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A fundamental principle of financial planning is the management of risk. From an Estate Planning and Insurance perspective Risk Management represents a collection of strategies and approaches to provide certainty of outcome in the event of death or disablement. Protecting wealth is just as important as creating wealth.
A major part of Risk Management is reducing the risk to an acceptable level and this can be done by transferring some or all of the risk to an insurance company.
Personal Risk
The Problem
What are the risks?
The most common risks are events that can damage or destroy tangible assets, namely the house, contents and vehicles. The tangible debts such as the mortgage, credit card and car loans should also be insured and most Australians are familiar with this form of protection.
What about the intangible assets and liabilities?
Your income and that of your spouse are possibly greater assets than the family home. Multiplying the
family income by the number of years until retirement provides a surprising but reasonably accurate amount that is lost to a family on death. Surprisingly only 6% of Australians have income protection and only 1/3 of them have enough cover to replace their income for more than one year.
Intangible liabilities include the future cost of raising and educating children and the much underestimated cost of providing household duties in the future. A report issued in October 2002 indicates that it costs an average family $450,000 to raise two children.
Unpaid housework is likely to be $70,000 per year according to the ABS, indicating a present value of 10 times that cost or $700,000.
The Solution
Once a risk is identified, merely taking out insurance does not solve the problem. The correct amount of cover is not the same as the correct cover.
Personal risk protection covers the areas of Term insurance Total & Permanent Disablement insurance
(TPD), Trauma and Crisis Insurance, Income Protection and Business Expenses Insurance.
The following issues also need to be addressed in relation to the above plans.
- is the premium stepped or level?
- can the premium be tax deductible – if so, how?
- is the level of cover reducing each year, remaining constant or increasing with the CPI?
- is there tax payable on the proceeds and at what rate?
- by having a different owner of the policy can the proceeds be tax free?
- is the amount of tax payable different if the beneficiary is either a non-dependant or dependant person?
- would an “own occupation” definition be preferable to an “any occupation” definition?
- should a beneficiary be nominated and should it be a binding nomination?
Business Risk
A business is an essential part of the financial plans of not only the owners and those involved in its running but also the families of staff working for the business.
The Problem
What would happen to the business if a partner or principal were forced to withdraw because of an illness or injury causing permanent incapacity? Or worse still, if the partner unexpectedly died.
Could the business afford to continue to pay any debts? In a partnership, would the surviving partner want to continue to run the business with the deceased partner’s spouse?
A lump sum could be used by the remaining partner to buy out the other share of the business, but would the money have to be borrowed? Can the survivor afford the repayments?
How does a business replace a key person who generates a significant portion of the business revenue or who has a critical role?
The Solution
Transferring the business risks to an insurance company can solve the problems that threaten the very existence of the business.
However, once again the ownership of the solution is critical to avoid unnecessary and unexpected income tax or capital gains tax.
A tax deduction today may create a 30% tax bill on the proceeds of a policy. Not an ideal solution.
Implementation
Seeing a financial adviser at Thornton Group is the next
step.
There are complex issues and you need to consider a number of different elements based on your personal or business situation.
There are some basic traps that you can and should avoid.
We can help you determine the type and level of insurance as well as the insurance structure that best fits your circumstance.
For an initial consultation to learn more about protecting yourself, your family and your business make an appointment with a highly qualified Thornton Group adviser.