Who will pay the bills if you are no longer around or able to?
This may sound blunt but it is a harsh reality. Too many people leave their loved ones in the lurch to struggle because they procrastinated or just didn’t have things in place with life insurance. We make the process of gaining life insurance seamless for you, ensuring that you have the absolute best coverage in place. So if something unforeseen was to happen to you, your family will be taken care of and will be secure financially. For more information on all of our services continue reading below, please get in touch with any queries we are happy to help.
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The term insurance refers to sudden and unforeseen events. On the other hand, you can argue that as death is inevitable to us all, it is therefore not unforeseen, but can still be sudden or premature. Assurance refers to a pledge, confirmed through a contract, to pay the amount of the policy upon the death or terminal illness of the life assured.
Life insurance pays out a lump sum to ensure that those who are financially dependent on the life assured have a measure of financial security. Most people tend to consider life cover when they marry, take out a mortgage and/or have children.
Life policies in New Zealand generally include a terminal illness extension which pays if the life assured has been diagnosed with a terminal illness.
Policies pay out small amounts early to provide funds for immediate expenses such as funerals, while coverage is usually on a worldwide basis and for all illness and accidental causes. Suicide is excluded for the first 12 months.
How much cover you need depends on your situation. A chat with one of our advisers can help you understand what level of cover you might require.
What is Critical illness cover and why do I need it?
A critical illness/trauma policy is designed to pay you a lump sum for this type of event – in fact, most policies will cover up to 40 conditions such as cancer, stroke and heart attack. They pay you a lump sum because you suffer a serious illness and survived, not because you died! The point of this kind of policy is, whilst you are receiving treatment for your condition, who is paying your mortgage? What is this doing to your savings or any equity you have in your house? Even where you have someone else bringing an income into the home, will it be enough, and what sort of impact is it having on those people? What if they have to give up their job to look after you?
Many people consider that having life insurance is enough, or don’t want to consider other options because of the cost. Consider that because life cover pays out when you die or become terminally ill, any payment may come too late. When people calculate how much life insurance they need, they rarely allow for the costs that come before death. The cover you already have may cover the old mortgage, but not the new one you just took out to get you through the previous 18 months.
Sickness benefit without children, single, 25yrs or over – $201.40 net per week (invalids benefit $251.73).
Sickness benefit for married, civil union, or defacto couple with or without children – $335.66 net weekly total (invalids benefit $419.56).
DPB – Care of sick or infirm, single, 18 years and over – $251.73 (net per week); Sole parent – $330.70 (net per week); Half-married or civil union or de facto rate – $209.78 (net per week).
Let’s look at this another way – 2 in 5 men and 1 in 4 women will suffer a critical illness between 30 and 65 years of age – that’s an enormous 40% of men and 25% of women
If you had a 40% (or even 25%) probability of winning Powerball before the age of 65 how much of your weekly pay would you be prepared to spend on lotto tickets? Quite a big proportion I’m sure! Yet the chances of winning Powerball are 1 in 38,000,000.00 (that’s 38 million) – quite a bit less likely than suffering a critical illness!
The amount will depend on your age (it costs more the older you get), what other types of disability cover you have, your financial status (equity, investments etc) and how you have structured your overall risk plan. There are lots of things to consider and a good adviser should be able to guide you through this process. Having some of this type of cover should be considered as a minimum in a personal risk plan in the same way as life insurance is. The chances of you suffering from a qualifying condition are so high that trauma cover is one of the most relevant insurance products available today. Call us today to find out how we can fit this into your own risk plan.
Author: Gerard Tilleyshort
Mortality and demographics data, Health Information Service report, 2006.
South Australian Cancer registry, 2003.
Ministry of Social Development, selected benefit rates at 1 April 2011.
General Cologne Life re , 2002.
Someone with specialised skills or knowledge in your business
The founder or public face of the company
The creator of unique intellectual property – software, key advisor, major account/sales person
Someone with responsibility for a significant portion of revenue/profitKey person Insurance
The death or disablement of a key person can affect a business in a number of ways:
Lost profits otherwise generated by the key person
Additional costs to secure and integrate a replacement
Loss of contracts and customers
Loss of market share as competitors “fill the void”
Ability to stay solvent, potentially breaching The Company’s Act
Ongoing stress for the remaining proprietors/staff
Loss of company value
Key person cover is designed to inject cash into the business to provide funds to secure a replacement, replace or reduce lost profits, reassure customers and creditors that the business is financially secure, and to meet contractual obligations. Without key person cover the business may be forced to wind up or face a significant reduction in its value. Statistics tell us that:
5% of businesses have to be wound up or cashed up if there is an event which affects a key employee
In a forced sale business, assets only realise approximately 35% of the owner’s perceived value.
Debt cover may have been affected on the life of the key person by the business. Once a claim has been made and debts repaid this may make funds previously used to service debt available to meet key person needs that may have arisen.
As any sole trader will be the key person in their business, their death or disability invariably means the business will not continue. In the event of premature death, it would be important to ensure sufficient funds were available to compensate dependents who needed it and in the event of a disability, income protection would be important to secure a replacement cash flow.
Key person policies are normally owned by and paid for by the company. The generally accepted view for limited companies is that the premium is tax deductible and the benefit is assessable. However, if all funds are used within the tax year of receivables for deductible expenses, no tax is payable. Each company must seek advice from their tax advisor on their specific circumstances.
Author: Gerard Tilleyshort
The Companies Act 1993 makes the following requirements:
Liquidity Limb: The company must be able to pay its debts as they fall due during the ordinary course of business
Balance sheet Limb: The Company must have assets greater than all of its liabilities, including contingent liabilities.
Technically a company must be solvent at all times to remain in existence. The death or disablement of a key person may make it impossible for a company to meet this test.
Losing a key person may affect the company’s ability to meet its normal commitments under a loan agreement. The purpose of debt protection is to provide cash to repay external debt such as loans, overdrafts, leases and H.P’s, creditors and contingent liabilities, and internal debt such as shareholder advances and current accounts.
The risks commonly associated with triggering a default would be death, permanent disability and temporary disability.
A questions to ask yourself is: What event could give rise to a default on your debt? What debts can be met from cash flow?
A careful analysis of a company’s financial position should be able to reveal whether it could meet the above requirements. A review of who is responsible for generating revenue and servicing important clients or who has specialised knowledge or intellectual property will assist in understanding how that person’s loss would impact on the company balance sheet. Discussing what that outcome could look like with directors/guarantors could be very revealing.
It is normal for a lender to request a personal guarantee when a business loan is advanced and many of these are joint and severable, meaning all guarantors are jointly and equally responsible for the total debt. A lender may recover the full outstanding balance from the surviving guarantor.
Consideration should also be given to how the premiums are paid, ownership of the policies and potential tax issues. This is something that your accountant and solicitor should be involved in. The impact on your buy/sell agreement should also be considered; should any debt payout be included as part of the valuation if it also triggered a buy/out under said agreement? What happens if there are surplus or insufficient funds? When is the personal guarantee released?
Debt protection insurance is designed to meet actual needs and should not be a windfall. Careful consideration should be given as to how this fits in with your overall business risk strategy. A good risk adviser should be a real asset in this area. Feel free to contact us if you need any information or would like to take out a debt protection policy.
Author: Gerard Tilleyshort.