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Advising on need not Premium Determining Insurance Adequacy Levels Jason Menzies Senior Product Technical Manager BT Life Insurance “I keep tweaking and.

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Presentation on theme: "Advising on need not Premium Determining Insurance Adequacy Levels Jason Menzies Senior Product Technical Manager BT Life Insurance “I keep tweaking and."— Presentation transcript:

1 Advising on need not Premium Determining Insurance Adequacy Levels Jason Menzies Senior Product Technical Manager BT Life Insurance “I keep tweaking and crafting until I get the perfect sound.” A life lesson from a music producer

2 2 This presentation has been prepared by BT Financial Group Limited (ABN ) ‘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 :00am to 6:30pm (Sydney time)

3 Determining adequacy levels 3 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

4 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

5 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 5

6 Three main variables in determining adequacy 6  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

7 Need is different for different types of insurance Life (death) Insurance TPDLivingIncome Protection Future income need Maybe, if dependants Yes Adjust for income protection NoYes N/A Payout loansYes No Medical Expenses NoYes Modifications to family home NoYes Maybe Funeral expensesYesNo Mobility aidsNoYesMaybe 7

8 Determining adequacy levels 8 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

9 Determining need for Stuart and Bronwyn 9  Stuart and Bronwyn both age 30 years, with 2 children –Hamish (age 5) –Samuel (age 3)  Employment details –Stuart earns $100, % 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

10 Stuart’s future income capacity increases over time 10

11 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% 11

12 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? 12

13 Adjusted future income need decreases with age 13

14 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 ? 14

15 Workshop exercise – Suggested solutions  Childcare –Day care –School holidays  Housekeeping  Reduction in income - Stuart –Part time –Change jobs  Income on returning to work 15

16 Bronwyn’s need doesn’t factor in a return to work 16

17 Could include estimate of Bronwyn’s future income 17

18 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 18

19 Determining adequacy levels 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

20 TPD and Living are offset by income protection 20

21 TPD need includes medical and other fixed costs 21

22 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 22

23 Determining adequacy levels 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

24 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 24

25 Death $900K (Premium free portion) TPD $900K (double TPD) Death $1.5M Double and buy-back can reinstate death benefit 25  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

26 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 26 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

27 Determining adequacy levels 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

28 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 28

29 Industry fund default life cover varies greatly 29

30 Caresuper TPD follows future income trend 30

31 Salary continuance is not default on all funds Industry Super FundIncome Protection CBus Not default - Optional Australian Super 60 day wait 2 year benefit period Default capped at $3,000 per month (age 21-49) Hesta 90 day wait Benefit to age 60 Default capped at $850 per month Host Plus Not default – Optional Care Super Not default - Optional 31

32 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 32

33 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 33

34 34 The Insurer of BT Protection Plans is Westpac Life Insurance Services Limited ABN 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 SFN SPIN WFS0112AU RSE R , the issuer and trustee is Westpac Securities Administration Limited ABN RSE L (WSAL). For policies paid via SuperWrap, which is part of Retirement Wrap ABN RSE R , the issuer and trustee is The Trust Company (Superannuation) Limited ABN RSE L (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 (BTPS). BT Protection Plans are distributed by the Westpac Banking Corporation ABN (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.

35 35 –Super –BT Wrap –Insurance –Investments BT Financial Group – a multi-brand strategy  Our division name  Sets us apart from our banking brands  Widely know for super, retirement and investment  Secondary to our customer brands


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