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Introduction to Financial Planning

- helping people plan their lives, manage their lives and make sure that they can afford a retirement.
- A dynamic process; the design, implementation and maintenance of a set of integrated actions and
transactions which best achieve and maintain financial well-being.
- highly regulated industry
Why study financial planning?
➢ Financial planning industry is a growing profession about helping people plan their lives
➢ Can’t offer everyone financial planning
Demand
➢ It has evolved from industry to profession
➢ help people find money for their retirement
➢ from 3 to 40, the growth exponentially is a factor for us to be in demand
Why consider a career in financial planning?
➢ It is a unique opportunity to help people improve their lives, help them live better today, plan their
future, and finance that
➢ It is a very rewarding one
➢ To have the ability to make or to be in that role to make financial advice to others
Any direction between a financial planner and a client

What do financial planners do? (per advice basis)


Life Insurance:
➢ make sure people are protected from death, critical illness and disability (temporary or permanent).
➢ Critical part of making a financial advice
Superannuation:
➢ an organizational pension program created by a company for the benefit of its employees
➢ Make sure that money is properly allocated
➢ Need to know the investment appetite of a client:
Aggressive investor = place adequately the funds within that area
Conservative investor = provide advice on which type of investment the client needs to take (money
market, fixed income/interest)
Investments:
➢ Look at their existing situation, risks and plan the most appropriate strategy
➢ Most rewarding part of what we do – not just for the growth of the investment, but also reaching the
objective of the client
➢ Client goals and objectives
➢ Investment appetite (aggressive or conservative)
Jira – task management system; track both billable and non-billable tasks.
Billable – task that employees do for the client (directly)
Non-Billable – lunch break, internal training (internally for the company, not for the client) (admin category)
TAT – Turn Around Time
➢ Time given by the client to finish a task
➢ Amount of time taken to fulfill a request from receiving the task until its completion or sending to the
adviser
TAT – CLIENT – COMMITMENT
TTC – Time To Complete
➢ Allowable time that we need to complete a certain task
➢ Total hours allocated for you to complete the task
➢ Start doing the task up to the completion, not necessarily on submission.
TTC – COMPANY – EFFICIENCY

Intro to Australian Financial Planning Industry


“Failing to plan is planning to fail”
Financial Planning – planning provides the framework to achieve financial goals
Areas of Advice:
➢ Investment
➢ Risk Management
➢ Insurance
➢ Taxation
➢ Estate Planning
- It involves the preparation of the documentation required both to enable the efficient distribution
of a person’s assets (and liabilities) when they die, and to provide instructions for surviving
family members as to how they would like their affairs to be managed in the future.
➢ Social Security
- The social security system in Australia is both a complex and dynamic area with continual
changes to the legislation.
- The social security system is intended to be a safety net for those who cannot provide an
adequate standard of living for themselves.
➢ Superannuation
➢ Retirement

Factors that increase demand of Financial Planning


➢ government policy – which places greater responsibility on the individual for their financial well-being,
and a decrease in government willingness to accept responsibility in the long term
➢ increase in compulsory superannuation guarantee – All employees are obliged to save for their
retirement and are becoming more informed about the choices available to them.
➢ ageing population (demographics) – a large percentage of the population is concerned with both
financial and estate planning issues, particularly Australia’s “Baby boomers” as they approach
retirement.
➢ privatization of Australian companies and floating of shares – has brought thousands of Australian
households into the share market, leading to an increasing awareness and the need for continuing advice
➢ ever-changing and increasing complexity of government rules – as they apply to taxation, social security
and superannuation.
➢ fallout from the 2008 – 2009 Global Financial Crisis – has had a massive impact on the savings plans of
many Australians who are facing increasing uncertainty in volatile markets both here and overseas.
2/6/19
Who seeks advice?
The idea of planning for one’s financial future for concerns
Some of them don’t think that they need financial advice
Some are hesitant to seek financial planning:
➢ they lack confidence on their own ability to understand the complexity of financial issues (fees,
complexity of going through the process)
➢ they might be given poor advice
Could benefit from access to quality personal or general financial advice and access to factual information
especially at the time of key life events or transitions
Consumers who access financial advice benefit financially as a result of the advice, even after the cost of the
advice is taken into account.
Perception that financial advice is only valuable if they have significant assets to advice upon, advice can be
beneficial for people in a wide variety of financial circumstances.

Financial Planning Statistics: (2010) “Access to Financial Advice in Australia” Report


• The financial advice industry has over 750 adviser groups
• There are over 8000 financial planning practices
• The financial planning industry employs around 18,200 people
• Only 20% - 40% of adult have ever consulted a financial adviser
Financial Advice is provided with a medium to long term view unlike some forms of professional advice
providing benefits that can continue for many years
Long term financial impact of seemingly small financial decisions can be significant
This is why the financial planning industry has traditionally focused on establishing long term adviser/client
relationship
Financial Interest
Financial Literary
• Australians seems more knowledgeable and confident about simple familiar finance topics such as
budgeting, credit, savings and debt
• Less knowledgeable and confident about more complex and unfamiliar topics such as investing,
superannuation and saving for retirement
Factors that influence people’s knowledge and understanding of financial matters
➢ Attitudes and beliefs about money
➢ Confidence levels
➢ Interest and engagement levels
➢ Socio-demographic background
There is a mismatch between that people say they know and what they do know
When considered together with the Australian Bureau of Statistics research into Australians’ general level of
literacy and numeracy, results suggest that about one in two Australians do not have the skills required to make
informed choices in their interactions with the financial services sector.
Types of Advice:
➢ Superannuation
➢ Retirement Income
➢ Borrowing and credit
➢ Insurance
➢ Investments
➢ Debt management and reduction
➢ Social security
➢ Tax minimization
➢ Property
➢ Estate planning
Life Stage Categories
➢ What drives people financially often depends on their life stage
➢ Very essential to financial planning
➢ This determines the type of advice they might provide to individuals
Financial Freedom – refers to the situation where enough income is generated form passive sources that a
client’s lifestyle needs can be financed without the need for work. When it comes to achieving financial
freedom, the reality is money is required.
Basic ways to acquire money:
➢ Marry, inherit or given (affiliation)
Drawback: if you have not learned how to create money yourself, maintaining your wealth over time
may be difficult.
➢ Earn it by working
Drawback: people have a finite working life
➢ Make money work for you
Drawback: if you don’t have the experience of running a business or investing
Life Stages:
Stage I: Young Adults and Families (Early Accumulators)
➢ Between 20’s and 30’s
➢ A client’s income is often greater than their net worth
➢ Fiscal fitness must be adopted at this early stage in order to move forward financially
➢ Financial habits must be adopted. The first habit is savings, irrespective of income
The savings may be earmarked:
• First home deposit
• Starting a business
• Establishing an investment portfolio
Superannuation as a forced savings mechanism via the superannuation guarantee (SG), it alone will not provide
financial freedom without extra sacrifice, savings and investment on their part.
Stage II: Middle Aged Adults and Families (Rapid Accumulators)
➢ Between 30’s and 50’s
➢ A client’s net worth exceeds their annual income
➢ They move into the phase of more rapid wealth accumulation
➢ The income from investments begin to exceed a person’s annual savings, and net wealth is able to be
accumulated exponentially
➢ This is when individuals are at their peak earning capacity as employees
➢ Children also may be either at school at this point, or moving towards independence from the family
allowing both parents to work, earning two incomes, not one, and possible at the same time reducing
expenditure on child related areas of the budget
Stage III: Pre-Retirement (Conservation)
➢ Between 50’s and 65’s
➢ The focus tends to be on superannuation and the beginning of plans for how individuals will spend their
retirement.
➢ A client’s net worth may be 10-15 times their living expenses
➢ The earnings and any income from pensions might be sufficiently adequate to fund lifestyle
requirements without them working
➢ This is when financial freedom is achieved, and a choice can be made to work or not, or to semi-retire or
not
➢ Greater scrutiny is applied to investments and the income generated from investments to fund lifestyle
needs.
Stage IV: Retirement (Aged Care and Gifting)
➢ At this stage of life, you’ve often walked away from work and are fulfilling your retirement dreams.
➢ In this life stage you might consider an income stream for superannuation and/or age pension payments.
➢ You need to ensure you have enough money and health cover to pay for medical expenses.
➢ Estate planning considerations become increasingly important and decisions about gifting any assets
should be considered.
A License to Provide Advice:
➢ The term ‘license’ refers to Australian Financial Services License (AFSL) holders and representatives or
authorized representatives of license holders.
➢ A new entrant to the financial services industry will need to operate under an existing AFSL holder (also
called a licensee) as either an authorized representative or a representative
➢ The license holder is ultimately responsible for the advice being provided. As such, there is an
obligation to impose compliance and audit requirements on their authorized representatives.
➢ Some license holders, particularly institutions, will require representatives to work from their premises
where the relationship is more like that of an employee rather than a business partner.
➢ Other license holders operate more as a franchise and provide far more flexibility for authorized
representatives to operate from their own office premises.
Who provides advice?
Institutionally owned
➢ This firm of licensee is controlled by a large fund manager, insurance provider or bank
➢ The approved product list for this type of licensee may be limited
➢ There also may be an implied preference for the financial advisers to recommend some of the products
or duns owned by the institution to which they are affiliated
➢ Example: Westpac, ANZ, NAB, CBA (Big Four)
Medium to Large
➢ Medium to large adviser groups generally are a franchise type of operation, whereby authorized
representatives can choose to trade under their own ‘brand name’ (individual or corporate), or
alternatively the licensee group’s name
➢ If an adviser does choose to trade under their own ‘brand name’, it is still required by law that they also
disclose and/or co-brand the licensee’s name and AFSL number on the adviser’s stationary or advice
documents.
CBA (licensee – AFSL)

CBA Financial Planning Limited Count Financial Wisdom Others (Crowe Horwath and Infocus)

working under licensee of CBA but not owned by CBA

➢ The approved product list for medium to large adviser groups may also be restricted, just as they are in
institutionally owned models; It could be because the group is still owned by a bank or large fund
manager. Or it could be because it is impossible to research every possible investment opportunity
within the ‘investment universe’
Small Boutique
➢ Small boutique advisory firms pride themselves on their boutique and/or ‘independent’ status
➢ They own and operate their own AFSL often with the help of a specialist outsourced compliance firm
(Pathway, Jigsaw or Goldseal)
➢ It is not always the case that a small boutique advisory firm will be considered independent in ASICS’s
eyes
➢ Don’t have the restricted approved product lists that larger advisory groups do. Small boutique firms
may conduct their own research into products they wish to recommend
➢ One disadvantage is the time consuming and costly nature of being responsible for your own in-depth
research and approved products; this cost can’t be spread across a large number of advisers
➢ The advantage of being a boutique is that manty clients value the breadth and flexibility of investment
opportunities available
Representative vs. Authorized Representative
Representative
➢ Employees of a licensee (i.e. an AFSL holder)
➢ Generally bears no risk
➢ Is legally liable for the work
➢ Work as part of the employer’s business
➢ Perform work themselves and cannot subcontract
Authorized Representative
➢ Agents or contractors licensed under an AFSL holder
➢ Typically have more independence
➢ Work in accordance with a specified contract
➢ Work as part of their own business and may be associated with other businesses
If they are a corporate authorized representative, they may subcontract, or sub authorize another representative.

The Six Step Process


Product: Absolute clarity about his/her financial position
Financial planners imbued (inspire) with the task of providing advice have a responsibility to the client seeking
advice, to the licensee with whom they are associated and to the profession itself, to ensure that the advice given
is both accurate and comprehensive.
Financial planning as a process provides a framework which allows the client’s needs and goals to be identified,
recommendations to be implemented and modifications to these recommendations to be made in light of
changing circumstances.
Step I: Gather client data
Engagement between client and adviser
Under s961B of the Corporations Act 2001, it is stated that financial advisers must act in the best interests of
their clients.
➢ FSG (Financial Services Guide) – a document that explains the financial services offered to a retail
client by AFS Licensees or authorized representative upon the initial contact.
Contains:
• how the adviser operates (who will provide the financial service, the kinds of financial services
being provided and for whom the adviser acts in providing the financial service)
• how the service will be provided to the client
• how the adviser is paid (commission and benefits)
• any interest, associations and relationships that might be expected to influence the provision of
the financial services
• dispute resolution system that covers complaints
The information in an FSG must be current and presented clearly and concisely, with enough detail for a
client to make an informed decision about whether to acquire the service.
➢ Find out why the client has come to see you
The client may have been referred to you, or you may be seeing the client because your licensee has sent
out a marketing offer to their client base. Or it could be an existing client who is seeking more advice.
In financial planning, there is no such thing as a ‘same day sale’
Rapport and trust are two critical ingredients in a successful financial planning relationship.

➢ Client questionnaire (Client Fact Find) – enables the financial planner to gather information about
personal details about the client (contact details, family status, current net worth, income and
expenditure details, health of the client, short term goals, medium and long term goals, current and
future financial needs, and concerns about inflation, tax, flexibility of investments, needs for easy access
to funds, estate, wills, powers of attorneys, testamentary trust, life and general insurance, consideration
of retirement planning issues, both financial and non-financial).
It is an important document as it forms the basis for making product recommendations to your clients
and is evidence of the requirement to meet your obligations under the Corporations Act – acting in
clients’ best interests.
➢ Capturing the client’s risk tolerance – This means assessing the client’s acceptance and tolerance of risk.
• concern regarding inflation
• need for current income
• liquidity requirements
• liquidity requirements
• desire for growth of capital
• concern regarding loss of capital
• concern about taxation issues
• attitude towards the security of the investment
• desire for ease of management
• impact of decisions on estate planning needs
• desire for flexibility of any investments
• time frame over which any investments will be made
• comfort with short term volatility of returns.
May or may not be included in the client questionnaire but must have a risk profile questionnaire.
(attitudes, values and experience in terms of wealth and investment)
The questions are straightforward and focus on attitudes to various situations.

Three common problems with regards to adequately assessing their client’s attitude to risk:
• Disconnect between couples - A ‘client’ is often a couple (two people not one), and couples do
not always share the same attitude to risk.
Action to take: It is important in these situations to remain impartial and not ‘gang up’ on either
party to win them over. It is important as an adviser to point out the implications of moving
along the risk spectrum
• Disconnect between goals and required risk - a client has unrealistic expectations of achieving
certain goals. For example, the client may wish to retire within a certain period of time and live
on an amount of funds not consistent with the investment return they are currently on track to
earn. To reach their goals, they would need to earn a higher investment rate of return, involving
higher risk. Often there is a disconnect between the risk the client is prepared to undertake to
achieve their goals, and the higher risk they would need to take to increase the chance of meeting
their goals.
Action to take: After analyzing the client’s situation, an adviser may say something like,
“unfortunately your current investment risk profile is unlikely to achieve the results you are
hoping for. This means there are two options. Firstly, you could revise your expectations about
your retirement income down, or secondly, you may need to move up the risk spectrum to give
you a better chance of meeting your goals – whilst understanding the significance of any
additional risk you undertake particularly in the short to medium term”.
• Bull market fever - the realization that clients might say and think they are comfortable with a
given risk profile, but in reality, when they are staring down the barrel of capital losses, they are
very uncomfortable with the level of risk associated with their investments.
Action to take: it is important to clearly explain the short to medium term range of possible
returns their investments might deliver. The emphasis should be on the downside risks (should
they occur).
Step II: Establish financial goals and objectives
The role of the financial planner is to listen carefully both to what is said by the client and also to what is not
said by the client. The financial planner must ask questions that are open ended in an attempt to encourage the
client to provide as much detail as possible about their needs, concerns and aspirations.
➢ Access some of the information from the client questionnaire
➢ Conduct a client interview
Both talking and listening are important elements when interacting with your clients. By actively listening,
focusing on what the client is saying, making eye contact with the client, being aware of any non-verbal
communication and summarizing what you hear the client say, there is a much greater chance you will
successfully build strong client relationships.
Step III: Identify financial problems
Common financial problems:
➢ Managing money
Clients will often be earning quite high income, but either be unable to save money, or even worse, find
themselves going backwards financially and plugging the spending gap with credit cards.

▪ Completing a budget, monitor spending


Discretionary Accounts – perspective of the product provider; the client has no discretion on the
funds to be allocated
Non-discretionary Accounts – perspective of the client; the product provider has no discretion over
the investments to be allocated
▪ Prioritize spending after reviewing spending habits and understand the consequences to future
financial plans of both ‘action’ and ‘inaction’ with regards to managing expenditure.
▪ literally cutting up credit and using cash for purchases works
Budgeting
• the act of first reviewing cash flow by identifying all income and expenses and comparing them
to see how cash earned is actually spent.
• decisions can be made to adjust either or both the income and the amount of expenditure in order
to achieve certain goals
• budgeting requires only basic math and a desire to take control of a financial situation.
• provides both a financial planner and the client key information about the client’s net position
and is fundamental to sound financial decisions.
• It can be used to:
➢ project future cash flows
➢ understand a client’s actual position
➢ create what-if scenarios to assist in financial decision-making
➢ determine if a client will achieve a financial goal over time given similar activities
➢ identify opportunities to adjust behaviors to achieve financial goals
Reviewing actual expenses over a period of time against projected budgets can improve the accuracy
of future forecasts. Thus, budgets are living documents that change as lifestyle, income and expenses
alter. Budgets, like financial plans, should be regularly updated, and should underpin a financial
plan. In fact, creating a budget and living by it is a life skill which can make a real difference in
assisting clients to reach their goals.
➢ Changes in family circumstances
May place short to medium term strain on the family’s ability to meet their expenditure needs, or
alternatively to save as much as they were able, prior to the reduction in family income.
o Prepare a detailed cash flow model for the client
• This model should show their income and expenditure over time.
• The model should identify in which periods there will be a cash deficit, so you can
recommend and implement strategies in the short to medium term to overcome this
problem.
• The model should also show when the deficit ends, and a surplus or neutral position is
likely to be achieved.
Pro tip: This type of modelling requires either the use of excel, a financial calculator or specific
financial planning software such as Coin, Xplan or Midwinter.

➢ Dealing with large expenditures


o To have clients decide about whether the client can afford it or not
This should be shown in terms of the financial impact on their current and future lifestyle via a
cash flow model
Pro Tip: In some circumstances, the goals and objectives of the client are not likely to be
achieved. It is important to inform clients when their goals and objectives are unrealistic, and to
illustrate what would be required in order to achieve such goals.
Step IV: Prepare a set of written recommendations - SOA
It is the stage at which the financial planner produces the set of written recommendations or a Statement of
Advice (SOA) which establish how the client’s goals and objectives can be met.
The recommendations will cover all issues relevant to the client and may include recommendations about
investments strategies, retirement planning, risk management, estate planning, tax planning and social security
issues.
The recommendations should address the short term, medium term and long term goals and provide an estimate
of the impact of the recommendations on future cash flows.
The set of written recommendations should clearly show how the recommended strategies will enable the client
to meet their goals.
Letter of Engagement
➢ itemizes what the adviser will do and the associated cost.
➢ This ensures that in the event the client has second thoughts about wanting to continue with the advice,
the adviser is still paid for their work they do in preparing the recommendations.
➢ Before you document the advice to your client, you need to ensure you and your client both agree which
areas of advice you will address.
The scope of advice
Comprehensive advice (holistic advice) – ‘traditional’ advice model offered by financial advice licensees.
Advisers make detailed client enquiries and provide advice to the client on all relevant aspects of their financial
circumstances.
Licensees largely view comprehensive advice as optimal in ensuring client needs are adequately and thoroughly
met and addressed. It is argued that:
- comprehensive advice ensures that a client‘s full objectives, needs and financial position are considered,
which may be at risk if advice is isolated to a particular area or subject matter
- clients may seek scaled advice based upon their own potentially incorrect or inaccurate assumptions
about their objectives, needs and financial position to their detriment
- comprehensive advice may be the only suitable type of advice for certain clients, depending on their
individual circumstances. For example, scaled advice may not be appropriate for clients in the retiree
and pre-retiree market who need broad advice on their retirement planning strategies
- the provision of scaled advice may require the same amount of time and effort as comprehensive advice.
Limited advice (scaled advice) – provided on a single issue or on a limited range of issues. Industry has adopted
differing terminology to refer to this type of advice including, but not limited to:
• limited advice
• single issue advice
• targeted advice
• defined scope advice
• simple advice
• piece-by-piece simple advice
Scaled advice is inevitable in many circumstances, despite the potential risk to both client and adviser.
Potential Risks
The risk of scaled advice
- only one area is the adviser does not understand the complete client picture.
- The risk to the adviser is that this inadequate advice could cause the client economic loss (or an
opportunity cost).
How is scaled advice implemented in reality?
When considering how the requirements of the best interest’s duty can be applied flexibly, it is important to
note that the same rules apply to all personal advice on a particular topic. There are not two sets of rules one for
‘comprehensive’ advice and one for ‘scaled’ advice that is more limited in scope. This means that complying
with the best interest’s duty and related obligations remain equally relevant for persons who are providing, or
are considering providing, ‘scaled’ advice.
When limiting the scope of advice, you must ensure that you do not exclude critical issues that are relevant to
the subject matter of the advice.
Fee Disclosure Statement (FDS) – outlines the fees and charges and services provided to the client on a 12-
month period. Applicable for clients who subscribed or is on an ongoing fee agreement with the provider.
An ‘ongoing fee arrangement’ is a fee (either fixed or percentage) paid during a period of more than 12 months
where:
• personal advice is given to a retail client;
• the client has entered into an arrangement with the financial services licensee or representative who
gives the advice; and
• under that arrangement, a fee is to be paid during a period of more than 12 months.
An ongoing fee arrangement does not apply if a client merely undertakes a payment plan for work conducted in
relation to an upfront fee, an insurance premium is paid, or product fees are paid.
An FDS must be sent to a client within 30 days after the 12-month anniversary date (known as the ‘disclosure
date’) of the client entering into the ongoing fee arrangement with the adviser. The disclosure date will often be
the date the client and adviser have signed the Ongoing Service Agreement.
Opt-In renewal notices
The aim of the opt-in renewal notices requirement is to ensure clients consider whether or not the ongoing
services they receive continue to provide them with value for money and encourage them to discuss ongoing
needs with their financial adviser.
This means that for the licensee or adviser to continue to charge an ongoing fee for more than 24 months, the
licensee or representative must provide both a Fee Disclosure Statement and a renewal notice to the client
before the end of the period of 30 days beginning either:
• 24 months after the day the arrangement was entered into; or
• if an arrangement has previously been renewed, 24 months from the last day on which the arrangement
was renewed.
A renewal notice must state that:
• the client may renew the arrangement by giving notice in writing;
• the arrangement will terminate, and no further advice will be provided, or fee charged under it, if the
client does not elect to renew the arrangement;
• the client will be taken to have elected not to renew the arrangement if they do not notify in writing of
an election to renew before the end of the 30-day renewal period; and
• the renewal period is a period of 30 days beginning on the day on which the renewal notice and Fee
Disclosure Statement is provided to the client.
It is allowable for a Fee Disclosure Statement and renewal notice to be incorporated into a single notice that
contains all of the requisite information and there is flexibility in how these documents can be provided to
clients.
A financial adviser must not:
• accept conflicted remuneration (either monetary or non-monetary);
• give an employee conflicted remuneration; and/or
• charge asset-based fees on geared portions of investments.
Conflicted remuneration is defined as any benefit (either monetary or non-monetary) given to a licensee or their
representative who provides general or personal financial product advice to retail clients that could reasonably
be expected to influence the choice of financial product recommended or the financial advice given.
Financial product advice is a recommendation or a statement of opinion, or a report of either of those things that
is, or could reasonably be regarded as being, intended to influence a person or persons in making a decision
about a particular financial product or class of financial products, or an interest in particular financial product or
class of financial products.
Approved Product List (APL) – list of investment, risk insurance products and classes of financial products
that the licensee has approved to be used by the representative or authorized representative.
Non-approved products are those products or asset classes that the licensee has specifically excluded from its
approved list. They might be excluded because the licensee does not like the style of management of a
particular fund, or the performance might not be considered adequate. It could also be that the products are part
of an asset class that the licensee is precluded from either advising on e.g. tax effective agricultural schemes or
property syndicates or horse racing syndicates.
Documenting the Advice – most costly and labor-intensive part. Ensure that you are providing the client with
proper documentation.
Statement of Advice (SOA) - is a disclosure document that helps a retail client understand and decide whether to
rely on the personal advice provided by a representative of a licensee.
Must include:
➢ A statement of advice given to the client
➢ The information on which it is based
➢ How the advice is paid, including any commissions and other benefits that might reasonably be expected
to influence them
➢ Any interests (whether pecuniary or not, direct or indirect) and any associations or relationships that
could influence the provision of advice
➢ A suitable warning that the information is based ion limited information, and hence the advice is
restricted and limited to that extent, if the advice is based on incomplete or inaccurate information;
s947B and 947C of the corporations’ act.
The information in an SOA must be presented clearly and concisely, with enough detail for a client to make an
informed decision about whether to act on the advice.
An SOA is not required where only general advice is provided; however, the adviser must warn the client about
the limitations of the ‘general’ advice provided: s949A of the Corporations Act.
Product Disclosure Statement
If the recommendations within the SOA include investment recommendations that contain either managed
funds or investment platforms, then a product disclosure statement is also needed as an accompaniment to the
SOA
A PDS is a point-of-sale document prepared by or on behalf of the person providing the financial product. It
should be given to a retail client at or before the time a recommendation is made to acquire a financial product
or an offer is made to issue or arrange for the issue of a financial product and before the client acquires the
financial product: s1012A(3)
A PDS must set out:
➢ Contact details for the issuer and seller of the product
➢ Significant benefits of the product
➢ Costs payable of the product
➢ Commissions that may impact the returns
➢ any other significant characteristics or features of the product
➢ significant taxation implications
➢ Significant risks associated with the product
➢ Information about dispute resolution system for the product
➢ Information about any cooling off regime that applies in respect of the product
➢ Any other information that might have a material influence in the decision to acquire the product
Charging the client for advice (fees)
➢ Complexity of the advice provided
➢ Level of support required by the advice recipient
➢ Qualifications and experience of the adviser
➢ Level of service agreed upon
Step V: Start implementing the plan
The financial planner’s role in this step is to ensure that all necessary paper work is completed and that the
client is fully aware of the steps necessary to implement the plan.
Straight-through-processing (STP)
Using software that has STP means that you input client data once, and you use the same data to actually model
the client scenario and then produce the recommendations in the SOA.
Step VII: Review, revise and maintain the financial plan
Reviewing a plan by comparing the performance of any investment recommendations, assessing whether or not
the plan is on track to achieve the client’s goals and objectives in the light of changes to economic, legislative
and personal circumstances, and consideration of the likelihood that the current plan will continue to meet the
client’s goals and objectives.
Revising the plan is necessary if any changes in the above circumstances affecting the client impact upon the
suitability of the plan in its current state.
Maintaining a financial plan allows the client to call you, the adviser, at any time to query anything that is of
concern to them
The Regulatory Framework in Financial Planning
To ensure consumers receive the most appropriate advice, the financial services industry is regulated by the
Australian Securities and Investments Commission (ASIC). Those providing financial advice must hold an
Australian Financial Services License (AFSL) or be authorized as a representative of an AFSL holder.
RG146
Anyone who provide personal or general advice on financial products to retail clients must meet the training
standards set out in RG146
ASIC’s nine skills requirement identify the necessary skills advisers must have
➢ Establish relationship with clients
➢ Identify client objectives, needs and financial situation
➢ Analyze client objectives, needs, financial situation and risk profile
➢ Develop appropriate strategies and solutions
➢ Present appropriate strategies and solutions
➢ Negotiate financial plan, policy or transaction with client
➢ Coordinate implementation of agreed plan, policy or transaction
➢ Complete and maintain necessary documentation
➢ Provide ongoing service
Under the new legislation:
• The term financial planner/adviser will be enshrined in law
• An independent standard body will be established from July 1, 2017
• They will develop an industry exam and code of ethics, work with education providers and set education
standards, and determine the level of supervised work and ongoing CPD requirements
Personal or General Advice
Personal advice takes a client’s objectives, financial situation and needs into account, and recommends
appropriate strategies and financial products.
It is given in circumstances where:
➢ The provider of the advice has considered one or more of the person’s objectives, financial situation and
needs; or
➢ A reasonable person might expect the provider to have considered one or more of those matters.
General advice is an advice that is not personal advice. It may be generic information or advice that is not
specifically tailored to suit a particular client.
Quality of Advice
Good quality of advice - improves a client’s financial situation. This is not necessarily confined to a monetary
improvement, but encompasses a person‘s preparedness for the future
It has some or all of the following features:
➢ A clearly defined scope and a thorough investigation of the client’s relevant personal circumstances
➢ Assistance given by the adviser to the client to set prioritized, specific and measurable goals and
objectives
➢ Where relevant, consideration of potential strategies
➢ Where relevant, consideration of the wider impact of the advice (tax or social security consequences)
➢ Good communication with the client – SOAs are logically structured and easy to understand, and verbal
interactions that aim to ensure that the advice and recommendations are understood.
Principles that underpin good quality advice were identified:
➢ Meets the client’s needs and requirements of the law
➢ Refines and clarifies the client’s objectives and help the client achieve the objectives
➢ It can be comprehensive or limited in scope, depending on the client’s needs ad circumstances
➢ Educates and equips clients to make informed decisions about their finances, including whether to
accept and implement the strategies and products recommended to them
➢ Sound strategic advice is a key component of good quality advice. Product recommendations should
follow rather than direct the suggested strategies
➢ Involves good communication including SOAs and verbal communications
Advice Grades
➢ Good quality advice
• appropriate in accordance with the law
• the adviser has improved the client’s financial situation
• the adviser has clearly defined the scope of the advice and obtained detailed information about
the client’s relevant objectives, financial situation and needs.
• The adviser assists the client to set and prioritize specific and measurable goals and objectives.
• The strategy meets the client’s relevant personal circumstances well, is specific, measurable and
achievable, does not expose the client to more risk than necessary, and presents options.
• The adviser considers the wider impact of the advice
• Good communication with the client
• SOAs are logically structured and easy to understand and verbal interactions that aim to ensure
that the advice and recommendations are understood.
• Products meet the strategy

➢ Adequate quality advice


• appropriate in accordance with the law
• obtained info about the client’s relevant objectives, financial situation and needs.
• The strategies are reasonable but may not necessarily improve the client‘s situation
• The products recommended are suitable for the client but other products, which could deliver
more value, may not have been recommended.

➢ Poor quality advice


• has not obtained sufficient info about the client’s personal circumstance
• does not make reasonable inquiries
• makes little attempt to clarify the client’s retirement expectations
• the strategy does not meet the client’s personal circumstances or is unrealistic.
• The recommended products may not meet the client’s personal circumstances
Client File Requirements
• FSG – is a document that identifies the scope of services offered by an adviser, including what areas of
advice is authorized, fee structures, complaints procedures etc.
• Client questionnaire – it must be kept on file (or at least electronically) to ensure a full picture of a
client’s situation is documented
• First appointment file note – extraction of the key information from the first interview that is relevant
towards developing a financial plan
• Advice file note – advice needs to be reviewed regularly, often even outside of specified agreed reviews.
The reasons why an adviser may be required to issue additional written advice to an existing client
outside of agreed review periods vary. It could be a change in legislation, a change in investment
markets, an inheritance or windfall, or a change in a client’s family circumstance (divorce, job loss) that
warrants additional advice.
• Risk profile – determine investment appetite
*the only time a risk profile does not need to be completed is if an execution only transaction is being
conducted.
• Authority to Proceed - It acknowledges that the adviser has explained the contents of the SOA,
confirmed the client’s risk profile, and it also puts context around elements of the SOA such as past
performance and future projections via legal disclaimers that limit future legal action by a client on
certain areas
• Execution only – if a client request an adviser facilitate a transaction with no advice at all, an adviser
must get a client to sign an ‘execution only’ document
• Option to quote Tax File Number – in behalf of the ATO. They must withhold tax if a TFN is not
provided, so it is important that a client or company TFN is included on all applications to avoid
unintended withholding tax.
• Service agreement – outlines what services the adviser will provide to the client both initially and
ongoing and the fees and obligations are clearly outlined in this document
• Client contact cover sheet – ensures no matter who in the office picks up the file, they are sufficiently up
to speed with what has been happening (or not been happening) in relation to the client.
• Client file note – an in-depth explanation of what is also contained in the client contact cover sheet
• Review appointment file note – done on a semi-annual or annual basis but can be conducted regularly.
Investment Planning
I. Investment Classes
One of the key basic concepts in the finance industry
• Cash
- Most liquid type of asset
- Realize the true value of it
• Fixed interest
- Commonly known as ‘term deposit’
• Property
- Normally goes up, except when experiencing global financial crisis
• Shares/stocks from publicly listed companies
How to invest money within the four asset classes?
Key factors for consideration:
• The amount and frequency of income required
• Investment time frame
• Risk tolerance
• Tax position
How to determine the investment opportunities over these asset classes?
• What are the returns?
• What are the risks?
• How is the return generated?
-related to the increase in the appreciation of the property
• How do you invest in it?
CASH ASSETS
• Includes term deposits, money market securities, cash management account/trust
• They are often capital guaranteed by the Australian government which can be an important
consideration for investors
• The Australian government provides capital guarantee of up to 250,000 for investors. This is known as
the Financial Claims Scheme
Returns
• The returns of cash are derived from the interest rate on offer by the provider which are usually the
banks. Thus, the returns vary with the changes in interest rates.
Risks
• Cash investments carry the lowest risk of all the asset classes. The 90-day treasury note interest rate is
often used as a proxy or yardstick for the risk-free rate of return on offer in Australia
• Cash generally exhibits no capital volatility, unlike other investment options. Because this also means
that the capital base never rises, the return are dependent on the cyclical nature of the interest rates. This
means that there is always a real risk that a cash investment will not keep pace with inflation and lose
the real terms.
Generally when offered a substantially higher interest rate on a cash investment compared to comparative
providers, it generally reflects a higher inherent risk or a greater burden to tie-up the investment capital for a
longer time frame.
Generated returns
• The bank will use your capital that you have invested or ‘lent’ to the bank as a depositor and they will
‘re-lend’ that capital to a borrower at a higher interest rate.
The difference between the interest rate offered to a depositor and the interest rate offered to a borrower
is called the interest rate “spread”. The banking system has generated profits via this “spread” since
borrowing and lending for trade and commerce first commenced thousands of years ago.
• Each bank has an account with the Reserve Bank of Australia (RBA) known as an exchange settlement
account (ESA). The bank invests its excess money each night with the RBA and is paid an ‘overnight’
interest rate by the RBA.
The RBA is able to set ‘interest rate’ policy for the Australian economy (called monetary policy) by
manipulating this overnight interest rate.
How to invest?
Banks:
• Term Deposits (TD)
• Cash Management Account (CMA) - usually invest in a range of short-term money market investments
FIXED INTEREST ASSETS
Fixed interest investments can be issued by a range of entities for the purpose of raising capital form investors.
Issuers include the federal government, state governments, semi-government authorities, banks and other
corporations, both locally and overseas
Initially borrowers raise their capital they require in the primary fixe interest market from investors. Investors
are then able to sell their fixed interest investments to other investors at any time (without waiting for
repayment of interest of capital). They trade these securities via the ‘secondary’ market. The fixed interest
market is also called the debt securities or bond market.
Types of fixed interest securities
• Government bonds
Issued directly by a government and are explicitly guaranteed by that government. Implementing major
government projects and managing budget deficits are reasons governments issue such bonds.
• Semi-government bonds
Not issued directly by government but may be issued by a statutory authority empowered by
government legislation. These bonds may also include an implies guarantee of performance by the
government (but not always).
• Corporate bonds
Issued by large public companies to fund expansion and working capital.
Considered to be riskier than government and semi-government bonds so they typically offer higher
interest rates
• Hybrids
Have characteristics of both fixed interest and equity. Convertible bonds commence as bonds but can be
converted into equity at a future date. These types of securities have higher risk than government or
corporate bonds because they are less secure and in the even of a default, often rank behind more senior
debt issued by the corporate borrower
Risks:
• Credit risk
- risk of non-payment or default by the issuer of the bond. Non-payment or default can occur across
any bond.

• Inflation risk
- fixed interest investments generally have less growth potential than share or property. For investors
that hold their bods to maturity, they ultimately receive only the interest rate that existed when they
acquired the bond in the first place (either on the primary or secondary market). The effects of
inflation over time on the real return of a bond, is therefore a risk.
• Rating agencies
- the interest rate that a borrower pays to an investor is linked to the perceived risk or default back to
the investor. The task of determining the risk of default in large part is conducted by ratings
agencies.
- Provide a ranking system from best to worst:
AAA – best or least risky investments
Junk – most risky
Getting a good or bad rating will impact on the amount of interest the market will require when a
new bond is issued in the primary market. The better the market, the lower the interest rate and vice
versa
• Interest rate risk
1. If interest rates rise, the bond price falls. This is because investors won’t buy the bond paying the
‘lower’ coupon rate (interest rate), unless the bond price falls enough to reflect the prevailing
interest rate.
2. If interest rates fall, the bond price rises. This is because owners of bonds will refuse to sell their
bonds on the secondary market at the original issue price because the bond pays a higher coupon
rate (interest rate) than the currently prevailing interest rate. Bondholders will only rationally
sell their bonds if they receive a higher price than the issue price, to take into account the fact the
‘new’ purchaser of the bond is entitled to a higher coupon rate (interest rate) than the prevailing
coupon rate.
3. The longer the time to maturity, the greater the volatility of a bond price if interest rates change.
Generated returns
- Fixed interest investments (bonds) usually have longer investment terms than cash investments.
Australian bond maturities range from one to 10 years, but US bonds extend up to 30 years.
- The underlying return of a fixed interest investment is the interest rate known as the ‘coupon
rate’
- This rate is no different to a cash investment in that it is a percentage of the face value of the
specific bond. The coupon amounts are paid periodically throughout the term of the bond.
- More complexity exists when comparing the return of a bond to that of cash. This is because if
you sell your bond prior to maturity, the value of the bond may fluctuate just like a share. It is
only when the bond reaches the maturity that the investor receives the face value of the bond
Factors that affect the bond price:
• The difference between the current interest rate in the market place and the coupon rate offered on a
bond.
• The time to maturity of the bond
• The number of coupon payments yet to be received by the bondholder.
How to invest?
Minimum direct investment for a retail investor wanting to purchase a bond is often prohibitive depending on
the type of bond. Because of this ‘parcel sizes’ it can make it difficult to adequately diversify within the fixed
interest asset class, and also across desired maturities. Many retail investors choose to invest indirectly into
bonds via managed funds.
PROPERTY ASSETS
Two types of property assets:
Residential property – property that is used for residential purposes (apartment, zone residential, house)
Commercial property- used for commercial purposes – generally to operate some business or commerce from
(offices, factories, industrial premises, retail premises, shopping centers)
Risks:
• It is a long-term investment and has higher risk than cash and fixed interest investments but is
considered a similar risk to shares
• Represents a higher risk
Liquidity risk – assets ability to be turned into cash and how quickly this can be achieved. The easier and
quicker an investment can be transformed into cash, the lower the liquidity risk. Direct property is divisible, so
if an investor wants to turn their property into cash quickly, they are forced to sell the entire property. The
timeframe for selling is often lengthy too. A sale contract must be drafted, a sale campaign implemented by a
real estate agent (generally), and settlement of the property after the sale is executed if often 30 days or more.
Vacancy risk – property is untenanted impacts an investors immediate return and is called vacancy risk. An
untenanted property can impact the underlying property price too. This is because potential investors will weigh
the relative desirability of a property without a tenant against other investment opportunities and will facto that
in to how much they are willing to pay for the property.
Many factors impact vacancy risk and include:
• Demand and supply
• Surrounding and infrastructure
• Proximity to amenities
• Zoning
• Demographics
• Type of property
• Economy
Gearing risk – often indirect property investments have borrowings within the trust structure. If the borrowings
represent, 50% of the trust, it meant that the trust return will be magnified. That is gains will be accelerated but
losses will eat repayments on the borrowings, or interest rates rise, the economics of the property trust may be
compromised impacting liquidity and/or the value of the investment
Capital risk – a number of factors can impact the price of a property:
• Location
• Land size
• Type of property on the land
• Street
• Suburb
• Local property market
• Regional property market
• National property market
• Demand and supply
• The economy
• Demographics
The key to understanding capital risk when it comes to property is that generally, the longer the time frame that
you hold property, the lower the capital risk.
Generated Returns
• Rental – property investors generally rely on ongoing income from rental from tenants
A tenancy is an agreement whereby the tenant of the property pays the owner (investor) an agreed
amount periodically. The over-riding agreement between tenant and owner is called a lease. A lease sets
out the rights and responsibilities of both parties, and also covers the key commercial transaction
features; the lease term (months or years), the lease amount, and how often it will be paid (weekly,
monthly, quarterly etc.).
• Rental yield – when assessing a property investment, the ongoing income is often expressed as a rental
yield. Rental yield is calculated by dividing the yearly rental by the property value
• Capital – property is a financial asset that is traded between market participants (buyers and sellers). An
investor that purchases property ideally would like to sell the property at a higher future price,

If they are able to do this, then the investor would make a positive capital return. A capital return is the
difference between the selling price and purchase price after taking into account purchase and selling
costs such as agent fees, legal fees and stamp duty. As you can see, a capital return can be positive, but it
also can be negative whereby the investor sells the property for a lower future price.
How to invest?
• Direct
Residential property purchases and sales generally are direct transactions between buyer and seller. It can be
performed at public auction whereby certain rules and regulations stipulate the obligations of both
purchasers and vendor.
• Indirect
Commercial property can be purchased indirectly via listed or unlisted property trusts and/or managed
funds. The benefits of purchasing commercial property indirectly is often the exposure (and hence
diversification) you can receive.
• Indirect Property Investments - Listed Property versus Unlisted Property
It is important to differentiate between listed property trusts (sometimes called an AREIT11) and unlisted
property investments. Listed property trusts are traded on the Australian Stock Exchange (ASX). They can
be purchased and sold like any other share. This is in contrast to an unlisted property trust with less
liquidity, where it generally takes longer to convert the underlying investment into cash
SHARE ASSETS
• Investing in the share market allows investors to participate in the growth and future profits of
Australian and international businesses. It is possible to purchase shares in either private or public
companies, however it is generally only possible to purchase shares in publicly listed companies on
stock exchanges. Many companies are listed on stock exchanges across varying different industries.
• It is important to remember that not all companies (even large companies) choose to become public and
list on stock exchanges. However, the benefit of buying shares in a publicly listed company on a stock
exchange is the increased liquidity.
• The share market or stock exchange is a market in which buyers and sellers come together to buy and
sell shares. In Australia, the leading market for shares is the Australian Securities Exchange (ASX). The
ASX is made of up of close to 2,000 companies and is the 12th largest share market in the world. It is
also the third largest in the Asia-Pacific region.
• Companies that choose to raise capital via an Initial Public Offering (IPO), become ‘listed’ on the stock
exchange in the country they choose to raise the capital from. When an Australian company raises
capital in Australia from the public, they become ‘listed’ on the Australian Securities Exchange (ASX).
Companies raise capital in order to grow either organically or via acquisition. It also allows large
foundation shareholders (often the founders) to reduce their exposure (and raise money themselves).
Generated Returns
Shares returns are generally two-dimensional:
• Firstly they (may) pay dividends to investors, and secondly the share price may appreciate over time
offering the opportunity of a capital gain.
• Of course, the inverse must also be considered. That is, there is also the possibility of a company
choosing not to pay a dividend at any given time. Furthermore, if an investor chooses to sell their shares,
they may make a capital loss too.
The income you receive from shares is in the form of dividends.
Dividends can grow over time as the capital value of your investment also grows.
II. Performance of Asset Classes
Cash is the least risky (as defined by volatility in returns) and in theory generates the lowest returns in the long
term.
Fixed interest is slightly riskier and generates greater returns than cash.
Property is riskier again and in theory generates higher returns than either cash or fixed interest
Shares are arguably the riskiest of the asset classes with strong returns in some years and significant declines
in others. For Australian investors, Australian and international shares have been the most volatile asset classes,
experiencing best performance and worst performance more often than property, cash or bonds.
Dollar Cost Averaging
Dollar cost averaging relies on the idea that if regular amounts are invested, more units can be purchased when
the price is low and fewer units can be purchased when the price is high.
The effect of this strategy is that on average, investors will be acquiring units at a lower average price and will
therefore generate higher returns.
III. Investment Risk
Some of the more common definitions of risk are:
• The chance of loss of capital
• The chance of loss of purchasing power
• The variability of the returns associated with the given asset
Return is the total gain or loss experienced by the owner of a financial asset or investment over a given period
of time.
Chance of loss – This occurs when the returns are not greater than inflation which is second definition of risk.
Consequently, an investment in cash may result to negative real return.
Compared with cash investments, shares have a greater probability of generating returns that beat
inflation, i.e. maintaining their purchasing power. Whilst an investment may produce positive returns in
‘nominal’ terms (before consideration of inflation), if inflation exceeds the nominal return, the investor will
experience a loss of purchasing power, i.e. negative ‘real’ returns (i.e. negative returns after consideration of
inflation).
Risk of not diversifying: The possibility that if the client puts all of their investment capital into one basket,
e.g. the share market, a fall in that market will adversely affect all of their capital. Diversification is a
deliberate strategy aimed at reducing the impact that volatility in one asset class, sector or single product will
have on the overall portfolio of assets.
Re-investment risk: The possibility that if a client invests in a fixed rate investment, e.g. bonds, the client may
have to re-invest maturing money at a lower rate of interest if rates generally decline during the life of that
investment.
Liquidity risk: The possibility that the client may not be able to readily access their funds when they want or
need them most, because they are invested in illiquid assets, e.g. real estate.
Credit risk: The possibility that an institution holding the capital, e.g. a debenture issuer, may fail to pay
interest or return that capital.
Regulatory risk: The possibility of government policy changes, negatively affecting the financial strategy, e.g.
changes to the treatment of Capital Gains Tax.
Timing risk: The possibility that a strategy of trying to time entry and exit of markets will expose the client to
greater short-term volatility.
Value risk: The possibility that the client will pay too much for a particular product or that it will be sold too
cheaply.
Manager risk: The possibility that the client will invest in a fund manager based primarily on their recent past
performance, without regard to their fundamental ability to cater to the particular needs of the client or
performance expectations over the time frame in mind.
Currency risk: The possibility that investments held in other countries may rise or fall in value compared to the
value of the currency held relative to the domestic currency.
IV. Diversification
Four main asset classes in which investors could place their funds are:
• Cash
• Fixed Interest
• Property
• Shares
In each of the asset classes, the investment can be direct or indirect.
A direct investment may involve the investor placing money in a cash deposit in their own name or joint
names, purchasing a fixed interest bond in their own name or joint names, buying a property site or purchasing
specific shares in their name or joint names.
Managed Investments
In managed investments, individual investors pool their funds with other investors into a professionally
managed fund from which investments are purchased, dependent on the nature and objectives of the fund.
As a result of pooling funds with other people, an investor holds a proportionate amount of the pool according
to the amount of the investment. As a result, the investor receives a proportionate share of income and/or capital
growth. The investor does not own any particular asset within the managed investment but rather owns units in
the managed investment. These units determine the proportion of the income or capital growth to which the
investor is entitled. The managed investment is overseen by a trustee who is responsible for abiding by the
conditions set out in the trust deed. For these reasons, managed investments are sometimes referred to as
managed funds or simply unit trusts.
Benefits of Managed Investments for Investors
• Professional investment management: Effective management of any investment portfolio is a complex
and time-consuming task. Individual investors find it increasingly difficult to keep up with the rapidly
changing investment market. Most managed funds are run by skilled professionals in a competitive
market and should be able to provide better results than unskilled individuals
• Diversification: There is a wide choice of managed funds with a broad range of products across the
asset classes. This provides diversification for a small investment. The managed funds themselves
spread their investment so that diversification is increased still further. This can spread the risk and
provide a reasonable return
• Ready access to funds: Managed funds offers buy back facilities which can offer cash usually at very
short notice. Thus, the investor does not have to find a buyer to cash in the investment.
• Reduced paperwork: Fund managers do an enormous amount of paperwork for the investor.
Administrators of managed funds process all the complex factors associated with share markets; taking
up bonus and rights issues, share splits, subscribing to floats and placements, participating in dividend
reinvestment plans and processing dividends. Therefore, the decision to use managed funds or not for
share market investing is driven by the convenience factor; a fund manager makes it easier for investors
to diversify their investments.
• Better time management: For many people, time is their most valuable asset. When an investor buys
into a share fund, they are paying for time and expertise of an investment professional - the investor is
making the implicit decision that they do not want to be involved in the fine detail of buying and selling
shares; that is the fund manager’s job.
• Access to institutional offers: Frequently, placements of discounted shares and new share floats are
offered to institutional investors only, with retail investors almost totally excluded. Managed
investments have access to these shares.
• Depths of research coverage: Fund managers will typically draw on research from a wide range of
areas including stockbroking and investment banking analysts. They will also employ their own analysts
who filter the information into broader parameters for buying or selling companies within their portfolio.
V. Understanding the client needs
Financial planners are constantly faced with questions such as these. In order to provide answers to such
questions, it is necessary for financial planners to have a strong working knowledge of fundamental
mathematical concepts which relate to investment and retirement planning. The skills required include a basic
understanding of the nature of compounding and the time value of money.
An understanding of these concepts will enable financial planners to determine both present and future values
of capital amounts and to assess alternative income streams so that different investment options can be
compared. In practice, financial planners can often access computer packages which, with the click of the
mouse, will determine present and future capital values and compare alternative income streams. What
computer packages cannot do is equip financial planners with the skills to explain to clients the basis on which
their advice is determined. To be able to do this, the financial planners must understand the concepts of
compounding and the time value of money.
Financial planning is a relationship profession built on trust and responsibility. It is imperative that
financial planners not only provide clients with solutions but also provide clients with the assurance that the
advice given is based on a thorough understanding of the factors that give rise to these solutions.
Risk and Insurance
Risk – the uncertainty concerning the occurrence of a loss
Classification of Risk:
• Pure risk – a situation in which the only possibilities are loss or no loss
➢ Personal risk – directly affects an individual involving the possibility of loss of income or assets
Four major personal risk:
• Risk of premature death of the main breadwinner with unfulfilled financial obligations
• Risk of old age
• Risk of poor health
• Risk of unemployment
➢ Property risk
• Direct loss – is a financial loss that results from the physical damage, destruction or theft of the
property
• Indirect or consequential loss – is the financial loss that results indirectly from the occurrence of
direct physical damage or theft loss
➢ Liability risk – are also regarded as pure risks that people face. A person may be held to be legally liable
if they do something that results in bodily injury or property damage to someone else.
• Speculative risk – a situation in which either gain or loss is possible
Classification of risk:
➢ Peril – the cause of a loss
➢ Hazard – a condition that created or increases the chance of a loss
• Physical hazard – a physical condition that increases the chance of loss
• Moral hazard – is dishonesty or character defects in an individual that increase the frequency or
severity of loss
• Morale hazard – is carelessness or indifference to a loss because of the existence of insurance
Handling Risk
➢ Avoidance – this is simply the choice of not doing something. Avoidance of risk is sometimes impracticable
➢ Retention – an individual or business may retain some of the risk
- Active retention – is where the individual is aware of the risk and takes a deliberate action to retain
all or part of the risk
- Passive retention – where the risk is retained because of ignorance, indifference or laziness
Risk retention is appropriate for high frequency but low severity risks where potential losses are
relatively small. Low frequency but high severity should be covered under an insurance policy, not
through retention.
➢ Non-insurance transfers – involves the transfer of risk to a party other than an insurance company
• Hedging – a form of non-insurance transfer. A technique for transferring the risk of unfavorable share
price fluctuations to a speculator by purchasing and selling futures contracts on an organized
exchange. This portfolio insurance is not formal insurance but is a risk transfer technique that
provides protection against a decline in stock prices.
• Incorporation of a business firm – can be a useful method for protection of the owner’s personal
assets from creditors, i.e. this is a transfer of risk from the owner to the creditor
➢ Loss control – involves activities to reduce the severity and frequency of losses
• Loss prevention – aims at reducing the probability of loss so that losses are less frequent
• Loss reduction aims at reducing the severity of a loss

Loss control is desirable form society’s viewpoint for two reasons:


• The indirect costs of losses may be large and, in some cases, exceed the direct costs
• The social costs of losses are reduced
➢ Insurance – the transfer of the risk to an insurance company is often the most practical means of handling a
major risk. The benefits of pooling the risk over a large number of people can make insurance very cost
effective.
Basic Characteristics of Insurance:
• Pooling of losses
- Heart of insurance
- Spreading of losses incurred by the few over the entire group, so that in the process, average loss is
substituted for actual loss
- Pooling implies the sharing of losses u the entire group and the prediction of future losses with some
accuracy based on the law of large numbers.
• Payment of fortuitous losses – a fortuitous los is one that is unforeseen and unexpected and occurs as a
result of chance; the los must be accidental and occur randomly
• Risk transfer – occurs where a pure risk is transferred from the insured to the insurer, who typically in a
stronger financial position to pay the loss than the insured.
• Indemnification – means that the insured is restore to his or her approximate financial position that existed
prior to the occurrence of the loss. This is based on the principle that you cannot make a profit on a loss
- Indemnity policies – whereby losses are calculated at the time of the claim and compensated by the
insurance company based on the actual loss
- Agreed value policies – a benefit is pre-defined at the time of applying for the insurance and upon pre-
defined event occurring, the insurance pays a predefined payout.
Requirements of an Insurable Risk
• There must be a large number of exposure units. This enables insurers to predict loss based on the law of
large numbers
• The loss should be accidental and unintentional. This means that the loss should be fortuitous and outside
the insured’s control. If intentional losses were paid, moral hazard would be increased, and premiums would
rise
• The loss must be determinable and measurable; the loss must be definite as to cause, time, place and
amount. With disability insurance, there can be some issues
• The loss should not be catastrophic. This means that a large proportion of exposure units should not incur
losses at the same time.
Two approaches are available to meet the problem of catastrophic loss:
o Reinsurance can be used. This involves the shifting of part or all o the risk from one insurer to a number
of insurers
o Insurers an disperse their coverage over a large geographical area
• The chance of loss must be calculable. The insurer must be able to calculate both the average frequency and
the average severity of future losses with some accuracy
• The premium must be economically feasible. The insured must be able to pay the premium
Adverse selection and insurance
Adverse selection is the tendency of persons with a higher-than-average chance of loss to seek insurance at
standard or average rates
Underwriting is the process of selecting and classifying applicants for insurance
Reinsurance – an arrangement whereby an insurance company that has a direct relationship with clients place
the full or partial risk with a reinsurer in order to spread the risk
How do insurers determine their premium?
• A premium is constructed to allow enough insured persons to be able to afford the insurance cover
• It must provide enough revenue to the insurance company to allow for the estimated claims to be paid
• It must allow for a sufficient profit margin to the insurance company.
In order to achieve this aim, insurance companies often re-insure up to 75% of their premiums (and hence
contingent claims). Of the remaining 25%, 15% usually covers the cost of operating the company including
staffing, underwriting, rent (leasing), marketing as well as ‘other’ business costs. The remaining 10% of a
premium is anticipated to generate the profit for the insurance company.
The Role of an Actuary
Risks are determined based on the likelihood of a particular event actually happening. The probability can be
determined based on looking at a pattern within a large enough pool of insured persons. It is then possible to
observe how often an identified insured event occurs. After a thorough mathematical analysis, an actuary
incorporated these findings into formulas that provide the basis for published tables. The tables are then used for
the construction of premiums. The tables take into account the relevant factors that influence an insured event
arising.
Life Insurance Rating Factors
Rating factors are used to determine the level of premium to charge for a risk that a life insurance provider
carries on a particular policy. This varied depending on:
• Age
• Sex
• Occupation
• Existing health condition
General Insurance Rating Factors
If the insurance for property, premiums will vary depending on:
• Is the property vacant, tenanted or owner occupied?
• Construction materials used to build property
• Age of property
• Residential or business
• Risk profile of property location
• Security measures in place
The Role of the Underwriter
An underwriter has the task of evaluating the individual risk of an applicant based on specific circumstances of
the applicant
Underwriting and the Insurance Cycle
Each insurance company decides the level of risk it will accept. There are no regulations that prescribe a set of
underwriting formula. Often insurance companies follow what can commonly be described as an insurance
cycle. This involves underwriters either starting off cautiously when assessing applications for insurance or
alternatively applying lenient underwriting practices initially.
The process
• When an insurance proposal is submitted, it is first vetted by an underwriting team. The specific underwriter
examines the proposal carefully to determine if there is any reason to reject the proposal or charge a higher
premium or appl some form of exclusion.
• An underwriter’s task involves:
- Protecting the financial viability of the insurance company from unprofitable insurance contracts with
applicants whilst at the same time ensuring commercial imperatives of sufficient new business inflows
can continue to occur
- Identifying the key risks in a careful, timely and efficient manner
• The underwriter divides applications into three categories:
- Standard risk – people with ‘normal’ risk factors that will therefore pay a normal or average premium
- Substandard risk – people with higher-than-normal risk factors but who are still insurable. They may
have the extra risk returned to a standard risk via paying a higher premium (loading), or accepting an
exclusion
o Substandard risk – loadings – a substandard risk if often managed via applying a higher premium
(known as loading) compared to what an average applicant would pay. The extra premium is either
represented in percentage terms or a set dollar amount.
o Substandard risk – exclusions – exclusions are applied on insurance policies whereby a specific
condition or activity is able to be clearly identified and then ‘excluded’ in order to normalize the risk
and hence premium.
- Decline or defer – an application is rejected sometimes either permanently if the risk is unlikely to
change, or the application may be deferred for a period whereby the risk might possibly improve in the
future o allow appropriate insurance to be granted using either standard or substandard risk profiling.
The Financial Adviser’s Role in the Underwriting Process
➢ The financial planner also provides a vital role in the pre-underwriting stage in the context of providing
advice on personal insurance such as Life, TPD, Income Protection and Trauma Insurance.
➢ The financial planner often asks the client key questions around health and other underwriting related issues
in the first stage of the financial planning process via the client questionnaire. If the client volunteer’s
information that a financial planner knows will create an underwriting problem, the financial planner can
communicate the potential problems associated with obtaining insurance in such circumstances.
➢ Who communicates an underwriter’s decision to the client?
Where insurance has been recommended by a financial planner, the insurer will rely on the financial planner
to communicate the status of the application. That may include acceptance of the applications for insurance
at standard rates, a loading, exclusion or outright denial of cover.
The Insurance Broker’s Role in the Underwriting Process
When clients engage an insurance broker, they are often not aware that general insurance contracts can be
varied by the underwriter. The variations reflect higher risk that may be present. Astute insurance brokers will
have a thorough understanding of the overall underwriting considerations. This will allow them to pre-warn
clients about possible conditions that may be applied to a policy avoiding unnecessary client surprises.
Insurance Broker’s Areas of Insurance Advice
Brokers act on behalf of and in the best interests of their clients to provide tailored and appropriate general
insurance advice. It is their role to identify potential risks and explain general insurance terms, conditions,
benefits and costs. Brokers often work with business clients. This is because businesses have multiple insurance
requirements at any given time.
This might include the following:
o Motor vehicles and fleets – it is compulsory to insure all company or business vehicles for third party
injury liability however most businesses choose comprehensive vehicle insurance.
o Building and contents insurance – this insurance covers the building, contents and stock of your
business against fire and other perils such as earthquake, lightning, storms, floods, impact, malicious
damage and explosion.
o Burglary – insures business assets against burglary and is most important for a retailer or business that
has a property that is not always attended.
o Business interruption or loss of profits – covers business profits if it is interrupted through damage to
property by fire or other insured perils. Ensures the businesses ongoing expenses are met and profit is
maintained through a provision of cash flow.
o Deterioration of stock – covers a business for the deterioration of chilled, refrigerated or frozen stock
following the breakdown of the refrigerator or freezer in which they were kept.
o Electronic equipment – covers business electronic equipment in the event of theft, destructions or
damage.
o Employee dishonesty – covers losses resulting from employee theft or embezzlement.
o Farm insurance – insurance for farms covering things such as crops, livestock, buildings and machinery
o Goods in transit – covers loss of, or damage to, the goods a business buys, sells or uses in the ordinary
course of business when they are in transit by ship, air, post, rail or road.
o Machinery breakdown – protects a business when mechanical and electrical plant and machinery at the
worksite breaks down.
o Tax audit – covers a business for the cost of professional fees in the event of a tax audit or investigation
into the business
o Property in transit – cover theft or damage of items used for business purposes that travel with an
employee.
o Public liability insurance – covers a business against the financial risk it is found liable in the event of
death, injury, loss or damage to another person or property
o Professional indemnity insurance – protects advice-based businesses from legal action taken for losses
incurred as a result of professional negligence. It provide indemnity cover of a businesses’ client suffers
a loss – material, financial or physical – directly attributed to negligent acts, errors, or omissions.
o Product liability – If a business sells, supplies or delivers goods, even via repair or service, a business
may need cover against claims of goods causing injury, death or damage. Product liability insurance
covers a business if any of these events happen to another business or person by the failure of a product
or the product you are selling or supplying.
o Directors’ and officers’ insurance – Directors and Officers liability insurance protects the directors and
officers, as well as senior managerial staff against claims arising from their actions and decisions in their
official capacities.
An Insurance Broker’s Role
An insurance broker can specialize in different types of general insurance for specific target client types or
provide advice across all industry areas and insurance types.
Regardless, their role includes:
• Negotiating premiums on the client’s behalf
• Preparation of a customized insurance and risk program
• Assistance with claims and liaising with the insurer on the client’s behalf
• Creation of a SOA (Statement of Advice) where personal insurance advice is provided
Broker disclosure – brokers are required to advise clients of fees, charges and commission taken.
Governing and industry bodies – The Australian Securities and Investments Commission (ASIC) regulates
insurance brokers. They are required to work under an Australian Financial Services License issued by ASIC. It
is a condition of an AFS license that brokers are a member of an authorized external dispute resolution scheme.
The Financial Ombudsman Service (FOS) is the main complaints service in this regard. In most cases it is the
FOS which acts as an independent arbitrator to resolve complaints and problems between brokers and their
clients.
Insurance Brokers code of Practice
The code prescribes standards and levels of service that are expected of brokers. These include:
➢ Resolving complaints – all insurance brokers and their organizations should have an internal complaints and
disputes handling process which brokers must be aware of and have access to.
Where a complaint remains unresolved and is referred to the Financial Ombudsman Service (FOS), the
Ombudsman will examine the dispute and an impose binding sanctions if a decision is made in favor of the
client.
The good news is that there are very few disputes involving insurance brokers each year. They average only
2.5% of all yearly disputes involving general insurance. The majority of disputes arise between end clients
and the actual insurer.
➢ Insurance fraud - The definition of fraud is “a deliberately dishonest act that causes actual or potential
financial loss to any person or entity”. Insurance fraud like retail theft has an impact on everyone. In short it
makes the product more expensive.
Types of fraud
• Opportunistic – Overestimating on a legitimate claim
• Fraudulent – The inclusion of misleading or dishonest supporting evidence within a claim or non-
disclosure of critical evidence
• Premeditated – Deliberately executed events such as theft, arson or vandalism staged for the purpose of
making a claim
➢ The rights of the insurer - An insurer can reject a claim in part or totally where it determines it to be
fraudulent. However where the error, omission or misrepresentation is deemed minor or insignificant the
insurer cannot reject an entire claim.
Key Legal Obligations in Insurance
It is important for consumers to have faith in the insurance companies in which they pay premiums. After all,
consumers pay a premium and in effect receive a promise that they will be compensated subject to certain
events occurring. Appropriate legislation and regulations allow trust in Australia’s insurance industry.
A regulated insurance industry ensures:
• Policyholders who purchase insurance are provided with appropriate advice to allow them to make informed
decisions
• Financial planners and brokers act ethically and competently when engaging with clients relating to their
insurance needs
• Life insurance companies properly supervise the activities of their staff
• Insurance contracts are designed to reflect the interests of both the insurer and insured
• Applicants are obliged to provide complete and honest information requested by insurers to maintain the
integrity of the Australian insurance sector.
Important to be aware of the following key legal and regulatory principles
• Insurance Contracts Act 1984 - The aim of this Act is to ensure a fair balance is struck between the interests
of insurers, insureds and other members of the public so that the provision included in such contracts and
the practices of insurers in relation to such contracts operate fairly.
This Act addresses a number of issues including utmost good faith, duty of disclosure misrepresentation and
non-disclosure.
• Utmost good faith - It means all parties entering into an insurance contract must provide any information
that might influence the other’s decision to enter into a contract.
• Duty of disclosure - Under the duty of disclosure provision, the insured must disclose everything that is
relevant before the contract of insurance is entered into.
• Misrepresentation
In the case of life insurance, if the failure to disclose was accidental, the insurer may be able to avoid the
contract. Section 29(3) allows an insurer, within three years after the contract was entered into, to avoid the
contract if the insured fails to comply with the duty of disclosure or misrepresented a fact prior to the
contract of insurance being entered into. If the failure to disclose was fraudulent, then the insurer is within
their rights to avoid the contract.
Similarly with general insurance, the insurer can avoid the contract if the non-disclosure was fraudulent. If
this is not the case, then the insurer can reduce the claim to an amount that it would have been had the
misrepresentation not been made.
General Insurance
Insurance other than ‘Life Insurance’ falls under the category of General Insurance. General Insurance includes
insurance of property, household contents, motor vehicles, caravans, boats etc. against fire, theft, damage and
loss. It also includes personal insurance such as accident and health insurance and liability insurance.
• Home (Building) and/or contents insurance
o Home or building insurance covers the financial costs associated with damage to property which may be
one’s home or investment property. Contents insurance covers the financial costs associated with items
generally stored in that property.
o Not all home and contents insurance policies cover the same items. The following variables highlight
some differences which may apply:
➢ What is covered – buildings, contents and/or valuables;
➢ The basis of cover – accidental damage versus defined events;
➢ Location of cover;
➢ Possible additional covers;
➢ The basis of payment of claims – indemnity versus replacement;
➢ Whether averaging applies.
➢ Whose property is covered.
o Co-insurance clauses in Property related insurance contracts
▪ Underinsurance hurts the insured and the insurer
It actually means the insurer is taking a disproportionately greater risk. Where an insured person or
business takes out insurance representing less than their total possible loss, this is loosely termed
“under insurance”.
▪ An insurance broker’s role in clarifying the risk of “underinsurance”
When advising clients, an insurance broker must communicate the risk that in the event of a severe
fire, all stock would be lost. But the insurer is also losing when an insured underinsures.
Consequently they often put clauses into general insurance property related contracts known as
“averaging” or “co-insurance clauses”.
▪ When advising clients, an insurance broker must communicate the risk that in the event of a severe
fire, all stock would be lost. But the insurer is also losing when an insured underinsures.
Consequently they often put clauses into general insurance property related contracts known as
“averaging” or “co-insurance clauses”.
▪ Typical Co-insurance Clause
“We will not pay the full amount of any "loss" if the value of Covered Property at the time of "loss"
times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of
Insurance for the property.
▪ Instead, we will determine the most we will pay using the following steps:
1. Multiply the value of Covered Property at the time of "loss" by the Coinsurance percentage;
2. Divide the Limit of Insurance of the property by the figure determined in step (1);
3. Multiply to the total amount of "loss", before the application of any deductible, by the figure
determined in step (2); and
4. Subtract the excess from the figure determined in step (3)
We will pay the amount determined in step (4) or the Limit of Insurance, whichever is less. For
the remainder, you will either have to rely on other insurance or absorb the "loss" yourself
Subrogation in its most common usage refers to circumstances in which an insurance company tries
to recoup expenses for a claim it paid out when another party should have been responsible for
paying at least a portion of that claim.
▪ Landlord (or Residential investor) insurance
o Landlord insurance can be taken out to cover someone’s investment property. Landlord
insurance can protect both the property’s income as well as the property itself.
o Landlord insurance can provide coverage for many features which are the same or similar as
home and contents insurance.
o Landlord insurance can also provide coverage for additional events which may be relevant for
investment properties which would not normally apply for home and contents insurance for
someone’s home. The additional events relate to renting out the investment property and can
help to protect the insured’s rental income and protection against theft by tenants.
• Motor vehicle insurance
o Motor vehicle insurance can cover damage to the insured’s motor vehicles and those of third parties as
well as the financial impact of bodily injuries caused by impact with a moving vehicle.
o General insurers offer the following three types of motor vehicle insurance:
➢ Comprehensive – this covers the insured for loss of or damage to his or her own motor vehicle.
Where the motor vehicle has been involved in an accident, it also covers damage to other people’s
property caused by the insured’s motor vehicle.
➢ Third party property – this covers damage caused by the insured’s motor vehicle to other people’s
property. It does not cover the cost of repairs to the insured’s own motor vehicle.
➢ Third party fire and theft – this is similar to third party insurance but also extends coverage to loss
of or damage to the insured’s motor vehicle caused by fire or theft.
• Business insurance
There can be many risks to businesses which can be protected by taking out business insurance policies
which can usually be packaged to include items which are of most relevance to the particular business.
Business insurance packages can generally cover the following types of risks:
➢ Fire and extraneous perils
➢ Business interruption
➢ Burglary or theft. This cover usually excludes theft of money which is covered under a separate
insurance cover type described below.
➢ Money
➢ Glass (e.g. fixed external glass such as windows and fixed internal glass such as shelves)
➢ Liability
➢ General property/accidental damage
➢ Machinery breakdown
➢ Electronic breakdown
➢ Personal accident. Where a Work Cover benefit is paid, the amount payable under the policy is reduced
by the amount of the Work Cover benefit
➢ Accidental damage
➢ Fidelity guarantee
➢ Goods in transit
➢ Motor vehicle
• Liability insurance
People have a responsibility to avoid causing injury or damage to others. If someone happens to cause an injury
to another person, they may be liable to pay compensation for their behavior. Often, the person who caused the
injury was not at fault to any great extent, but nevertheless may be liable to make good the damage so caused.
What is negligence?
The concept of negligence is based on the notion that a person or business owes a duty of care to others.
What are the elements of a negligent act?
A negligent act consists of four main features:
• a duty of care is owed by the person or business to others
• the duty of care has been breached
• damage or injury has resulted from that breach of duty
• the damage or injury can be causally linked to the breach, and it is not deemed too remote.
Defence against negligence
A common defence used in negligence cases is the argument that the other party was also at fault and was
negligent to some extent. It is then up to the courts to decide to what degree each party was responsible for the
damage which resulted. This is known as contributory negligence.
Types of damages
• Special damages - These are damages to pay for specified costs, e.g. medical and physiotherapy
expenses, lost wages, property costs.
• General damages - These are payments for losses which cannot easily be assessed in monetary terms,
e.g. payments for pain and suffering, and loss of enjoyment of life.
• Punitive damages - These are payments imposed by the courts as a punishment and as a deterrent to
others against such wrong-doing. There is usually no financial basis for punitive damages; sometimes
they can be severe and at other times may be regarded as a token.
Types of liability insurance
• Product liability - This form of insurance provides protection for manufacturing businesses which
produce goods made available to the public.
• Public liability - Householders usually have insurance for public indemnity built into their home
insurance policy. Public liability should be held by individual home owners, renters, as well as business
owner’s regardless of whether they own a property or lease it
• Professional liability - Professionals such as doctors, lawyers and accountants are advised to have a
professional indemnity policy. Such a policy is designed to provide a claimant with an amount of
damages if the professional is found to be negligent in the carrying out of his or her duties.
• Directors’ and officers’ liability insurance - Legislation imposes general and specific duties and
responsibilities on specific types of officers (e.g. directors or secretaries). In general, responsibilities
would lie with the directors of very senior personnel in the company. The further down the chain of
management, the lesser the responsibility.
Trends in liability cases
In the past few years, there has been a trend throughout the world towards seeking negligence claims against
manufacturers, individuals and especially against professional people.
Personal Insurance
• Life insurance policies are guaranteed renewable unlike general insurance policies that are cancellable. This
means the insurer cannot cancel your life policy, but they can cancel a general insurance policy either after a
claim or at the end of the term.
• In addition to life and general insurance, private health insurance will provide cover so you can choose your
own private doctor or hospital.
• Protecting the lifestyle of the insured and/or dependents and/or business partners is one of the main aims of
personal insurance (i.e. the role of insuring oneself).
Legacy Products
These types of policies are no longer available for purchase, but some clients may still hold these products
• Endowment policies
- An endowment policy is a policy in which a certain sum will be paid at the end of a stated period of
time. Often the policy included bonuses which accrued over the period of the policy.
- If the person whose life was nominated on the policy died before maturity, the sum assured plus bonuses
were paid to the estate of the deceased
- Usually the policy is paid for with a regular fixed rate or premium
• Whole of life policies
- Whole of life policies were designed to be paid at a certain age, usually at an older age, say 85 or 95, or
when the policyholder (insured) dies.
- The premium is paid at a fixed rate over a lengthy period of time. Whole of life policies are very similar
to endowment policies.
Personal life insurance
• It covers a person’s life for a stated period of time.
• Today’s life insurance may be regarded as temporary insurance, as the policy must be renewed each year. If
the owner of the policy does not pay the premium within the stated time, or chooses not to renew the policy,
then the policy will lapse.
• A person may choose to insure their life with a different company from time to time. This decision may be
based on the level of premium charged or other features the policy owner finds attractive. However,
depending on the level of cover required, or on certain health characteristics, the life insured may have to
undertake a number of medical test (i.e. the underwriting requirements) before a proposal is accepted by the
other life company. Once a policy is written, the option to renew is in the hands of the policy owner
regardless of a change in health circumstances of the life insured.
Four main types of personal life insurance:
• Term life insurance
• Total and permanent disability insurance
• Trauma insurance
• Income protection insurance
Guaranteed renewability
• This means the insurer has to insure you each year, regardless of your health i.e. if you pick up a chronic
illness, the insurance company still has to provide insurance at the same premium rate.
• The policy owner is not obliged to continue with the contract but the insurer is obligated to continue to offer
the contract for as long as the policy owner wants it, i.e. up to a maximum age (for example 65 or 70).
Every policy is different!
It is important for an adviser to understand the Product Disclosure Statement (PDS) for each product as each
product is different. Some insurers may include extra benefits which is included in the cost. i.e. other features
(either included or provided at an additional cost) are Buy Back benefit, Guaranteed Insurability, Child Cover,
Accidental Death Cover, Indexation, Waiver of Premium, Accommodation benefit and Loyalty Bonus benefit.
Insurable Interest
• A basic principle of insurance law is that the insurance policy does not cover any property or ‘people’ in
which the insured has no insurable interest.
• An interest can be established where it can be shown a sufficient connection exists between the policy
owner, and the insured person or property in question.
• The policy owner must be able to demonstrate a financial loss as a result of an insured event occurring in
relation to the insured person or property. This prevents policy owners gambling on the risks of loss by
others and turning insurance underwriting into a casino for gamblers.
• Without an insurable interest, the underwriter also has no assurance that the policy holder or insured will use
any efforts to protect and preserve the insured property or a person’s health.
• While insurable interest is no longer required by law in Australia, it is still a principle by which the
insurance industry stands.
Insurable interest between spouses and children
➢ It is important to know that life insurance payouts fall outside of a will. This means that sometimes, as part
of an overall estate plan, and particularly where blended families are involved, people may provide life
insurance ownership to a child or new spouse as an interim measure before readdressing their own will in a
much more comprehensive way.
➢ This ensures that whilst the will may not provide for a new partner, spouse (or child of a new partner or
spouse), insurance can be put in place to ensure surviving partners or spouses (or their children) can be
looked after financially.
Structuring your cover
The potential outcome of a claim may be vastly different depending on how the policy or policies are
structured.
Ways of structuring life insurance policies
➢ Stand alone
a) one that covers each of the life insurance events on its own. It is not linked to or influenced by any other
policy. You could hold any of these insurances; Life, Total and Permanent Disablement (TPD), Trauma
or Income Protection as separate Stand-alone policies
b) will have stamp duty added and may also have a policy fee attached to it
c) provides the ability to claim on each type of cover without affecting the other policies, the premiums
will be higher if structured this way compared with a bundled policy
➢ Bundled
a) allows you to connect two or more different types of life cover together under one policy
b) a cheaper option than a Stand-alone policy and may be a consideration when cost is a concern
c) The additional cover/s which are added to the main policy may also be referred to as 'rider' cover.
d) Life cover and TPD cover are typically bundled together, you may notice this with some default
superannuation funds. Some online quotes may only allow TPD and Trauma cover if it is bundled with
Life cover. Again, you should check the Product Disclosure Statement to understand what each
insurance company offers.
e) The sting in the tail of a bundled policy is that the total payout amount will be restricted to the total
amount of the base cover. That is, if a benefit is paid out under one type of cover, the remaining cover is
reduced by this amount.
➢ Flexi-Linking
a) allows you to link cover across different policies, inside and outside the superannuation environment
which in effect allows multiple ownership of bundled policies.
b) allow you to overcome benefit restrictions placed on policies inside super (such as 'own' occupation
TPD) and funding restrictions outside super.
c) Similar to the bundling method, a claim against one policy will be offset against the sum insured on the
other policy.
How to choose a life insurance policy
1. Find out exactly what is covered. Make sure you are covered if you die due to an illness, as well as from
accidental causes. Also, suicide is generally not covered for the first 13 months.
2. Know how much will be paid for a claim. Clarify how much you will be paid as well as the conditions of
payment. For example, will the claim be paid prior to your death if you are diagnosed with a terminal illness
and have less than 12 months to live?
3. The cost of the premiums. Knowing how much you will be paying now and into the future allows you to
budget, as well as decide whether a level premium or a stepped premium is better for you depending on your
age, and how your financial circumstances are likely to change in the future.
4. How can the cover amount be increased? If your circumstances do change and you feel you need a higher
amount of cover because you have taken on a larger mortgage or started a family, find out whether you need
to complete a new health check.
5. Switching and transferring policies. If you already have a life insurance policy and you want to switch to a
new provider, you may not need to undergo another health check if your old insurer assessed your health
within the last five years. Also make sure you cancel your old insurance policy only after your new policy
has been issued.
What happens in the event of terminal illness or suicide?
➢ Term life insurance policies provide the mechanism to manage the financial consequences of premature
death. Lump sum payouts (and the income they produce) help to pay for funeral expenses, secure a business,
cover mortgage payments, and many other bills.
➢ It is important to know, companies will generally not offer term insurance to an applicant of more than 80
years of age.
➢ Most life insurance policies will pay out if you are diagnosed with a terminal illness and your life
expectancy is less than 12 months. You will need an independent doctor’s report and documentation to
confirm the diagnosis.
➢ In most cases, insurers will have a 13-month waiting period on life policies before they will pay out on a
suicide. This is to avoid people taking out cover to protect their family in the full knowledge that they are
planning to suicide. There is a strong correlation between the end of the suicide exclusion period and
increased suicide levels which has led to a call for a 36-month exemption period.
Term Life Insurance
• An insurance policy which pays out a lump sum benefit amount upon the death of the life insured or on
diagnosis of a terminal illness where the life insured has less than 12 months to live.
• Upon the death of the life insured the proceeds of a term life policy are paid to the nominated beneficiaries,
to the deceased's estate, or to the policy owner (if different from the life insured).
• If the benefit is payable in the event of terminal illness, the life insured may receive the sum insured if they
are also the owner of the policy.
How do you choose how much cover is sufficient?
➢ There is no general rule of thumb in the insurance industry as to how much life insurance to carry.
➢ Coverage for an amount 10 times your annual salary plus your mortgage, all credit card bills, personal and
car loans, and funeral expenses is one unscientific method some in the industry rely on.
Things to consider:
1. The amount of your mortgage and other debts.
2. Whether you have a spouse, children or other dependents.
3. The age of your children and the costs which would be required for them to finish school and continue
their education.
4. Whether your dependents have special needs.
5. Whether assets or other investments could provide some financial security by covering some costs after
your death.
6. Your current wage and how much you expect to earn in the future.
7. The amount your family needs to maintain their current lifestyle.
A starting formula
Determining ‘how much’ life insurance is required is not an exact science.
a) Some AFSLs (dealer groups) will dictate prescriptive formulas that must be used when determining the
amount required for an individual or couple.
b) Other AFSLs rely on financial planning modelling software already used by advisers to generate a
Statement of Advice (SOA) such as Xplan or Coin. This software allows an adviser to determine how much
life insurance is required by filling in certain key data points. Nearly all financial planning software
providers do offer ‘insurance needs analysis’ capability.
It is relatively common for an adviser to go through a process of calculating the lump sum life insurance needs
of a client, and then find the client reacts in a very defensive manner based on the mistaken belief the amount of
insurance calculated is “too high” for their circumstances.
This is quite normal and essentially requires an education process between adviser and client. The adviser needs
to explain to the client the impact of death or permanent disability on the remaining family members in financial
terms. This is a skill that will be developed over time but is important to understand the mechanics.
Pro Tip
Despite an adviser’s best efforts to assure a client they require a certain lump sum amount (that is either a life
insurance lump sum or total and permanent disability lump sum insurance payout), some clients will not want to
take out the full amount of insurance recommended. They simply want a lower amount, or it could be cash flow
concerns. Cash flow concerns in many instances can be resolved by structuring the cover within
superannuation.
In such circumstances, it is important to put a sufficient warning in writing to the client in the Statement of
Advice (or authority to proceed) depending on when the client makes their decision. You can insert this into the
SOA, however if you are at the implementation stage for the insurance where you are completing the forms, it
should be documented in the authority to proceed with detailed supporting file notes.
In such circumstances, it is important to put a sufficient warning in writing to the client in the Statement of
Advice (or authority to proceed) depending on when the client makes their decision. You can insert this into the
SOA, however if you are at the implementation stage for the insurance where you are completing the forms, it
should be documented in the authority to proceed with detailed supporting file notes.
Regardless of whether it is documented in the SOA or authority to proceed, this warning must disclose the
amount you recommended to the client initially, followed by a statement that the client has chosen not to insure
themselves for this amount, but a different one. If the client provides any reason for why they want a different
amount, this should be documented in file notes and if possible, the SOA or authority to proceed.
This will ensure you are appropriately protected if a legal dispute ever arises, whereby the client or their estate
charges that they were “underinsured” based on your negligent advice. Some AFSLs even go so far as to get the
client to sign the SOA or file notes, ensuring direct evidence exists that the client acknowledges the insurance
implemented is different to that which you have recommended they take out.
Age to retirement lump sum approach
➢ Based on determining what is required in capital terms (assuming any lump sum was invested relatively
conservatively once received) to allow the family’s lifestyle requirements to be met up until retirement
should the insured die or become permanently disabled prematurely. The lump sum must also allow for
post-retirement; hence it cannot be completely exhausted at retirement but should provide an income beyond
that up to the client’s life expectancy (with an appropriate margin for error).
➢ Multiply the life insured’s current gross salary (before tax) by the number of years to retirement. You then
multiply that answer by 0.66.
Income capitalisation approach
Step 1: This approach starts by asking the client what family income they require should the other partner die
prematurely or become permanently disabled. This should be gross income before tax.
Step 2: Determine a discount rate.
Step 3: Calculate all non-investment related debt.
Step 4: Calculate the client’s net investable funds.
Step 5: Divide the discount rate into the required income.
Step 6: Add any non-investment related debt that needs to be extinguished. Add this to the lump sum
determined in Step 5.
Step 7: Deduct any net investable funds.
Goals approach
➢ The basis of this approach is to work out what level of lump sum insurance will be required in the event of
death, TPD or trauma to pay for estimated lump sum and regular expenses or debt repayments for the
remainder of the client’s (or their spouse’s) lives.
➢ This approach does not contain a simple formula. Instead, it takes the following inputs into consideration:
i. Lump sum debt repayment
ii. Lump sum estimated medical expenses
iii. Lump sum funeral expenses
iv. All future planned ad hoc and annual expenses (e.g. children’s schooling, car replacements and
annual lifestyle expenses)
v. Inflation applicable for future lump sum expenses
vi. Discount on lump sum based on assumed earnings rate on the lump sum
vii. Discount on the TPD insurance required based on estimated after-tax income protection insurance
proceeds (i.e. if someone meets the definition of TPD by being totally and permanently disabled and
unlikely to ever work again, they would in principal also be eligible for proceeds from their income
protection insurance policy which covers both short term and long-term illnesses and injuries
preventing them from work)
viii. Reduction in required insurance sums based on available investments which the client can draw
down on in the event of death, TPD or trauma
ix. Reduction in required new insurance representing the clients’ existing insurance sums (assuming
they will retain their existing insurance cover)

Do not disregard the client’s existing insurance cover


After getting involved with all these calculations to determine the amount of cover that is required but
remember that clients may already have existing policies which must be factored into your recommendation.
Term insurance add-ons
Often referred to as 'riders' or bundled polices term life insurance may have total and permanent disability
(TPD) cover or trauma insurance added onto the base policy, and these will increase the premium.
Total and Permanent Disability Insurance
This provides cover when the insured is both totally disabled and permanently disabled. The cover pays a pre-
agreed lump sum benefit to the policy holder who is generally the life insured. The lump sum benefit paid is
often used to eliminate debts, pay for medical expenses or fund permanent lifestyle changes.
• Definition of total and permanent disability
➢ Any Occupation: unable to perform the duties of any occupation for which you are reasonably suited by
reason of education, training or experience.
➢ Own Occupation: unable to perform the duties of your own occupation (generally available to certain
white-collar professional lives only and incur a 50% loading on premiums).
➢ Homemaker: unable to perform full time unpaid domestic duties.
• Most TPD policies will also offer a 'Loss of limbs and/or sight' disablement definition. Under this definition
the life insured is entitled to a TPD benefit if they suffer one of the following:
o permanent loss of use of both arms; or
o permanent loss of use of both legs; or
o permanent and total loss of sight in both eyes; or
o a combined loss of one limb and sight in one eye
• TPD cover normally ceases at age 65 but many insurers are now extending cover beyond this age, where the
benefit is paid when the insured is totally and irreversibly unable to perform a specified number of 'activities
of daily living' such as:
o bathing and showering
o dressing and undressing
o eating and drinking
o using a toilet to maintain personal hygiene,
o moving from place to place by walking, wheelchair, or with assistance of a walking aid.
• How much TPD insurance is necessary?
The right amount of cover means that, in the event of serious illness or injury, there will be sufficient funds
available to:
➢ Pay off the mortgage and other debts
➢ Make home modifications or pay for rehabilitation
➢ Pay for nursing or other medical care
➢ Meet ongoing household expenses
➢ Pay for your children’s education.
• TPD insurance buy back options
A buy-back for TPD insurance can be offered as standard by some companies, and others will offer it as an
addition that will increase the premium.
The TPD buy-back option is an added benefit that can be purchased under a bundled term life and TPD policy.
After you have been paid a claim under your Total and Permanent Disablement policy this gives you the option
to buy back the amount that has been deducted from your life benefit. You have the option to exercise the TPD
buy-back 12 months after your claim was paid. TPD buy-back options are not available if the TPD is stand-
alone or linked under a trauma benefit. It has to be linked to a term life insurance policy.
• Double TPD options
This option may be offered at an additional cost with a bundled policy. It is similar to the TPD buy back option,
but without the 12-month waiting period. Depending on the policy there may a 14-day waiting period. This
option may also waive some premiums.
Income Protection Insurance
• This is paid when a person is unable to continue in their work for a lengthy period of time due to some form
of disability, injury, physical illness or mental illness.
• It may also be referred to as Disability Income Insurance (DII), Temporary Disablement (TD) or Salary
Continuance (SC).
• The income protection benefit can be up to a maximum of 75% of the earned income of the insured and is
generally paid monthly.
• Some policies may offer cover up to 85% of income, with 75% being paid as income and the balance being
paid into superannuation to replace superannuation guarantee payments.
• Premiums on income protection insurance are tax deductible, and the benefits received form part of
assessable income.
• Premiums on income protection insurance are tax deductible, and the benefits received form part of
assessable income.
Tailoring an applicant’s needs means they can generally choose:
- A ‘waiting period’ between 14 days and two years. This is the time between your becoming disabled,
injured or sick and receiving your first income protection payment. A shorter waiting period usually means
a higher premium.
- A ‘benefit period’ of two or five years, or up to age 65. This is the period during which you receive your
income protection payments.
- There are two types of income protection insurance:
➢ Agreed value – This is the most expensive option. It pays out the benefit agreed to reflect your income
at the start of your policy and is not affected by any fluctuations in income.
➢ Indemnity value – This is more common and less expensive, verify your income at the time of making
a claim and may adjust your benefit accordingly. This can be an issue if your salary fluctuates, for
example if you have taken maternity leave, worked part time or become unemployed. Policies provided
through superannuation funds may be the cheapest option, are often indemnity value-based, and offer
fewer features and less flexibility due to superannuation legislation
Income protection cover versus workers compensation
- Workers’ compensation payments are only made on claims where the injury/accident occurred at work.
It is estimated that 75% of injuries/accidents occur in the home and only 25% in the workplace. In
addition, workers’ compensation is more restrictive.
- If you do receive a workers’ compensation payment and have income protection in place, the insurer
will generally reduce your income protection payment accordingly. This is to avoid having the monies
you receive greater than what you were actually earning before the accident. The clause in the insurance
policy covering this, is generally known as an “offset”. If this is the case, many insurers will refund you
some of your past paid premiums to compensate for the lower payments.
Trauma Insurance
How trauma insurance benefits you
• Modifications to the home, for example in the event of disability where ramps or lifts may need to be built
for ease of access
• Specialist medical attention, whether within Australia or overseas
• Repayment of debts, such as a mortgage, personal loans, credit card bills and living expenses
• Provision of a buffer for you and your family should you require your partner to take some time off to care
for you and/or children while you are recovering from the medical condition.
Who should consider trauma insurance?
• Trauma insurance is suitable for all people and all ages not just married couples with children.
• Trauma cover is most important for people who are in a high-risk age category or have a debt that needs to
be serviced.
Trauma insurance and buy-back options
• Repayment of debts, such as a mortgage, personal loans, credit card bills and living expenses
• When taking out trauma cover, you may want to combine this benefit with a life insurance benefit. This type
of life insurance policy is called a linked, bundled or rider policy.
• It offers a cheaper premium however it only pays out for either the life insurance or trauma insurance event,
basically whichever occurs first.
• Buyback option allows you to repurchase the death cover component once there has been a full trauma
insurance payout.
• Buyback option can offer additional protection should you have to make a claim in the future and you know
you will still need a level of life insurance should you then pass away.
Waiting periods apply
• In most cases "accidental" types of traumas are covered immediately, although many insurers impose a
waiting period (commonly 90 days after the policy is accepted) for certain illnesses e.g. cancer, stroke, heart
attack.
• This is particularly important when changing or replacing policies as you may not be covered during the
waiting period on the new policy for certain conditions.
Trauma insurance compared with TPD insurance
• A TPD claim may be payable in the event of a 'day one condition' such as cardiomyopathy, motor neuron
disease or major head trauma.
• With a Trauma policy there is a long list of disorders, (in addition to a day one type of condition) which may
result in a successful claim. These conditions are as defined in the Product Disclosure Statement and differ
from one insurer to another.
• It is not necessary for the life insured to be disabled totally and permanently or be unable to work due to the
trauma event. In order for a Trauma claim to be payable it must satisfy the medical definition as defined by
the insurer.

CLAIMS PROCESS
Whether it’s a general or a life insurance claim, the process is fairly similar. In the first instance you need to
inform your insurer as soon as possible of the event. In all likelihood you will then have to fill in a claim form.
You will also need to supply evidence for your claim. For trauma insurance policy, you may be asked to
provide a letter from your doctor advising of your cancer diagnosis with accompanying test results and reports.
If it is a life insurance claim, then the policy owner (or the executor of the estate if the policy owner is
deceased) will need to provide a death certificate. If your house were burgled and you were making a contents
policy claim, you would need to provide evidence such as the police report, receipts and valuation reports. The
insurer will then assess your claim, and if there are no issues it will be paid.

INSURANCE PREMIUMS
The standard premium may then have a loading applied to it as a result of the underwriting process. The loading
may be based on the occupation of the life insured. An occupation loading can result in a premium which is
higher or lower than the standard premium and can make a big difference to the premiums payable. For
example, a nurse may pay twice as much as an office worker for some types of insurance. Other loadings may
be due to ill health or pre-existing conditions and may increase the base premium by as much as 150%, 200% or
even 300%. The other decision which affects the premium particularly in the long term is whether you choose
to pay it based upon the ‘stepped’ or ‘level’ calculation.
What factors affect Insurance Premiums?
- Your age, as premiums can increase or decrease as you get older.
- Your gender, as women typically live longer than men and so pay lower premiums.
- Whether you are a smoker.
- Your job and its level of risk, for example a construction worker can pay higher premiums than an office
worker. Those that work in high-risk occupations within the mining industry sometimes find it difficult to
obtain cover at all.
- Your general health.
- Any pre-existing medical conditions.
- Genetics tests you’ve had, as these may show you are more likely to develop a certain condition.
- Hobbies and pastimes: for example, if you indulge in amateur motor racing on the weekends, death or injury
resulting from doing this will generally be excluded by the underwriter within the policy.
Rate for age premiums
Using this method, the premium is calculated using the premium rate multiplied by the sum insured. The
premium rate may be influenced by age, gender, smoking status and occupation. For Income Protection, the
premium rate is also influenced by the waiting period and the benefit payment period.
• Occupation classification
A person's occupation classification is based on the duties that they perform rather than their title, and each
insurer provides guidance in this area. Some examples include:
- Professional: accountant, architect
- White collar: office staff, bookkeeper, chemist, salesperson
- Light blue collar: building foreman (no manual work), hairdresser
- Blue collar: licensed tradesperson doing skilled manual work such as a builder, locksmith, mechanic
- Heavy blue collar: manual but not hazardous work such as a cleaner, masseur, motor vehicle detailer
- Special risk: janitor, horse riding instructor, furniture removalist
Depending upon the insurer, some occupations may be uninsurable such as a cray fisherman or a motorcycle
courier. Based on the occupation classification, the occupation loading is applied after the calculation for
age premium, using the rate for the insured’s Age Next Birthday.
• Death and TPD
The premiums for death and TPD are influenced by the client’s age next birthday.
• Income Protection
The premiums for income protection are influenced by the waiting period and the benefit period.
• Waiting Period
➢ The longer the waiting period, the lower the premium so when affordability is a concern for your client
you should consider alternative options.
➢ Typically, a self-employed person would have a shorter waiting period because they would not have
employer paid sick leave whereas a long-term employee with a build-up of sick leave may be able to
sustain themselves for 60 or 90 days until the benefit applies. Waiting periods from 14 days up to 2
years are available.
➢ So why would you want to wait for 2 years for your benefit to start? There are some policies (e.g. group
super and salary continuance) which provide income protection benefits which cease to be paid after a 2-
year period, so it is important to thoroughly check the details of a client's existing cover. Under these
circumstances, in the event of an extended claim, the initial claim would be made under the 2-year
policy and when the payment period finishes, the policy with the 2-year waiting period will continue to
provide benefit payments.
• Benefit payment periods
The benefit payment will also affect the total premium. The longer the benefit will be paid to the client, the
more expensive the premium will be. Some insurers may not offer a long benefit payment period to a higher
risk occupation classification.
Stepped Premiums
Start out as very affordable but increase each year. This can make stepped premiums very expensive as you age
because while premiums may decrease when you are in your 20s, the premiums can increase by as little as 3%
in your 30s to as much as 30% each year when you are in your 60s. The break-even point is usually about nine
to 12 years when level premiums become the cheaper option. If you start the policy in your 30s and pay
premiums with the same insurer until age 65, then you can end up paying almost half the total amount of
premiums by choosing the level option.

Level Premiums
Level premiums stay the same for the entire time you hold your life insurance policy, so you can plan and
budget for the cost into the future. For example, a 35-year-old male requiring $500,000 worth of life insurance
would initially pay higher premiums if they chose level premiums compared to step premiums. Nevertheless, if
the insured maintained the policy beyond 9-12 years (the general break-even point for stepped vs level
premiums), they would be much better off with level premiums as they would become significantly cheaper
(relative to stepped premiums) beyond this time. If an applicant plans on sticking with the same provider, a
level premium is better in the long term, but if they like to switch providers from time to time, a stepped
premium might be preferable The problem for many insured people is that they switch insurance providers, or
cancel their policies prematurely negating some of the benefits of taking out insurance with level premiums.
Level premiums do not remain exactly the same year after year due to rate increases over time, CPI increases
and any other policy fees.
Unitized Premiums
Another method of calculating insurance premiums which is commonly seen in group insurance policies. Rather
than calculate the premium rate according to a person's age, the rate is the same for everyone, but the amount of
cover decreases as the age increases.
Flexi-Linking Premiums
You should never focus on price alone. Payouts from flexi-linked policies are similar to a bundled arrangement
so the overall combined sums insured across all the linked policies will be lower than holding separate
standalone policies.
OWNERSHIP
Who can be the policy owner of a life insurance policy?
The owner of a life insurance policy does not necessarily have to be the life insured. A life insurance policy can
in fact be owned by any of the following as long as there is an insurable interest. This means that either the life
insured must own the insurance, or if the policy owner is someone other than the life insured, they would suffer
economic loss on the death of the insured person. The reason for this is to discourage gaming and wagering in
the form of insurance. That is, the principal of insurance is to restore one to their pre-loss position. This
obviously doesn’t include a ‘windfall’. For instance, a husband could take out life cover on his partner, but he
could not take out a policy on his next-door neighbor.
The policy owner may be:
• in the name of a company,
• a trustee on behalf of a trust,
• an individual,
• a superannuation fund or
• jointly such as partners in a partnership
An insurance policy is an asset which belongs to the policy owner so as with any asset, careful consideration
must be given as to who will be the owner of the policy. This decision will have an effect on both estate
planning and taxation. When making an application for life insurance, the insurer needs to know who the owner
of the policy will be. These are the most common ownership structures for term life insurance (excluding
business-related insurance). TPD, Income Protection and Trauma policies are more commonly owned by the
life insured.
Ownership structure
Advantages Disadvantages
– Term Life
Self-ownership Able to make changes Payout may be delayed on death as
proceeds may become part of the
estate if a beneficiary is not nominated
Cross-ownership Quicker payout. The policy is On separation or divorce, the life
not an estate asset insured is unable to make changes or
cancel the policy
Superannuation Fund Premiums can be funded by Tax may be payable by non-tax
SG contributions dependents in the event of a claim

LIFE INSURANCE INSIDE SUPERANNUATION


There are two ways that a client may end up holding life insurance in the superannuation environment;
• either via a Group Super fund as part of an employment arrangement, or
• by making a conscious decision to hold insurance in the superannuation environment (with or without a
financial adviser).
Insurance in Group Super
➢ This type of insurance may be available in a corporate super fund provided specifically for employees. For
example, if you are an employee of the Commonwealth Bank you may be a member of the Commonwealth
Bank Corporate Super Fund.
➢ Or, you may be a member of an employer's 'default' super fund. Unlike a corporate super fund, this fund
may not be restricted to just the employees of a particular company.
➢ It is often not a conscious decision to have insurance inside a group superannuation plan, but it is an extra
benefit which is provided as a result of having your Superannuation Guarantee contributions invested in that
plan.
Automatic Acceptance Limits (AAL)
➢ Subject to certain conditions, members of Group Super funds may receive a certain amount of default cover
without going through the underwriting process. This is referred to as the Automatic Acceptance Limit or
AAL.
➢ The AAL will vary across different employers and is negotiated between the company and the insurance
provider. This is possible due to the economies of scale and may be provided as a fixed level of cover or on
a unitized basis.
➢ The AAL may also vary across different categories of employee such as executives or general staff.
➢ It is commonly provided for Death and TPD benefits and may be offered for Income Protection (sometimes
called Salary Continuance).
Personal Insurance inside Super
➢ Of course, anyone may choose to have life insurance inside the superannuation environment, typically in a
retail fund or an SMSF.
➢ However, this arrangement differs from a group super arrangement as there would be no Automatic
Acceptance Limit, the member would go through the process of underwriting and the policy terms and
conditions may be more robust which may increase the likelihood of a successful claim.
➢ When we use the word ‘robust’, we are referring to the scope of what is covered as an insurable event, and
what is not. A more ‘robust’ policy definition would be easier to satisfy and hence receive a benefit payout
under the contract.
➢ Personal insurance policies (in contrast to group policies often offered by super funds) can afford to cover
more insurable events because they individually underwrite each ‘insured person’ one by one.
➢ This means they understand the risk intimately and therefore can price the premium and offer a broader
definition in the insurance contract.
➢ It is important to distinguish between personal insurance policies that can be held within superannuation,
and ‘group’ superannuation insurance policies –they are two different things.
Pros of having Term Life Insurance inside Super
➢ Premium affordability is often the key motivator that attracts individuals to place their term insurance via
superannuation.
➢ Premiums can be paid from:
• existing superannuation savings
• non-concessional (not deducted) contributions
• salary sacrifice arrangements in the case of employees
• tax-deductible contributions by the self-employed (concessional contributions).
➢ This allows life insurance to be put in place with little if any impact on a member’s cash flow. In particular
circumstances, the government can also assist with the payment of premiums through various concessions,
such as government co-contributions for low-income earners, along with spouse contributions. These
incentives are not available when purchasing insurance outside of the superannuation environment.
Superannuation fund trustees may claim a tax deduction when they pay life insurance premiums that
provide death benefits
Cons of having Term Life Insurance inside Super
➢ With the impact of the Global Financial Crisis (GFC) still being felt, many people are focusing their
attentions on using their superannuation contributions to rebuild their nest egg. Every dollar that is used to
pay for term life insurance inside superannuation is one less dollar that can be used to invest in a
concessionally taxed investment environment (taxed at a maximum rate of 15% inside super, versus a
maximum rate of 45% plus Medicare levy outside super).
➢ Affordability is just one part of the life insurance inside super decision.
➢ Two other issues involve:
• Who is entitled to receive the death benefit?
• How much of the benefit is eroded due to taxation, which is covered in a later section?
Who is entitled to your Death Benefit when Term Life Insurance is inside Super?
➢ The following individuals are entitled to receive the benefit under the SIS Act:
Members may nominate in any proportion they deem appropriate:
• their legal personal representative
• spouse (legal, de-facto, same-sex)
• child (stepchild, adopted, ex-nuptial child of any age)
• part of an interdependency relationship
• any person who is financially dependent at time of death.
➢ The only problem is that if the nomination is not correct, then the trustee of the super fund determines who
receives the death benefit.
Three types of nominations:
• Non-binding – a trustee may consider a member’s nomination, but the trustee still has ultimate
discretion.
• Binding – remains in force for three years from the date of signing but it must be witnessed by two
independent witnesses and the percentage of benefits paid to the beneficiaries must be clearly specified.
If the nomination does not comply, then any payments are subject to trustee discretion.
• Non-lapsing – is a binding death benefit nomination that does not lapse, remains in force until amended
or revoked, but needs to be diligently monitored.
TPD Insurance inside Super
➢ The premiums for TPD insurance policies purchased within a superannuation fund may be tax deductible to
the fund depending on the type of TPD policy. It is really important to check the type of insurance cover and
the terms of the cover are consistent with superannuation rules.
➢ For example, if the TPD policy definition is for ‘any’ occupation, then the premiums are likely to be fully
tax deductible.
➢ If the TPD policy is for an ‘own’ occupation definition, only 67% of these premiums may be deductible.
This will only apply to policies taken out before 1 July 2014 as the ‘own’ definition will no longer be
allowed for new policies within super.
➢ From July 1, 2014 new policies taken out through super can ONLY be ‘any’ occupation. In addition, trauma
insurance cannot be paid for through super. This is to align the insurance cover with the conditions of
release within superannuation legislation. As a result, it may be beneficial to hold an ‘own’ occupation TPD,
trauma and/or income protection insurance outside super.
➢ Any existing policy within super at July 1, 2014 will be grandfathered although that does not preclude the
possibility that the funds may be difficult to access from the superannuation fund if the conditions of release
under the SIS legislation are not met.
➢ If an insurance policy covers bundled term life and ‘any’ occupation TPD, the premiums will generally be
fully deductible.
➢ If an insurance policy covers bundled term life and ‘own’ occupation TPD, the premiums will generally be
only 80% deducible. Again, this will not apply to new policies taken out after 1 July 2014.
➢ The above deductible premium amounts for ‘any’ occupation and ‘own’ occupation TPD and TPD bundled
with term life insurance apply regardless of whether the TPD definition includes activities of daily living,
cognitive loss, loss of limb and domestic (or home) duties.
Switching Super Funds
When you switch super funds and you hold insurance within your super, then there are a number of factors to
consider:
• When you leave your existing fund, you will also leave the associated insurance policy.
• If you are switching to a self-managed super fund, then you may have to undergo a medical if you want
insurance in your SMSF.
• If your health has deteriorated, then your premiums may be higher or there could be exclusions.
• It is vital that you do not cancel your old policy until the new one is in place as you could find yourself with
no cover at all.
Holding Income Protection Cover inside or outside of Superannuation
➢ Some superannuation funds offer Income Protection insurance as default cover and automatically accept
applications without medical checks –and offer a choice for those who would otherwise not be covered.
➢ While this is good for some, often these ‘group’ policy definitions are not as robust as the definitions
contained in personal insurance policies.
➢ A person may choose to hold a personal IP policy with robust definitions etc. through superannuation, and
get the premiums paid from the superannuation fund. The reason why a person may want to get the
premiums paid from superannuation rather than from their personal bank account, is generally due to cash
flow constraints which are a common problem for many people.
➢ Please note, if you have income protection cover paid through your superannuation then there are certain
criteria that must be met. You can only receive the funds as a non-commutable income stream. The money
cannot be commuted, must be paid at least monthly and cannot have a residual capital value.
➢ Due to changes in the Superannuation regulations, trustees are prohibited from taking out new policies from
1 July 2014 which provide benefits to the life insured which are not aligned with the superannuation
condition of release for temporary incapacity.
➢ Under SIS legislation the range of benefits that may be offered under a superannuation income protection
policy are more limited than those that may be offered outside superannuation.
➢ Under SIS law, benefits for temporary disability claims can only be paid out if gainful employment has
ceased due to ill health.
➢ Therefore policies which provide additional benefits such as rehabilitation expenses and specific medical
events cannot be provided within superannuation. It is also a requirement that the life insured is employed at
the time of the disability.
Trauma Insurance
Trauma insurance is not available inside the superannuation environment. This is because a trauma event does
not satisfy a condition of release according to the SIS regulations.
KEY PERSON INSURANCE (Man Insurance)
➢ A common situation where an insurable interest is easily established. It is a life insurance on a key
employee, partner or owner on whom the continued successful operation of a business depends.
➢ The business is the beneficiary under the policy.
➢ May include:
• For large companies, an executive, principal shareholder, a senior scientist, or a particularly effective
salesperson.
• In a small business, an owner, the founders/partners or perhaps one or more key employee/s.
How Key Person Insurance works
A company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary
of the policy. If that person unexpectedly dies, the company receives the insurance payout. The reason this
coverage is important is because the death of a key person in a small company can cause the immediate death of
that company. The purpose of key person insurance is to help the company survive the financial cost of losing
the person who makes the business work or is imperative to the business’s ongoing success.
The company can use the insurance proceeds:
• for expenses until it can find a replacement person,
• in smaller companies, partners can use the money to purchase the shares in the business from the family of
the deceased,
• pay off debts, distribute money to investors, pay severance to employees and close the business down in an
orderly manner.
• In a tragic situation, key person insurance gives the company some options other than immediate
bankruptcy.
BUSINESS EXPENSE INSURANCE
➢ Business expenses insurance can ensure that the portion of someone’s business expenses for which they are
responsible will be able to be met should they be temporarily unable to work due to injury or illness. This
can be very important because without such cover, any business expenses may need to be funded out of the
business owner’s personal assets or income protection proceeds which could result in less net actual funds
for their personal protection needs.
➢ Business Expenses insurance generally reimburses a business owner for certain regular business expenses,
such as rent, utilities, lease costs, and depreciation. It is important to note that not all expenses will be
covered. This can help to cover the business owner’s fixed business costs and keep their business running
while the owners are recuperating.
➢ Generally, this type of insurance can cover up to 100% of eligible expenses up to the chosen benefit amount.
The maximum benefit payment is for one year’s expenses. The reason for the one-year benefit period is that
if the business owner is disabled for longer than one year it is assumed that the business would be disposed
of or restructured in some way.
➢ The premiums payable on business expenses policies are generally tax deductible and any proceeds would
be assessable for tax.
TAXATION
Term Life
➢ The premiums paid for term life are not tax deductible, except in some business situations or if the policy is
held inside superannuation.
➢ Therefore, in the event of a claim the proceeds are not treated as taxable income. (Different rules may apply
if the policy is held inside superannuation or if the life insured is a key person of a business).
Total and Permanent Disability (TPD)
➢ The premiums paid for TPD insurance are not tax deductible, except in some business situations or if the
policy is held inside superannuation.
➢ Therefore, in the event of a claim the proceeds of a TPD claim are not treated as taxable income. (Different
rules may apply if the policy is held inside superannuation or if it is a mechanism used to fund a business
succession plan).
Trauma Insurance
➢ The premiums paid for trauma insurance are not tax deductible, except in some business situations.
➢ Therefore, in the event of a claim the proceeds are not treated as taxable income. (Different rules may apply
if the policy is used as a mechanism to fund a business succession plan).
➢ Trauma is not available inside superannuation.
Income Protection Policies
➢ It is important to be aware Income Protection insurance policies if held personally, are tax deductible at the
insured’s marginal tax rate.
➢ Similarly, the benefit payment is assessable much like income in the hands of the insured. If held via
superannuation, the premiums are tax deductible to the superannuation fund (not the individual) but the
benefit payments are assessable at the insured’s marginal tax rate.
➢ For people who are on the top marginal tax bracket, it may be more advantageous to hold an Income
Protection insurance policy personally to claim a tax deduction at the potential tax rate of 45% plus
Medicate levy and Temporary Budget Repair Levy rather than holding it through superannuation and
effectively receiving a tax deduction at only 15% which is the tax rate applied to superannuation earnings.
HEALTH INSURANCE
The government Medicare system provides universal basic public hospital and medical cover to:
• all Australian residents
• non-residents who have legitimate reasons for being in Australia for more than six months
• visitors who are citizens of countries with which Australia has a reciprocal health agreement.
Medicare is funded by taxpayers through a special levy and via the general tax system. All taxpayers, except
those on low incomes, pay a levy of 2% on their taxable income. Singles who earn more than $90,000 (in the
2015-2016 financial year) and couples and families with a combined taxable income of more than $180,000,
pay an additional Medicare Levy Surcharge (MLS) of between 1% and 1.5% depending on their income level if
they do not have private health cover. Private health insurance is not tax deductible.
In an attempt to encourage more people to take out private health insurance cover, the government introduced a
number of initiatives, including the Federal Government's introduction, on 1 January 1999, of a 30% rebate on
private health insurance regardless of the insured's income level. That rebate for is now income tested and
depends on a person’s age and income level.
The Federal Government has also introduced Lifetime Health Cover which started on 1 July 2000. Specifically,
Lifetime Health Cover is designed to encourage people to join a private health fund at a younger age and to
reward people who maintain continuous hospital insurance cover throughout their lives. Under Lifetime Health
Cover, different premiums will be charged based on the age of the people taking out hospital over.
From 1 July 2000, people who joined a health fund before they are 30, and who keep their membership, will
pay lower premiums than people who delay joining until they are older. People over the age of 30 years pay a
2% loading on top of the base rate premium for each year they delay joining a private health fund.
APPLICATION OF LIFE INSURANCE
No one expects sudden death, accident or illness despite the statistics. Maybe it is part of our survival
mechanism to be positive and assume that we will not be afflicted with illness or worse death at an early age.
In the case of death, accident or illness, insurance can help protect the financial security of families. Insurance
can protect income, repay debts, and provide for dependents.
Regulations and Legislation
The insurance industry is governed by Australian law. There are a number of Acts that relate to the industry that
have been introduced over the years, but the two key ones are the Insurance Act 1973 and the Insurance
Contracts Act 1984. Chapter 7 of the Corporations Act governs the regulation of insurance intermediaries such
as agents and brokers.
The relevant acts include (in chronological order)
• Insurance Act 1973
• Insurance Contracts Act 1984
• Life Insurance Act 1995
• Financial Services Reform Act 2001
• Financial Services Reform (Consequential Provisions) Act 2002
• Corporation Act 2001 (In particular Chapter 7)
• Corporations Amendment (Streamlining of Future of Financial Advice) Act 2012
• Corporations Amendment (Further Future of Financial Advice Measures) Act 2012.
Regulators
➢ The insurance industry is regulated by two key bodies – the Australian Securities and Investment
Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).
➢ ASIC is the corporate regulator, responsible for market regulation and consumer protection. Its key role is
the administration of the Insurance Contracts Act 1984. It is responsible for product disclosure standards,
customer complaints and licensing of financial service providers.
➢ APRA is the prudential regulator, responsible for the general administration of the Insurance Act 1973 for
general insurance and the Life Insurance Act 1995 for life insurance. Its stated objective is to protect the
interest of insurance policyholders in ways that are consistent with the continued development of a viable,
competitive and innovative insurance industry.
➢ Most people could benefit from access to quality personal or general financial advice and access to factual
information especially at key life events or transitions
➢ Consumers who have access to financial advice benefit financially from this even after the cost of the advice
is taken into account
➢ Many consumers have the perception that financial advice is only valuable if they have significant assets to
advice upon however advice can be beneficial for people in a wide variety of financial circumstances
Industry Bodies
➢ In addition there are industry bodies that act as umbrella groups – the Insurance Council of Australia (ICA)
for general insurance and the Financial Services Council (FSC) for life insurance.
➢ The ICA oversees the General Insurance Code of Practice, which is a self-regulatory code that binds all
signatories.
➢ The FSC requires compliance with the FSC Code of Ethics and Code of Conduct for all its members.
➢ The National Insurance Brokers Association (NIBA) is the peak bod of the insurance broking profession in
Australia,
➢ Private health insurance is regulated by the Private health Insurance Administration Council (PHIAC).
➢ The Financial Planning Association (FPA) and the Association of Financial Advisers (AFA) oversee the
community of financial planners.
Life Insurance Act 1995
➢ The principal objective of this Act is to protect the interest of the owners and prospective owners of life
insurance policies in a manner consistent with the continued development of a viable, competitive and
innovative life insurance industry.
➢ A second objective is to protect the interests of persons entitled to other kinds of benefits provided in the
course of carrying on life insurance business.
The principal means to achieve these two objectives are:
• Restricting the conduct of life insurance business to companies that are able to meet certain requirements as
to suitability
• Imposing on life companies’ requirements designed to promote prudent management of the life insurance
business of such companies including
• Requirements designed to ensure the solvency and capital adequacy of statutory funds.
• Providing for the supervision of life companies by APRA and ASIC
• Providing for judicial management of life companies whose continuance may be threatened by
unsatisfactory management or an unsatisfactory financial position, so as to protect the interests of
policyholders and financial system stability in Australia
• Making provision to ensure that in the winding up of a life company the interest of policy owners are
adequately provided
• Providing for the supervision of transfers and amalgamations of life insurance business by the Court
Superannuation & Retirement Planning
Superannuation in Australia
• Investing in superannuation will give you tax benefits to encourage Australians to become more financially
independent
• Australia’s population is ageing
• Proportion of working-age people in the total population is expected to fall
Phases of Super
• Over Accumulation – period of time the investor accumulates a super portfolio to help fund retirement
• Transition to Retirement – investor can continue to work and also withdraw some money from super in the
form of an income stream
• Retirement Phase Income Stream – period an investor chooses to access their super via an income
stream/pension and no further contributions can be added to the income stream account
Superannuation Regulators and Operators
A. Regulators
• Superannuation Industry (Supervision) Act 1993 (Commonwealth) (SIS Act)
• ASIC
• ATO
• APRA
• Guiding Principle: Sole Purpose Test
B. Operators
1. Managing Super investment options
• offered by fund managers, life insurance companies, banks and other financial institutions.
• Can be managed personally via a Self-Managed Super Fund (SMSF)
2. What super funds are composed of:
• Member’s contributions
• Employers’ contributions
• Earnings/ income from investments
• Government co-contribution
• Spouse contributions
3. What we can withdraw from the super fund:
• Fund benefits paid to members when they leave a fund
• Insurance premiums
• Insurance benefits
• Management fees
• Taxation
• Administration Fees
4. Types of Funds
• Industry superannuation funds
• Public sector superannuation funds
• Company or employer sponsored superannuation funds
• Public offer superannuation fund
• Self-managed super funds
• Small APRA funds
Superannuation Contributions
a. Who can contribute?
• Employees
• Employers
• Self-employed
• Unemployed
• Spouses
• Pensioners
b. How much can be contributed?
I. Concessional Contributions
➢ Superannuation guarantee - compulsory rate of your salary that your employer is required to contribute to
your super fund. In the 2017/18 financial year, if you are an employee who earns
$450 or more a month from an employer, your employer is required to contribute 9.5% of your salary to
your super.
➢ Salary sacrificing - when you can arrange for your employer to direct some of your before-tax salary to
superannuation as contributions, your super fund deducts 15 cents in the dollar in tax, rather than your
marginal tax rate which may be much higher (up to 47% including the 2% Medicare Levy in 2017/18).
➢ Personal deductible contributions - The super fund will deduct 15% contributions tax and the individual
making the contribution can claim a tax deduction for the contribution.
➢ Insurance in super paid by employer - If an employer pays insurance premiums for an employee, and the
insurance is held inside superannuation, the premium is counted as a concessional contribution and included
in the concessional contributions cap.
II. Non - concessional Contributions
➢ Superannuation contributions made from after-tax dollars or money which you (or someone else in the case
of gifts or inheritance) have already paid income tax at some point in the past. This means that the 15%
contributions tax does not apply and isn’t deducted from such contributions.
III. Contribution Caps
➢ Concessional contribution cap – From the 2017/18 financial year, individuals can make concessional
contributions up to $25,000 p.a. The concessional contributions cap has continued to reduce over a number
of years as the government targets this area to raise more taxes.
➢ Non-Concessional contributions cap - Individuals can also make non-concessional (after-tax) contributions
up to $100,000 a year (for the 2017-2018financial year), while individuals under the age of 65 can use the
‘bring forward’ rule to make non-concessional contributions of up to $300,000.
IV. Penalty for exceeding concessional contribution caps
➢ From 1 July 2013, 100% of the excess will be included in the member’s assessable income and taxed at their
marginal tax rate plus an interest charge due to the Australian Taxation Office collecting the tax on a later
date than the member’s normal income tax.
➢ A 15% non-refundable tax offset will be applied. The government allows individuals to withdraw up to 85%
of the excess contribution to pay their tax liability. The amount withdrawn will not count towards the
member’s concessional contributions cap
➢ Any excess concessional contributions retained in your super fund (as opposed to withdrawing them) will
not only be taxed at the member’s marginal tax rate plus an interest charge, but these excess contribution
amounts will be added to the member’s existing non-concessional contributions
V. Penalty for Penalty for exceeding non-concessional contribution caps
➢ From 1 July 2013, the Government allows individuals to withdraw 100% of any excess non-concessional
contributions and 85% of any associated earnings after a release authority is received from the Australian
Taxation Office
➢ The full 100% of associated earnings will be added to the individual’s assessable income and taxed at the
individual’s marginal tax rate subject to a 15% tax offset for the investment earnings tax already paid by the
superannuation fund.
➢ A tax offset or rebate can be worth almost twice as much (for tax payers at the top marginal rate) as a tax
deduction. This is because a tax offset (or rebate) comes straight off tax payable, as opposed to a tax
deduction which reduces assessable income.
c. What is Superannuation Guarantee?
➢ compulsory superannuation contributions paid by the employer. You must however be an ‘eligible
employee’ to receive SG contributions.
➢ The superannuation guarantee rate is 9.5% p.a for this financial year
d. Salary sacrifice
➢ involves the foregoing of salary entitlements to receive a different form of remuneration such as employer
superannuation contributions.
e. What is government co-contribution?
➢ tax-free super contribution paid by the Federal Government into your super fund when you make a non-
concessional (after-tax) contribution in a financial year.
➢ Your eligibility to receive this depends on four tests: work, income, age and total super balance tests
f. Spouse contribution providing a tax offset
➢ If an individual has assessable income of less than $37,000, then his or her spouse can make contributions
on their behalf and claim a tax offset
➢ The contributing spouse can access the maximum tax offset of $540, provided that an after-tax (non-
concessional) contribution of at least $3,000 is made to the receiving spouse’s super account.
g. Splitting contributions with spouse
➢ A higher-income earning spouse salary sacrifices contributions (i.e. makes concessional contributions), and
then splits the contributions with the lower-income earning spouse.
➢ The higher-income spouse gets to reduce their salary (to the extent of the amount of their concessional
contribution).
➢ This reduces their marginal tax rate, or least ensuring part of their salary is being taxed concessionally at a
maximum of 15%. At the same time, the receiving spouse gets the boost to their super benefits.
➢ Concessional (before-tax) contributions can be split with a spouse provided that the super fund the
individual belongs to permits contribution splitting. If an individual plan to split super contributions with a
spouse, then the receiving spouse must be under the age of 65.
h. Low Income Superannuation Tax Offset / LISTO
➢ Refund of contributions tax payments is made up to a maximum of $500 for individuals earning less than
$37,000. This in effect means that any superannuation guarantee contributions for low income earners are
not taxed.
i. First Home Super Saver Scheme / FHSS
➢ allows eligible first home buyers to save for their deposit in the concessionally taxed superannuation
scheme, as opposed to saving for the deposit outside of super.
➢ These voluntary contributions are limited to a maximum of $15,000 per year and a total contribution limit of
$30,000 over all years.
j. Downsizer contribution
➢ The contribution allows people age 65 or over to make additional contributions of up to $300,000 per person
($600,000 per couple) from the proceeds of the sale of their home from 1 July 2018.
➢ The work test that normally applies for a person age 65 or over making a super contribution does not apply
to the downsizer contribution, so it can still be made regardless of work status.
Accessing Super
a) Preservation age
➢ Restriction placed on when you can access your super.
➢ Based on when you were born
b) Conditions of release
➢ Deciding to retire on or after preservation age
➢ Cessation of employment on or after the age of 60
➢ Reaching the age of 65
➢ Starting a transition-to-retirement pension (TTR)
c) Other Conditions of Release (access to super before retirement)
➢ The preserved amount is less than $200
➢ Severe financial hardship
➢ Compassionate grounds (to be approved by the Department of Human Services)
➢ Terminal medical condition
➢ Non-resident leaving Australia permanently
➢ Permanent disability
➢ Temporary incapacity
➢ Death
➢ Taking your benefit as lifetime pension or annuity
Retirement Planning
a. Retirement issues to consider
➢ Lifestyle in retirement
➢ Lump sum capital needs in retirement e.g new car
➢ Accommodation
➢ Regular local holidays or overseas holidays
➢ Lifestyle choices that have financial implications
➢ Do you think you will spend more money in the early years of retirement, or the later years of retirement?
Note, medical bills may be higher later in retirement but travel expenses, and so forth might also be less
compared to earlier in retirement.
➢ Lifestyle cost per week, or annually
➢ How much money in savings will be needed for the lifestyle you are planning in your retirement?
➢ How much superannuation and savings do you have now?
➢ How much super and savings will you have when you retire?
➢ If a gap exists between how much you want, and what your super and non-super savings are going to
deliver, what steps are needed to fill that gap?
b. Risks to keep in mind
➢ Risk of not diversifying
➢ Re-investment risk
➢ Liquidity risk
➢ Credit Risk
➢ Regulatory risk
➢ Timing risk
➢ Value risk
➢ Manage risk
➢ Currency risk
Super Payments
a) Super withdrawal
i. Account Based Pension
ii. Account Based Pension
iii. Lifetime Pension or annuity
iv. Transition-to-retirement pension
b) Pension Benefit Caps
➢ The super reform package, effective from 1 July 2017, places restrictions on the amount of superannuation
money that can be used to fund a retirement phase income stream. The current pension benefit cap is $1.6
million and is subject to future indexation.
➢ The amount which is in excess of the pension benefit cap must remain in an accumulation account where it
will now be subject to future earnings tax, or it must be withdrawn from the superannuation system.
c) Benefit Statement Components
I. Preservation Components
➢ Preserved amount
➢ Restricted non-preserved amount
➢ Unrestricted non-preserved amount
ii. Taxation Components
➢ Tax-free component
➢ Taxable component
d) What tax is payable on super withdrawal benefits?
i. Age 60 is a trigger for withdrawal tax
Generally, withdrawal benefits become tax free from the age of 60 (unless there is an untaxed element, in
which case withdrawal tax is payable). If the taxable component of your benefit is from an untaxed source21,
tax is still payable on the benefit even after the age of 60
ii. Tax on lumpsum withdrawals
• Age 60 and above
• Preservation Age to Age 59
• Below preservation age
iii. Tax on income stream withdrawals
• Age 60 and above
• Preservation Age to Age 59
• Below preservation age
Death Benefits
a) Taking a Lumpsum or Pension
The rule of thumb that you should work on is that superannuation is always the most tax effective environment
to build and maintain wealth. Hence, for recipients of pensions (particularly elderly spouses) that cannot
contribute to superannuation because they are over age 65, it is generally always within their best interest (if
given the opportunity) to continue to draw a pension from the deceased member’s benefit and receive all the tax
benefits that superannuation provides.
The alternative would be that a lump sum would be paid to them (tax free if they were a dependent), but they
would be forced to invest the proceeds outside of superannuation where often the tax treatment is less favorable.
b) Death Benefit Nominations
A death benefit nomination is a notice you give to the trustee of your superannuation fund requesting the
payment of your death benefits to either your estate or one of your specified dependents.
There are usually two types of nominations:
• A binding nomination is binding on the trustee, that is, the trustee must comply with it.
• A non-binding nomination, on the other hand, is merely an expression of your wishes. The trustee can
exercise its discretion not to follow your nomination.
c) Who is dependent for Superannuation purpose?
Upon death, a superannuation benefit can only be paid to a superannuation (SIS*) dependent.
A dependent for superannuation (SIS*) purposes includes:
• a spouse (including de facto),
• a child of any age,
• a financial dependent or someone who was in an ‘interdependent’ relationship with the deceased.
d) Who is dependent for taxation purpose?
e) Tax on superannuation death benefits
The two things to be considered from a tax perspective in respect of a super death benefit are:
• Is the beneficiary a dependent or non-dependent for tax purposes?
• Will the benefit be paid as a lump sum or an income stream?
i. Lump Sum Death Benefits
• If a death benefit beneficiary is a dependent for tax purposes, no tax is payable on any part of the death
benefit.
• If a death benefit beneficiary is not dependent for tax purposes, the benefit is taxed as follows:
- Tax-free component will always be tax-free
- Taxed element will be taxed at 15% + Medicare levy
- Untaxed element will be taxed at 30% + Medicare levy
ii. Pension (Income Streams) Death Benefits
In the event of your death where you have nominated a reversionary beneficiary, your spouse may continue to
receive the balance of your superannuation benefit as an income stream and may be entitled to tax concessions.
Generally, if at the time of your death you are:
• age 60 or above, the income stream is tax free for your spouse.
• under age 60, the income stream is tax free for your spouse if he/she is age 60 or above.
• under age 60, and your spouse is under age 60, no tax will be payable on the tax-free component and the
taxable component will be taxed at your spouse’s marginal tax rate (15% tax offset may apply). Once your
spouse turns age 60 the income stream will be tax free.
f) Death benefits and the transfer balance account
If you become a recipient of a death benefit income stream, your transfer balance account will be affected.
Remember, the transfer balance account keeps a record of retirement phase income streams. The amount and
timing of the credit into your transfer balance account will depend upon whether the death benefit pension is
reversionary or not.
Insurance within Super
a) Term Life Insurance Inside Super
b) Total and Permanent Disability (TPD) Insurance Inside Super
c) Income Protection Insurance Inside Super
Overview of Self-Managed Super Funds
A Self-Managed Super Fund (SMSF) is a small superannuation fund established for 1-4 people with the fund
being controlled by trustees/directors who are also the members. Control is kept in the hands of the members,
and the members decide how the fund will operate and what investments the fund will invest in.
Advantages of managing an SMSF
• Control - An SMSF provides maximum control over your superannuation assets.
• SMSFs allow you the flexibility to decide how your funds are invested and how the fund is to operate.
• Investment Choice - An SMSF can be structured to meet the specific investment needs of members who can
exert greater control over investment strategies.
• Tax Effectiveness - An SMSF allows a member to transfer funds from an accumulation phase of
superannuation to the pension phase without having to sell any underlying investment
An SMSF will have one of two types of trustees:
• individual members as trustees or
• a corporate trustee.
Generally, all members of an SMSF are required to be either a trustee of the SMSF or in the case where the
trustee is a company (corporate trustee); all members are required to be a director of the trustee company.