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Money and Life
(Financial Planning Association of Australia)
No one likes unpleasant surprises. Talking about your Will with your family can be stressful, but it can also help to avoid a worse situation when you are gone.
Contemplating one’s own death can be hard and in many families, talking about money or inheritances is taboo. Some parents worry that letting their children know how much they stand to inherit may cause a sense of entitlement or encourage them to become less productive. Others fear the chat could stir up jealousies, insecurities and feuds among family members.
But no matter how stressful that conversation is, not talking about what’s in your Will could cause confusion, bitterness, far bigger family feuds and even legal battles after you’re gone.
Having a transparent and open talk about its contents could help your family understand the reasons behind your decisions and ensure their expectations are realistic. It can also reduce their anxiety. After all, it’s often the unknown that stresses us the most.
The talk may also allow you to express any special wishes you have that are not specifically included in your Will. And, you may gain better insight into what different family members value and want. A conversation about your finances and wishes will help to clarify who to contact, and how to pay for basic expenses, as well as your funeral, when you pass.
One of the most contentious aspects of settling an estate can be the distribution of personal property like family jewellery, art or special collections, whether worth a lot or just of sentimental value.
Here are five ways to reduce the stress of these conversations:
#1: Identify potential hotspots
Think very carefully about what you plan to do with your assets and why. Do your research and speak to your lawyer about what’s possible and what’s not. Identify areas that could be touchy subjects.
For example, do you have a child you plan to leave more to than others? This could be because that child has a disability requires additional financial assistance or because that child is a single mother on a low income, whereas her sister is a lawyer married into a wealthy family.
Are you planning to make certain arrangements to protect your heirs? Perhaps one has a drug problem or can’t manage his or her financial affairs very well. Or, another is in a rocky marriage and you don’t want your hard-earned money being split with that child’s spouse.
It’s important to plan how you will broach these topics in your discussion with your family, if at all.
Giving good reasons for these decisions and getting buy-in now from everyone could avert problems later on, if they only hear about your plans when you are gone.
#2: Have a game plan
Decide whether you want to talk to each child separately, rather than addressing everyone as a group. If you choose the group route, will it be one discussion or a series of discussions?
Consider who should be involved in these meetings. In addition to your adult children, should you include adult or teenage grandchildren? Should spouses also be invited?
Proper planning can go a long way to keeping peace. Before the talk, determine the goals and objectives you want to achieve from the discussion. Draw up a meeting agenda and some talking points.
Chose a neutral venue for the chat, one that will make everyone feel comfortable and secure.
Consider having your solicitor, accountant or a trusted family elder or friend at the meeting – someone who could step in if things get heated and steer the discussion back on track.
Carefully explain why you have made the choices you have, especially if you are leaving more to one child than another or if you want sentimental items to go to specific people. Simple explanations can go a long way towards avoiding bad feelings.
Explain the principles, history and values behind your decisions. Let family members ask questions and provide feedback on your plans.
Listen and be open. Give everyone a chance to express their views. This will encourage a healthy dialogue and a common understanding of what different family members want.
#4: Keep the peace
Speak in a calming tone. Don’t shut down or lash out if things aren’t going the way you want.
Remember that talking about your passing can be a very emotional conversation for your children.
Try to stay focused on the topic at hand and not let other family issues get in the way. Remind everyone that relationships matter more than money and things.
No matter what is said, you have the power to choose how you would like your assets distributed. If a family member doesn’t agree with you, let them know they have been heard, but don’t feel pressured to change your plan.
#5: Follow up
After the discussion, draft a simple summary of your estate plans and distribute it to your heirs for final input. This draft could also include information such as where your important financial documents are located and what you’d like for your funeral.
It’s important to ensure that everyone has understood what was discussed and is one the same page.
Still think that a conversation with your loved ones about your Will is too uncomfortable and troublesome? Start by writing a letter to share your thoughts, reasons and wishes. Maybe you could even film yourself reading out. And remember while the conversation might be based around money, it’s really about values.
Planning our estate is a vital part of any wealth management process. Deciding who is entitled to what after we die is not something that can be put off and left until later. It must be clearly and legally defined well ahead of time.
This article is designed to serve as a guide, answering some of your questions and preparing you for planning your estate. Don’t forget to get in touch for further information or support.
Our will is essentially a contract; a legally binding document which dictates what happens to our estate after we are no longer here. In many instances, a will is straightforward and non-complex, but it should not be assumed that this is the case.
Instead, it is critical that we understand precisely the contents and structure of our will so that we can ensure that each benefactor is getting what they are entitled to. Passing on a legacy and assets is a serious business. It pays to make sure everything is being taken care of.
Wills and Power of Attorney
A Power of Attorney document is similar to a will but it is enacted while the individual in question is still alive. In short, it ensures that a trusted candidate is able to take legal and executive action regarding your assets or estate if you are unable to do so yourself.
There are two types of Power of Attorney applicable in Australia. Each comes with its own set of caveats according to which state or territory you are in. The types are:
Enduring power of attorney – which enables a nominated individual to manage your assets in the event of an illness or accident, or in the event that you are absent.
Medical power of attorney – which enables an individual to take control of your assets and act in your best interests if you medically are unable to decide for yourself.
What Happens Upon Death Without a Will in Place?
If the worst happens and someone dies without an adequate will in place, the estate will be dealt with according to the laws of the territory or state. In Western Australia, for example, the estate is divided up among immediate family members and the spouse, based on a ratio which decides who is entitled to what.
This can lead to step-children being left with nothing, for example, or a spouse being left homeless because the house is in the deceased’s name and is more than their entitlement is worth.
Superannuation as Estate Planning Vehicle
A superannuation can provide an effective means of planning your estate and ensuring the right benefactors get the right assets. However, this can be a complicated procedure, thanks to the taxes involved with superannuation death benefits and the fact that not all assets tied up in the fund will automatically be counted as part of the estate.
However, despite the complexity, the SMSF option can still be beneficial. By including a death benefit clause to pay out to your children – all minors – in the event of death, your children can receive the benefit tax free if tragedy occurs. This can be reviewed at a later date to ensure that you and your loved ones continue to enjoy the most advantageous terms.
Tax Dependent vs Superannuation Dependent
Under Australian law, a tax dependent is defined as any individual who is classed as a dependent for tax purposes. This can include a spouse or a child under the age of 18.
A superannuation dependent, on the other hand, is defined as an individual named as part of the superannuation death benefit benefactors, but is not dependent on the trustee for tax purposes. This can include an adult child, for example.
A death benefit on a superannuation fund can be paid out in a number of ways, based on which of the dependent categories the benefactor fits into.
If the benefactor is receiving a lump sum directly from the fund, they must be classed as a superannuation dependent. If they receive a pension from the fund, they may be classed as a tax dependent in some circumstances.
It can be difficult to disentangle the two categories and to position your superannuation fund in the most advantageous way. Get in touch with us for guidance and more information.
Child Account Based Pensions
Finally, a child account based pension can ensure that a pension is paid to your child in the event of your passing until the child reaches 25, upon which they receive a lump sum. Children with severe disabilities may be eligible to receive the pension for longer.
In certain circumstances, these pensions can be delivered tax free, so it is advisable to seek advice to find out if they are the best option for you. Speak to your financial adviser today to learn more about the importance of planning your estate and to ensure that all the moves you make are the right ones.
Income protection 101
There’s not much you can do without an income. In monetary terms, your ability to earn an income is your biggest asset by far – which is why income protection is so important. When you’re protecting your biggest asset, there are 3 things you need to understand so you know what you’re covered for, and what that means at claim time:
- How much you’re covered for – amount insured
- How long you need to wait for your claim to be paid – the waiting period
- How long your claim will be paid for – the benefit period
1. Sum insured
When you apply for income protection, you can generally choose to insure up to 75% of your before-tax income (which sometimes includes super contributions).
The higher your amount insured, the higher your premium will be. So you need to think about how much money you’ll really need to keep up with your everyday expenses (like your rent/mortgage, bills, school fees etc.). Just because you can cover 75% of your income doesn’t mean you have to.
For example, you might earn $10,000 per month but decide you only need $5,000 per month to keep up with your living costs. That may significantly reduce the cost of your cover (i.e. your premium).
You can also reduce your premium by choosing an ‘Indemnity’ benefit payment type.
This means the amount you receive will be determined by your actual income in the two years before the claim (which could mean you receive less than the amount insured) – as opposed to a ‘Guaranteed’ or ‘Agreed’ payment type where, at claim time your amount insured won’t be adjusted if your income has decreased.
2. Waiting period
The waiting period is the number of days before you become eligible to claim, starting from the date the doctor confirms you are disabled. The most common chosen waiting period options are 30 days, 60 days and 90 days.
Income protection payments are usually made monthly in arrears. So if you had a 30-day waiting period, your first payment would be made 60 days after you first became disabled.
The waiting period affects the premium. Naturally, a policy with a 30-day waiting period is more expensive than the same policy with a 90-day waiting period, because you’re eligible to claim sooner.
For example, if you’re off work for 80 days and have a 30-day waiting period, you could potentially be paid your amount insured for 50 days. But if you have a 90-day waiting period, you may not be eligible to receive anything.
When choosing your waiting period, you should think about how soon you’re likely to need financial support if your income stops:
- If you have access to sick leave or annual leave, or a high level of savings, you may be able to take a longer waiting period and reduce your premium.
- If you’re a casual employee or business owner, or you have a low level of savings, you may want a shorter waiting period, bearing in mind your premium will be higher
3. Benefit period
The benefit period is the maximum amount of time you can receive income protection payments for any claim while you are disabled. It can be based on time (e.g. 6 months, 2 years etc.) or age (e.g. to age 65, 70 etc.) and your choice can make a difference to the total amount you receive.
Say you’re aged 40 and you become permanently totally disabled, meaning you’ll never be able to return to work. If you had a 2-year benefit period, your benefit payments would stop when you’re aged 42. But if your benefit period was to age 65, you would continue to receive benefit payments for an additional 23 years.
Choosing a longer benefit period increases your premium because the potential payout is higher. However, be aware the benefit period is the maximum amount of time you can receive payments. If you’re able to return to work sooner than that, or you reach age 65, your payments will stop.
Also, if your policy offers ‘partial disability benefits’, you may be able to return to work part-time and receive reduced payments until you are able to return back to your pre-claims earnings. This can be a great benefit to have as it means you’re supported if you’re restricted in your capabilities, or you want to try a new occupation.
Oh, and one more thing…
One great feature of income protection is that premiums are generally tax-deductible, which can make it significantly more cost-effective to get the cover you need.
You may also be able to hold an income protection policy inside super, meaning you can use tax-effective super contributions to pay your premiums, however, within a superannuation environment policy feature are generally more restricted..
Check your cover now
If your income has changed significantly since you last updated your policy, there’s a chance you may be over or under-insured – in which case you should talk to your financial adviser.
Did you know?
There’s a common exclusion on income protection policies that means you generally won’t be covered if you suffer an injury or illness because of an intentional act. Also, if your cover is held inside super, you’re generally not covered if you suffer an injury or illness while you’re unemployed.
Want to know more?
If you’d like to discuss any of the content in this article and how it may apply to you, please contact your Financial Adviser.
(Australian Associated Press)
Australians should talk more about death and dying so they can plan for the final stage of their lives, a group of experts is warning.
A lack of acceptance, communication and planning means that many Australian’s preferences about the end of their lives are not understood or championed, they say.
The topic of death makes people in Australia uncomfortable, says Professor Ken Hillman, an intensive care expert at the University of New South Wales.
Although the majority of deaths in Australia each year are predictable, few people – just 15 per cent – have care plans to guide their final days. Seventy per cent of Australians prefer to die at home or in a home-like setting, but only 14 per cent do so currently.
Death and dying are “highly medicalised”, with health professionals focusing on their own priorities over those of the patient, which usually include preservation of dignity, company, and a peaceful, pain-free death, according Professor Hillman.
Professor Hillman is a member of The Violet Initiative, a social enterprise working to reduce regretful outcome for people in the last stages of their lives.
The Violet Initiative’s CEO, Melissa Reader, says caregivers are often the key decision makers.
“A ‘good’ last stage of life would involve many more Australians having more compassionate and dignified deaths, with their preferences aligned with their experiences,” Ms Reader said.
“Families and their caregivers would be offered relief, feel more resilient while going through this difficult experience, and in turn, would be able to return to life and work more fully.”
The group is calling for systemic change in the healthcare, community and aged care sectors to improve planning and encourage communication around the final life stage.
Your life insurance is flexible and can be adapted to your changing needs. Make sure you have a cover review with your adviser every 12-18 months to ensure you’re covered or when major life events occur, for just the right amount, paying the right amount, and getting the best value from your policy.
Every 12-18 months, make sure you ask yourself, have you:
Welcomed any new members to the family or taken on new responsibilities such as caring for an older relative?
You might want to add a new beneficiary to your policy or increase your amount insured to cover for your growing family’s future needs and the increased financial responsibility you have.
Changed jobs or got a promotion?
Your income is your biggest asset over the course of your life. If your income has changed, your future needs have likely changed too – so you’d benefit from reviewing your sum insured with your financial adviser.
This is especially important if you’ve got income protection. That’s because your benefit amount, and the premium you’re paying, are directly linked to the personal income we have recorded on your policy.
If your income has changed, get in contact with your financial adviser to review your policy.
Paid off large debts?
The amount you’re insured for is to cover for your future financial needs should something happen to you. If you’ve significantly paid down large debts, your needs may have changed.
You may want to think about reviewing your sum insured to ensure it’s right for your needs – not too little, and also not too much.
Taken on any new debts?
Being insured for the right amount is an important factor of cover suitability. Customers usually need a level of cover that can, as a minimum, pay off any existing debts should something happen to them. If you’ve taken on new debts, your needs may have changed.
You should review your cover with your financial adviser to ensure you’re covered for the right amount.
Does your policy have a health loading? Has your health improved – or have you stopped smoking?
Personal risk factors such as smoking and your Body Mass Index (BMI) add what are called ‘premium loadings’ to your cover – which means you pay a higher premium than someone who doesn’t have this risk factor.
If your health has improved (e.g. you’ve lowered your BMI or your lifestyle has changed recently), get in touch with your financial adviser to review your policy and determine if these loadings can be removed to help lower your premium.
If you answered YES to any of these questions, you could benefit from reviewing your cover with the help of your financial adviser.
Ways you can adapt your cover to your current needs:
1) Choose the amount you’re insured for
Your premium is closely linked to the total amount you’re insured for. And it’s important to make sure you’re covered for the right amount, not too little, not too much. To find out more, see How much cover do I need?
Choosing the premium type that’s right for you can have a big impact on the lifetime cost of your policy, and your financial adviser will be able to help with forecasting that impact.
2) Choose to accept or decline indexation
Indexation, if available, is an automatic increase to your sum insured to ensure the value of your policy is not eroded by the impacts of inflation.
But you’re in control – it’s important to know that as the sum insured increases, the premium you pay may also increase. This means there are circumstances in which you might want to decline the indexation offer. Speak with your financial adviser about what is best for your personal circumstances.
3) Remove any loadings you might have
Personal risk factors such as smoking, dangerous hobbies or occupations, or a high Body Mass Index (BMI) may add what’s called a ‘premium loading’ to your cover – which means you pay a higher premium than someone who doesn’t have those risk factors.
Any loadings like these are recorded on your Policy Schedule. So, if your health improves or your lifestyle has changed recently, get in touch with your financial adviser to review your policy and determine if these loadings can be removed to help lower your premium.
In the end, you’re in control – you can review your cover with your financial adviser and adapt it to your needs.
Stay in control of your policy – book a cover review with your adviser every 12-18 months.
Some advisers offer a review service every 12-24 months, so make sure you enquire about this in order to stay in control of your policy.
Financial protection for your loved ones when you die
A sudden death can place financial stress on those who depend on you. If this happens, life cover can help them pay the bills and other living expenses.
What is life cover?
Life cover is also called ‘term life insurance’ or ‘death cover’. It pays a lump sum amount of money when you die. The money goes to the people you nominate as beneficiaries on the policy. If you haven’t named a beneficiary, the super trustee or your estate decides where the money goes.
Life cover may also come with terminal illness cover. This pays a lump sum if you’re diagnosed with a terminal illness with a limited life expectancy.
Accidental death insurance is different from life cover. It will only pay out if you die from an accident. It will not provide cover if you die from an illness, disease or suicide. This type of cover often has a lot of exclusions.
To understand what’s covered under a policy and the exclusions, read the Product Disclosure Statement (PDS).
Decide if you need life cover
If you have a partner or dependents, life insurance can help repay debt and cover living costs if you die.
If you don’t have a partner, or people who depend on you financially, you may not need life cover. But consider getting trauma insurance, income protection insurance or total and permanent disability (TPD) insurance in case you get sick or injured.
How much life cover you might need
To decide how much life cover to get, consider how much money you or your family would:
- need — to pay the mortgage, credit cards and any other debts, child care, school fees and ongoing living expenses
- receive — from super, savings, the sale of any investments, your paid leave balance, and support from your extended family
The difference between these is the amount of cover you should get.
Work out if you need life insurance and how much cover you might need.
If you need help deciding if you need life cover, and how much, speak to a financial adviser.
How to buy life cover
Check if you already hold life insurance through super. Most super funds offer default life cover that’s cheaper than buying it directly. You can increase your level of cover through your super fund if you need to.
You can also buy life cover from:
- a financial adviser
- an insurance broker
- an insurance company
Life cover can be bought on its own or packaged with trauma, TPD or income protection insurance. If it’s packaged, your life cover may be reduced by any amount paid on other claims in the package. Check the PDS or ask your insurer.
Before buying, renewing or switching insurance, check if the policy will cover you for claims associated with COVID-19.
Life cover premiums
You can generally choose to pay for life cover with either:
- stepped premiums — recalculated at each policy renewal, usually increasing each year based on the higher chance of a claim as you age
- level premiums — charge a higher premium at the start of the policy, but changes to cost aren’t based on your age so increases happen more slowly over time
Your choice of stepped or level premiums has a large impact on how much your premiums will cost now and in the future.
Compare life cover
Once you know how much life cover you need, shop around and compare:
- benefits and policy features
- waiting periods before you can claim
- limits on cover
- the cost of the premiums — now and in the future
A cheaper policy may have more exclusions, or it may become more expensive in the future. You can find information about the policy on the insurer’s website or in the Product Disclosure Statement (PDS).
Compare how long it takes different insurers to pay a life cover claim and the percentage of claims they pay out.
What you need to tell your insurer
You need to tell your insurer anything that could affect their decision to insure you. You need to give them this information when you apply, renew or change your level of cover.
Insurers usually ask for information about your:
- medical history
- family history, such as a history of disease
- lifestyle (for example, if you’re a smoker)
- high risk sports or hobbies (such as skydiving)
If an insurer doesn’t ask for your medical history, it may mean that the policy has more exclusions.
The information you provide will help the insurer to decide:
- if they should insure you
- how much your premiums will be
- terms and conditions for your policy
It is important that you answer the questions honestly. Providing misleading answers could lead an insurer to deny a claim you make.
Making a life cover claim
If someone close to you dies and you need to make a claim, or if you need to make a terminal illness claim, see how to make a life insurance claim.
Money and Life
(Financial Planning Association of Australia)
Many of us think of retirement as a given – you work hard for your middle years, and then you get to bow out of the workforce and enjoy a well-deserved rest, take those bucket-list trips and enjoy the best life has to offer. After all, you’ve made your contribution and now you’ve earned the right to kick back.
But unfortunately, retirement isn’t that simple or straight-forward for many of us, even those who have lived their lives with the promise that compulsory superannuation contributions would accumulate and keep us better off than if we were on the pension! Afterall, we all have different needs and ambitions for how we want to spend our post-work life, and if you don’t take an active role in planning for your retirement – even if you’re in the earlier phases of your career at the moment – the reality might not match the dream.
What we get wrong about retirement
As a study by global investment manager Schroders found, people significantly underestimated the cost of living in retirement. They expected to spend an average of 34% of their retirement income on basic living expenses, but in reality, they required nearly 50%.
Similarly, wealth and career consultant Mercer has discovered that Australians are also poor at estimating how long they might live. Its research shows that younger people greatly underestimate their life expectancy while older people significantly overestimate it.
According to Mercer, many people assume they will spend less money in later retirement and the age pension will be sufficient for their needs, but this isn’t the case. Studies show that while spending on travel and entertainment decreases, this is matched by a corresponding increase in medical, care and housing needs.
The facts and figures of retirement in Australia
According to the Association of Superannuation Funds of Australia (ASFA), single people require about $28,165 a year to maintain a modest lifestyle in retirement. They will receive more than they would through the Age Pension but will only afford the basics.
ASFA says single people require around $44,146 a year to maintain a comfortable lifestyle in retirement. This will allow them to be involved in a broad range of leisure and recreational activities and to be able to buy household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment and domestic and occasionally international holiday travel.
Both budgets assume that retirees own their own home outright and are relatively healthy.
Of course, everyone is different and their expenses and activities will vary in retirement. They will stop work at different ages and will have different reasons for retiring.
Australian Bureau of Statistics (ABS) figures for 2016/17 show that 36% of men and 22% of women chose to retire when they became eligible to draw on their superannuation and/or the age pension.
The average age for retirement of this group was 62.9 years – men at 63.6 years and women at 62.1 years.
But the figures also show that people retire for other reasons, for example, to care for someone, because of retrenchment or an inability to find work, or as a result of sickness, illness or injury. That means that their time of retirement was not within their control or came earlier than planned.
All these uncertainties complicate retirement planning. Thus, it’s no wonder that a new survey commissioned by Industry Super Australia shows that almost 40% of recent retirees are struggling and that more than a quarter had to go back to work, many to keep the lights on.
That said, many Australians are enjoying a comfortable retirement. How they achieved it is no secret: through good retirement planning.
How do I plan for retirement?
Start with you and your specific circumstances and requirements. Look at your spending, income, assets, savings, current investments, insurance, taxes and estate management. And consider how you should approach your retirement saving as you move through different life stages.
All this may require some tough decision-making. For example, do you want to live frugally now for future financial freedom through the FIRE movement, or would you like to take steady and consistent saving steps? Are you comfortable with more risky investments which may offer better growth but could keep other people up at night? Would you prefer to let the experts manage your savings or to make the investment decisions yourself? Are there ways you could boost your super while enjoying tax benefits? Should you salary sacrifice? And, do you need protection through insurance?
A CERTIFIED FINANCIAL PLANNER® professional who specialises in retirement planning can support you through this journey and help you design a plan that takes into account the many different scenarios that can occur along the way.