You’ve saved hard to build your retirement nest egg. You should be able to spend the money on a well-earned relaxing lifestyle. But all this could be put at risk if your adult children don’t have their own financial affairs well managed, particularly adequate insurance protection. 

It’s human nature to assume that bad things only happen to others. Unfortunately this approach means that many people are unprepared financially for their future if sickness, accident or injury strikes. This often results in other family members having to bear the costs of supporting them.

For those close to or in retirement who are placed in this position, the financial impact can be devastating. 

Could this happen to you?

Let’s consider the example of Gary and Roslyn, both 61, who have one child, a 30-year-old daughter Janet. Gary and Roslyn are retired with an investment portfolio valued at $700,000, paying them an annual income of around $48,000. They also own their home, valued at $650,000.

Gary and Roslyn were enjoying trips away and spending time with their extended family members overseas until their lives dramatically changed when Janet was badly injured in a car accident. Janet was in hospital for almost three months, requiring another nine months of rehabilitation before she was able to return to work. 

Janet’s sick leave ran out after the first fortnight, and as she had no insurance cover in place, she had no income to pay the mortgage on her apartment ($2,500 a month) or other essential costs, including her mounting medical expenses.

As they didn’t want Janet to have to sell her apartment, Gary and Roslyn needed to draw on investment capital from their portfolio to pay Janet’s mortgage and meet her expenses for the year she was off work. This ultimately reduced Gary and Roslyn’s investment portfolio by almost $70,000 (or 10%). 

While Janet fortunately made a full recovery, the cost to Gary and Roslyn of supporting their daughter in her time of need meant a dramatic change in their long-term retirement prospects; ultimately their income was reduced by $7,000 per year for the rest of their lives (a 15% reduction), plus their travel plans were significantly affected. 

What can you do?

Believing that unfortunate events only happen to other people isn’t a responsible solution and is a terrible way to jeopardise your retirement. As part of looking after your own financial future, make sure that others who could affect your plans, such as family members, have also taken the right steps for their own lives. 

Talk openly to your adult children about their insurance cover and if they are putting themselves or you at risk, recommend they talk to a licensed adviser.

Call (02) 4926 2300 or email us to spreak with one of our specialist risk management advisors about protecting your entire family 

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Although a health crisis can occur at any time of life, the risks obviously increase as we age which is why insurance is important at any age. Unfortunately, due to the increased risk of illness or injury the cost of insurance for those over 50 can be high. As a result, people in this age group often drop their insurance cover altogether just when their need is at its greatest.

If age 50 is looming, or you’ve already passed your half century, it’s even more important to protect both your income-earning ability and the financial security of your dependents. This can be achieved with appropriate insurance.

Here are some solutions to consider:

• Life and disability insurance can be arranged through most superannuation funds. Premiums are paid from the superannuation thereby reducing strain on the household budget.
• Review your level of insurance. As your investments and superannuation increase, or your debts and expenses decrease you may be able to reduce your cover and still provide for your beneficiaries.
• For income protection insurance, if you have savings in place, annual leave or sick leave entitlements, you may consider increasing the waiting period before a claim. Depending on circumstances, this may allow you to retain an important benefit at a more affordable price. More-over, while Income Protection cover targets insuring 75% of your Gross Wages, your annual cashflow needs to cover living costs may be lower than this. You may consider reducing the monthly benefit in line with your cashflow needs thereby reducing the cost of cover.

If you’re not sure what to do, talk to one of our licensed financial adviser here at Leenane Templeton before you make any adjustments to your insurance cover. It may not cost you as much as you first thought.

Call (02) 4926 2300 or email us.

To discuss how insurance is important at any age please call our specialised financial and risk management advisors to discuss your circumstances further.

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Mike’s case

Mike and Terri are both aged 38 and have three children under six. Mike earns $100,000 a year and Terri and the children rely on his income. They have a $300,000 mortgage and know they are taking a big risk not having life insurance. However, they rely on every dollar Mike earns and don’t think they can afford the premiums.

They discuss their circumstances and needs with a financial adviser and agree that ideally they need about $1.6 million dollars of cover. This would include funds for Mike’s medical and funeral expenses if he got very ill and died, paying off the mortgage and providing an income for Terri and the children. Mike is charged a premium of about $3,500 in the first year.

Their adviser shows them how they can afford the premiums by arranging the cover in superannuation and salary sacrificing the premiums. The table shows their expenses are $40,000 a year and have a very small surplus at present (insufficient to meet the insurance premium). Mike would need to salary sacrifice $4,117 (to allow for the 15% tax in superannuation) but this would reduce the amount of income tax he pays and maintains some of their surplus as well as paying for the necessary life cover.

The need for review

This case is based on Mike and Terri’s circumstances today. What if they had another child or received an inheritance? Next year the premiums will be higher because Mike is a year older – will they still need the same level of cover? Mike’s employer will be paying into superannuation for him and as his account grows he may need less cover.

Some types of insurance are treated differently when held in a super fund and there is a range of issues to consider, so it’s important to seek professional guidance from your financial adviser first.

Disclaimer: The Case study in no way suggests that a single income family earning $100,000 with a $300,000 mortgage requires $1.6M of insurance and should your circumstances be similar an individual review of your needs is still required.

Sources: www.ato.gov.au

Disclaimer

If you would like to learn more about how you can cut the cost of insurance please contact our expert Risk Management Advisors.
Call (02) 4926 2300 or email us.

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Following changes to the SMSF sector as part of the government’s Stronger Super review measures, SMSF trustees are now required by law to consider the need for insurance cover for members, such as life or disability insurance.
 

Considering insurance for one or more of its members will come under the SMSFs broader investment strategy, which trustees will need to ‘regularly review’, taking into account the changes in circumstances of the fund and its members. The new legislation does not require an SMSF to obtain an insurance policy on the behalf of its members, but rather demonstrate that the fund has considered insurance as part of its investment strategy.
 

It is critically important that trustees review their fund’s investment strategy and that all appropriate documentation is maintained to prove that regulations have been complied with. Compliance may be shown either through decisions taken in regards to the fund’s investment strategy, or if there has been no change, then the trustee minutes will show that the required actions have been taken.

Contact Leenane Templeton today for further information.

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