Advising on need not Premium

Determining Insurance Adequacy Levels

Jason MenziesSenior Product Technical Manager

BT Life Insurance

“I keep tweaking and crafting until I get the perfect sound.”

A life lesson from a music producer

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This presentation has been prepared by BT Financial Group Limited (ABN 63 002 916 458) ‘BT’ and is for general information only.  Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described.  The presentation has been prepared without taking into account any personal objectives, financial situation or needs.  It does not contain and is not to be taken as containing any securities advice or securities recommendation.  Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.  BT does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation.  Except insofar as liability under any statute cannot be excluded, BT and its directors, employees and consultants do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person.  Unless otherwise noted, BT is the source of all charts; and all performance figures are calculated using exit to exit prices and assume reinvestment of income, take into account all fees and charges but exclude the entry fee.  It is important to note that past performance is not a reliable indicator of future performance.

This document was accompanied by an oral presentation, and is not a complete record of the discussion held.

No part of this presentation should be used elsewhere without prior consent from the author.

For more information, please call BT Customer Relations on 132 135 8:00am to 6:30pm (Sydney time)

Determining adequacy levels

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3. TPD and Living

2. Determining life insurance need

1. Factors in calculating insurance need

4. Insurance need after an event

“Every artist is different, but it’s my job to make them all sound amazing.”

A life lesson from a music producer

5. Industry fund considerations

Determining adequacy levels

4

3. TPD and Living

2. Determining life insurance need

1. Factors in calculating insurance need

4. Insurance need after an event

“Every artist is different, but it’s my job to make them all sound amazing.”

A life lesson from a music producer

5. Industry fund considerations

Life insurance need changes with life stage

Singles– TPD & Trauma

DINKs– Mortgage risk

Couples with children– Bring up children

– Education expenses

– Mortgage

Empty Nesters– Protection for income in retirement

Retirees

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Three main variables in determining adequacy

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Loss of future income– Effect of other policies such as income

protection

– Younger clients may experience higher growth in income

Debt– Home & investment loan

– Personal loans and credit cards

Fixed expenses– Medical costs

– Home modifications

– Mobility aids (e.g. Scooters)

– Funeral expenses & estate planning

Need is different for different types of insurance

Life (death) Insurance

TPD Living Income Protection

Future income need

Maybe, if dependants

Yes Yes Yes

Adjust for income protection

No Yes Yes N/A

Payout loans Yes Yes Yes No

Medical Expenses

No Yes Yes Yes

Modifications to family home

No Yes Yes Maybe

Funeral expenses Yes No No No

Mobility aids No Yes Maybe Maybe

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Determining adequacy levels

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3. TPD and Living

2. Determining life insurance need

1. Factors in calculating insurance need

4. Insurance need after an event

“Every artist is different, but it’s my job to make them all sound amazing.”

A life lesson from a music producer

5. Industry fund considerations

Determining need for Stuart and Bronwyn

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Stuart and Bronwyn both age 30 years, with 2 children– Hamish (age 5)

– Samuel (age 3)

Employment details– Stuart earns $100,000 + 9% super, employed in an

office role

– Bronwyn is a stay at home mum

Superannuation– Stuart - $50,000 in HESTA

– Default cover ($100,000 death & TPD)

Home valued at $500,000 – Mortgage of $300,000

– Repayments of $2,500 per month

Stuart’s future income capacity increases over time

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Future income component calculation

Adjusted future income All future income amounts Super contributions

Plus Estimated future income increases

Less Tax on taxable income Discount for future earnings on

investment of lump sum

Assumptions for Stuart Inflation rate 3% Income growth rate 3% Investment earning rate 6%

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Breakdown of components reinforces need

Stuart’s total life insurance need is calculated as $2,442,805

Future income– Adjusted for inflation

– Future income increases

– Reduced by monthly payments by paying off mortgage

Fixed costs added– Funeral costs

– Pay off mortgage

– Children’s expenses

– Private school/university fees?

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Adjusted future income need decreases with age

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Workshop exercise

Bronwyn is currently not earning any income – Calculators recommended need largely

on future income

– Bronwyn’s future income calculation is zero

Questions What additional costs would Stuart

incur if Bronwyn was to pass away? Would calculations change if she

intended to go back to work when children turned age 10 ?

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Workshop exercise – Suggested solutions

Childcare– Day care

– School holidays

Housekeeping Reduction in income - Stuart

– Part time

– Change jobs Income on returning to work

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Bronwyn’s need doesn’t factor in a return to work

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Could include estimate of Bronwyn’s future income

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Considerations for Life Insurance

Higher income growth rate for younger clients

Consider costs each party would incur on TPD of the other party– Loss of income to look after kids

– Relocation costs

– Housekeepers

Income protection covers part of TPD need

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Determining adequacy levels

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3. TPD and Living

2. Determining life insurance need

1. Factors in calculating insurance need

4. Insurance need after an event

“Every artist is different, but it’s my job to make them all sound amazing.”

A life lesson from a music producer

5. Industry fund considerations

TPD and Living are offset by income protection

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TPD need includes medical and other fixed costs

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Considerations for TPD and Living

Income protection covers part of TPD need– Deductibility

– Ease of claim

Consider costs each party would incur on TPD of the other party– Loss of income to look after kids

– Relocation costs

– Housekeepers

Direct costs of disability– Mobility aids

– Medical expenses

– Rehabilitation

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Determining adequacy levels

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3. TPD and Living

2. Determining life insurance need

1. Factors in calculating insurance need

4. Insurance need after an event

“Every artist is different, but it’s my job to make them all sound amazing.”

A life lesson from a music producer

5. Industry fund considerations

Still need for life insurance after TPD or living paid

Income protection portion not covered in original benefit– Future income need shortfall

Estate planning expenses not covered in TPD or living– Funeral costs

– Estate equalisation

TPD and living often linked to death benefit

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Death $900K(Premium

free portion)

TPD $900K(double TPD)

Death$1.5M

Double and buy-back can reinstate death benefit

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Double benefits– TPD & Living

– Insured survives 14 days

– No further premiums payable on reinstated amount to age 99

Buy backs– TPD buy back

– Living buy back

– Living reinstatement

TPD

$900K

Example - Double TPD

Stuart

Death$2.4m

Double features provide bucket list protection

Ensures death benefit payable– Doubles reinstate death benefit

– No premiums on reinstated portion to age 99

Gap of total need– Life insurance reduced by fixed costs

specific to TPD

– Estate planning costs

Bucket list protection...– Overseas trips

– New car or boat

– Sea Change

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Bucket list

1.Ride a Harley Davidson motorbike

2.Drink champagne on the Eifel Tower

3.See the sunset over Ayers Rock

4.Feed the dolphins at Monkey Mia

5.Own a house on the beach

Determining adequacy levels

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3. TPD and Living

2. Determining life insurance need

1. Factors in calculating insurance need

4. Insurance need after an event

“Every artist is different, but it’s my job to make them all sound amazing.”

A life lesson from a music producer

5. Industry fund considerations

Default insurance in industry funds vary greatly

Insurance options vary considerably

Cover can either: – Decrease as member gets older

(premium smoothing)

– Remain fixed based on age when joined plan

Personal plans don’t tend to get allocated to default plan

Some funds require members to have at least 1 unit of cover

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Industry fund default life cover varies greatly

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Caresuper TPD follows future income trend

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Salary continuance is not default on all funds

Industry Super Fund Income Protection

CBus Not default - Optional

Australian Super 60 day wait

2 year benefit period Default capped at $3,000 per month (age 21-49)

Hesta90 day wait

Benefit to age 60Default capped at $850 per month

Host Plus Not default – Optional

Care Super Not default - Optional

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Stronger super requires opt-out of insurance

APRA funds – Required to offer life and TPD on an

opt out basis

– Discretion for IP as an opt in, opt out, or at all

My super– Standard default level of life and TPD

– Members will be able to adjust their cover

Insurance definitions to be aligned with SIS condition

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Negotiate on need not premium

Tailor insurance portfolio to life stage– Anticipate future events

Negotiate based on adequacy– Assumptions

– Inclusions

Consider growth rate when projecting future income increases– Younger clients & Professionals

Industry funds – Insurance tends to decrease with age

Protect against bucket list risk– Double benefits

– Buy backs

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The Insurer of BT Protection Plans is Westpac Life Insurance Services Limited ABN 31 003 149 157.  All BT Protection Plans, except for Term Life as Superannuation and policies paid via SuperWrap, are issued by the Insurer.  For Term Life as Superannuation, which is part of the Superannuation Division of Westpac MasterTrust ABN 81 236 903 448 SFN 281412 SPIN WFS0112AU RSE R1003970, the issuer and trustee is Westpac Securities Administration Limited ABN 77 000 049 472 RSE L0001083 (WSAL).  For policies paid via SuperWrap, which is part of Retirement Wrap ABN 39 827 542 991 RSE R1001327, the issuer and trustee is The Trust Company (Superannuation) Limited ABN 49 006 421 638 RSE L0000635 (SuperWrap Trustee).  The administrator of all policies paid via SuperWrap and Wrap and the arranger of policies paid via Wrap is BT Portfolio Services Ltd ABN 73 095 055 208 (BTPS). BT Protection Plans are distributed by the Westpac Banking Corporation ABN 33 007 457 141 (the Bank).  The Insurer, WSAL and BTPS are wholly owned subsidiaries of the Bank.  Neither of an investment in, or acquired using, SuperWrap or Wrap nor BT Protection Plans are an investment in, deposit with or other liability of the Bank. Neither the Bank nor any member of the Westpac Group (other than the Insurer and WSAL) guarantees the benefits payable in relation to BT Protection Plans. Investments in, or acquired using, Wrap and SuperWrap are subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. None of the Bank or any other company in the Westpac Group stands behind or otherwise guarantees the capital value or investment performance of any investments in, or acquired through Wrap or SuperWrap. This information has been prepared without taking into consideration any persons personal objectives, financial situation or needs (personal circumstances). Because of this, before acting on this information, any person receiving this information should consider its appropriateness, having regard to their personal circumstances. Conditions, limits and exclusions on cover apply and are explained in the BT Protection Plans Product Disclosure Statement and Policy Document and BT Protection Plans (SuperWrap and SuperWrap Essentials) Insurance Booklet (each a PDS). Before any person makes a decision in relation BT Protection Plans, they should consider the relevant PDS available from advisers.  This communication may contain financial product advice and has been prepared for use by advisers only. It must not be made available to any retail client and any information it is must not be communicated to any retail client or attributed to the Insurer, WSAL, the SuperWrap Trustee, BTPS, the Bank or any other member of the Westpac Group.  This information has been prepared by the Insurer.

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