This article provides a brief overview of the four main types of personal risk insurance. Commonly these are referred to under the umbrella term of “life insurance” but they each serve distinct purposes. Think of each type as a different strand in your safety net.

For more detail on each cover please browse through my article archive. The archive includes articles on:

• Why you would have each cover
• How to work out how much cover you may need
• Statistics on the likelihood of events occurring
• The cost of items and services you may need if you were seriously ill or injured

Life (or Death) Insurance

Pays you a lump sum benefit on your death. Modern, quality policies often include a feature that gives you an advance payment if you are diagnosed with a terminal illness.

In my experience premature death is the life event most considered by people when they think of personal insurance. However it is perhaps the least likely event that can have a serious impact on your wealth creation. Therefore the next three types of life insurance cover are critical to understand.

Income Protection Insurance

I consider income protection insurance to be the most important personal insurance for anyone who is not yet financially independent. So that’s most adults.

Income protection insurance pays you a regularly monthly benefit while you are temporarily unable to work due to injury or illness.

Short term incapacity is one of the most likely events. And since many people would fall behind in loan repayments and bills if they were out of work for just one or two months, the impact of short term incapacity is high.

You can also receive a partial benefit when you are partially disabled and only able to work part time. This is a very crucial point as partial disablement is probably more likely than total disablement. So it is great to get some benefit to top up your part time income.

Income protection insurance generally pays up to 75% of your total remuneration package (including superannuation and non-cash benefits.) You can choose the waiting period before a benefit will be paid. Plus you can choose for how long the benefit will continue to be paid if you are long term disabled. Commonly financial planners recommend a waiting period of 30 days and a benefit payable up to age 65.

One bonus is that premiums for income protection insurance are tax deductible.

Total & Permanent Disablement (TPD)

Many people have some Total & Permanent Disablement insurance within their employer superannuation but it is rarely close to enough cover.

Total & Permanent Disablement insurance pays a lump sum benefit if you (as the name suggests) are totally disabled and are expected to be for the rest of your life. The rest of your life part is as determined by specialist medical practitioners.

Total & Permanent Disablement is a compliment for income protection insurance. Whilst there is some overlap having TPD is not a replacement for having income protection insurance.

When you are long term disabled you have extra expenses compared with being short term unable to work. For example you may require modifications to your car and house. You may also need to pay for a carer and other household services. If your partner becomes your carer then you’ll need to replace their former income instead.

Total & Permanent Disablement insurance can be used to top-up the extra 25% of your income not covered by income protection insurance. Plus you’ll need some money to cover the saving and investment you would have being doing if you worked your whole life. This can be used to meet your expenses from age 65, which is the maximum age for most income protection policies.

Trauma or Critical Illness Insurance

In my experience another life event that occupies people’s mind is ‘what if I get cancer or have a heart attack?’
Trauma insurance pays you a lump sum if you suffer a serious illness.

Importantly it has nothing to do with your ability to work as a result of the illness. As long as the illness is serious enough to meet the minimum medical definition (in your policy) then you can claim a benefit.

The four most common illnesses covered under these polices are cancer, heart attack, stroke and coronary bypass surgery.

Commonly you could use this benefit payment to help you meet the costs of medical treatment including medication.

Also, if faced with a serious illness many people would like to choose to stop working to focus their efforts on beating the illness. If you medically are able to work but choose not to work then income protection insurance won’t pay you a benefit. So you can use your trauma insurance to replace your income for a year or two while you choose not to work. This can also apply to replacing your partner’s income as many partners may like to be able to be by your side to support you.

You can claim on all four types

It is important to note that you can ‘simultaneously’ claim each of income protection, trauma and TPD insurance for the same illness. Here’s an example how:

• You suffer a serious stroke. It meets the medical definition so you claim your trauma benefit.
• Immediately you can’t work or do much at all so after 30 days you claim your income protection benefit. This keeps paying you each month while you continue to be disabled.
• After 6 months (or 12) you have not recovered your ability to return to your occupation and the doctors unfortunately say that you never will. You make a claim for your TPD benefit and receive a lump sum payment. This claim does not wipe out your income protection, which you continue to receive.
• Many years later you pass away and your partner receives a benefit from your life insurance. (At this point the income protection benefit does stop.)

How much cover?

To assess how much cover you need for each of the four types of personal life insurance you need to consider your personal life choices. These are individual to you so there is no set rule of thumb.

Insurance fills the gap between the wealth you need to find your desired life, and the wealth you currently have. So your required level of cover (sum insured) changes over time.

To get the cover right first you must consider the life choices you would make in each of the circumstances. Next you work out how much it would cost to fund those life choices.

The calculations can be difficult so use a financial planner to guide you through the process.

Related posts:

1. Life Saving Advice
2. Tragedy strikes around 20 percent of working families

In my experience of working with people many want to start their own business. But their traditional education and employee experience often has not given them the toolkit to succeed.

In the video below Cameron Herold argues that we need to be teaching kids how to be entrepreneurs. Herold has been an entrepreneur since childhood and for the past 20 years has been coaching other entrepreneurs.

The presentation was recorded at TEDxEdmonton in March 2010. TED is an organisation devoted to “Ideas Worth Spreading” and includes many wonderful presentations of ideas that inspire you to learn more and take action.

In his presentation to TEDxEdmonton Herold shares some of the lessons he learned from his childhood jobs and business ventures that are important entrepreneurial skills. He also summarises some key entrepreneurial traits to teach our kids. Both will spark ideas in you that you can being to implement at home with your children of any age.

One idea that may challenge you is Herold’s attitude to paying children an allowance, or pocket money as we say in Australia. Watch below and find out his suggested alternative.

Related posts:

1. Homecomings: the real reason to…
2. Wealth Insights for Young People
3. Really Achieving Your Childhood Dreams: by Dr Randy Pausch

An off the shelf fund gives you great control

When you are thinking of getting more control over your superannuation, what control are you seeking? Is it more control over investment decisions?

Well, you already have plenty of that control in most off the shelf (retail) funds. For over a decade you’ve been able to choose the investment option within your current fund. And for nearly five years you’ve even been able to choose the superannuation fund (account) itself.

Are you seeking control over the money so you can spend it on yourself now? Think again – that’s technically illegal and scrutinised by the ATO.

What you can access and do in an off the shelf (retail) superannuation fund

• Access an investment menu that includes hundreds of different managed funds from most investment sectors
• Directly buy the top 200 (even 300) shares listed on the Australian Stock Exchange (ASX)
• Invest in managed funds that include internal gearing
• Buy some derivatives, such as some types of options and warrants

If you want all of those features you’ll pay a higher administration fee, but it’ll still probably be less than a SMSF would cost you.

If you don’t want any of those features you can find really low cost funds off the shelf (retail) that still give you control. The retail superannuation product market is so diverse you can probably find a product to suit your needs whilst also being value for money.

Do you really want to DIY your super?

Self managed superannuation funds may also often be known as DIY Super, which sounds attractive. But DIY is dangerous when you don’t know what you are doing.

Big penalties for non-compliance

Each member of a SMSF is also a trustee, which involves a lot of responsibility.

The SIS Act (Superannuation Industry Supervision Act) is huge and as trustee of your SMSF you are legally obliged to understand it and comply with it. If you don’t comply you could be stripped of your concessional tax status and pay the top tax rate. (i.e. no more 15% tax rate.) Ouch!

You can also be personally subject to a range of civil and criminal penalties for non-compliance.

Yes, you can outsource some of that compliance to a specialist financial adviser plus a compliance firm. But that costs money.

They’re costly

You also need to pay for annual financial accounts and audits. More money.

In a SMSF the costs can only be spread across four members, not thousands as with a retail superannuation fund. So your administration, investment and transaction costs can quickly add up to higher in percentage terms than in an off the shelf product. That’s why it’s best to wait until you have hundreds of thousands of dollars in superannuation before considering self managed superannuation.

When you may need a SMSF

There are some types of assets that retail superannuation funds generally don’t enable you to hold. If (big if) you need to hold these assets in superannuation then a SMSF may be appropriate for you. These assets include:

• direct property
• private business
• collectibles (for investment only – no personal use allowed. And a recent announcement suggested these ‘exotic’ assets be banned.)
• other direct investment assets. (e.g. that gold bar you just bought from the Perth Mint.)

In addition technically you can now ‘directly’ borrow to buy investment assets within superannuation. For example you can borrow to buy an investment property. If you want to implement that strategy you will need a SMSF (plus a nice sized deposit and good cash flow from contributions.)

Who definitely should NOT consider a SMSF

If you habitually ignore your superannuation, as evidenced by barely reading your annual statement, then a SMSF is not right for you.

Similarly if you don’t understand how superannuation works then don’t go near DIY Super. This may sound harsh, but if you have not understood this article then you’re probably not yet ready for a SMSF.

In summary the reasons a SMSF is not appropriate for most people include

• you can get the desired level of control from a retail fund
• you can access the desired type of investments from a retail fund
• you’re not interested enough to learn to fulfil the trustee’s obligations
• you want to minimise your costs
• you don’t currently have a high enough balance

What do you think? Anything I’ve overlooked? Please share in the comments below (you can be anonymous)

Related posts:

1. Checklist to ensure your SMSF deed is up to date
2. Should you use a Corporate Trustee to run your Self Managed Super Fund?
3. Advanced Gearing Products

As with most things whether you use a corporate trustee to run your self managed superannuation fund entirely depends on your situation. Your accountant is the best person to ask.

A Corporate Trustee is good if you fall into the following categories:

You are secretive and own lots of assets

Don’t want anyone to know what assets you own? A Corporate Trustee holds the assets in the name of the company. If someone does a land titles search using your name, they won’t find the real estate held in your SMSF.

The members of your SMSF change often

Your members are the Trustees. So when a member changes, so do the Trustees. In this instance, you have to go back to the local titles office and transfer the property into the names of the new Trustees. There are generally no state duty or Capital Gains Tax issues to do this. But there are administrative costs to transfer.

You love asset protection strategies

Assets in your SMSF are meant to be conservative – they are there for your retirement – not for speculation.  Risky or not, I have had clients that have ended up with negative assets in their SMSF. Insolvency ensures that the Trustees of the SMSF can go down with the sinking ship.

You pay land tax

In most States you pay a higher rate of land tax the more land you have. Therefore, if you and your wife already have a rental property then owning more land (as Trustee of the SMSF) increases the rate of land tax you pay. You can transfer the land out of your name into the name of your new company – for no transfer duty and no Capital Gains Tax. (Get the help of a tax lawyer.)

Corporate Trustees add expense and complication. Your Accountant is best to do the costs/benefit analysis.

For the definitive arguments for and against a Corporate Trustee visit LawCentral and subscribe for Platinum membership.

Related posts:

1. Why you don’t need a SMSF
2. Checklist to ensure your SMSF deed is up to date
3. Update your Will when your cheating husband is given marching orders

Imagine you are your five year old self – what would you do in that situation?

Two thirds of the children ate the marshmallow – some immediately, some after many minutes had passed.

The study is clearly an examination of the children’s ability to delay their gratification, which is a key trait in creating wealth.

The significance of the study was shown when the progress of the children was analysed over a decade later. The one third of the children who had held out the fifteen minutes to get their reward were assessed to have become more successful adults.

The study and its implications for success are discussed in the book “Don’t eat the marshmallow … yet!” by Joachim de Posada.

Watch Joachim de Posada briefly discussing the study in this video (6 mins). It’s worth it for the hilarity of watching the children resist eating the marshmallow. (It could be an entrant in “Funniest Home Videos”)

So, Easter Sunday may be the only day it is ok to eat chocolate for breakfast but do you have any eggs left today, just three days later?

To increase your ability to create and keep wealth start by saving some of your Easter eggs.

What do you think of the study and its thoughts on delayed gratification? Share your reactions inc the comments below.

Related posts:

1. Create wealth with your home
2. Crank Up The Pace With Gearing
3. Thwack! Zero income. How long will you last?

Tax cuts in terms everyone can understand

Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

• The first four men (the poorest) would pay nothing.
• The fifth would pay $1.
• The sixth would pay $3.
• The seventh $7.
• The eighth $12.
• The ninth $18.
• The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.”

So, now dinner for the ten only cost $80. The group still wanted to pay their bill the way we pay our taxes.

So, the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his ’fair share’?

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being ‘PAID’ to eat their meal.

So, the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

• The fifth man, like the first four, now paid nothing (100% savings).
• The sixth now paid $2 instead of $3 (33% savings).
• The seventh now paid $5 instead of $7 (28% savings).
• The eighth now paid $9 instead of $12 (25% savings).
• The ninth now paid $14 instead of $18 (22% savings).
• The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”

“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works.

The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.

This parable is often circulated whenever tax cuts are being discussed and especially when the direction of those tax cuts is being politicised (that’s always isn’t it?).

You can get a sense of the value system of the original author through the parable. But I am interested to hear your view and reactions to the above –  please share them in the comments below (you can do so using “Anon” as your name if you wish.)

If the Henry Tax Review in Australia results in cuts in personal tax rates how should they be applied?

Related posts:

1. Tax breaks for polluting activities

Peter Fletcher has written this very useful guide on “How to build a vibrant business community using Facebook Pages“. In his introduction Peter explains why you may consider a Facebook page for your business:

Facebook presents a powerful opportunity for business. At one stage it was just for college kids. But that’s no longer the case. As this is written the social networking platform has well over 200 million active users. If Facebook were a nation it would be one of the earth’s most populous. Over 100 million log on at least once per day and these users upload over 850 million photos every month.

But, importantly for business, Facebook’s fastest growing demographic is 35 years of age and older. They’re connecting, they’re communicating, and they’re spending. It’s fertile ground for business.

Early in 2009 Facebook released a new version of Pages. Business Pages, or Fan Pages as they’re also known, harness the power of some of Facebook’s most popular applications. Previously these applications were only available on personal profiles, but today they’re being used by business to leverage connections and engage and interact with their community in new and creative ways.

First, I hope to demonstrate how Facebook Pages provide a unique opportunity for marketers to build active communities around their business. Second, I plan to reveal some of the new skills that are essential to online marketers in order to create engagement and dialogue, and to tap into trends and fashions. Finally, I hope to show that the development of a vibrant business community is within reach of anyone with the passion, will and drive to create outstanding results.

A Facebook page as a compliment to your website

You may be thinking that since you already have a website for your business you don’t need a Facebook page.

Firstly I ask how often is the content on your website updated and is it easy to do so? You can post new information, articles, photos and videos very easily to your Facebook page. And even better people can interact with them – and you can interact back. It’s great to have such a conversation with your customers.

Secondly, my thought is that if Facebook is where people hang out then I want to make it easy for them to interact with me where they are. I don’t want to force them to come to me. Sure I’d love for everyone to come back to my website, but most importantly I want them to be able to get value reading my stuff wherever they are.

Time to get started

Even, and perhaps especially if you are brand new to considering social media as part of your business brand management I recommend you read Peter’s book. It is easy to read and includes a step-by-step guide into starting your Facebook business page. It’s already helped me tune my Facebook page.

While you are on Facebook setting up your page you are welcome to connect to my Facebook page. I look forwarding to discussing personal finance with you there or in the comments below or wherever you like to hang out.

Related posts:

1. Protect your personal brand with your own domain name
2. Try to make your passion a business
3. Making money writing about your passion

Question: My client is distraught. After finding out that her husband’s personal assistant was taking the ‘personal’ part of the job literally, they are now divorced. I am a Western Australian accountant that wants to protect my already fragile client. I hear that divorce invalidates a Will. Should she make a new Will? What happens if she fails to make a new Will?

Answer: Your client should make a Will as soon as possible.

The laws are different in Western Australia compared to the rest of Australia. In the bad old days, only marriage revoked a Will – divorce didn’t. This meant that there were unfair situations where a divorced spouse benefited from their ex-partner’s Will. All States deal with this. However, Western Australia does it differently. Under the Wills Amendment Act 2008 (WA), divorces, like marriages revoke a Will. Revocation means that the Will is now totally void. I suppose this is good because ex-spouses no longer benefit from their separated spouses – but other States do it better (see below).

What happens if your client doesn’t make a new Will?

If your client doesn’t make a new Will, then she dies without a Will – intestate. Trust me when I say that you don’t want to die intestate. It means that your estate is then administered according to the relevant state’s Administration Act. Relatives are beneficiaries in the proportions as set out by the act. This happens even if it is not what you wanted.

Worse, the evil Public Trustee is the default administrator. The Public Trustee automatically takes a percentage of your assets on your death. The greater your assets, the more you pay – even if there is no additional work. It is expensive and usually a waste of time. If you trust the government more than your family, then sure, let the Public Trustee take over. Otherwise, just appoint the beneficiaries as the executors.

What happens outside of WA?

In all other States and Territories, the Will remains valid after divorce. The only change is that the ugly spouse is removed. If your ex was an executor then they lose that job. If they were a beneficiary, the gift fails. Everything else in your Will remains the same. The integrity of the rest of the Will is intact and the document still stands. This means that the estate is distributed according to your wishes (but excluding your ex-spouse).

What is wrong with dying intestate?

You ask what is wrong with dying without a Will. Dying intestate has tax problems. You are taxed long after you die. Although death taxes were abolished by 1981, your estate is reduced by the three defacto death taxes – Income Tax, Capital Gains Tax and Stamp Duty. Failure to plan allows these hungry taxes to eat away at your estate’s value. LawCentral Platinum members can safeguard themselves by learning about:

• Three Generation Testamentary Trusts;
• Post Testamentary Trusts (Poor Man Trusts); and
• Superannuation Testamentary Trust

You can sign up for Platinum membership of LawCentral from the link below:

Related posts:

1. Store your Will safely in the Will Bank
2. Checklist to ensure your SMSF deed is up to date
3. Should you use a Corporate Trustee to run your Self Managed Super Fund?

If you are absolutely brand new to planning your money and investing then this book may be useful in enlightening you of concepts that are essential to understand. In a sense it is about increasing your base financial literacy. Things you may discover include:

• Mainstream types of investments (asset classes)
• Main risks of investing
• Risk based investment portfolios
• Avoiding financial scams

The book does include some useful check lists such as the one about getting ready to invest.

Historical returns

One of the interesting graphs presents the historical annual returns of the Australian share market from 1900 to 2008. (Page 29). You can see that it is similar in shape to the bell curve with most annual returns being between zero and 20%.

Expected returns

One of the fascinating areas for me as a financial planner was the information on risk profile based investment portfolios (pages 26 & 27). In particular ASIC have published the expected annual average return from each portfolio based on historical returns.

It fascinated me as a planner since the expected returns are higher than we as licensed professional advisers could get away with using when advising clients. Maybe I’ll start including those two pages in my statements of advice as proof of my “reasonable basis of advice” if ASIC’s lawyers ever come knocking.

What you won’t get

One of the limitations of publication from a Government regulator is that that can’t really express their opinion nor give you detailed processes for how to make a decision that is appropriate for you. They just tell you to make your own decisions and here’s a few basic things to keep in mind.

That’s where sites like mine (The Money Guide) come in. You’ll find articles where I take a stand and share my opinion. Plus in the detailed resources I share the processes I use when selecting the appropriate strategies for clients. So if you are not yet a subscriber now is a great time to get on board as I have lots more detailed resources planned for publication this year.

Related posts:

1. What Warren Buffet is Doing: in his own words
2. What are realistic expectations of market returns?
3. Be wary of league tables

As the author of the Australian Unity Wellbeing Index, Professor Cummins from Deakin University notes:

“[Unemployment] is devastating to the wellbeing of the people directly affected and also to the wellbeing of their families. While governments recognise the economic impact of unemployment, the shocking impact on personal wellbeing and mental health is not sufficiently recognised.”

What measures are you taking to protect you and your family from the impact of unemployment?

You may not think losing your job is likely and you may have the typical “we’ll be right” attitude but what evidence do you have to back that attitude?

It’s probably easier than you think to set up some financial protection against the economic impact of retrenchment. Having that financial safety net is also an investment in your mental health as it gives you a greater sense of wellbeing. Don’t wait for or rely upon the Government to support you and your family.

Watch the video in my previous article “Don’t stress about losing your job” to learn the three key elements to your retrenchment safety net.

Related posts:

1. Thwack! Zero income. How long will you last?
2. Don’t Stress About Losing Your Job
3. Redundancy First Aid