© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Financial Planning in Australia 5TH EDITION Sharon Taylor Roger Juchau

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Insurance - Life CHAPTER 15

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor OVERVIEW There are four ways to manage risk: avoid, reduce, retain or transfer. Life, TPD, and trauma insurances are ways to transfer unavoidable risks. Death and disability can have devastating consequences for individuals, families and businesses. Professional advice helps to accurately determine the levels of cover required. A range of insurance policies and premiums is available to meet the needs. Overview

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor There can be a reluctance to face up to the need to insure oneself and one’s family against the financial losses associated with death, disability and incapacity. The reasons range from personal denial to a strong focus on long- term saving goals (for example, superannuation) which obscures the need for insurance in the present. Facing up to Insurance Needs

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Yet despite all of these ‘reasons’ for under- insuring, the most important thing a financial adviser can do for his or her clients is provide appropriate and affordable insurance cover. Any financial plan can be brought undone by the intervention of unexpected events. Premature death, disability, and loss or damage to property can all result in a financial plan not being achieved as essential parts of the plan can no longer be funded. Facing Up to Insurance Needs

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Identification of risks Quantification of risks Strategies for handling the risks — 1.Reduce or eliminate the risk 2.Provide financing to meet the consequence Transfer the risk (insure) Retain the risk (self-insure) Implement the program Review the program Risk Management Process

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Life insurance provides protection against the risks of premature death and disability. Often more than one person benefits from the generation of income, particularly within families. Consideration is needed of the consequences of an income prematurely ceasing. –Who would be affected? –To what financial extent will they be affected? –What insurance cover could be used to cushion those financial consequences? Life Insurance

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Death and disability are not predictable events. From time to time stories surface of a person dropping dead who was very fit, who exercised daily, and who was last person one would expect to die prematurely. Prediction of premature death is not possible. Causes of Death

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Principal causes of death Cancer Heart attack Accidents are a much less common cause of death than illness Causes of Death

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Life Expectancy

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor In providing for the consequences of a client’s death two separate matters need to be considered: –What amount is needed to take care of immediate expenses including clearing any outstanding debts? –What amount needs to be set aside to take care of the dependants into the future? Immediate Consequences of Death

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor These expenses can be summarised as: funeral and associated expenses; final medical expenses; mortgages; other debts; emergency funds; taxes; and other items particular to the circumstances. Immediate Expenses

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor To provide for the consequences of premature death and disability it is necessary to establish: who will be affected by the premature death or disability; and the degree of dependency. Consequences of Death or Disability on Dependents

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Young Adult –Limited needs on death –A long future if permanently disabled Young Family –Often catastrophic consequences from Death of income earner Death of homemaker Permanent disablement Mature Family –Children self-supporting –Health, disability considerations –Existing assets Insurance needs change throughout life

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The multiple approach Calculates the capital sum required to replace an earned income with investment returns 1.Decide what salary would need to be replaced Example: $70,000 2.Nominate an achievable investment interest rate Example: 7% 3.Divide one hundred by that rate and round up Example: 100 / 7% = = 15 (rounded up) 4.Multiply the salary to be replaced by the multiple Example: $70,000 X 15 = $1,050,000 This amount, invested at 7%, produces $73,500. The tax liability on this amount should be no more than the tax paid pre-death. Calculation of needs: The Multiple Approach

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Shortcomings of this approach It does not take account of any other resources that may exist. It does not specifically investigate whether the dependents need the amount of income that results from the calculation. Depending on whether nominal or real investment returns are used for step two, this method may not provide inflation protection for the income generated. Calculation of needs: The Multiple Approach

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The needs approach uses three steps: Calculate the amount needed for the dependants to maintain their standard of living. Calculate the resources the dependants would have to meet those needs. The difference between those two sums is the amount for which life insurance needs to be effected. Calculation of needs: The Needs Approach

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The immediate dependants in a family would be the partner and children. The partner needs to be provided for over a lifetime or, if there was a superannuation plan, until the superannuation benefits commence. The children would need to be provided for throughout the period of their dependency. For each of the dependants it would be necessary to establish their age and the length of their dependency. The Dependents

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The amount required for living expenses would be derived from amounts currently incurred. In ascertaining costs the full amount of the family’s expenditure needs to be brought into account. When considering living expenses in relation to children, consider costs at different stages of their lives. As they get older, the costs will increase. The Living Expenses

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor After calculating the amount needed by the dependants, the next step is to ascertain what funds may be available to meet the calculated amount, including: –the personal exertion or investment income of surviving family members –any available government benefits –where death or disability arises from a motor vehicle or workplace accident, a benefit that may be payable under the state scheme providing benefits for those situations –proceeds of a superannuation plan. Current Resources

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Also to be brought into account would be: –life insurance cover currently in force –any investment that can be converted into income-producing assets.. Current Resources

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Stand-alone which cover disablement, or life insurance policies can be extended to include this type of cover. In either case, a lump sum amount would be paid in the event of: total and permanent disablement (TPD); and/or the consequences of significant illnesses or accidents (trauma). Disablement

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor TPD provides for a lump sum amount to be paid in the event of a situation where the insured will never work again. In such a situation many of the needs that exist in the event of death arise. There are two broad categories of expenses: –medical and other costs associated with the disablement; –ongoing support of the client and their dependants. CHAPTER 15

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The needs that may exist for life and permanent disability insurance must be explored thoroughly as the end result potentially makes provision for a family for many years, in some cases a lifetime. If the amount calculated is not adequate then it is the client’s family that will suffer the consequences. The sums produced can be high and may result in the client being inclined to dismiss the amount as being excessive. Need for Life Insurance

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Regardless of the reaction the client should be taken through the calculations explaining how the amount was arrived at and the necessity for each consideration taken into account. In doing this the client can clearly see the necessity for cover amounting to the total amount. Need for Life Insurance

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Applying for insurance When a person seeks insurance an insurer is required to make a Product Disclosure Statement (PDS) available to the client. The PDS gives the client a reasonably comprehensive description of the policy, the factors associated with establishing the premium, taxation and other relevant issues. Insurance Policies and Premiums

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor At law the insured has a duty to disclose any information that can be regarded as material. Material information refers to any matter that the client could be reasonably expected to know is relevant to the insurer’s decision. If the information given in the application form is incorrect in a material way the insurer may be able to reduce the amount payable or deny any cover under the policy. The duty of disclosure is imposed under the Insurance Contracts Act 1984 (Cth). Duty of Disclosure

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor When deciding whether to accept the risk under a life insurance policy, the insurer is looking for lives that meet certain requirements in relation to health, occupation and pastimes. Pastimes include not only obviously dangerous activities undertaken by the client, such as hang gliding, but also travel. Deciding Whether to Accept the Risk

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor There are two ways in which the premium may be applied: stepped, in which each dollar of insurance cover becomes more expensive with age; or level, in which premiums will only rise if more insurance is required, as may happen if sums insured are indexed to inflation. Types of Premiums

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Broadly there are three types of policies provided by life insurers: term, in which the premium is set no higher than is needed to provide the insurance cover required whole of life, in which the premium includes an investment component, enabling a level premium over the whole of life endowment, which operates like whole of life but maturing at a specified age or at the end of a fixed term. Types of Policies

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Premium rates — vary according to the situation of the insured as well as cost structures of the insurers and the type of cover sought. Three generic factors influence life insurance premium rates: –Sex: fewer females die than males at all ages, so premiums are cheaper –Age: with the exception of young adult males the risk of death increases progressively with age, so premiums generally increase with age –Smoking: smokers pay higher premiums. Premiums

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor There is range of business uses for life, TPD and trauma policies. Briefly these covers can be used: As an employment benefit. Superannuation and life insurance cover may be provided as part of the conditions of employment. This may include TPD and trauma cover. As ‘key person’ insurance. The business could effect a cover on an employee on whom the business depends for income generation. If the person were lost to the business through death or disability then the policy would provide for the hiring and training costs of a new employee and any loss of income. Insurance

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor As ‘share purchase’ insurance. Where a business is operated by partners (incorporated or not) on the death or incapacity of one of those partners the question arises as to who will acquire the deceased’s interest in the business, what its value is, and how the acquisition will be financed. Often a formal ‘buy/sell’ agreement is entered into providing options to buy to existing partners, with funding provided by insurance. Business loans can be protected by a life and disability policy. Business Insurance

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor Superannuation funds often provide life insurance cover for their members. The nature and extent of cover will vary between funds. Some will also include permanent and partial disability cover. Trauma insurance is not normally offered by super funds. Life and TPD Insurance Under Superannuation

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor The advantages for an individual in this sort of cover come from: lower effective tax rate producing a lower premium; the requirements to submit to a medical examinations tend to be less stringent using its bulk buying power a superannuation fund may be able to achieve premium concessions from an insurer.

© 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Ancillary for Financial Planning in Australia, 5th edition by Taylor and Juchau. Powerpoint created by Amanda Taylor There are four ways to manage risk: avoid, reduce, retain or transfer. Life, TPD, and trauma insurances are ways to transfer unavoidable risks. Death and disability can have devastating consequences for individuals, families and businesses. Professional advice helps to accurately determine the levels of cover required. A range of insurance policies and premiums is available to meet the needs. Summary