Future proof your family

Life has a habit of throwing us curve balls. How else to explain that every day in Australia 18 families lose a working parent and a chunk of their future income. That’s a strong argument for protecting your loved ones with adequate life insurance. 

And it’s not just the main income earner’s life that needs insuring. If their partner dies, it is estimated that the family income will drop by half. Even if the partner who earns the lesser income is not working at all, the main income earner will have to find extra childcare and or/housekeeping help or perhaps work fewer hours, all of which would squeeze the household budget. 

How much cover?

The simplest way to work out how much cover you need is to subtract your current financial resources from your future expenses. And when you do so, remember that your debts don’t die with you. 

It’s not just your mortgage you need to take into account but also your credit card and any personal loans as well as your day-to-day living expenses. Actuaries Rice Warner believe you need 15 years’ income to be fully covered.i

Yet Rice Warner found that the median level of life insurance cover across the working age population only accounts for 61 per cent of basic life insurance needs and only 37 per cent of the amount needed to fully maintain the standard of living of remaining family members.i

Insurance within super

For most working Australians, a basic level of life insurance is available automatically through your super account. This can be useful if cash flow is an issue, as the money will come out of your superannuation contributions or balance. 

However, life insurance within super is often not enough to meet your needs. The industry average for benefits payable from super is about $70,000, nowhere near the amount needed to provide ongoing support and security for your family.ii And if a payout is made to a non-financial dependent, they will pay capital gains tax on amounts over $50,000. 

The solution could be to top up your cover in a retail product outside super. The major difference between the two products is the underwriting process. 

When you apply for a retail policy your risk is assessed via underwriting. By comparison, most policies within super are not underwritten and cover is automatically granted without any individual risk assessment. 

While at first glance automatic acceptance may seem attractive, it does make sense to have an underwritten policy where the insurer assesses your risk through a medical examination or questionnaire as the cover will be tailored to your individual needs. Interestingly, industry statistics show that 93 per cent of people who go through the underwriting process will be accepted at standard premium rates.iii

The younger, the better

If you think you are too young to worry about life insurance, think again. The younger you are, the cheaper it will be. That’s because you will be deemed low risk and once the policy is in place the insurer can’t cancel it. 

Next, you need to decide on stepped or level premiums. While stepped premiums start off cheaper, over time level premiums are more cost effective. If you are young and expect to hold the policy for a long time, level premiums are worth considering. 

It is estimated that a 35-year-old non-smoking male seeking $500,000 cover will pay $30 a month in premiums while a female with the same profile would pay only $25 a month.iii

It’s always wise to know exactly what your policy includes. Some policies will pay out before death if you are diagnosed with a terminal illness. Others may cover suicide although they generally have a 13-month exclusion from the date the cover starts.iv

Making sure you have the right cover for your needs is vital. If you would like to discuss your options please contact us. 
 

i http://ricewarner.com/australias-relentless-underinsurance-gap/ 
ii https://www.amp.com.au/wps/portal/au/ 
iii http://www.lifewise.org.au/insurance-101/how-does-life-insurance-work
iv http://www.lifeinsurancefinder.com.au/post/insurance-types/life-cover-death-benefit/suicide-is-it-covered-by-life-insurance/

The changing face of DIY super

Move over baby boomers, younger Australians are taking to self-managed superannuation funds in ever greater numbers. While the face of DIY super may be changing, the reasons for flying solo remain the same. Flexibility and control are the main drawcards, along with falling set-up costs.

The latest statistics from the Australian Taxation Office show that the number of trustees aged under 55 has grown significantly. Of SMSFs established in 2014, 71 per cent of members were under 55, up from 51 per cent in 2010 and 65 per cent in 2013. And the trend is expected to continue.

At the same time more women than men have set up SMSFs in recent times, particularly in the 35-44 age group. This is at odds with the long-held image that all SMSF trustees are wealthy older men. At June 30 last year, there were 65,771 female members in this age group versus 63,517 men.

Some of this change can be explained by the fact that Gen Y and younger Gen X have had superannuation since they started work, so many have built up a reasonable sum in their super by their mid to late 30s. As a result, they now want to take advantage of the flexibility and control that an SMSF can offer.
 

Greater control

Not only can you invest in a wider range of assets in an SMSF, but you have control of when and what you buy or sell.

Another driving force for SMSFs is that when markets perform weakly, many Australians believe they can do better by themselves and benefit from the lower fees.

Lower fees and the potential to outperform big super funds may prove particularly appealing for women who have forfeited years of superannuation contributions while they raise a family. It’s a chance to catch up.

But it is worth remembering that SMSFs can just as easily perform badly in any given year. Just because you have control, it doesn’t mean you are guaranteed positive returns.

In fact, some SMSFs may make the mistake of holding too much money in cash and not enough in growth assets like commercial property and international shares. In the current investment climate with the volatile stockmarket this may seem attractive, but cash rates are hardly setting the world on fire.
 

Cost benefits

The rule of thumb is that you need a balance of at least $200,000 in your fund to make it cost effective.

While it may cost as little as $200 to buy an off-the-shelf trust deed, which is the main set-up cost, annual running costs average about $2500 depending on whether you do your own investing or get advice.

Of course if you know your SMSF balance is going to grow quickly over the next few years, then you may choose to accept higher relative costs in the early years.
 

Investment choice

One of the key advantages of SMSFs is investment choice. If you want to borrow to invest in property inside super, for example, then a self-managed fund is the only way to go.

You may even be able to borrow money to fund your investment using what is called a limited recourse loan. The advantage of this type of loan is that other assets in your fund are not affected if you fail to meet the repayments.

For those in their 30s and 40s, the longer timeframe till retirement can make borrowing to invest in property a good strategy. Do make sure though that your portfolio is diversified and you have sufficient cash flow in your fund to finance the mortgage repayments.

Despite the attractions of running your own super fund, it’s not for everyone. It’s a long-term commitment and ultimately the responsibility for making sure your fund complies with the rules rests with you.

If you would like to explore your superannuation options, please let us know.