What is your Greatest Asset?

Q: If you owned the goose that laid the golden egg, which would you insure – the goose or the golden egg?

A: The goose, of course! As long as you have the goose, you can get more golden eggs!

When people think of their most important asset it is usually the family home, investment property or even the car. What people fail to realise though is that these assets could not exist at all without the income to support them. A person’s greatest asset is their ability to earn an income, plain and simple.  

Without income the vast majority of Australian families would not be able to fund the mortgage repayments on their home or their investment properties. Furthermore many families would not even be able to support themselves without income – personal debt, bills, child care and school fees, to name a few are all dependent on that cash flow. The colloquial adage “no mun, no fun” rings true for many Australians, especially in the current economic environment.

The view of life insurance in the Australian market seems to be one of very short-sighted proportions. Consumers will willingly protect their home and their car, but not themselves. For example, a person will insure their car because if their car is involved in an accident, it needs to be fixed or replaced so that person can continue to function in their everyday life. However what if a person suffers a massive stroke, is left unable to work for the rest of their life and did not have a form of Life Insurance to provide cash flow for them?

The figures speak for themselves:

• 71% of Australians have motor vehicle insurance¹ – average monthly premium $89.42²
• 60% of Australians have house insurance¹ – average monthly premium $57.52²
• 16% of Australians have death cover¹ – average monthly premium $25.81³
• 6% of Australians have income protection cover¹ – average monthly premium $130.02³
• 5% of Australians have total & permanent disability (TPD) cover¹ – average monthly premium $25.00³
• 3% of Australians have critical illness (trauma) cover¹ – average monthly premium $32.77³

For the financial year ending 30/06/2008 the Australian life insurance industry paid out a whopping $3,045,333,112⁴ in claims to Australian families for death, TPD, critical illness and income protection – all of which are covers offered under the blanket term ‘life insurance’.

From the figures above however it is still obvious that Australian families are not adequately protected. So, what are the options if a family is not protected with life insurance and the cash flow stops as a result of death, serious illness or injury?

• Support from Relatives: this plan could work for a few months, maybe even a few years however it is not sustainable unless that relative happens to be a millionaire, likes you and is willing to help.
• Sell the Assets: Fire sale! Get rid of the investment property, that will create some cash! But why? This will put the family back years in their financial goals and at the end of the day will create more stress and less cash than a life insurance payout. That is even if the property can be sold, it may sit on the market for months when the family needs that money now.
• Government Assistance: fortnightly benefits paid are barely enough to support a family as it is. How is a family going to live on that benefit and also have enough to pay back mortgages or medical bills?

Life insurance offers peace of mind and is the only simple and solid solution to these very real issues. It is a cost of doing business, a small cost relative to the value of a person’s earning ability, and must be embraced as a cornerstone of a sound investment and asset protection strategy. At the end of the day what would you rather lose – your cash flow or all your financial burdens?

¹Roy Morgan Research 6 months to April 2009, Australian population aged 14+. Motor vehicle insurance includes comprehensive, TPP and CTP.

²Home and Car Insurance assumes a 35-year-old male (age 36 next birthday) home owner, degree-qualified accountant, non-smoker lives in a double brick house (with deadlocks and externalsecurity doors and a garage for his car) in Parramatta(2150). He has taken out the Insurer’s residential Package with building ($350K) and contents ($75K), and is based on a $300 excess. He drives a 2005 Holden Commodore Executive VZ sedan 4A V6, with comprehensive car insurance with 65% no claims discount and a $600 excess. He has held his licence for 15 years, Restricted Drivers access and there is no finance on the vehicle. The premium rate for his Home and Car insurance includes all statutory charges. Monthly premiums are quoted as at 2 July 2009

³ Life, Income Protection, TPD and Critical Illness insurance assume a 35-year-old male (age 36 next birthday), non-smoker, degree-qualified accountant, annual income $150,000 stepped premiums; Life cover of $500,000, $10,500 monthly Income Protection benefit (including $1,125 super continuance), $200,000 TPD (any occupation) and $200,000 Trauma cover. Monthly premiums are quoted as at 2 July 2009.

⁴Risk Store Analysis

If something happens and you're not insured there are a few other options that are available to you.

• Workers Compensation
• Selling your Assets
• Get a loan
• Government Benefits
• Trade Shares

Workers Compensation

This is not a bad option - if something happens to you at work and that something happens to be an accident. If you lose a limb at work or hurt your back then chances are you will be able to make a claim under workers compensation. If you suffer an illness such as a heart attack, even if it is at work, then you will not be covered. So if you qualify for a workers compensation claim then you have to get over the next hurdle - how long will they pay you for? If you have a short term claim such as getting a few physio sessions then its not so much of an issue. However if you have a situation where it looks likely you will be on a long-term claim the weekly benefits and length of benefits depending on the extent of your injury vary from state to state. Workers Compensation only works if an accident happens at work (and in some cases to and from).

On the other side, Income Protection offers a much more stable and flexible structure for claiming if you are unable to work due to accident/injury AND sickness. Income Protection covers you 24/7, worldwide; on holidays, on your weekends, on your daily commute. Income Protection is tax deductible and is a guaranteed payment to reflect your income.

Sell your Assets

Imagine you have been diagnosed with cancer. The treatment costs are expensive and you will need at least 6 months off work. Your partner/spouse will also need to take some time off work to help look after you, drive you to and from the hospital on those days when you need chemo and you cannot even keep your eyes open. You need a large amount of money to pay for quality treatment and you need it now. So you decide to sell the investment property, that will solve your problems!

So you go about listing that property, you need it to sell quickly so you knock a few thousand off the asking price - FIRESALE! After you have sold the property and paid the bank back and any other associated costs you'll be left with a small lump sum to pay for your medical costs! That's what you needed! However, in selling that investment property you have caused yourself a lot of stress and goodness only knows what that has done to your health and you have taken a huge step back in your financial future by selling that property. You're back to square one.

On the other side, if you had Critical Illness cover you would have been paid a tax free, lump sum of whatever you had been insured for upon diagnosis of cancer and could afford all those medical costs and time off work whilst never raising your stress levels or taking a huge hit on your financial future.

Try and get a Loan

Post-GFC it is harder to qualify for a loan. But if you have been diagnosed with a serious illness that has rendered you unable to work and you need money for treatment the banks might look kindly on you? Most likely no. However, if you are able to get a loan to pay for medical costs and everyday living expenses that's great - you can get yourself better faster and get back to work sooner. However then you are left with a debt and interest to pay off. It is no understatement that if you had a heart attack, qualified for a loan to pay for your immediate expenses and then spent the next few years working hard to pay it off, you will create more stress for yourself and potentially end up having another heart attack. This was actually the basis for the creation of Critical Illness insurance by Dr Marius Barnard, a South-African heart surgeon. He found that he could treat and repair a person physically but not financially. After suffering the financial stress of trying to pay for the cost of a heart attack those same patients would often end up on his operating table a few years down the track.

Government Benefits

Centrelink and other benefits from the government are very low at the best of times. If you have had a stroke and are unable to work ever again you will get a government benefit, but it is extremely difficult to sustain your living and medical expenses on the fortnightly benefits.

The other option is Income Protection, which as discussed above is a reflection of your income, guaranteed, paid monthly to your bank account up to age 65 or even age 70 depending on your occupation. It will allow you to continue living the standard of life you were accustomed to before the event giving rise to a claim.

Trading Shares/Property Development

Even if you are involved in an horrific car accident and left paralysed, as long as you have a finger working you could technically trade shares and continue to earn an income via private trading. However the other thing you need to do this is a solid mind. If you have had a nervous breakdown how are you going to be able to trade shares. As the rate of claims is on the increase for mental health issues this is not going to be a viable option for those people.

Conclusions

All of the above examples are options, they do exist for those people who do not have insurance. However they are not viable options.

• They are not long term options.
• They tend to create more stress in an already stressful situation
• They do not help you to maintain your wealth
• They do not give you the help when you need it the most

Taking out one, or a combination of Death, TPD, Critical Illness and Income Protection cover will help to ensure you financial freedom and stability in uncertain times of sickness, injury and death. It is the true definition of an investment product - it gives you the biggest return when you need it the most.

Insurance for Life

An article written by Sacha Loutkovsky illustrating the need for insurance at various life stages.

Did you know that as early as the 3^rd and 2^nd millennia BC Chinese and Babylonian traders practiced the concept of transferring and distributing risk? People have long recognised the value of insurance and with the types of risk that exist in a monetised society it is imperative that risk is transferred and distributed in a way which will protect a person and their interests throughout the various stages of life.

There are many types of insurance – automotive, home, health and property to name a few and essentially any risk that can be quantified can potentially be insured. All of these insurances serve a purpose and anyone who is serious about protecting their financial future and livelihood should start by purchasing and regularly reviewing their insurance cover.

There is however a group of insurance that is often overlooked - the life insurance group consisting of death, total and permanent disability (TPD) critical illness and income protection insurance.

The stages of a person’s life can be broken roughly down to four stages:

Stage 1

Who are they?These people are starting their careers, beginning to create wealth, they have short-term debt, not many commitments and no dependents.

Why do they need insurance?The biggest issue for this group is injury and disablement. Without adequate insurance independence may be lost at a young age and could impact not only them but their parent’s future plans.

What insurances do they need?Income protection, critical illness and TPD are a must. Death cover may not be necessary given they have little debt, few commitments and no dependents.

Stage 2

Who are they? These people are building their wealth and career. They have longer-term debt in the form of a mortgage and are generally in a long-term relationship or married with children.

Why do they need insurance? During this crucial building stage protection strategies must be in order because if something happens which causes the income to stop flowing due to death, sickness or injury the results - both financial and emotional - can de disasterous and the family unit may never recover.

What insurances do they need? At this stage death cover, TPD, critical illness, income protection and children’s insurance should be a part of any protection portfolio.

Stage 3

Who are they? These people are building and maintaining wealth, they are career-focussed, reducing their mortgage and planning for retirement. Their children are growing up but may still be dependent.

Why do they need insurance? Similar to stage 2 wealth is being built and is now being maintained but there is fiduciary commitment with a mortgage and investments as well as education fees for their older but dependent children.

What insurances do they need? This group requires the same insurances as stage 2 but may require less cover as they are reducing their debt and may have more cash flow from and for investment.

Stage 4

Who are they? These people are maximising their wealth as they are preparing for retirement and financial security is of primary concern. This group typically has lower debt, not as many familial commitments and are focussing on investment growth. 

Why do they need insurance? This group needs to protect their assets for retirement. If they were to be diagnosed with cancer for example the treatment costs could erode their savings which in turn could potentially mean delaying retirement

What insurances do they need? As the primary goal is the protection of savings and retirement death, TPD, critical illness and income protection coverage should be part of their protection porfolio.

Some people have different circumstances than those outlined above, take the self-employed person for example. This person eats, sleeps and breathes their business and they need to make sure their business and their personal lives are protected accordingly. To ensure adequate protection there are insurances such as public liability which covers a business against claims should its operators injure someone or damage their property in some way. Professional indemnity insurance protects insured professionals such as medical practioners and accountants against potential negligence claims made by patients/clients. Another relevant insurance for self-employed people is business expenses or business overheads insurance which will pay the overheads and regular expenses of the business if the insured is unable to work due to sickness, accident or injury.

This is not an exhaustive intepretation but it is a comprehensive starting point if getting the foundations in place to protect you, your family, your livelihood, your investments and your interests financially and emotionally is of value to you (hint: it should be).

There are two major methods of sourcing insurance products – do it yourself online or by appointing an insurance broker who will conduct a thorough investigation of your requirements and source the best product for your needs. It is easy to use online methods to source general insurance products such as car, home and property insurance as they specifically target assets rather than your personal needs. You can research life insurance products online and apply for some basic coverage but in many cases if you call a reputible company direct they will redirect you to a broker or one of their in-house advisers to assess your needs as life insurance products have certain nuances which can be difficult to gauge and appreciate without the help of a qualified professional.

It is important to remember when developing your protection portfolio that insurance is called a safety net for good reason;  its effect can be powerful, life-saving even, and it alleviates the impact of several factors both emotional and financial, not only the immediate concern for which the claim is made.

As Life Insurance advisers we are sometimes confronted with people who feel they do not need insurance. To be fair, there are people we come across who may have no particular need for insurance for their personal circumstances but we believe the vast majority of Australian's do need it. We have come to the conclusion that some people feel they do not need insurance for a few reasons:

• They do not trust insurance companies
• "She'll be right mate"
• It is too difficult to navigate and understand

People do not trust insurance companies

It is common knowledge that in general insurance there is the famous 'Act of God' clause which indemnifies general insurance companies. Let me be the first to tell you that the life insurance industry has no such clause. The life insurance industry is also one of the most heavily regulated and audited financial bodies in Australia, constantly having their books and claims examined by ASIC to make sure the consumer is protected. The problem from an adviser's perspective is that people lump all types of insurance together, not understanding the very different laws, regulations and consumer interests behind them. If someone tries to make a claim they are worried that beureacracy will stand in their way and that the insurer will try their hardest not to pay them. In Loutkovsky Insurance's 26 years of business we have only had one claim turned down by the insurance company and that was due to blatant non-disclosure from the client trying to obtain claim proceeds fraudulently. As advisers we are passionate about what we do partly because our industry is misunderstood; we have never seen life insurance do bad for a client. This is an industry that is not based on making an investment to create wealth, it is about making an investment that you can only reap when something bad such as death occurs. Life insurance companies and advisers are here to serve the public and help them protect themselves and their families in the event of death, sickness or injury - if you cannot trust us to help handle potentially the most challenging time of your life then who can you trust?

"She'll be right mate"

Australian's are famous for our 'can-do' attitude and love of the underdog. It is a strong sentiment in Australia that people feel if they or their partner could not work due to sickness, accident or injury they will get through it somehow; move in with family or friends or sell their assets to get by. People regard the accumulation of assets as a more worthwhile way to spend their money - which is true for people who may not have a 'bigger picture' view. A lot of people regard an investment property as their financial safety net - in the event something happened they will just sell it. But why should you have to? It is the simple question that people cannot or do not want to answer. If they had some insurance in place to protect them against death, sickness or injury then they could continue to maintain and potentially even build wealth. Yet people still choose to lose it all in an instant than make it easier for themselves by insuring themselves.

It is too difficult to understand

This can be true, it can be difficult to get your head around. But that is why there are businesses like Loutkovsky Insurance who make it our business to help you understand. Some insurance companies are direct marketing on the television and radio which is good, it helps to get people thinking about their insurance needs but where do you start? How much cover do you need? How much cover do you want? What sort of cover do you want? What about your family - does your spouse or children need cover? I would not know where to start or even dream of fixing the plumbing in the house so I out source to a professional who can get it done for me. It is the same with insurance - if you do not understand or know where to start, just ask and we can help you! Call one of our advisers on 02 9633 5530 today to start getting your insurance needs sorted!

Stepped and Level premiums are two ways you can pay your premium which can make a very big difference to your short or long-term financial plans.

Stepped premiums - just like steps because it goes up – the premium will increase each year with your age and inflation. It is cheaper whilst you are younger but as you get older the premium will increase exponentially to reflect the increased risk of you suffering from a claimable condition. They are great because they are cheap when you first take them out. However, as you start to get into the 45+ age bracket that's when a lot of people start to claim on their policies. Thus the premiums start to go up to reflect that risk. It is at this age group that a lot of people start cancelling their policies - right when they may need them the most.

Level premiums - remain fairly constant over the life of the policy, increasing only with inflation. It means you pay more in the first few years of your policy than the equivalent Stepped premium but that you can afford the cover when you are older and when you need it the most. It is a long-term strategy that requires you commit to the policy and the company that you take the policy out with. Level premiums are good if you understand what you're taking out. The long term the savings can be massive over stepped premiums and will also allow you to have the cover long-term, through your 50's and 60's when most people can't afford the premiums anymore. Level premiums expire at age 65, at which time the premium will revert to Stepped.

Note the graph below, a common representation for Stepped and Level premiums. This is an actual quote done in July 2011. The premium curve is representative of $500,000 Death and $200,000 Critical Illness cover (Trauma Cover) for a 35 year old non-smoking female. Inflation is included.

The corresponding table below shows the 30 year cumulative premium paid on Stepped premiums to be $129,623.68. The 29 year cumulative premium paid on Level premiums would be $54,822.69. As you can see, the savings over the long term with Level premiums can be enormous.

NB: Future premium rates are not guaranteed by the insurance company. Any insurance company has the right to change the premium rates at any time.

Things to be Aware of with Level Premiums

Level premiums are a long term structure and there are several factors that you and your adviser should take into account before taking them out:

• How long does the client need the cover for?
• How long will it take to reach the cumulative premium crossover point?
• Any indexation effect
• The likelihood of rate increases
• That the client needs to choose a company that has a solid foundation, product and passback policies

This is where having an Adviser, a specialist in the Life Insurance industry, is invaluable. Make sure you consider, discuss and understand all the options with an Adviser before making your decision. Call our office on 02 9633 5530 if you wish to discuss Stepped and Level premiums with an Adviser, or fill out a quote request form.

Life Insurance is different from other types of insurance in that when you submit your application it involves underwriting by a real person who assesses your application based on your occupation, medical history and lifestyle factors. When the underwriter has made their decision it will be one of the following:

• standard Rates
• issued with a loading
• issued with an exclusion
• decline

Standard Rates - This means that your case has been accepted as per the proposal on the application and will be put in force immediately.

Issued with a loading - This means that your case has been accepted but subject to an increased premium. This can be due to body mass index (BMI), the results of blood tests or other things such as raised blood pressure or raised cholesterol. The good thing about loadings is that if you are able to bring the factor which caused the loading under control then the loading can be removed. For example, if you are loaded an extra 50% premium due to raised cholesterol but are able to bring it down to within acceptable levels then the loading can be removed with the potential of removing it altogether.

Issued with an exclusion - This means that your case has been accepted subject to an exclusion for claims made for a particular condition. Often we see exclusions on the musculoskeletal system - lower back exclusion, left knee exclusion, shoulder exclusion etc. Exclusions are usually placed on a particular condition or site if you have had recent occurences involving the condition or site and/or if the condition or site is ongoing. As with loadings exclusions can be reviewed and removed at an underwriters discretion once you have been symptom-free for a minimum of 12 months (most insurance companies prefer at least 18 months).

Decline - your case has been declined by the insurance company and you will not be offered cover. This can occur if you have severe medical history, or recent serious medical history. Generally as advisers we are able to determine if your case would be a decline and save you the hassle of filling out an application etc.

What can you do about it?

As explained above loadings and exclusions and previous decline decisions can be reviewed - you are not stuck with the altered terms on your policy indefinately. Loutkovsky Insurance is here to help you negotiate the terms of your cover, it is what we do! One service we offer to all our clients who we feel may have special terms applied to their policy is to speak with our underwriters at every insurance company we deal with to see who can offer you the best terms. We want the best decision for our clients so we find it for you. We also keep an eye on our client's policies and regularly check in with our clients to see if their health has changed in a way that may benefit them and help remove loadings or exclusions.