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Lecture 6

AYB250 Lecture Notes - Lecture 6: Carport, Medicare (Australia), Elective Surgery

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Risk Management Process
Identification of risks
o Identify risks with economic consequences
Unidentified risks can ruin a plan and thus, goals
o A good advisor assumes unexpected events will happen
Quantification of risks
o Establish the likely financial consequences of each risk
Allows you to work out best way to handle it
Helps establish a priority
Strategies for handling the risks
1. Eliminate the risk
2. Control or reduce the risk
3. Retain the risk
4. Transfer the risk
Implement the program
Review the program
o Check to ensure the cover remains relevant & appropriate
Life Insurance
Life insurance provides cover against the risks of premature death.
Emotions aside, establish if anyone would be financially disadvantaged upon the premature death of a client
Principal Causes of Death
Heart diseases (Heart attack & blocked arteries of the heart)
Dementia & Alzheimers Disease
Accidents (15-24 : 68%)
Life Expectancy
The average life expectancy will continue to rise with each generation
o Advisors need to plan for a longer time frame
Life insurance policies can be extended to include cover for disability and pay a lump sum amount in the event
o Total and permanent disablement (TPD); and
The TPD extension provides for a lump sum amount to be paid in the event of a situation where
the insured will never work again.
o The consequences of significant illnesses (trauma)
There are two broad categories of expenses:
o medical and other costs associated with the disablement;
o ongoing support of the client and their dependants
Total and Permanent Disablement (TPD)
Pays a lump sum
Specific losses or unable to work again
Generally an extension of life policy
Can be added to/part of trauma policy
Own occupation & any occupation

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Can occur in one of two ways:
1.You suffer the permanent loss of use of:
Two limbs (whole hand or whole foot) or
The sight in both eyes or
One limb and one eye
2. Where you are engaged in any business, profession or occupation, whether as an employee or otherwise:
You have been absent as a result of illness or injury for 6 consecutive months and
At the end of 6 months, you are disabled to such an extent as to render you unlikely never again to be engaged
o Any occupation
o Any business, occupation or profession for which you are reasonably suited by your education training
or experience
o Your own occupation
AKA: trauma, critical illness, crisis insurance;
Provides a lump sum on the occurrence of one of a number of specified events;
Can be added as extension to a life policy or stand alone;
Main conditions covered (92% of claims) -
o Heart attack;
o Coronary artery bypass
o Stroke;
o Malignant cancer
Consequences of Death and Disability on Dependents
To provide for the consequences of premature death and disability it is necessary to establish:
o who will be affected by the premature death or disability and
o the degree of dependency
Young Adult
o Death
o Disablement
o Trauma
Young Family
o Death of Income Earner
o Death of Homemaker
o Permanent Disablement
o Trauma
Mature Family
o Children self supporting
o Health, disability considerations
The Multiple Approach
An investment interest rate at an achievable level if selected by multiplied by salary
The interest rate is divided by 100 and rounded up
The tax that would b incurred on this amount would be similar to the taxation paid pre-death
Shortcomings of the Multiple Approach:
Other resources that may exist
What amount of income the dependents actually need
No capital to dismiss immediate debts

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The Needs Approach
The needs approach uses three steps
Calculate the amount needed for the dependants to maintain their standard of living
Calculate the resources the dependants have to meet those needs
The difference between those two sums is the amount for which life insurance needs to be effected
The Dependants
The immediate dependants would be the partner and children.
o The partner needs to be provided for for life or, if there was a superannuation plan, until the
superannuation benefits commence.
o The children would need to be provided for throughout the period of their dependency.
It would be necessary to establish their age and the length of their dependency.
The Living Expenses
The amount required for living expenses would be derived from amounts currently incurred.
In ascertaining costs the full amount of the family’s expenditure needs to be brought into account.
When considering living expenses in relation to children, consider costs at different stages of their lives.
o As they get older, the costs will increase.
Current Resources
After calculating the amount needed by the dependants, ascertain what funds will be available to meet the
calculated amount apart from any sum insured by a life policy. This could come from:
o The income of surviving family members.
o Any available government benefits.
o Where death or disability arises from a motor vehicle or workplace accident, a benefit may be payable
under the state scheme providing benefits for those situations.
o Proceeds from life insurance cover under a superannuation plan.
o Life insurance cover currently in force would also be brought into account.
o Any investment that can be converted into income producing assets.
Need for Life Insurances
If the amount calculated is not adequate then it is the client’s family that will suffer the consequences
The sums produced can be high and may result in the client being inclined to dismiss the amount as being
Duty of Disclosure
At law the insured has a duty to disclose any information that can be regarded as material. Material information
refers to any matter that the client could be reasonably expected to know is relevant to the insurer’s decision.
If the information given in the application form is incorrect in a material way the insurer may be able to reduce
the amount payable or deny any cover under the policy.
Types of Premiums
There are two ways in which the premium may be applied:
Types of Policies
Broadly there are three types of policies provided by life insurers:
Whole of life
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