Beruflich Dokumente
Kultur Dokumente
- 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
CBA Financial Planning Limited Count Financial Wisdom Others (Crowe Horwath and Infocus)
➢ 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.
➢ 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.
• 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
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