In the shadow of the GFC and tightened spending, Tim Browne explains why the insurance needs of clients are now more pertinent than ever.
During times of financial difficulty families often need to cut their discretionary spending. For many, life insurance is an easy cost to cut as there is no obvious immediate benefit associated with the expenditure.
As a result, many people underestimate the value of insurance — and when belts get tightened, existing policies, such as life insurance, may not be renewed.
However, it is important that families are protected should the unthinkable occur, and the purchase of life insurance should be a key consideration for many families, especially if there is only one main income stream in the household. In reality, when clients say ‘they can’t afford it’, this simply underlines how reliant they are on their income.
To put this into perspective: On average, Australian families need approximately 35 per cent of their income to pay their home loan. In addition, around 23 per cent of an average family’s income is required to raise two children.
The good news is that over the past 15 years life insurance has become more affordable, with term life premiums falling by an average of 3.5 per cent per annum.
During the same period the consumer price index (CPI) increased by approximately 3 per cent per annum, demonstrating that life insurance continues to remain value for money.
There are various methods and strategies people can use to save money, even during tough times, to allow them to keep their life insurance in place.
Many people don’t realise they can use their Superannuation Guarantee or existing account balance to fund their insurance.
Superannuation can also be a useful temporary measure to ensure a client has at least some insurance in place. When your client can afford to add insurance to their already tight budget, other alternatives can then be considered to ensure their superannuation retirement savings are not adversely impacted over the long term.
For instance, life insurance in a client’s superannuation policy can lower the effective cost of insurance for some people.
If your client earns less than $61,920 per annum and makes a personal after-tax contribution to superannuation, they may be eligible to receive a Federal Government co-contribution payment.
Together, these could be used to pay insurance through their superannuation, with the Federal Government effectively paying some of the premiums.
In addition, clients who are employees can pay their premiums using before-tax dollars through salary sacrifice by having insurance in superannuation, which can deliver significant savings.
An effective salary sacrifice agreement must be in place where salary sacrifice payments are prospective, and you must check that your client is able to salary sacrifice via their employer.
For self-employed clients, having life insurance through superannuation may also reduce the effective cost of insurance. Self-employed people may be eligible to claim a tax deduction for contributions up to the relevant concessional contribution cap ($25,000 for the 2010-11 financial year).
In addition, if they have a total income of less than $61,920 per annum they may be eligible for a Federal Government co-contribution if they make a personal after-tax contribution.
In fact, some people use these strategies together.
Other money saving options include paying premiums annually, saving 8 per cent each year compared with accumulated monthly payments.
After experiencing hard times, including natural disasters, many clients are now more aware how important it is to protect their assets.
And despite the fact that the unemployment rate has been decreasing, clients must understand the importance of maintaining adequate cover and know that life insurance is the key to protecting their family’s financial future.
Tim Browne is general manager of retail advice at CommInsure.
