Asset Protection and Risk Management
Asset protection can be divided into two areas:
- protecting against creditor action arising from financial liabilities and litigation resulting from occupational activities.
- protecting assets against the financial implications of disability and/or critical illness where the ability and capacity to maintain income is affected.
Where there is the possibility of litigation assistance can be provided by structural asset protection and property ownership strategies.
The risk of loss or erosion of assets as a result of death or disablement can be either:
|(iv)||dealt with by a combination of (ii) and (iii)|
Acceptance of risk implies that strategies will not be implemented to offset or transfer the risk.
Transference of the risk (with regard to adequacy of funding) is achieved by implementing appropriate insurances to provide the required amounts of cash at the appropriate time. (This strategy completes the plan in the event of premature death preventing the longer term accumulation of the required level of assets to achieve the necessary funding).
Management of the risk involves taking action to reduce the insurable risk (i.e. by health improvement) and implementing distribution strategies (i.e. Will provisions).
In our recommendations, we seek to demonstrate where exposure exists and how the risks can be transferred and/or managed using appropriate insurances.
Life insurance provides a lump sum in the event of death which can multiply the value of an estate for a comparatively small amount of money. Life insurance policies can be owned in such a way as to maximise the benefits of insurance proceeds and minimise tax implications. For example, life insurance owned by a superannuation fund can be tax deductible and provide tax effective income to dependants.
Recommendations in this regard depend upon whether or not investments are to be retained should either of you die or be disabled. As estate planning objectives are built around retaining wealth creation objectives and providing certainty, recommendations usually assume that existing strategies are retained.
If estate protection measures are adequate, investments can be retained to sustain wealth creation objectives and provide for your children’s legacy.
How much is enough? When estimating how much life insurance is enough there are a number of important areas to consider including;
- What debt is to be resolved?
- What are education costs going to be?
- What outstanding tax might ‘rear its head’?
- What sum of money is adequate to provide lifetime income to a dependant or surviving partner, particularly when it is preferred to provide choice as to work commitments?
It is comparatively easy to estimate the requirements for items 1 – 3 however calculating the income need may be more complex.
Our preference when estimating the desirable level of income is to recommend that between 50% to 75% of combined income is available to the surviving spouse dependent upon whether there are minor children and whether that partner wishes to have the choice not to work. This is after resolution of debt.
In order to ensure adequate long term income through varying economic conditions a lump sum sufficient to provide income by way of a conservative return of 6% is calculated and the necessity to ‘draw down’ on that lump sum is avoided. Whilst lump sums are available for emergencies, the regular draw down of a lump sum puts the certainty of adequate lifetime income at risk.
Calculations should take into account the fact that our income tends to dictate a lifestyle dependent upon the continuation of a similar ‘disposable’ income.
Total & Permanent Disability (TPD)
Total and permanent disablement insurance provides for payment of a lump sum after a consecutive six month period of total disablement following which medical advice is provided that you are unable to work again either at your own or any occupation.
Total and permanent disablement provided as part of your superannuation arrangements is normally any occupation cover due to restrictions on payments from superannuation funds unless you are totally disabled (i.e. unable to work at all). Insurance proceeds received into a superannuation fund from own occupation cover would not be released until retirement or in the event of total disablement.
The level of total and permanent disablement cover recommended will depend upon the other benefits available in the event of disablement, such as income protection and trauma cover. Whilst it may not equal life cover provisions, it is an important ‘safety net’ to protect against the financial consequences of total and permanent disablement.
This vital form of protection pays a tax free lump sum in the event of specified conditions. It allows you to focus on recovery rather than debt and has particular impact on resolving abnormal expenses, (including home modifications), preserving wealth and supplementing wealth creation strategies.
It provides funds for:
- Debt resolution
- Meeting abnormal ( i.e. medical) costs
- Modifying your home
- Modifying your lifestyle
- Taking time out from work
- Boosting wealth creation strategies when long term income earning capacity is reduced.
The implementation of trauma insurance is a vital risk management strategy for those who are in the accumulation stage of their financial plan, i.e. they have not yet reached retirement age with adequate funds to provide for a financially secure retirement. Whether you are in an early life cycle stage, where the cost of raising children and meeting mortgage liabilities is a priority, or at a later stage when all resources are focused on building up retirement funds, you are confronted by serious risks.
It would be fair to say that it is always difficult to specify how much trauma insurance is enough. Our experience is that even in the case of considerable net wealth, there is a need for trauma insurance to ensure that in the event of critical illness there is no requirement to erode existing wealth, which in itself causes anxiety and does not assist in the recovery process.
Income Protection Plans are designed to replace 75% of your income in the event of you being unable to work due to accident or illness.
As your income provides the basis to wealth creation, it is essential to ensure that your income is protected, particularly where strategies such as gearing are used which depend upon continuity of income. The cost of income protection is normally tax deductible and the cover can be designed to suit your special needs and budget.
The benefits are indexed to the CPI. The cost depends upon such factors as your occupation and the chosen waiting period.
The waiting period is the upfront period during which no payment is made (similar to an excess). Many policies for professional and managerial occupations pay benefits during the waiting period if you are hospitalised or confined to bed at home under medical supervision.
This type of protection is an essential element of financial planning.
Continuation of your income is critical to support your wealth creation strategies, maintain your existing lifestyle and to ensure that your retirement objectives can ultimately be achieved. Without this form of protection you remain considerably exposed from a financial perspective.
The cost of income protection is tax deductible against the personal income of the policy owner/insured.
It is important to distinguish between indemnity or agreed value income protection. Under indemnity protection you will be paid the income that can be supported at the time of the claim and minimal financial evidence is required on application. Under agreed value the insurer is obliged to pay the insured benefit subject to satisfactory and more extensive evidence at the time of application. Indemnity cover is a lower cost benefit and is more suitable for regular income earners whose income pattern is consistent and transparent.