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Personal Insurance via Superannuation

Have you considered the risks of having your personal insurance inside superannuation compared to the same level and type of cover on the outside? It is important to consider the different factors that apply to insurance held via superannuation to make an informed decision.

In essence the benefit of life insurance via super is that the cost of the insurance you incur today is paid from your retirement benefits. So its not that you don’t pay for insurance, it’s really a matter of when you pay for it.

Life cover

In my opinion there are a few situations that should make you think twice.

Ownership of policy:

The policy is effectively owned by the trustee of the super fund. Legislation directs the trustees to pay the proceeds to dependants at claim time. Who is considered by law to be a dependant I hear you ask?

• Spouse
• Former spouse
• Any child under 18
• Any person who is financially dependant on the member, or who has an interdependency relationship with the member prior to the member’s death.

Outside of the estate:

Death benefit proceeds paid from a super fund do not form part of the estate and therefore bypass the directions in a personal will. What is your current and historical personal relationships and situation? How will these relationships and situation effect any payouts?

Life cover on a unit type basis

Another issue to consider is that some superannuation funds offer life cover on a unit type basis. That is based on your age and a set price for the level of cover. Each year the level of cover will reduce and essentially the premium paid remains the same. This does not suit everyone and this style of cover may have some unintended consequences if you are trying to increases cover in the future.

Total & Permanent Disability (TPD)

Once again the superfund trustee comes into play with a TPD payout. The question the trustee needs to be asked once a payout has been admitted by the insurer and paid to trustee but before they release the funds to you are:

1. Have you met the TPD definition under the insurance contract?
2. Have you meet the TPD or other condition of release under the superannuation law?
3. Have you meet the disability super benefit definition under tax law? (to calculate additional tax free portion)

You need to remember that TPD benefits may have potential tax implications imposed on the proceeds of up to approx 21.5%. This will depend on a formula that takes your days to retirement and service days into consideration.

Having an “own occupation” TPD benefit paid by the insurer to the trustees may have a condition of release issue. This issue may result in the proceeds remaining in the superannuation environment when you need them most. This issue may not be as much of an issue for those aged 55-60 depending on their date of birth.

Trauma

There are very few situations that would allow you to even consider having Trauma via super because on payment from the insurer to the fund, the challenge is that the trustee must be satisfied that a condition of release is met before the proceeds can be passed on to you. In my opinion only those within very close proximity to their retirement age and depending on their date of birth should consider this option as you may not get the money when you need it. After all isn’t that what a trauma benefit is designed for? You must bear in mind that some insurers will not allow you to have trauma in super for this reason.

Income Protection

This is the most contentious of all the insurances to be considered via super in my opinion.

Having income protection inside the super environment has some key issues that you should consider before proceeding. They are:

• Once a successful claim has been made with the insurer you then need to meet a super fund or trustee’s condition of release. Funds are usually released under the “temporary incapacity” condition. It is a commonly stated opinion that income protection is better held outside of super as there is no condition of release issue at the time of claim.
• Reduced benefits (no day one accident option, critical illness benefits, specified injury, bed care, definition of disability, advanced payments, rehabilitation benefit)
• To receive a benefit you are required to meet the definition of temporary incapacity which means a total cessation of work. This makes partial disability payments unlikely if you are gradually making you way back into the workforce.
• Indemnity only type payout. The amount of payout at the time of claim is restricted to an indemnity type assessment. That is the benefit that is paid cannot exceed the members remuneration at time that they become ill or unable to work.
• You also need to consider the speed and efficiency of any payouts as a result of the trustee’s administration of these issues. Remembering that once the insurance company pays the proceeds they pay them to the trustee who then decides if and when they can pass these proceeds on to you. Compare that to the insurance company admitting the claim and passing the proceeds directly into your bank account.

Trustee responsibility

So you need to remember the trustee’s legal responsibility and requirements as effectively adding a middle man or layer between the insurance company admitting any claim and the proceeds being passed on to you.

So before you make the decision to rely on having your personal insurance inside your superannuation please consider all the issues that will affect you now, when you need the proceeds and in the future. Please feel free to discuss your options with us.

Free Report

When it comes to the specific and variables of income protection you might like to refer to our report on the “13 things you should know about income protection”.

Please call us on 03 9890 3388, email us on This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit www.essentialfs.com.au for you complimentary copy.

Robert Bonifacio

Authorised Representative

Charter Financial Planning

ABN 35 002 976 294

Australian Financial Services Licence No 234665

Contact Robert at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Phone (03) 9890 3388

Important Notice

The information provided in this report is general information only. It has been prepared without taking into account your individual objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. Your Financial Adviser can assist you in determining the appropriateness of any product or advice you may require.

Are you protecting up to $2 million of your real wealth?

In our time advising business owners and the employed, we find some people asking themselves whether they should invest in income protection.

Why should you consider income protection as part of your back-up for when things don’t go as planned?

Income protection provides money for you and your family when you are unable to work due to a sickness, serious medical condition or accident that prevents you from working. It can also provide income if your ability to work has reduced. You don’t have to be totally unable to work to receive part payment. If your family’s financial security relies on your income please spend 4 minutes to read this report.

John F Kennedy once said “There are risks and costs to a program of action, but they are far less than the long-term risks and costs of comfortable inaction.”

Let’s consider the alternatives to having your own income protection:

Some people have accumulated a savings buffer as a fall back position - so why have additional income protection?

Well that may depend on the size of the buffer. How long will it last? Do you need the money for anything else? What happens when the buffer runs out? If that buffer was going to help fund your retirement what will you do when the funds run out?

Some will rely on their family and friends to help.

Are the other parties aware of this? Do they have the money? How will you repay them? How long will it take you to repay them? Are you actually using money that they have ear marked for other activities?

But it may not only be their money you need but their physical help as well. Will they be both financially and physically able to help? Are they prepared for this burden?

Perspective

Our experience is that once a person buys a home they automatically insure it. This is a very important asset - one where we live and spend a fair amount of our time. The average mortgage in Australia is $347,000¹, yet the one thing that most people do is pay off that mortgage for their home via the income they earn. Yet that income is often not protected. This is the income that pays off the house and maintains a livelihood. Did you know a 40 year old earning $60,000 is going to earn in excess of $2 million by the time they turn 65². Income Protection is the investment that is available to protect the income that is paying for that asset.

One final point, I assume most people who own a car have it insured as well. We all know what has a greater long term value - the income that is helping you to drive that car.

What are the chances of needing cover especially if you have never been sick a day in your life?

Your future health is not guaranteed even if the past has been kind to you. It’s not just the things that you control that income protection provides cover for but also those unexpected surprises that were probably not even your fault.

Did you know in Australia last year the industry paid out over $3.5 billion³ dollars in the areas of Life, Trauma, TPD and Income Protection insurance? This equated to $14.3 million per day paid to 245 Australians every working day in 2010. Of these claims more than half were for income protection claims.

I am sure you are thinking that people who look after themselves are a lesser risk of something happening. However, in my eyes the one person who lives the epitome of a healthy lifestyle is Dr John Tickel the author of Fish Vegetable Sex and Fish who in 2010 was diagnosed with brain cancer. Then there are articles everyday in the newspapers of accidents that happen to unsuspecting people be it at home, at work or on holidays with the kids.

Recent statistics show that those aged between 20 – 55 years of age are a 1 in 4 chance of making a claim on income protection that lasts longer than 3 months⁴.

What effect would it have on you life and financial situation if you were unable to work for 3 months? Worse what if you were unable to work for 6 or 12 months or longer?

Causes of recent claims⁵

It may interest you to know the type of medical conditions that have recently seen people claim on their income protection:

• Depression
• Breast Cancer
• Lower Back
• Chronic Fatigue
• Parkinson’s Disease
• Fractured arm
• Myocardial Ischaemia

How would your financial situation change if this was you?

Things to consider.

Income protection is tax deductable and a contract structured correctly represents a small percentage of your income which enables you to protect your income when you are unable to work. As a guide, in our experience the investment someone might expect to make for their income protection could be about 2 – 3% of their income, however this may vary depending on the variables that are applicable to their situation. That is two or three percent to protect your income during pre retirement. The government in Australia only requires employers to contribute 9% for employees for their super for post retirement anyway.

Income protection can be tailored to provide you and your family with sufficient funds to resolve your long term income needs or alternatively it can be used to buy you time so that you can control your financial future. You could be in a position to control the outcome of your situation rather than your situation controlling you.

Complimentary Appointment

If this report has prompted you to better understand how income protection might enhance the security of your future, our service is such that we are happy to offer you a complimentary meeting to discuss the options that might suit your situation.

About Essential Financial Services

With 25 years industry experience, Essential Financial Services was established in 2004 with a specific focus of providing you with advice and guidance in relation to your personal or business risk management and protection. (Please see my FSG on page 17)

Essential Financial Services is a Certified Quality Advice Practice (CQAP) which has been awarded by their licensee, Charter Financial Planning. Robert has completed a Diploma of Financial Planning (Dip FP) and has a Diploma in Management (Dip Mgt). In August 2011 Robert was recognised as a Fellow Chartered Financial Practitioner (FChFP) through the Association of Financial Advisers (AFA) which is awarded through the Asia Pacific Financial Services Association (APFinSA). The FChFP is the AFA’s highest professional designation and requires practitioners to meet ethical and best practice standards within the financial advice profession. Robert is also a member of the Association of Financial Advisers (AFA)

Free Report

When it comes to the specific and variables of income protection you might like to refer to our report on the “13 things you should know about income protection”.

Please call us on 03 9890 3388, email us on This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit www.essentialfs.com.au for you complimentary copy.

Robert Bonifacio

Authorised Representative

Charter Financial Planning

ABN 35 002 976 294

Australian Financial Services Licence No 234665

Contact Robert at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Phone (03) 9890 3388

The website http://www.savingsguide.com.au/a-look-at-the-average-mortgage-size-in-australia/

² Assumes annual gross income $60,658 p.a. ($1,166.50 pw) and annual salary growth of 5%

³ Industry Stats 2010 – provided by The Risk Store.

⁴ MLC article “What’s your priority of cover”.

⁵ CommInsure personal risk claims data 1 May 2006

Important Notice

The information provided in this report is general information only. It has been prepared without taking into account your individual objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. Your Financial Adviser can assist you in determining the appropriateness of any product or advice you may require.

What if this happened to you and your business?

Two friends Bill 55 & Gordon 45 who become business partners have now owned a business together for many years. Over this time the business has continued to grow and now turns over $5 million per year and generates a substantial profit. On the open market the business is worth $1.5 million dollars. With a 50% stake, each share is therefore worth $750,000 to Bill & Gordon.

Both partners have put in many hours of hard work. Both Bill & Gordon brings a separate skill to the business. Bill is more client and administrative focused while Gordon has always loved the hands on approach.

They employee 8 staff and Gordon’s wife, Jenny now comes in part time to help where she can in reception. Bills wife Sonia stays at home and looks after their 3 children.

The business needed an injection of capital a few years ago and each borrowed $250,000 secured against their individual homes to do so.

Life is actually pretty good for all concerned.

One area they have been meaning to address and keep putting off is what if one of them unexpectedly died or become incapacitated and could no longer work? What happens then? They know they need to address it but just never put the time aside to do anything about it.

Friends are friends but in some cases there is a line drawn in the sand especially if things go off the rails or some unplanned event happens and money is involved.

If tomorrow morning Gordon gets a call to say Bill is never coming to work again due to a terrible unforeseen event (lets assume he passed away) what is the first things that happens?

Gordon probably goes into panic mode and needs to begin by sorting out the day. He needs to now take on all of Bill’s jobs and do his own. He also wants to console and needs to know what help Bill wife Sonia needs. The staff obviously start asking questions but staff was never Gordon’s strong point. Gordon needs to stop what he had planned to do and address all these things. But he is really worried, concerned and a flustered.

Let’s assume Gordon gets through the initial shock. Bill’s passing has left a big whole in the business. Three months later, Bill’s wife Sonia, has taken advice and decides its best if she liquidates her share of the business as she doesn’t want to have anything to do with it now Bill is gone.

What do you think the business is now worth? Is it still worth the $750,000 each, which was estimated before Bill’s passing? In my experience, probably not. How quickly can Sonia now sell it to achieve the maximum price? What is the best way of getting the money? Gordon doesn’t have it. How will Gordon and Bill’s wives Sonia agree on who Bill’s share of the business now gets sold to? Remember Bill’s wife Sonia just wants to move on but Gordon now needs to find someone he can work with and that can work with him. Who has the right, skill set and the money because Gordon does not now have the ability to get the money required.

What will the bank say about the $500,000 that is owed? Both have secured the loans against their respective homes? Sonia is really worried she will loose her home. Bill did not have any insurance to protect the borrowed funds

Will Gordon be able to continue to function and operate to his optimum level under all this pressure? Will he want to? How will he deal with the financial issues now beginning to impact on him his family and the business? Even a couple of key staff members have left because the company who poached them suggested that Gordon may struggle to get through it. What decisions does he still need to run past Bill’s wife Sonia? After all she is now the other 50% stake holder in the business. Can she make the decisions that are in the long term best interest of the business or does she just want her money? Bill & Gordon were best friends but recently Sonia and Jenny were not seeing eye to eye so there is also a little tension in the air.

The most effective solution was that Gordon & Bill should have set up a business succession plan (a business Will) An agreement that effectively ensured the included funding that ensured the value of the business being $750,000 was passed to Bill’s wife Sonia and for that Gordon now has control of the business to make the best decisions for him his family, staff and the business.

Separate insurance policies for $500,000 would have ensured the loans were paid out in full and the banks were satisfied. In an ideal world an injection of funds into the business could have been included to give Gordon some flexibility to hire a recruitment agency to find a temporary of permanent replacement for Bill while Gordon continued to do what he needed to do for both the business and to support Bill’s wife Sonia and also his family.

Getting advice is paramount as all these issues can be addressed before they occur so that if and when they do there is far greater certainly and control for everyone.

Did you know all this could have been achieved for less than 1% of the value of the business? Such a small investment to protect so many and so much.

If you would like to know how we can help you with your succession planning please call me on 03 9890 3388 or email robert at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Please note that this document provides general information only. Before making any financial, insurance or investment decisions, we recommend you consult a financial planner to take into account your particular investment and insurance objectives, financial situation and individual needs. Charter Financial Planning and its Authorised Representatives do not accept any liability for any errors or omissions of information supplied in this document.

Tax planning for Small Business

When it comes to tax planning for small business it is widely recognised that protecting the cashflow of the business is an essential consideration.

Cashflow not only pays staff and the owners, but must be effectively managed to ensure the business can cover its running costs. Cash is a scarce resource for many businesses and therefore what happens if the cashflow ceases, or is reduced because the business owner is unable to work? Something has to give the longer they are off work.

We all know business owners who work even when they are feeling really ill. But what if it is beyond their control? Yes staff will step-up or a family member can help but for how long? Will they be able to do the same job? Will the relationships the owner has with key clients begin to be affected by their absence? Will the revenue the business generates actually start to decline the longer the primary small business owner is away? Unfortunately for some businesses it will.

For a period of time most businesses will be able to cover these costs, but for how long?

Did you know that small business owners can actually protect the fixed operating costs of their business if they are unable to work due to a sickness or accident?

Items such as rent, the interest on the loans the business has, and utility costs such as electricity, gas, water and rates are covered by business expense insurance. The bills keep coming in regardless, but this type of cover allows the owner to recover from a serious illness or accident knowing a number of fixed costs in the business are covered.

Covering these fixed operating costs is tax deductable. Not only could it be considered tax planning but it could also be good business planning.

I would be happy to provide information for clients on the specifics for their situation. Did you know that this benefit can be added to an existing income protection policy or taken as a stand alone policy?