit. Check your existing agreements to see if there is credit life insurance in place and how much it covers, and if not, find out if you can take out credit life insurance to cover the outstanding balance or any amount not covered by your existing insurance.
2. Take out life insurance
Life insurance can be taken out to cover a specific debt, such as when a life policy is ceded to a bank as part of a home loan agreement. The pay-out from a valid life insurance claim can also be used to pay off any other debts you leave behind when you pass, for example a student loan. Life insurance is unique as the pay-out can be made directly to a policy beneficiary, so it does not form part of the estate, and the pay-out is tax free. This can be a huge help for your loved ones. They can receive the payment quickly without having to wait for the estate to be wound up, and can be sure of the amount they will receive for valid claims as no charges or taxes are deducted.
Life insurance can also be used to give liquidity to your estate so that costs such as executor fees and any taxes can be paid without assets having to be sold.
Top tip: You can also take out insurance that is specifically designed to cover the costs, and sometimes debts, involved in winding up an estate such as the 1Life Wills and Estate Plan. This plan covers cash shortfalls in your estate, and provides for a valid, signed, retrievable will.
3. Become a master at managing your debt
If you avoid unnecessary debts and manage your debts well, such as paying off your credit card in full each month, you can avoid leaving your loved ones any generational debt. However, Truth About Money, a 1Life Insurance initiative, offers a free online Ditching Debt course to help you manage and get rid of your debt forever, if that is not the case.
4. Work out your wealth-building plan
Not leaving debt is a good start to get your family on the road to financial wellness! The next step is building wealth and assets, such as buying a home, investing in yours and your family’s education or saving and investing, such as in shares and unit trust funds. Generational wealth could be yours if you have and follow a wealth building plan! Your financial adviser can assist with this, making sure it is appropriate and realistic.
Go on, build your wealth today
Want to leave a lasting financial legacy that changes your family's life for the better? You can! Take control of your debts, use insurance where available and kick start your wealth building plans. Your family will inherit your generational wealth without losing any funds or property to cover your generational debts.