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INSIGHT

 Are you underinsured? - Insight - Citi

January 2017

Are you underinsured?

Although the vast majority of Australians think nothing of purchasing car or home insurance, many of us don't consider our financial wellbeing worth insuring.

Just 27% of Australians currently protect their income1, and for those who do purchase life insurance, many will be grossly underinsured2.

Life insurance (including life, accident and income protection) provides essential peace of mind for you and your loved ones. Surprisingly, the problem of under insurance does not simply appear to be an issue of affordability - as it is evident across all income levels.

Simon Harris, Head of Insurance at Citibank, admits income protection insurance can be difficult to understand, and the "Australian 'she'll be right mate' attitude" may play a role."

"While income protection insurance premiums tend to be higher than the average car or house insurance premiums, the average payouts also are substantially higher," says Harris.

"Yet cars are usually our least significant asset - income, investments and superannuation have a much higher value."

Do wealthy investors really need personal insurance?

If you have a sizeable investment portfolio, you may believe you don't need life insurance. This isn't true, as Harris explains.

"Typically, people with a significant investment portfolio or wealth assets also have big debts associated with those assets - which unfortunately do not disappear if you are unable to work, or if you pass away. So many of our high net worth clients use a life insurance policy as a form of hedging," says Harris.

As well as protecting your family and your lifestyle, the policy can help you feel more comfortable about making bigger investment decisions.

"Often, they'll treat the income protection policy as one of the expenses of their wealth accumulation plan."

"No matter what you earn, if you rely on your income to pay for daily expenses, including building your asset base, you should consider protecting your income. A good wealth accumulation strategy will also include a good wealth protection strategy," says Harris.

Protect your investments

Maintaining your investment strategy is another important consideration.

"Income protection policies generally assist in maintaining financial control. Even if you are unable to work, it will allow you to continue working towards your financial goals without having to fire sale any of your hard earned assets to generate cash flow."

"Short term periods without an income can have drastic consequences on the viability of long-term financial goals. Most investors often rely on having income coming in to continually invest in the market," says Harris.

If you have business assets, an income protection policy can play a role there too.

"Many of our high net wealth clients have significant business interests, independent of their personal assets, so these policies can also protect their family, business partners and business by keeping all the associated parties financially secure," advises Harris.

He points out that trauma cover is also sometimes neglected as part of a wealth protection plan, but can be a perfect companion to income protection. Trauma cover pays a lump sum on the diagnosis of a specific illness, whereas income protection cover will pay a monthly benefit.

"Many of our high net worth clients use a life insurance policy as a form of hedging. Typically, people with a significant investment portfolio or wealth assets also have big debts associated with those assets - which unfortunately do not disappear if you are unable to work, or if you pass away." Simon Harris

Estate planning

It is very common for a life insurance policy to be used to transfer wealth to beneficiaries. Often, a transfer requires estate equalisation, which helps all beneficiaries to be treated fairly and equitably. "This avoids the need to sell off any family assets to ensure equal inheritance for all children," explains Harris.

If you have a life insurance policy equivalent to the value of the business the investment won't need to be sold off. The business could transition to one beneficiary, with other beneficiaries receiving equivalent or fair value through the policy. This can save a lot of disagreements and potentially irreparable damage within a family.

"There's more to this than simply putting a will in place," says Harris. "Your financial adviser should work with lawyers and other experts, to ensure that the right amount of money goes to the right person in the right way."

Life insurance and capital gains tax (CGT)

A life insurance policy could be structured in a way that helps pay CGT on an inheritance, or to support your business through a transition in ownership.

"CGT is unavoidable, but financial advisors work with accountants to work out the best way to fund those liabilities. They can be easily calculated before they are required," says Harris.

Learn more about Citibank's Income Protection Insurance today.

Learn more

So, are you underinsured?

Life insurance is a critical component of a solid wealth management plan, and the start of the new year is the perfect time to review your current insurance policy to make sure you have adequate cover. Especially if your circumstances have changed in the last 12 months.

"If you have a large mortgage and children at private schools, you'll be in a very different situation to someone with no children and few debts," Harris explains. "We understand that no two clients are in the same financial position."

He says Citibank is able to provide tailored life insurance for clients with high income - requiring higher levels of protection. "Some of Citigold's benefits include convenient medical checks - a paramedical nurse or doctor will come to you at a time that suits you."

Contact a Citibank to see how a wealth protection plan can complement your wealth accumulation strategy.

Important Information:

1. http://www.smh.com.au/money/planning/malaysia-and-mexico-are-beating-australia-in-incomeprotection-insurance-20160822-gqyeo3.html

2. https://www.canstar.com.au/life-insurance/life-insurance-are-we-underinsured/

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