Advising on need not Premium

Advising on need not Premium Determining Insurance Adequacy Levels Brendan Bowen Product Technical Manager, BT Life Insurance

I keep tweaking and crafting until I get the perfect sound. A life lesson from a music producer

This presentation has been prepared by BT Financial Group Limited (ABN 63 002 916 458) BT and is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. BT does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, BT and its directors, employees and consultants do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise noted, BT is the source of all charts; and all performance figures are calculated using exit to exit prices and assume reinvestment of income, take into account all fees and charges but exclude the entry fee. It is important to note that past performance is not a reliable indicator of future performance. This document was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author. For more information, please call BT Customer Relations on 132 135 8:00am to 6:30pm (Sydney time) 3

Determining adequacy levels 1. Factors in calculating insurance need 2. Determining life insurance need 3. TPD and Living 4. Insurance need after an event 5. Industry fund considerations Every artist is different, but it s my job to make them all sound amazing. A life lesson from a music producer 4

Life insurance need changes with life stage Singles TPD & Trauma DINKs Mortgage risk Couples with children Bring up children Education expenses Mortgage Empty Nesters Protection for income in retirement Retirees 6

Three main variables in determining adequacy Loss of future income Effect of other policies such as income protection Younger clients may experience higher growth in income Debt Home & investment loan Personal loans and credit cards Fixed expenses Medical costs Home modifications Mobility aids (e.g. Scooters) Funeral expenses & estate planning 7

Need is different for different types of insurance Future income need Adjust for income protection Life (death) Insurance Maybe, if dependants TPD Living Income Protection Yes Yes Yes No Yes Yes N/A Payout loans Yes Yes Yes No Medical Expenses No Yes Yes Yes Modifications to family home No Yes Yes Maybe Funeral expenses Yes No No No Mobility aids No Yes Maybe Maybe 8

Determining need for Stuart and Bronwyn 10 Stuart and Bronwyn both aged 30, with 2 children Hamish (age 5) Samuel (age 3) Employment details Stuart earns $100,000 + 9% super, employed in an office role Bronwyn is a stay at home mum Superannuation Stuart - $50,000 in HESTA Default cover ($100,000 death & TPD) Home valued at $500,000 Mortgage of $300,000 Repayments of $2,500 per month

Stuart s future income capacity increases over time $350,000 Income and Super contributions $300,000 $250,000 Annual Income $200,000 $150,000 Tax Payable Super After Tax income $100,000 $50,000 $0 30 35 40 45 50 55 60 Age 11

Future income component calculation Adjusted future income All future income amounts Super contributions Assumptions for Stuart Inflation rate 3% Income growth rate 3% Investment earning rate 6% Plus Estimated future income increases Less Tax on taxable income Discount for future earnings on investment of lump sum 12

Breakdown of components reinforces need Stuart s total life insurance need is calculated as $2,442,805 Future income Adjusted for inflation Future income increases Reduced by monthly payments by paying off mortgage Fixed costs added Funeral costs Pay off mortgage Children s expenses Private school/university fees? Total insurance need Mortgage $300,000 Estate Planning $30,000 Future income $1,772,805 Children's costs $340,000 13

Adjusted future income need decreases with age $3,000,000 Future income need as age increases $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 30 35 40 45 50 55 60 65 Future Income Need Mortgage Estate planning costs Childrens expenses 14

Workshop exercise Bronwyn is currently not earning any income Calculators recommended need largely on future income Bronwyn s future income calculation is zero Questions What additional costs would Stuart incur if Bronwyn was to pass away? Would calculations change if she intended to go back to work when children turned age 10? 15

Workshop exercise Suggested solutions Childcare Day care School holidays Housekeeping Reduction in income - Stuart Part time Change jobs Income on returning to work 16

Bronwyn s need doesn t factor in a return to work $800,000 Bronwyn's insurance need $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 30 35 40 45 50 55 60 65 Mortgage Estate planning costs Childrens expenses 17

Could include estimate of Bronwyn s future income $900,000 Bronwyn's need with estimated future income of $30,000pa $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 30 35 40 45 50 55 60 65 Mortgage Estate planning costs Childrens expenses Estimated Future Income 18

19 A note on single parents Step 1 Calculate taxable (taxed) Benefit amount x Service days Service days + DTR Less tax free amount Step 2 Calculate taxable (untaxed) Total benefit less taxable (taxed) and tax free

Calculating untaxed - Example Leah was born on 18/4/1966 Eligible start date - 1/4/1997 Life policy of $500,000 held within her super fund Super benefits: Taxable (taxed) $500,000 Tax free $ 20,000 Total $520,000 Leah passes away on 18/9/2012 and her superannuation death benefit is paid to her son Jeremy (age 22) Jeremy is no longer living with Leah but cannot hold down a job 20

Life policy can taint the taxed component Calculation of untaxed component Component Amount Tax payable Net benefit Taxable (taxed) @15% $443,375 $66,506 $376,869 Taxable (untaxed) @30% $556,625 $166,987 $389,638 Tax free $20,000 $Nil $20,000 Total $1,020,000 $248,494 $786,507 Insurance policy taints the taxable (taxed) component Taxable (taxed) reduced from $500,000 to $443,375 with insurance added Segmenting insurance can provide better results 21

Separating insurance stops tainting Superannuation benefit Component Amount Tax payable Net benefit Taxable (taxed) @15% $500,000 $75,000 $425,000 Taxable (untaxed) @30% Nil Nil Nil Tax free $20,000 Nil $20,000 Total $520,000 $75,000 $445,000 Insurance only super (with same ESP) Component Amount Tax payable Net benefit Taxable (taxed) @15% $227,145 $34,072 $193,073 Taxable (untaxed) @30% $272,855 $81,856 $190,999 Tax free Nil Nil Nil Total $500,000 $115,928 $384,072 22

Considerations for Life Insurance Higher income growth rate for younger clients Consider costs each party would incur on death of the other party Loss of income to look after kids Relocation costs Housekeepers Tax calculations if applicable 23

TPD and Living are offset by income protection $2,000,000 TPD future income need $1,800,000 $1,600,000 $1,400,000 Future Income $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 30 35 40 45 50 55 60 Age TPD Coverage Income Protection Coverage 25

TPD need includes medical and other fixed costs $1,000,000 TPD + Fixed Costs $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 30 35 40 45 50 55 60 65 TPD Coverage Children's costs Medical Costs Home moficiations 26

Considerations for TPD and Living Income protection covers part of TPD need Deductibility Ease of claim Consider costs each party would incur on TPD of the other party Loss of income to look after kids Relocation costs Housekeepers Direct costs of disability Mobility aids Medical expenses Rehabilitation 27

Case Study - Tax effect on TPD proceeds Rohan (36), born on 14/2/76 has the following benefits in super with service date of 10/7/97: Tax free $100,000 Taxable $300,000 Total $400,000 Home valued at $800,000 with mortgage of $500,000 He takes out $500,000 TPD (any occ) in super to cover mortgage Rohan became permanently incapacitated on 15/8/2011 28

Rohan s super gets a boost in tax-free component Increase in tax free = Benefit x Days to retirement Service days + Days to retirement Rohan s benefit increases to: Tax free $729,650 Taxable $170,350 Total $900,000 Withdrawal to pay off mortgage: Components Tax Net Withdrawal Taxable $94,639 $20,347 $74,292 Tax Free $405,361 $Nil $405,361 Lump sum withdrawal $500,000 $20,347 $479,653 29

Tax creates shortfall against mortgage initially $600,000 TPD Super compared to mortgage $500,000 $400,000 $300,000 $200,000 $100,000 $- 35 40 45 50 55 60 65 Age Insured amount Net insurance benefit Mortgage 30

Still need for life insurance after TPD or living paid Income protection portion not covered in original benefit Future income need shortfall Estate planning expenses not covered in TPD or living Funeral costs Estate equalisation TPD and living often linked to death benefit 32

Double and buy-back can reinstate death benefit Double benefits TPD & Living Insured survives 14 days No further premiums payable on reinstated amount to age 99 Buy backs TPD buy back Living buy back Living reinstatement Death $2.4m Death Death $900K $1.5M (Premium free portion) Example - Double TPD TPD $900K (double TPD) Stuart TPD $900K 33

Double features provide bucket list protection Ensures death benefit payable Doubles reinstate death benefit No premiums on reinstated portion to age 99 Gap of total need Life insurance reduced by fixed costs specific to TPD Estate planning costs Bucket list protection... Overseas trips New car or boat Sea Change 34

Default insurance in industry funds vary greatly Insurance options vary considerably Cover can either: Decrease as member gets older (premium smoothing) Remain fixed based on age when joined plan Personal plans don t tend to get allocated to default plan Some funds require members to have at least 1 unit of cover 36

Industry fund default life cover varies greatly $700,000 Default Life Insurance Cover - Industry Funds Sum Insured $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 Cbus Life Insurance (manual) Australian Super Life Insurance Hesta Life Insurance Hostplus Life Insurance* Caresuper Life Insurance $- 16 21 26 31 36 41 46 51 56 61 66 Age 37

Caresuper TPD follows future income trend 38 Sum Insured $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $- Default TPD Cover Industry Funds 16 21 26 31 36 41 46 51 56 61 66 Age Cbus TPD (manual) Hesta TPD Hostplus TPD Caresuper TPD Australian Super TPD

Salary continuance is not default on all funds Industry Super Fund CBus Income Protection Not default - Optional 60 day wait Australian Super Hesta Host Plus Care Super 2 year benefit period Default capped at $3,000 per month (age 21-49) 90 day wait Benefit to age 60 Default capped at $850 per month Not default Optional Not default - Optional 39

Stronger super requires opt-out of insurance APRA funds Required to offer life and TPD on an opt out basis Discretion for IP as an opt in, opt out, or at all My super Standard default level of life and TPD Members will be able to adjust their cover Insurance definitions to be aligned with SIS conditions 40

Negotiate on need not premium Tailor insurance portfolio to life stage Anticipate future events Negotiate based on adequacy Assumptions Inclusions Consider growth rate when projecting future income increases Younger clients & Professionals Industry funds Insurance tends to decrease with age Protect against bucket list risk Double benefits Buy backs Total insurance need Mortgage $300,000 Estate Planning $30,000 Future income $1,772,805 Children's costs $340,000 41

The Insurer of BT Protection Plans is Westpac Life Insurance Services Limited ABN 31 003 149 157. All BT Protection Plans, except for Term Life as Superannuation and policies paid via SuperWrap, are issued by the Insurer. For Term Life as Superannuation, which is part of the Superannuation Division of Westpac MasterTrust ABN 81 236 903 448 SFN 281412 SPIN WFS0112AU RSE R1003970, the issuer and trustee is Westpac Securities Administration Limited ABN 77 000 049 472 RSE L0001083 (WSAL). For policies paid via SuperWrap, which is part of Retirement Wrap ABN 39 827 542 991 RSE R1001327, the issuer and trustee is The Trust Company (Superannuation) Limited ABN 49 006 421 638 RSE L0000635 (SuperWrap Trustee). The administrator of all policies paid via SuperWrap and Wrap and the arranger of policies paid via Wrap is BT Portfolio Services Ltd ABN 73 095 055 208 (BTPS). BT Protection Plans are distributed by the Westpac Banking Corporation ABN 33 007 457 141 (the Bank). The Insurer, WSAL and BTPS are wholly owned subsidiaries of the Bank. Neither of an investment in, or acquired using, SuperWrap or Wrap nor BT Protection Plans are an investment in, deposit with or other liability of the Bank. Neither the Bank nor any member of the Westpac Group (other than the Insurer and WSAL) guarantees the benefits payable in relation to BT Protection Plans. Investments in, or acquired using, Wrap and SuperWrap are subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. None of the Bank or any other company in the Westpac Group stands behind or otherwise guarantees the capital value or investment performance of any investments in, or acquired through Wrap or SuperWrap. This information has been prepared without taking into consideration any persons personal objectives, financial situation or needs (personal circumstances). Because of this, before acting on this information, any person receiving this information should consider its appropriateness, having regard to their personal circumstances. Conditions, limits and exclusions on cover apply and are explained in the BT Protection Plans Product Disclosure Statement and Policy Document and BT Protection Plans (SuperWrap and SuperWrap Essentials) Insurance Booklet (each a PDS). Before any person makes a decision in relation BT Protection Plans, they should consider the relevant PDS available from advisers. This communication may contain financial product advice and has been prepared for use by advisers only. It must not be made available to any retail client and any information it is must not be communicated to any retail client or attributed to the Insurer, WSAL, the SuperWrap Trustee, BTPS, the Bank or any other member of the Westpac Group. This information has been prepared by the Insurer. 42