The art and science of constructing winning life insurance solutions

1
The art and science of constructing winning life
insurance solutions
Paul Jones and Andrew Lowe ING Australia November
2006
2
Life insurance solutions

• Protecting retirement savings with life insurance
• Combining life insurance solutions
• Calculating sums insured
• Ownership of life insurance
• Tax effective life insurance planning
• Direction of life insurance proceeds

3
Protecting retirement savings with life insurance

• How will a client enjoy their retirement if they
  cant afford to retire?
• Disablement (temporary or permanent), or death,
  can impact a clients ability to save for their
  (or their familys) retirement

4
Protecting retirement savings with life insurance

• A 35 year old client earning 55,000 per annum
  will earn 2,750,000 by age 65
• Assuming a current accumulated benefit of
  30,000, 9 SG contributions and investment
  earnings of 8 per annum, total superannuation
  benefits will grow to 903,000 by age 65
• Disablement at an earlier age significantly
  reduces retirement income funding

5
Protecting retirement savings with life insurance
6
Protecting retirement savings with life insurance

• Appropriate Income Protection, Death and TPD
  funding can ensure that a client, or their
  family, are able to fund an appropriate
  retirement

7
The art of selling

• Create value by focusing on the needs of the
  client instead of focusing on the product.
• Commoditisation
• A commodity is any good, service or process
  that can be produced by any number of firms, and
  the only distinguishing feature between these
  firms is who can do it cheapest. Having your
  product or service turned into a commodity is no
  fun, because it means your profit margins will
  become razor thin, you will have dozens of
  competitors and all you can do is every day make
  that product or service cheaper and sell more of
  it than the next guy, or die.
• From The Lexus And The Olive Tree by Thomas L.
  Friedman

8
The SOFT approach

• Let the client tell you their
• Strengths
• Opportunities
• Fears
• Threats

9
From SOFT, we can then determine
10
Tax effective life insurance planning

• Funding life insurance via superannuation can be
  tax effective but requires a comprehensive
  analysis of the taxation and other consequences
  of receiving benefit proceeds
• With the Governments proposed superannuation
  reforms due to take effect from 1 July 2007,
  optimal funding arrangements may change

11
Types of cover

• Types of cover available through superannuation
  include
• Death
• TPD
• Income protection
• Trauma?

12
Tax effective life insurance planning

• Taxation of life insurance proceeds received
  through superannuation
• Death benefits
• Dependants
• Non-dependants
• TPD
• Post-June 94 invalidity component

13
Tax effective life insurance planning

• Insurance proceeds paid as a lump sum to a
  dependant
• Tax free within deceaseds Pension RBL
  (1,356,291 or higher transitional RBL)
• Excess taxed at 39.5/48.5

14
Budget strategy update

• Government has proposed that RBLs are to be
  abolished from 1 July 2007
• From 1 July 2007 we will see uncapped amounts of
  death cover held via superannuation
• Government has proposed caps on deductible and
  undeducted contributions from 9 May 2006
• Life insurance remains a way of getting
  substantial assets into superannuation to fund
  tax effective income streams for beneficiaries

15
Tax effective life insurance planning

• Insurance proceeds paid as a lump sum to a
  non-dependant
• Benefit divided into normal ETP components
• Taxed as ordinary ETP (within Pension RBL) with
  minor exceptions
• Age of recipient irrelevant
• Taxed post June 1983 component taxed at 16.5
• Low tax threshold (135,590) unavailable
• Part of insurance proceeds will be an untaxed
  component and taxed at 31.5
• Excess taxed at 39.5/48.5

16
Taxation consequences

• Untaxed post June 1983 component
• Calculate fixed ETP components and Pre 83
• Notional ETP ETP x Days of service
• Total days
• Pre and Post (taxed) calculated on notional ETP
• Balance is Post (untaxed)

17
Tax effective life insurance planning

• TPD benefits are not all tax-free
• Part of a TPD benefit (relating to future service
  from date of invalidity to age 65) is a post June
  1994 invalidity component and is available tax
  free
• Balance of the benefit is a normal ETP and is
  taxed accordingly
• Remember discounted RBL under age 55

18
Tax effective life insurance planning

• Post June 1994 invalidity component
• ETP x Days to normal retirement
• Total service to normal retirement

19
Budget strategy update

• Government has proposed that the invalidity
  component is to be replaced by an exempt
  component from 1 July 2007
• Government has advised that the self-employed
  will also be eligible for this concessional
  treatment

20
Case study

• Doug Robinson 40 years old
• Wife Samantha, 37 years old
• Three dependent children (four, 10 and 12 years
  old)
• Samanthas mother partly dependent on Doug
• Home mortgage of 180,000 house valued at
  1,200,000.

21
Case studycontinued

• Borrowed 550,000 and bought a small franchise
• Earns 115,000 per annum
• Samantha does book keeping and administration for
  business (approximately 20 hours per week).
• Combined superannuation assets of 180,000 (Doug
  - 100,000 and Samantha 80,000)

22
Address clients overall needs

• Doug
• Protect income
• Extinguish debt
• Medical catastrophe
• Estate planning
• spouse
• children
• mother-in-law (dependency??)

23
Address clients objectives

• Samantha
• Replacement cost of contribution to business
• Replacement cost of primary carer for her mother
• Medical catastrophe
• Estate planning
• Debt domestic
• Replacement cost / domestic help

24
For consideration

• Doug
• Income Protection
• guaranteed contract preferred
• Life Cover
• - extinguish debt
• - provide for childrens education
• - provide income stream for family

25
For considerationcontinued

• Medical catastrophe/Trauma
• - supplement income protection to 100
  plus provision for extraordinary medical expenses
• TPD
• Own occupation immediate needs outside
  superannuation extinguish debt plus medical
• Future needs own occupation inside
  superannuation to access at retirement.

26
For consideration

• Samantha
• Life Cover
• extinguish mortgage
• provide income stream for family
• Medical catastrophe / Trauma
• - extinguish debt plus extraordinary medical
  expenses and 1 years LOE spouse
• - childrens trauma attached

27
For considerationcontinued

• TPD
• - own occupation (available after 20 hours work
  per week)
• - extinguish all debt plus medical

28
Recommendations

• Doug
• Income Protection
• Indemnity for 12 months at 80 of 115,000
• 30 day wait
• Life cover - 1.78 million
• 730,000 to extinguish total debt
• 150,000 for childrens tertiary education
• 750,000 (50,000 x 15 years) to provide income
  stream for family
• 150,00 outside super for immediate access
• - 50,000 immediate expenses
• - 100,000 to mother in-law

Super
29
Recommendationscontinued

• Trauma - 350,000
• extraordinary medical expenses 250,000
• top up IP to 100 for five year period (5 x
  20,000) - 100,000
• TPD (own occupation) - 1.8 million
• 1.2 million outside super immediate use.
• 730,000 extinguish total debt
• 250,000 extraordinary medical expenses
• 220,000 modified living
• 600,000 inside super
• - access post retirement

30
Recommendationscontinued

• Samantha
• Life cover - 1.08 million
• 180,000 to extinguish mortgage
• 750,000 (50,000 x 15 years) to provide income
  stream for family
• 150,000 outside super
• - 50,000 for immediate expenses
• - 100,000 to mother

Super
31
Recommendationscontinued

• TPD (own occupation) - 1.4 million
• 800,000 outside super
• 180,000 extinguish mortgage
• 270,000 extinguish partial business debt
• 250,000 extraordinary medical expenses
• 200,000 modified living expenses
• 600,000 inside super
• - access post retirement

32
Recommendationscontinued

• Trauma - 815,000
• - 180,000 extinguish mortgage
• - 270,000 extinguish partial business debt
• - 250,000 medical expenses
• - 115,000 loss of earnings spouse
• Children's trauma
• - 150,000 each

33
Ownership of life insurance

• Ownership of a life insurance policy provides the
  legal right to deal with the policy
• Ownership, in the absence of a nominated
  beneficiary, provides a legal right to any
  proceeds of the policy

34
Ownership of life insurance

• Self
• Cross
• Joint
• Superannuation fund
• Entity
• Trust

35
Direction of life insurance proceeds

• Ordinary policy
• Policy owner
• Nominated beneficiary

36
Direction of life insurance proceeds

• Superannuation fund ownership
• Trustee receives proceeds
• Trustee can generally only pay dependants or the
  estate of the member
• Who is a superannuation definition dependant?
• Who is a tax definition dependant?

37
Case study

• The widow of one of your clients is sitting in
  your office working through the financial
  implications of her husbands death
• Who will be paid the proceeds of her husbands
  superannuation fund?

38
Direction of life insurance proceeds

• Superannuation fund ownership
• Trustee may be bound to pay particular
  beneficiaries or may retain discretion
• Nominated beneficiaries
• Binding
• Non-binding
• Trustee discretion
• Trustee may be bound to pay benefit in a
  particular form or may retain discretion
• Lump sum
• Pension

39
Direction of life insurance proceeds

• When providing superannuation advice, make sure
  you know what happens when a client dies!

40
Life insurance solutions

• Protecting retirement savings with life insurance
• Combining life insurance solutions
• Calculating sums insured
• Ownership of life insurance
• Tax effective life insurance planning
• Direction of life insurance proceeds

41
Disclaimer

• This information is a summary based on INGs
  understanding of the relevant legislation. It is
  current as at November 2006 but may be subject to
  change. It is general in nature and may not be
  relevant to individual circumstances. You should
  not do or refrain from doing anything in reliance
  on this information without obtaining suitable
  professional advice.