Macquarie Life
Calculating levels of insurance
cover
Lauren Styles
Business Development Manager
This activity has been accredited for continuing professional development points by the Financial Planning Association
of Australia but does not constitute FPA’s endorsement of the activity.
Accreditation number 005725 for 1 point.
Disclaimer

Macquarie Life Limited (MLL) ABN 56 003 963 773 AFSL 237 497 and Macquarie
Investment Management Limited (MIML) ABN 66 002 867 003 are not authorised
deposit-taking institutions for the purposes of the Banking Act 1959 (Cth) and MLL and
MIML’s obligations do not represent deposits or other liabilities of Macquarie Bank
Limited ABN 46 008 583 542. Macquarie Bank Limited does not guarantee or
otherwise provide assurance in respect of the obligations of MLL.

This information is provided as a guide for licensed financial advisers only. Financial
advisers are prohibited from passing on this information to any retail client. In no
circumstances is it to be used by a potential client for the purposes of making a
decision about a financial product or class of products.

This presentation and the case studies are not based on any particular client or their
specific needs, any similarities are purely coincidental. Financial Advisers must take
into account each individual client’s specific situation, needs and circumstances when
recommending levels and types of Insurance.
Agenda

Calculation methods

Disability income / business expenses

Death

TPD

Trauma

Severity based cover

Tailoring your message
3
Australian statistics
Life underinsurance based on current median levels of cover is
$2,166 billion.
For total and permanent disability (TPD), the level of
underinsurance is $7,912 billion.
Rice Warner 2012
4
Australian statistics

$1.46 million – present value of $100,000 pa income over 20 years1

$60,657 – the expected government school education costs for a child
born in NSW in 2012 (preschool – year 12)2

$330,294 – the expected private school education costs for a child born
in NSW in 2012 (preschool – year 12)2

$347,000 – average new mortgage size in NSW, October 20123

Every year 235,790 working age parents suffer a serious illness or
injury – 17,000 will be forced to stop working permanently or for an
extended period.4
1 Assumes
discount rate of 6%, salary increases 3% pa
Australian Scholarships Group (www.asg.com.au)
3 AFG Mortgage Index Nov 2012, (www.afgonline.com.au)
4The Lifewise / NATSEM Underinsurance Report, Feb 2010
2
The effects of underinsurance

20 per cent - the proportion of Australians who listed illness or accident
as a reason for missing a mortgage payment5

11per cent - the proportion of those Australians who declared
bankruptcy in 2011 who identified one of the reasons as ill health6

36 per cent - the proportion of Australians with chronic conditions who
reported problems with accessing health care due to cost7

17 per cent - the proportion of Australians who skipped a medical
treatment, test or follow up recommended by a doctor because of the
cost.7
5 RMIT
Mortgage Difficulty Survey 2010
Insolvency and Trustee Service Australia: Profile of Debtors 2011 (www.itsa.gov.au)
7 Centre for Policy Development: Out of Pocket – Rethinking health copayments ,July 2009 (www.cpd.org.au)
6
How much is enough?

No set formula – each client will have different needs based on
factors such as:
– purpose of the cover – personal or business
– personal circumstances – married, children, dependents
– level of debt
– private health insurance coverage
– current insurance in place
– lifestyle expectations
– budgetary constraints
– savings, disposable assets, ongoing income
– tolerance to risk.
Predicting the future

It’s not always possible to accurately determine how much cover will
be enough because there are a number of unknowns including:
– the condition or injury the person sustains
– medical costs after claim
– final expenses – funeral, estate finalisation costs
– other statutory insurance payments – NDIS, CTP, workers
compensation
– interest rates
– inflation.
Lump sum calculation
 Not recommended

Multiple of salary:
– 5 x salary, or 15 per cent of salary x years to age 65
– does not take personal circumstances into account
– for example: unmarried client, no debts, no dependents, earning $100,000.
Is $500,000 death cover (5 x salary) needed/appropriate?

Human life value / present value of lost income:
– present value of personal income lost up to retirement age
– better than multiplication of salary but still doesn’t look at the client’s needs
or future requirements
– for example: what about additional ongoing expenses or initial upfront costs
of a TPD.
Lump sum calculation
 Better option

Comprehensive needs analysis:
– looks at actual needs of the client/dependents, now and in the future
– must be regularly reviewed to ensure the client’s needs are still being met
– life changes need to be taken into account eg marriage, new baby, mortgage
– if there is ever a dispute as to the appropriateness of cover you have
recommended, there will be clear reasoning to back up your advice.
Disability income and business expenses
Disability income
Business expenses
75% of the first $320,000
50% of the next $240,000
20% of the balance
100% of allowable business expenses
Maximum cover $60,000 per month for first two
years, $30,000 thereafter
Maximum total payment of 12 times the
monthly benefit over 24 months
Insurable income:
• income from personal exertion
• superannuation contributions.
Examples of allowable business expenses
include:
• electricity and gas
• property rates
• rent on business premises
• salaries of non-income generating staff
• regular advertising
• equipment hire
• interest payments on loans.
Consider including Claims Escalation to ensure
claim payments keep their value against
inflation
100% of superannuation is insurable via
superannuation contribution benefits but this
must be paid into a superannuation account
Maximum cover $60,000 per month
The normal day to day expenses incurred in the
insured person’s business.
11
Death cover
Case study – family with non-working spouse
Immediate expenses
Final expenses (eg funeral, legal costs)
25,000
Clear debts
Mortgage
Credit cards
Other debts
250,000
10,000
15,000
Future expenses
School fees/expenses
120,000
Ongoing income requirements
Living expenses
750,000
(yearly income required x years required)
Less
Savings
Superannuation
Disposable assets
50,000
120,000
20,000
Recommended insurance
$980,000
TPD insurance
Immediate expenses
Medical expenses & related costs
Home/Car modification costs
100,000
150,000
Clear debts
Mortgage
Credit cards
Other debts
250,000
10,000
15,000
Future expenses
School fees/expenses
120,000
Remember
• TPD insurance pays out on permanent
disablement only
• It is not a replacement for disability income
insurance which pays for permanent and temporary
disablement
Ongoing income requirements
Living expenses
750,000
(yearly income required x years required)
Ongoing medical expenses
500,000
(eg rehab, carer)
Less
Savings
Superannuation
Disposable assets
Disability income cover
(after-tax benefit x benefit period)
50,000
120,000
20,000
750,000
Recommended insurance
$975,000
13
Trauma insurance
Case study one – cover out of pocket costs
Case study two – change in lifestyle
Immediate expenses
Immediate expenses
Possible medical expenses
100,000
Possible home/office/car modification costs 150,000
One year after-tax salary
70,000
One year after-tax salary (spouse)
60,000
Possible medical expenses
100,000
Possible home/office/car modification costs 150,000
One year after-tax salary
70,000
One year after-tax salary (spouse)
60,000
Less
Accumulated sick/annual leave
Clear debts
Mortgage
Credit cards
Other debts
250,000
10,000
15,000
Future expenses
School fees/expenses
120,000
Recommended insurance
10,000
$370,000
Heart attack statistics1
- Minimum recommended time off work is two weeks2
- Average time off work is three months
- 80 per cent return to work within 12 months
1The
Less
Accumulated sick/annual leave
Savings
Disposable assets
Recommended insurance
economic cost of heart attack and chest pain (Acute Coronary Syndrome), Access Economics, June 2009
and Secondary Prevention. Accessed from http://www.health.vic.gov.au/
2Rehabilitation
10,000
50,000
20,000
$695,000
Lifetime costs of cancer1
Type of cancer
Melanoma
Colorectal
Prostate
Breast
Lung
Non-Hodgkin’s Lymphoma
Leukaemia
Bladder
Kidney
Stomach, liver and pancreatic
Uterine, ovarian and cervical
Brain
Head, neck and thyroid
Other
All cancers
1The
Cost of Cancer, Access Economics and Cancer Council, April 2007
Average cost ($)
16,100
40,700
29,100
28,500
59,000
69,200
103,900
27,200
50,000
69,700
36,400
149,400
75,500
61,100
47,200
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Don’t forget the spouse and kids

Spouse cover:
– although non-working spouses don’t financially contribute to the bank account –
their efforts reduce the money flowing out of it
– consider the costs of childcare, cleaning, cooking, washing, errands, etc
– hiring someone to perform these duties could cost over $100,000 p.a1
– a working spouse may have to take time off while non-working spouse recovers.

Child trauma:
– a child’s illness can put a huge strain on family finances
– a parent often ceases work to be with the child
– for families in non-metro areas, there are the costs of accommodation to access
the treatment and costs associated with not being at home
– may want to consider covering an amount equivalent to one year’s salary plus an
additional amount for out-of-pocket expenses.
1 Stay-at-home
mums worth $124,000 pa, May 2008 (www.news.com.au)
Non-medical hospitalisation costs
Category
Travel
Description
• Travel to the hospital (eg, petrol, rail, taxi, •Passport and visa fees for families travelling
public transportation, airplane, car rental)
internationally
Tolls
•Parking fees
•Hotel, motel, or bed-and-breakfast facilities •Hospital-sponsored housing
•Hospital cafeteria, takeout foods, and restaurant meals eaten out by spouse and other family
members during visitation
• Cost of additional family members who move
• Unplanned but necessary enrolment in
into the family home to care for children
daycare or after-school programs
•
Lodging
Food
Childcare
•Entertainment
and extra food costs for
siblings and caregivers
•Cleaning
service
Homemaking • Delivery charges and/or errand running
expenses
Employment • Unpaid leave of absence
Incidental
expenses
•Telephone
•Laundry
and Internet costs
and dry cleaning
•Toiletries,
over-the-counter medications
•
Babysitting
•
Gifts for volunteer caregivers
•Pet
sitting or kennel fees
•Voluntary
separation or termination of
employment
Reduction in number of work hours
• Specific food requests, toys, and other
distractions for a child
•
Clothing needed to be purchased because of
unexpected admission
•
Nonmedical out-of-pocket expenses: A hidden cost of hospitalization, Journal of paediatric nursing 2011
Other options

Death, TPD and trauma are generally all or nothing cover:
– you either get paid or you don’t, there’s no in between.


Consider heart attack under a traditional trauma policy:
–
an insured person may have a relatively minor heart attack, meet the definition,
receive the full sum insured, then go back to work after a few week’s rest
–
alternatively, they may have a major heart attack, again meet the definition and
receive a payment, but require many months off work and are advised to
drastically reduce their workload going forward.
What scenario should you cater for in your advice?
–
advise the client to pay a higher premium for a level of cover not necessarily
needed for the health event suffered?
–
save money but risk underinsurance in the event of a major health event?
Severity based cover

Pays a portion of the total sum insured depending on the severity of the health
event, for example:
– a severe heart attack is likely to result in payment of 100 per cent of the sum
insured, while a milder heart attack as defined in the policy would possibly receive
40 per cent
–
Applying a needs analysis calculation simplified to two worst case scenarios for
lump sum cover
–
–
–

Death
Worst case (A severity) health event scenario
Claim payments better matched to client needs
Because payments are based on severity, many more conditions are covered,
generally at a lower premium (even with the grossed up sum insured)
Severity based v traditional

Pricing efficiencies passed on

40 year old male non-smoker, white collar executive
FutureWise
Cover
Premium
$750,000 Life, TPD (own) and
$116.05 per month
$250,000 trauma plus with
reinstatement
Active
$750,000 death and health events
$123.20 per month
20
Severity based v traditional cont.
FutureWise
Active
20% = $50,000
5% = $37,500
Progress to stage 2
Balance = $200,000
40% - 5% = $262,500
Progress to stage 3
Zero
65% - 40% = $187,500
Early stage melanoma
Zero
5% = $37,500
Total claims paid
$250,000
$525,000
Prostate cancer
(T1a, Gleason score 5)
21
Remember: tailor your messages
IFSA/TNS Research suggests -

Men need a wake up call1:
– language and content that shakes them out of their complacency
– content that questions their assumptions of invulnerability
– believable, concrete facts to overcome cynicism.

Women need a connection1:
– language that reassures and content that tells a story they can relate to
– analogies that makes sense to them
– ammunition in the form of facts and anecdotes to promote and fuel the
insurance debate at home.
1IFSA/TNS
- A Nation Exposed: Closing the Protection Gap 2005
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