What is life insurance and why you need it?

The best way to understand life insurance, and how important it is, is to imagine what would happen to your family and their finances in the event that you or your partner were to die unexpectedly or become disabled and unable to work.

Think about all of the financial commitments you have in your life. Like many of our clients, there a probably a few large expenses that spring to your mind! Mortgage repayments, car or personal loan repayments, credit card debts. And then there are your dependents. You might have your children’s care and education costs to consider or your parent’s aged-care living expenses. And on top of that, you probably have a few long-term financial goals, like a retirement fund you and your partner are saving towards.

If you were suddenly out of the picture what would happen to all of these financial commitments and goals?

Who would be able to pay all of your debts?

What would your family have to sacrifice?

Although it’s not a scenario that many of us like to think about (and for good reason) being adequately prepared for the worst can save your family from years of financial hardship in the long run. That’s why life insurance is something that everyone should think seriously about.

This article is designed to explain everything you need to know about life insurance.

Specifically, we’ll discuss:

The different types of life insurance available

How to work out how much cover you need

What to consider when applying for life insurance and

How life insurance premiums work

So what is life insurance?

Life insurance is an umbrella term that’s used to describe a range of products that can provide financial support and cover for your family in the instance of your death, disability, serious illness or injury. The amount of cover and the nature of this financial assistance can vary greatly depending on the type and level of insurance cover you have.

Many people take out life insurance to provide security for large expenses such as their mortgage repayments, but life insurance can also be used to protect your family’s quality of life by covering smaller, ongoing expenses such as bills, general living costs and even costs associated with your death that your family may incur, such as the cost of the funeral.

Life insurance can also be used to ensure that your family will continue to receive adequate income in the event that you are seriously injured or ill and are unable to continue to work.

Types of cover

There are several different types of life insurance available, and it’s important to understand what each offers. Often these different products are packaged together, so you should always check what is included in your life insurance when applying.

• Life cover
  There are several different types of life insurance available, and it’s important to understand what each offers. Often these different products are packaged together, so you should always check what is included in your life insurance when applying.
• Total and Permanent Disability (TPD) Insurance
  TPD insurance is very often paired with life cover, but instead of covering you in the event of death, it offers cover in case you are seriously and permanently disabled and no longer able to continue to work and support your family. Different insurers have different definitions of what constitutes a ‘total and permanent disability’ so it’s important that you read and understand the terms and conditions that your insurance provider offers.Generally, there are two different options. For some products, TPD insurance can only be claimed if you can no longer work at all in any occupation. For other products, TPD is claimable if you can no longer work in the specific occupation that you did previously. This will be established when you take out your insurance.
• Income protection
  Income protection (or salary continuance) is a way of ensuring that you and your family will be financially covered in the event that you are seriously ill or injured and unable to work for any period of time. Like TPD cover, insurance providers have different definitions of what is considered a disability to work, so you need to check carefully what they will and will not cover.Unlike TPD insurance, however, income protection can be claimed even if you are only unable to work for a limited period (such as 6 months or a year), and you do not need to be permanently unable to work to claim. Income protection is a way to ensure that you continue to receive ongoing income to cover your ongoing expenses, even if you are not working. For this reason, income protection is highly recommended for small business owners, and self-employed people, but it is useful for anyone who relies on an income.
• Trauma cover
  Trauma cover (sometimes called ‘critical illness’ cover) is used to cover you in case you develop a specific illness or condition (such as a stroke, or cancer). In the event that you do develop this illness or condition, you will likely find it difficult or impossible to keep working. Trauma insurance will pay a set amount to help you and your family through this time.

How much cover do you need?

Working out how much life insurance cover you need is a complicated task, and it requires a lot of research, and personal consideration to determine the best options for your circumstances.

As a very simple equation, you need to try to answer the following two questions:

How much money would my family have access to if I were out of the picture?

How much money would they need?

The gap between these two amounts is a good approximation of how much life insurance cover you would ideally need. But you also need to think about what you can afford.

Working out the answers to both of these questions is not easy, though, and you need to consider many other factors to have an accurate idea of your financial position.

• What you should consider
  You need to think realistically about your family’s financial situation, and how it would change if you were suddenly out of the picture.How much money do I currently have in savings? (Include superannuation, shares and any investments).
  How much cash would my family need to continue living at the same quality of life? (think about mortgage repayments, childcare costs, your other bills)
  How much income would continue to come into my family without my contribution?
  What additional expenses could arise as a result of my death or disability? (Think about funeral costs or the prospect of ongoing medical bills and palliative care.)
  Would other family members be able to help support your family financially?
  Do you have paid leave entitlements at work that would be paid out on your death?
  What other forms of financial support might be available to you or your family? Remember that you may be entitled to worker’s compensation or government payments if you become disabled or seriously injured. Accidental death insurance, which is a life insurance product may also be paid to your family if you die in an accident.Many insurance providers offer insurance cover calculators to help you work out how much cover you need. Or you can always discuss you options with one of our consultants who will talk you through the whole process.
• Who needs to be covered?
  Another important thing to consider is who needs to be covered in your family. Although it may seem like only the main income earner needs to be protected, you need to carefully consider whether this is the case.Consider a situation like that of Mark and Sara. Mark works full-time and Sara works part-time while also looking after their 3 children for most of the week. Even though Mark is the main income earner, if something were to happen to Sara, Mark’s income alone would not be enough to cover their mortgage repayments, as well as the additional cost of full-time childcare. They decide they both need life insurance to protect their family.
• Superannuation and life insurance
  Once you’ve worked out the appropriate level of life insurance you need, it’s worth taking a look at your current superannuation. Many super funds include life insurance, so it’s worth checking what you are already covered for.
• Review your life insurance regularly
  For many people, the amount of life insurance they need will change a lot over their lifetime. If you take out a new mortgage or have children the amount of cover you need will increase quite a bit! Similarly, if you have just paid off your mortgage, or your dependents move out of the home, you might find you can reduce the amount of cover you need.It’s important that you have your life insurance cover assessed regularly so that your policy can be changed and updated to match your changing circumstances.

Applying for life insurance

Once you’ve decided on the type and level of life insurance you would like, you can apply for a product that meets your needs.

Applying for life insurance cover is a simple and straightforward process. However, it’s important to know that when applying for any life insurance product, you will need to provide the insurance provider with some personal information on your health and lifestyle. If you have a serious, or terminal pre-existing medical condition, you may not be able to apply for life insurance. Some insurance companies will need you to undertake a medical examination before you take out a policy.

Premiums

For any life insurance product, you’ll be paying premiums. Most insurance providers will allow you to pay your premiums monthly or annually so talk to one of our consultants to find out what will work best for you and your budget.

Usually, life insurance premiums will become more expensive the older you get. This is a matter of statistics, as insurance companies expect elderly people to be more likely to make a claim on their life insurance than young people.

Because of this, when applying for life insurance, you’ll often be given the choice of stepped or level premiums, so what is the difference?

• Level premiums:
  Level premiums are set at a fixed rate that will not increase as you get older, although they may still increase with inflation and additional insurance provider’s fees. Level premiums will normally be more expensive than stepped premiums, at least when you first take out insurance, but because they do not increase with your age, it’s easier to plan for your future and control how much you’ll be spending later. Often level premiums will work out cheaper in the long run.
• Stepped premiums:
  Stepped premiums will go up each year as you get older (like steps) but because of this, they will usually be cheaper than level premiums, at least in the beginning. If you are thinking of choosing this option, you need to think realistically about how long you are likely to be paying your premiums. You might save money for a little while, but if you’re stepped premiums end up much higher than a level premium it might have been wiser to have selected a level premium all along.

Conclusion

It’s easy to see why for many clients, life insurance is one of the most important aspects of financial planning. No one wants to imagine a situation where their family is left in debt or financial hardship. Life insurance offers peace of mind that if the worst were to happen, your family would not have to worry about money or their financial future. With the appropriate life insurance cover, your family will be financially secure no matter what.

 

This post first appeared What is life insurance and why you need it?

Keyman Insurance: A Definitive Guide (Updated 2016)

If you’re like most of our clients, you’re a busy business owner running a growing and profitable business.

You have a reliable team of employees who are as passionate as you are about going to work and a work culture that breeds positivity.

But there are one or two employees whom your company heavily relies on.

This might be your co-founder, your head of marketing…

…it might even be you.

Now:

What would happen if you or that person were to die suddenly or become critically ill?

How long would your company survive?

A morbid thought, granted, but it’s one so many businesses overlook…

And it can cost them dearly.

It’s not secret that as a business owner, you need to do everything you can to protect your company.

(If not only for you but your employees, too)

But how do you protect your business from going under in times of death or critical illness?

Keyman insurance.

In this comprehensive article, you’ll learn everything you need to know about keyman insurance.

Specifically:

What keyman insurance is, why you need it and how to find the best price available

The potential tax ramifications to a business that receives proceeds from key man insurance

What you need to know before applying for keyman insurance

Ready?

Let’s get started.

What is Keyman Insurance?

We’ve all been there:

We’re doing everything we can to run and grow our businesses, focusing on the urgent and important activities that come with such a responsibility.

Prospecting, hiring employees and servicing your clients comes at the highest priority…

…and non-urgent but important tasks—like researching keyman insurance—can easily fall by the wayside.

While many business owners are unfamiliar with keyman insurance it’s actually pretty simple.

Keyman insurance (also known as a keyman insurance policy, key person or key employee insurance) is an insurance policy that is taken out by a business to cover an important individual within a business.

This is often a key partner, executive or employee whose life is integral to the day-to-day running of the company and whose death would create substantial financial hardship for everyone involved.

If that key person were to pass away or succumb to illness, but the company had taken out keyman insurance, proceeds from the policy would be paid to prevent irreparable damage to the company.

Keyman insurance is popular with many business owners for an obvious reason: it affords another option other than bankruptcy.

While no amount of money in the world can replace the death of a valued employee, it can buy the peace of mind that your company’s future won’t be affected because of it.

Who Can Be Considered a Keyman?

Anyone in your company can be considered a key person, but generally, key people are individuals whose skills, knowledge, experience or leadership are important to your business’ profitability.

Granted, every individual employed at your company plays some role in how much money is brought in, but generally, keyman insurance will only be taken out by the person who runs the entire operation.

What Can Keyman Insurance Be Used For?

Keyman insurance does more than just protect your company and retain precious employees; it covers many of the costs that are associated with the day-to-day running of a company.

Here are just some of the ways keyman insurance can be used:

Recruitment, selection and training of new employees. We all know how expensive onboarding new employees can be. As Jason Hesse writes in Forbes, “The contrast between hiring just the one employee and hiring when you’re a larger company is striking.” We probably don’t need to tell you that losing a key person is costly, but with keyman insurance, the costs of hiring and retaining a suitable replacement become less of a financial concern.

Covering expenses. A death of a key person can send your company into turmoil. There are daily expenses to cover, bills to pay and debt repayments to be made (the last thing you need at a time of crisis is wolves at the door). With keyman insurance, you’ll have the peace of mind that all the day-to-day running costs of your business are covered, leaving you to get back to what you do best: running and growing your company.

Provides funding for the restructuring of your business. With the passing of a key person, a complete restructuring of a business is often required. And, like recruitment, this can become a costly expense. But with keyman insurance in place, you can secure new partners without the need to shut down your business.

Buy the stock from the deceased owner’s estate. Imagine you’ve co-founded your company and one day, your co-founder becomes incapacitated or worse, passes away. What would his or her surviving family members do with your co-founder’s share of the company? Would they hold onto it, or would they cash it in? Having keyman insurance puts you in a position to compensate them fairly while retaining full ownership of the company you helped build.

The profit your business generates is its lifeline…

…and protecting those profits at all costs is one of the wisest investments you can make.

When Can I Use Keyman Insurance?

Let’s imagine for a moment you’re running a digital marketing agency.

Most of your company’s revenue comes from “John,” your number one salesperson.

This is because John has many valuable connections in the online space and knows how to close the higher-end deals.

Now:

If John was to become critically ill or die suddenly—would your business survive?

This is an uncomfortable question to answer, but it’s one every business owner must consider (especially when your company and your employees’ livelihoods are at stake).

John often generates at least 50 percent of the agency’ sales and is critical to the business’ continued success.

In addition to this possibility, you recognize you need to reward his performance so that he isn’t tempted to leave the company and work for a competitor.

You don’t currently offer a retirement plan for your employees, but you would like to provide John with a supplemental income stream—if he stays with the agency, long-term.

John is currently 40 years old and in very good health.

What would you do?

One solution would be to invest in keyman insurance.

Here’s what that would look like:

You estimate it would take two years for John’s replacement to be trained and build a highly-nurtured pipeline of prospects.

To address your need to reward and retain John, the agency’s legal, tax and financial advisors also draft a formal business agreement for supplemental benefits.

If John should die before receiving any retirement income, the business promises to pay a $500,000 survivor benefit to his beneficiary.

Using the key person life insurance strategy, the agency is able to prepare for the financial challenges which would result if John were to suddenly pass away.

For a manageable annual premium, you would be able to immediately secure the financial stability of your business. Moreover, you would be able to provide a substantial incentive for John to continue working at the agency.

What Types of Keyman Insurance Are There?

There are two basic types of keyman insurance, each covering different areas.

The type of policy that’s the right fit for your business will often depend on what you want to achieve with the policy, and of course, how much budget you have.

That’s why we recommend you speak to a consultant to help decide what’s right for you and your business.

Here’s what you need to know:

Buy-Sell Insurance. Also known as a buy-sell agreement or buyout agreement, buy-sell insurance is a legally binding agreement between co-owners if a business covers the value of shares in their company. It’s mainly used to determine what events will trigger a buyout in the event of death or disability or what price will be paid for a partner’s or shareholder’s interest in the partnership.

Capital Protection Insurance. Imagine your co-founder is the guarantor of a substantial business loan you have outstanding. If he were to die suddenly or become seriously incapacitated, what would you do? How could you shield your company from financial ruin? The answer is capital protection insurance. With it, you could call on the loan to be repaid or put a stop on any further funds being loaned, safeguarding your company from going out of business.

What Are The Advantages of Keyman Insurance?

In addition to protecting your company in the event of death or critical illness and strengthening trust and loyalty among employees in your company, keyman insurance offers a number of overlooked advantages.

These include:

Security at an affordable price. While you can’t prevent events such as the death of a key person in your business, you can mitigate the consequences of such events. And for a modest monthly fee, you can secure the peace of mind that if something bad does happen, you can maintain a certain standard of living and your finances won’t be burdened.

Freedom of choice. Keyman insurance offers the freedom of being in control. With the insurance policy in place, you have the freedom to decide which employees to insure. As mentioned above, anyone who is an asset to your company can be protected

What Does Keyman Insurance Cover?

There are four categories of loss for which keyman insurance can provide compensation:

Loss of revenue. If a key person passes away or becomes ill for an extended period, keyman insurance provides temporary personnel and, if necessary, finances the recruitment and training of a replacement.

Insurance to protect profits. Keyman insurance can be used to offset lost income from lost sales, losses resulting from the delay or cancellation of any business project that the key person was involved in, loss of opportunity to expand, loss of specialized skills or knowledge, and more.

Insurance to protect shareholders or partnership interests. This enables shareholdings or partnership interests to be purchased by existing shareholders or partners. (Note: if you’re a venture-backed startup, most venture capitalist will insist you have keyman insurance before they invest in your company.)

Insurance for anyone involved in guaranteeing business loans or banking facilities. As mentioned above, this covers the guarantor of any outstanding debt in your company. (Note: the value of insurance coverage is arranged to equal the value of the guarantee.)

Is Keyman Insurance Tax Deductible?

(Note: We recommend seeking taxation advice from your accountant  before considering keyman insurance as the below statements are a guide only.)

This is a common question we’re asked.

And for good reason:

Tax treatment for keyman insurance varies from country to country.

In Australia, for example, keyman insurance is tax deductible depending on how it’s used.

As per Section 51 of the Income Tax Assessment Act, the following practices are in place:

treat the premiums as non-deductible under section 51 and the proceeds as non-assessable of a life policy is involved treat the premiums as deductible under section 51 and the proceeds as assessable income if an accident/sickness or term/whole of life policy is involved.

When it comes to paying tax on the benefits received by the beneficiary, the following ruling usually applies:

the claim payment is not taxable if received by the original beneficial owner if a life insurance policy is involved

the claim payment may be subject to capital gains tax (CGT) if the benefits are received by a company or trust for an accident/sickness/life policy

the claim payment is usually not taxable if received by the life insured, spouse or relative for any policy involved

As with any insurance policy, it’s important to understand that keyman insurance has both tax-deductible and non tax-deductible components.

Most businesses either purchase keyman insurance for revenue, capital, or both.

Key person insurance is considered to be bought for revenue purposes if it’s to find a suitable replacement or replace lost income that comes as a result of losing a keyman.

As Finder writes,

Any purpose that ensures continued revenue and profits for the business and any expense that has to be incurred for the successful running of day-to-day business activities that directly result in income are considered as revenue purposes.

On the other hand, if key person insurance is purchased to back a loan you’ve taken out, or to ensure your company debts are repaid, then the Australian Taxation Office might consider the fact that you took out keyman insurance for capital purposes.

Put another way:

If the funds from the key person insurance are NOT used for income generating activities but are instead used to further the company after the loss of its key person, then it’s for capital purposes and the premiums paid for the insurance will NOT be tax deductible.

To clear up the confusion that often comes with identifying whether keyman insurance is deductible or not, we’ve broken it down into two categories below:

When keyman insurance is tax deductible

When it is used to compensate for the loss of profits and revenues of your company or business

When it used to hire and train the replacement of your key person

When it is used to pay the temporary replacement you have employed until a full-time replacement is found

When it is used to pay debts incurred by the loss of your key person

When keyman insurance is NOT tax deductible

When the benefit is used to pay the debts of a key person

When the benefit is used to pay other debts incurred by the loss of the key person

When the value of goodwill is replaced because of the absence of your key person

When lines of credit are replaced guaranteed by your key person

How Much Does Keyman Insurance Cost?

While the cost of keyman insurance varies from one insurance provider to the next, the amount of cover will often be calculated based on the amount of profit a key person brings into the company and the loss that would occur without them.

As with all insurance policies, it’s worth shopping around to get a fair quote. Ask for quotes on $100,000, $250,000, $500,000, $750,000 and $1 million and compare the costs of each. Then, consider how much money your business would need to operate, in the event of a tragedy.

A common question we’re asked is, “How much keyman insurance do I need?”

Here are a few things to consider:

(Note: The figures below are general advice only and have not taken your personal circumstances into consideration. Please seek advice from your accountant or one of our financial planners before deciding the right amount for you)

The size of your business and the cost to replace an employee. You need to consider the size and financial situation of your business operations, but in most cases, you want to insure your key person for as much as you can afford. In Australia, for instance, you can take out cover for between $500,000 and $10 million. They may seem like exorbitant amounts, but think about how much your business would realistically need to survive until a key person could be replaced, and how much would need to be spent on recruitment and training.

The structure of your business. The structure of your business will obviously influence the amount of cover required as you may need to buy back shares in the company from family members of the deceased to ensure you remain in control of your business.

Review your cover frequently. Make sure the level of coverage is regularly reassessed to ensure the benefit will be enough to cover the costs during the loss of a key person (especially if you plan to use the benefit to buy back shares from an estate).

What Do I Need to Know Before Applying for Keyman Insurance?

Before you apply for keyman insurance, make sure you:

Know the value of your key person. While it’s difficult to put a value on your own head or that of someone important to the company, you need to estimate their value to determine the level of cover you want to apply for. Consider the value of business that could be jeopardized or lost without that person, the percentage of sales generated by that person and the costs associated with replacing them.

Know whether you need key person insurance. Not every business is eligible for keyman insurance. If, for example, your business already has credit insurance which covers outstanding loans and debt amounts, you might not need keyman insurance. Consult with a financial planner before moving forward with your application.

Know how your business will recover from a loss. Often, keyman insurance applications require business continuation plans as part of their application process. With that in mind, it’s important you create a plan that outlines how your business would continue to operate after the loss of a keyman.

Conclusion

Keyman insurance is not for everyone.

But you shouldn’t dismiss it without doing some research, first.

While it isn’t always convenient, investing in keyman insurance is one of the best ways of protecting your business—and those involved.

To learn how keyman insurance can protect you and your business, contact us for a free quote today.

This article originally appeared at Keyman Insurance: A Definitive Guide (Updated 2016)

Various Benefits of Permanent Life Insurance

It is the biggest reality of life that life is uncertain and we never know where life will take us. Therefore, in order to deal with the various uncertainties of life, it is essential to make some important decisions regarding the financial stability of your family. One of the most important decisions is to choose the right kind of permanent life insurance policy to ensure the financial security of your family.

One of the main factors that play an important role in the choosing of a life insurance policy is your family’s needs and requirements. Since you are opting for life insurance so that you can provide them with financial security against the odds of life, your family members need both pre-death and post-death coverage. If the permanent life insurance policy is chosen with diligence, it can definitely prove to be of great benefit.

Benefits of permanent life insurance:

Most people prefer to opt for permanent life insurance policies. This is because its terms are much better compared to normal term insurance policies. Some of the benefits that influence people to choose permanent life insurance are:

• Permanent life insurance provides lifetime coverage.
• You can take a policy loan by borrowing against your cash value of the life insurance scheme.
• Permanent life policies offer death benefits that can be beneficial for your family after your death.
• It is considered as ‘cash value insurance’ since, a part of your premium (after the deduction of insurance expenses) is invested by your insurance company and the accrued interest builds up your cash value overtime.

Based on the above mentioned benefits, you should opt for permanent life insurance to ensure maximum security for your family.

Source: This article was first published here Various Benefits of Permanent Life Insurance.