Risk Insurance

Personal Risk Insurance

When considering any form of investment it is important to consider the effect that your death of disability will have on the financial stability of your family.

Without adequate insurance provisions, event the most well constructed financial plan will not succeed if death or disability occurs.  Therefore, it is always recommended that prior to investments being placed, you consider these circumstances and discuss them with a licensed financial adviser.

You will need to consider the following when discussing your insurance need with your advisor:

• How much debt is to be eliminated in the event of your death
• What level of capital is required to meet the needs of your family
• What assets are you able to liquidate if required
• What types of insurance are required i.e. life insurance, disability cover, total and permanent disablement, income protection, business insurance

INSURANCE - Insurable Risks Need To Be Covered

• Life Cover
• Income Protection
• Disability Cover
• Trauma Cover

Life Insurance

• “Permanent plan”, “with profits” or “cash value” policies involve an investment element.
• Term or pure insurance policies, which pay benefits upon death or disability within an agreed period.
• Traditional or conventional permanent plan policies, including:
• Whole of life policies (with or without profits); and
• Endowment policies (with or without profits).
• “Unbundled” pure investment contracts. The account balance is the death benefit in this type of policy. These policies can be purchased with a regular premium or a single premium. When purchased with a single premium, they are referred to as insurance bonds.
• Universal policies. These are unbundled policies where the savings and life insurance elements are easy to separate and identify.

<back to top>

Term Insurance

Definition

Term Life insurance pays a lump sum benefit on the death of the life insured during the term of the insurance.

Purpose

• To repay debts
• To cover capital gains tax liabilities
• To cover dependents from the loss of income provider
• To secure a business

Tax Treatment

• Linked in Super
  Premium can be tax deductible if the person is normally eligible for a tax deduction for their superannuation contributions. For example, a self-employed person. Benefits are not taxed if within a persons Pension RBL. Lump sum tax applies if benefits are paid to non-dependents.
• Non-super
  Generally no tax deduction on premiums. Benefits are untaxed

Market

• Main provider of the family’s income
• People with dependents
• The full time home maker and parent
• Key people within a business

<back to top>

Whole of Life Policy

Whole of Life policies provide continuing death cover of a specified amount and have fixed premiums. Premiums are usually paid annually or more frequently but sometimes the policy can be effected with one single premium. The benefit form a whole of life or permanent insurance policy is the sum insured plus accumulated bonuses.

The benefit is paid on death or maturity, whichever occurs first. The protection and savings components of the premium are not readily identifiable and the contract is, therefore, considered a bundled contract. Part of the premium provides for the death cover and the balance is invested by the life insurance company.

Whole of Life policies usually have a surrender or cash value after two or three years. Once a surrender value is established, the policy owner can borrow against the policy.

Investment returns are by way of a bonus usually declared annually in arrears. A non-forfeiture clause is usually included.

<back to top>

Endowment Policy

Endowment insurance policies provide death cover for a specified period (such as until age 65 years) of a specified amount and also provide for a payment at the end of the period. As with whole of life policies, the endowment policies accrue bonuses, have a surrender value and usually contain a non-forfeiture clause.

<back to top>

Savings Plans – Insurance

Savings (or investment) plans are an investment insurance contract and can have an option to include term life insurance. Regular contributions (usually monthly) are paid to the insurance company, which uses these contributions to firstly pay fees and insurance premiums (if applicable) and then invest the balance in an investment account. Investment accounts are usually unit linked and offer a range of investment funds from cash, property, shares, and international investments of a mixture of these.

The death benefit may be the cash value plus the sum insured if life cover has been included or may be interactive with the investment account value i.e. in the event of death, the benefit would be the nominated insurance amount comprised of the value of the investment account and the balance form insurance. In the latter method, the insurance premiums are usually calculated and debited monthly, based on the difference between the investment account value and the nominated insurance level.

Savings (or investment) plans are useful for people who only have small amounts of money to save and wish to do so on a regular basis over a long period of time, that is, at least ten years. Investment returns in savings plans are subject to the same tax rules as life insurance bonds.

<back to top>

Universal Life

Universal Life is an “unbundled” contract where the protection and savings elements of the contract are easy to separate and identify. The policy owner chooses the amount of the premium and selects the level of life cover and the term and the balance is directed to the investment component.

The death benefit payable at any time is the amount equal to the sum insured or the balance of the investment account, whichever is the greater. Additional cash deposits can be made to this style of policy, which are added directly to the investment element (usually without fees or charges).

<back to top>

Terminal Illness

Some life insurance policies contain a benefit, which, at the request of the owner of the policy, will pay out the death benefit on diagnosis of a terminal illness. (Some contract can contain limits, which may be expressed as a dollar amount or a percentage of the benefit.) The benefit payment is treated as an advancement of a death benefit and taxed accordingly.

<back to top>

Within Superannuation Funds
Self-employed people

People who are self-employed or substantially self-employed are eligible to claim a tax deduction for the fist $5,000 plus 75% of any further contributions they make to superannuation up to their age based limits.

Funding personal insurance cover via an ordinary non-super policy means paying the premiums out of after tax dollars. Taking out cover through a superannuation fund, on the other hand, can often mean that the premiums are paid from pre-tax or concessionally taxed dollars, which can significantly reduce the cost of the cover, particularly for clients on the top marginal tax rate of 48.5% (including Medicare levy).

Within a superannuation fund, the trustee pays insurance premiums directly to the insurer after deducting the relevant amount from individual’s account balance. The trustee is responsible for making sure the premium payments are made on time, and they will be so long as there are sufficient funds in the account.

Section 279 of the Income Tax assessment Act 1936 allows the trustee to claim a tax deduction for the cost of providing insurance benefits to fund members.

Self-employed or substantially self-employed people are also able to have a stand alone superannuation life insurance plan, which is separate from their accumulation fund, and, indeed, it can be their only superannuation fund. The premiums will be paid by the insured wither from their superannuation accumulation fund or by making a contribution into super from their own bank account, which will then be used to pay the premium.

In this case, the self-employed person rather than the trustee is responsible for the payment of premiums from an account.

<back to top>