1. Provide advice in Life Insurance Provide advice in Life Insurance Introduction to Life Insurance

2. The material contained in the following slides have been adapted from various sources including the material in the recommended text. All references to legislation are intended as a guide only. Learners are encouraged to use this material as a supplementary source to their text, notes and lectures. The co-ordinator of these slides is not responsible for their currency and use and disclaims all claims made by any user, does not warrant their accuracy and provides no warranty as to the effectiveness of these slides in providing advice to your clients DISCLAIMER

3. Life Insurance = Denial (“The Nile”) is not just a river in Egypt……Mark Twain Move out of your comfort zoneLife Insurance: Wealth Protection Don’t let an unforseen lifestyle event destroy your client’s life savings! We all are in denial as to our own mortality – but death, sickness/accident Can be unexpected and sudden

4. What is Personal Risk Insurance? Personal risk insurances provide a financial benefit in the event of you suffering a serious injury or illness, or death. They include:  term life insurance,  total & permanent disablement insurance,  income protection insurance, and  trauma or critical illness insurance

5. Facing Up to Insurance Needs  Reluctance to face up to the need to insure against the financial losses associated with death, disability and incapacity  Reasons: personal denial to a strong focus on long-term saving goals (for example, superannuation) which obscures the need for insurance in the present  Problem faced is under-insurance  Solution: financial advisers need to “sell” the importance of having insurances and 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.

6. Risk Management Process  Identification of risks  Quantification of risks  Strategies for handling the risks — 1.Reduce or eliminate the risk 2.Provide financing to meet the consequence 3.Transfer the risk (insure) 4.Retain the risk (self-insure)  Implement the program  Review the program

7. Life Insurance  Life insurance provides protection against the risks of premature death and disability  > one person benefits from the generation of income, particularly within families  What to consider:  Who would be affected?  To what financial extent will they be affected?  What insurance cover needed for the financial consequences?  Who is the beneficiary and are there any tax consequences  Are the life insurances listed in the will?

8. Causes of Death  Premature death or disability are not predictable events  Principal causes of death  Heart attack  Cancer  Accidents are a much less common cause of death than illness  This is especially true in developed countries such as Australia

9. Life Expectancy Life Expectancy Thanks to advances in medical technology and health education, people are living longer However, longer does not equate to healthier Add to this the fact that we have record debt, economic uncertainty and the cutting back on public spending on health and social welfare

10. Consequences of Death and Disability

11.  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?  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?  What is the degree of dependency?

12. Immediate Expenses after death include:  funeral and associated expenses;  final medical expenses;  mortgages;  other debts;  emergency funds; and  Taxes, depending on the deceased investments, etc

13. Insurance needs change throughout life  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 – protect and grow retirement benefits

14. How are insurance needs calculated? There are a variety of ways and if you put a group of experienced financial advisers in one room and ask them to calcuate a particular client’s insurance needs, they may not all come up with the same answer – however, each of them will be able to justify the reason for the recommendation and this analogy is very similar to other specialists such as doctors and surgeons 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% = 14.28 = 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 $74,900. The tax liability on this amount should be no more than the tax paid pre-death.

15. How are insurance needs calculated? The Needs Approach The needs approach uses three steps: 1.Calculate the resources the dependants would have to meet their needs (include current life & TPD insurance). 2.Calculate the amount needed for the dependants to maintain their standard of living. 3.The difference between step 1 to 2 is the amount of life insurance required. Refer to example on pp483 - 484

16. In ascertaining available resources  Identify the funds that may be available to meet dependents needs, which may include:  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  life insurance cover currently in force  any investment that can be converted into income-producing assets.

17. When considering living expenses  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.

18. Disablement Life can be purchased as a stand-alone policy or bundled (i.e. attached) with:  total and permanent disablement (TPD); and/or  the consequences of significant illnesses or accidents (trauma).  TPD provides for a lump sum amount to be paid in the event of a situation where the insured is unlikely to work again in their “own” or in ‘”any” occupation that they are suitable to by their qualifications and experience. In such a situation many of the needs that exist in the event of death arise.  TPD own occupation is therefore easier to claim, but is about 20 to 30% more expensive than TPD any occupation. If TPD is attached to superannuation or if your client is in a high risk occupations they they will only be provided with TPD any occupation  There are two broad categories of expenses:  medical and other costs associated with the disablement;  ongoing support of the client and their dependants.

19. Trauma (Critical Illness) Insurance  Trauma refers to a sudden serious physical or mental injury. Trauma can keep people out of work for a long time, as they struggle to heal either mentally, physically or both.  Trauma or critical insurance, available in Australia, is for those who have suffered a critical illness. It can help people get back on their feet and live a normal life.  Trauma insurance is paid on the diagnosis of a specified illness and unlike TPD or income protection, it is not dependant on the client’s ability to work or not work.  Therefore, it is relatively easier to claim, but also more expensive.  So for instance, if Joe suffers a heart attack and has trauma insurance, he can choose to either go back to work, work part time or never work again.  On the other hand, if he just had TPD insurance, two doctors would need to certify, after a suitable interval of 3 to 6 months (the waiting period) that Joe would medically unfit to ever do his job in the future. Unless his heart is permanently damaged (which is relatively rare), Joe may not be eligible for a claim payment.

20. The importance of Life Insurance  To protect the provisions of 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.  Regardless of the reaction the client should be taken through the calculations explaining how the amount was derived 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.

21. Insurance Policies and Premiums Applying for insurance  When a person seeks insurance an insurer is required give a Product Disclosure Statement (PDS) to the client.  Duty of Disclosure: At law the insured has a duty to disclose any information that can be regarded as material.  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).

22. Insurance Policies and Premiums There are two ways in which the premium may be applied:  Stepped The insurance cover becomes more expensive with age; or  Level: The cost of the original amount of insurance will remain relatively unchanged. Premiums will only rise if more insurance is required, as may happen if sums insured are indexed to inflation.  In general, most clients choose the stepped option as it is 30% to 50% cheaper initially, when compared to the level premium option – however in the stepped option, over the longer term, the total cost of all premiums paid over the life of the policy could be much higher than if the client had chosen the level premium option.  Premium rates: vary according to the situation of the insured as well as cost structures of the insurers and the type of cover sought.

23. Types of Insurance Policies Broadly there are three types of policies provided by life insurers:  Term Life insurance:  Term Life insurance: A set amount of cover is chosen for a set term (usually to age 99 or when the client cancels the policy or dies). There is no savings component. If the policy is cancel, no monies are refunded to the client. This is the most common form of insurance in Australia and almost all new polices are term life.  Whole of Life:  Whole of Life: premium includes an investment component, enabling a level premium over the whole of life  Endowment:  Endowment: operates like whole of life but matures at a specified age or at the end of a fixed term.  Both whole of life and endowment are no longer offered by any major life company in Australia.

24. Insurance Under Superannuation  Superannuation funds offer life insurance, TPD (any occupation only) and Income protection cover for their members. The nature and extent of cover will vary between funds.  Trauma insurance is not normally offered by superannuation funds.Advantages:  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.  Premiums don’t affect your cash flow position as they are paid from the monies in your superannuation

25. Insurance Under Superannuation Disadvantages:  It is not uncommon for even “straight-forward” death claims to take up to 3 months or more to be paid – similar claims for life insurance not attached to superannuation could be paid within 4 weeks. This is because when insurance is attached to superannuation, the clalim first goes to the life company and after the life company pays the claim, it is deposited in the superannuation fund. Then, the trustees of the superannuation fund need to organize a meeting to decide if and when and to who the monies need to be paid to….  The insurances offered within superannuation; do not generally offer the same level of ancillary benefits as those outside superannuation - i.e. Optional benefits are generally not available – hence the insurance is of a “basic” nature and you should weigh this up when comparing the relatively cheaper price of an equivalent amount of insurance cover “outside” the superannuation environment. Since the premiums for insurances are funded from a client’s superannuation, their final retirement balance in superannuation could be substantially lower and this could compromise their retirement

26. Insurance Under Superannuation Disadvantages:  There could be severe tax consequences if a claim is paid to a person who is not a financial dependent. For instance, SIS and taxation law offer differing treatment of children over 18 years of age.  Total and Permanent Disability (TPD) insurance is generally only available on an “any” occupation basis only. As we discussed, this “any” occupation definition is much more restrictive and therefore harder to claim  A lump sum TPD payment for an individual below the age of 55 could have severe taxation consequences. We have discussed that the amount of tax paid is a formulae based on your age, service period and amount of time to retirement. Depending on the circumstances of then the disability occurs, the actual tax on the benefit paid could be as high as 22%

27. Insurance Under Superannuation Disadvantages:  Income protection (also known as salary continuation) insurance attached to superannuation could be of a basic nature and usually is “indemnity value”. Indemnity value means that the client has to show proof of their insured annual income at claim – if the annual income that they have actually earned is less than the income they have insured for, then they will be paid the lower income.  Outside superannuation, Income protection is available via indemnity or agreed value (agreed value is where you can specify the amount of your annual salary that you wish to insure and you do not generally need to supply proof of income at claim)

28. Key Person insurance  Used to be called key man insurance  Is applicable for key people in a business – for instance, if you are a garment importing company who imports the majority of their clothes from South Asia and you employ a purchase manager who is fluent in Asian languages and has built up many contacts in that region. Your business and profitability is very dependant on this person.  If they were to die or become disabled or critically ill, your business would suffer. You therefore wish to insure this person for life, income protection, trauma and TPD, but you wish the business to be the owner of the policy – i.e. in the event of a claim, the monies are paid to the company and not to this individual.

29. Policy owners and Life Insured  A Life insurance product needs to have a life insured i.e. the person that is being insured for the specified event (death, TPD, Trauma, Income Protection etc)  A Life insurance product also needs to have a policy owner – i.e. the person or entity (company, trust) that will receive the monies in the event of a claim.  A husband can consider taking out a life insurance policy where he is the life insured and his wife in the policy owner. In the event of his death, the monies are paid directly to the policy owner (i.e. his wife) and generally bypass the estate or the will.  The advantage of the above is that this offers more certanity of payment, but what if the couple separate and the man re-marries. The first wife still retains ownership of the policy by paying the premiums to the insurance company. The husband has no control of this and will have to purchase new insurance for himself to safeguard his new wife (and new children). What if his health has changed and cover is not longer able to be provided to him? Given the complex nature of the contemporary family situations, policy ownership and beneficiary issues are a real challenge and advisers should ensure that clietns estate requirements are referred to suitable specialists

30. Riders  Personal insurances can be stand alone or be attached with a “rider”  For instance, you could just have Life insurance on its own, or just TPD or just Trauma. You could also have 3 separate policies for stand alone Life, TPD and Trauma. In the even of a claim for TPD or Trauma, you would still retain the full value of the other policies  Alternatively, you could attache TPD or Trauma to Life insurance or even attach both TPD and Trauma to Life insurance. Let’s say you have $500k of Life insurance and $300k each of TPD and Trauma attached to Life insurance. If a claim for $300k was paid for Trauma, the TPD would be cancelled and the value of the life insurance would now be just $200,000.  If on the other hand, you had stand alone insurance, you will still have $500k of life and $300k of TPD.  Stand alone insurance therefore provides more protection, but is more expensive.

31. Income Protection  Income protection is only usually offered as a stand alone policy, because unlike the other 3 covers mentioned earlier, it is Not a lump sum cover, but pays a regular income stream on claim if the client is unable to work due a sickness or accident (this needs to be certified by an appropriate doctor and/or specialist)  It is offered as a agreed value or indemnity style contract  Has a waiting period that can be either of 14, 30, 60 or 90 days or up to 2 years. The longer the waiting period, the cheaper the premiums because it means that the client has to still be unable to work for this entire period.  There is also a benefit period, that specifies the length of time the benefit has to be paid – this can be 2, 5 or 10 years, or up to ages 55, 60 or 65.  Also has a monthly benefit – this cannot be more than 75% of the clients total taxable income – i.e. if John is earning $100,000 per annum, his maximum monthly benefit cannot exceed $6250

32. Income Protection  Income protection is generally more complex than the other 3 lump sum covers, as it has a myriad of combinations and options  Given that it covers clients for both sickness and accident (total or temporary disability), it is generally quite expensive, but the premiums are tax deductible.  Conversely, the benefits are taxable when they are paid to the client, irrespective of the clients medical or financial condition (i.e. it is assessed as part of the tax return)  Hence from the earlier example, if the client was on a taxable income of $100,000 per year, the monthly benefit under the income protection is $6250 or $75,000 per year. This $75,000 is now fully taxable.

33. Packaging Insurances  There is a good reason why advisers recommend relevant clients to have at least 4 personal insurances  3 of these are lump sum covers – i.e. life, TPD and Trauma and the other is income protection  This is because TPD and Trauma do cover some similar conditions, but many important conditions that are covered by Trauma are not covered by TPD and vice-versa.  Income protection (IP) would usually cover for most of the conditions under Trauma and TPD, but unlike Trauma (and like TPD) IP would require that a medical practitioner(s) certify that the client is unable to work  These insurances can be costly and experienced use their expertise and experience to package these covers in way that reduces costs, but does not overly compromise on the benefits