Pro­tect the in­come ‘en­gine room’

Money Magazine Australia - - ASK THE EX­PERTS -

Glenn aims to build as­sets to fund fu­ture in­come needs for when he en­ters his re­tire­ment years. His plan in­cludes tak­ing on debt against the in­vest­ments be­ing made. His abil­ity to gen­er­ate in­come from em­ploy­ment will ul­ti­mately de­ter­mine the suc­cess of the in­vest­ment strat­egy. As the in­come “en­gine room” he un­der­stands the con­se­quences for his in­vest­ment strat­egy and life­style if he could not work, tem­po­rar­ily or per­ma­nently. Be­cause he is sin­gle, life cover does not hold the same pri­or­ity as dis­abil­ity pro­tec­tion.

For in­come pro­tec­tion

In ad­di­tion to be­ing in­sured for the monthly ben­e­fit amount, there are a few ad­di­tional prod­uct fea­tures that Glenn should con­sider:

Monthly ben­e­fit in­dex­a­tion – pol­icy ben­e­fit amount in­creases each year with CPI.

Claim in­dex­a­tion – while on claim, monthly ben­e­fit be­ing paid in­creases each year by CPI.

Agreed con­tract – locks in in­sured ben­e­fit amount at ap­pli­ca­tion stage (even if in­come re­duces later on).

Spe­cific ill­ness or in­jury ben­e­fit – pays a ben­e­fit, for ex­am­ple, if di­ag­nosed with a med­i­cal con­di­tion such as can­cer or heart at­tack, even if not dis­abled and work­ing still. Helps with un­ex­pected med­i­cal ex­penses.

Lump sum ben­e­fit – al­lows the in­sured to com­mute fu­ture claim ben­e­fit into tax-free lump sum. Use­ful if the in­sured prefers to take a lump sum to re­tire debt, for ex­am­ple on an as­set that could pro­vide a long-term in­come.

To­tal and per­ma­nent dis­abil­ity

At a min­i­mum, Glenn needs to en­sure he is in­sured for a lump sum ben­e­fit to re­pay all his debt. There are at least six vari­a­tions of lump sum dis­abil­ity cover. Glenn should con­sider “own oc­cu­pa­tion” as it is the most qual­i­ta­tive def­i­ni­tion with great­est prob­a­bil­ity of a ben­e­fit pay­ment in the event of a claim. The pre­mi­ums are not tax de­ductible, with the pro­ceeds tax free in the event of a claim.

Why not use his su­per fund’s prod­ucts?

The in­come pro­tec­tion prod­uct un­der su­per does not pro­vide the same qual­i­ta­tive def­i­ni­tions as a per­son­ally held pol­icy, would not ac­com­mo­date any fu­ture changes Glenn might make to his work ar­range­ments, and he could find him­self un­der­in­sured or, even worse, unin­sured. Fur­ther­more, there is no ca­pa­bil­ity to in­clude the agreed ben­e­fit, spe­cific ill­ness or in­jury ben­e­fit, lump sum ben­e­fits or monthly ben­e­fit in­dex­a­tion, all of which are im­por­tant for con­sid­er­a­tion.

The TPD lump sum def­i­ni­tion of “un­likely to re­turn to work” is too risky to rely on if to­tally dis­abled and ex­pect­ing a claim to be paid.

No con­trol over trustee’s de­ci­sion to change dis­abil­ity def­i­ni­tions in the fu­ture.

No op­por­tu­nity to con­tinue the cover if leav­ing Host­plus as cover is em­bed­ded.

When seek­ing ad­vice, Glenn should not fo­cus solely on price or tax de­ductibil­ity but give greater weight­ing to how poli­cies would per­form in the event of a claim.

Roy has 35 years’ ex­pe­ri­ence as­sist­ing peo­ple with their in­sur­ance needs and is a di­rec­tor of Fair­bridge Fi­nan­cial Ser­vices, which spe­cialises in in­sur­ance and cor­po­rate su­per­an­nu­a­tion. ROY AGRANAT

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