Life has a habit of throwing us curve balls. How else to explain that every day in Australia 18 families lose a working parent and a chunk of their future income. That’s a strong argument for protecting your loved ones with adequate life insurance.

And it’s not just the breadwinner’s life that needs insuring. If a wife dies, it is estimated that the family income will drop by half. Even if the wife is not working, the spouse will have to find extra childcare and or/housekeeping help or perhaps work fewer hours, all of which would squeeze the household budget.

How much cover?

The simplest way to work out how much cover you need is to subtract your current financial resources from your future expenses. And when you do so, remember that your debts don’t die with you.

It’s not just your mortgage you need to take into account but also your credit card and any personal loans as well as your day-to-day living expenses. Actuaries Rice Warner believe you need 15 years’ income to be fully covered.

Yet Rice Warner found that the median level of life insurance cover across the working age population only accounts for 64 per cent of basic life insurance needs and only 42 per cent of the amount needed to fully maintain the standard of living of remaining family members.^[1]

Insurance within super

For most working Australians, a basic level of life insurance is available automatically through your super account. This can be useful if cash flow is an issue, as the money will come out of your superannuation contributions or balance.

However, life insurance within super is often not enough to meet your needs. The industry average for benefits payable from super is about $70,000, nowhere near the amount needed to provide ongoing support and security for your family.^[2] And if a payout is made to a non-financial dependent, they will pay capital gains tax on amounts over $50,000.

The solution could be to top up your cover in a retail product outside super. The major difference between the two products is the underwriting process.

When you apply for a retail policy your risk is assessed via underwriting. By comparison, most policies within super are not underwritten and cover is automatically granted without any individual risk assessment.

While at first glance automatic acceptance may seem attractive, it does make sense to have an underwritten policy where the insurer assesses your risk through a medical examination or questionnaire as the cover will be tailored to your individual needs. Interestingly, industry statistics show that 93 per cent of people who go through the underwriting process will be accepted at standard premium rates.^[3]

The younger, the better

If you think you are too young to worry about life insurance, think again. The younger you are, the cheaper it will be. That’s because you will be deemed low risk and once the policy is in place the insurer can’t cancel it.

Next, you need to decide on stepped or level premiums. While stepped premiums start off cheaper, over time level premiums are more cost effective. If you are young and expect to hold the policy for a long time, level premiums are worth considering.

It is estimated that a 35-year-old non-smoking male seeking $500,000 cover will pay $30 a month in premiums while a female with the same profile would pay only $25 a month.^[3]

It’s always wise to know exactly what your policy includes. Some policies will pay out before death if you are diagnosed with a terminal illness. Others may cover suicide although they generally have a 13-month exclusion from the date the cover starts.^[4]

Making sure you have the right cover for your needs is vital. If you would like to discuss your options please contact us.

[1] http://ricewarner.com/newsroom/2013/december/02/rice-warners-latest-underinsurance-research-report/
[2] https://www.amp.com.au/wps/portal/au/
[3] http://www.lifewise.org.au/insurance-101/how-does-life-insurance-work
[4] http://www.lifeinsurancefinder.com.au/post/insurance-types/life-cover-death-benefit/suicide-is-it-covered-by-life-insurance/

Update On The US Shutdown

Update On The US Shutdown

By BT Chief Economist Chris Caton

 

The US government shutdown has entered its second week. This is not as dire as it sounds. First, only the 36% of Federal spending classified as “discretionary” is affected; Social Security payments, for example, continue to be made. Second, while there hasn’t been a shutdown since the halcyon days of Bill Clinton in 1996, before that they were quite a common occurrence.

The table below shows that there were 17 such shutdowns between 1976 and 1996. The median length was 3 days, with the longest being the 1995-96 event (21 days). Those that began on 30 September, as this one did, had a median length of 11 days. In each case, life as we know it eventually resumed.

The current shutdown came about because US Congress did not pass a “continuing resolution” to enable the Government to continue to spend when the new fiscal year began on 1 October, 2013. The main reason why Congress failed to do this is because the lunatic fringe of the Republican Party (frequently referred to as the Tea Party) is seeking to stop the Affordable Care Act (aka Obamacare), which makes health insurance compulsory for most  Americans, while ensuring that everyone can get coverage.

The economic effects of the shutdown are not huge; it is estimated that every week that it lasts will shave about 0.1 percentage point of Q4 GDP growth.

It now appears that the length of this shutdown will exceed the 11 days historical median. The reason is that the issue is about to be enjoined with another far more serious one; the raising of the US debt ceiling. This is something that needs to be done periodically so long as the Federal Budget is in deficit. Some will recall the share market chaos, and the downgrading of US Government debt by at least one ratings agency when the ceiling had to be raised in August 2011.

Raising the debt ceiling should be a simple accounting exercise; instead it tends to become a game of fiscal chicken between the Republicans and the Democrats. Given the intransigence that caused the shutdown, many fear that the debt ceiling negotiations will stall and the Government will literally run out of money, sometime soon after 17 October. A subsequent debt default by the US government would have untold negative consequences in global financial markets. The US Treasury has suggested that it would lead to a crisis as bad as 2008, and that the effects would be felt for a generation. 

The fact that the outcome of a default would be so pernicious is, of course, the biggest single reason why things are unlikely to get that far. But someone has to blink.

For as long as this remains an issue, markets will be volatile. But resolution should lead to a strong pickup as uncertainty is removed.

 

Disclaimers: Information current as at 8 October 2013. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. The information provided is opinion on general economic conditions only and does not constitute financial product advice.  Before acting on it, you should seek independent financial and tax advice about its appropriateness to your objectives, financial situation and needs. These economic updates are predictive. Whilst we have used every effort to ensure that the assumptions on which the economic updates are based are reasonable, the economic updates may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these economic updates. Past performance is not a reliable indicator of future performance.

HKS Federal Budget Analysis 2013

In the HKS Federal Budget analysis we summarise the key features announced last night. As in every other year, the Budget will have a positive or a negative impact on different individuals or households in Australia.

Budget at a glance:
 

1. Rise in budget deficit as tax revenue drops sharply

2. Big ticket commitments for disability, education and infrastructure

3. Superannuation and retirement changes

4. Clamp down on multi-national tax minimisation schemes

The government is planning deferrals and cuts in spending, plus tax changes aimed at multi-national corporations, to target a return to budget surplus by 2016–17.

Click here to read more of our Federal Budget analysis here. 

If you would like to talk about how this Budget affects you, don't hesitate to call us on 07 33977315.

In the meantime, we hope you find this analysis useful and informative.

 

RBA MEDIA RELEASE- Monetary Policy Decision

RBA MEDIA RELEASE- Monetary Policy Decision

Statement by Glenn Stevens, Governor

As per its meeting yesterday, the Board decided to lower the cash rate by 25 basis points to 3.25 per cent, effective today, 3 October 2012.

The outlook for growth in the world economy has softened over recent months, with estimates for global GDP being edged down, and risks to the outlook still seen to be on the downside. Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe.

Key commodity prices for Australia remain significantly lower than earlier in the year, even though some have regained some ground in recent weeks. The terms of trade have declined by over 10 per cent since the peak last year and will probably decline further, though they are likely to remain historically high.

Financial markets have responded positively over the past few months to signs of progress in addressing Europe's financial problems, but expectations for further progress remain high. Low appetite for risk has seen long-term interest rates faced by highly rated sovereigns, including Australia, remain at exceptionally low levels. Nonetheless, capital markets remain open to corporations and well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis. Share markets have generally risen over recent months.

In Australia, most indicators available for this meeting suggest that growth has been running close to trend, led by very large increases in capital spending in the resources sector. Consumption growth was quite firm in the first half of 2012, though some of that strength was temporary. Investment in dwellings has remained subdued, though there have been some tentative signs of improvement, while non-residential building investment has also remained weak. Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.

Labour market data have shown moderate employment growth and the rate of unemployment has thus far remained low. The Bank's assessment, though, is that the labour market has generally softened somewhat in recent months.

Inflation has been low, with underlying measures near 2 per cent over the year to June, and headline CPI inflation lower than that. The introduction of the carbon price is affecting consumer prices in the current quarter, and this will continue over the next couple of quarters. Moderate labour market conditions should work to contain pressure on labour costs in sectors other than those directly affected by the current strength in resources. This and some continuing improvement in productivity performance will be needed to keep inflation low as the effects of the earlier exchange rate appreciation wane. The Bank's assessment remains, at this point, that inflation will be consistent with the target over the next one to two years.

Interest rates for borrowers have for some months been a little below their medium-term averages. There are tentative signs of this starting to have some of the expected effects, though the impact of monetary policy changes takes some time to work through the economy. However, credit growth has softened of late and the exchange rate has remained higher than might have been expected, given the observed decline in export prices and the weaker global outlook.

At yesterday's meeting, the Board judged that, on the back of international developments, the growth outlook for next year looked a little weaker, while inflation was expected to be consistent with the target. The Board therefore decided that it was appropriate for the stance of monetary policy to be a little more accommodative.

If you have any questions regarding the above article, please contact the office on 07 3397 7315 and speak to your financial planner.

A Simple Strategy To Maximise Your Return On Cash

After today’s rate cut by the RBA, questions are beginning to raise as to how best utilise your cash holdings in order to gain the best benefit. With Australians rapidly becoming a nation of savers, this is a problem crossing the minds of most people.

The consensus with regards to today’s rate cut is that the major banks seem likely to pass on some – but not the entire cut for their borrowing products however they will inevitably reduce the returns paid in their savings products, father widening the gap between deposits and lending products.

As an example, for a 3 month term deposit at NAB of less than $20,000 you could expect to earn 5.20% whilst the standard variable rate at the same bank is currently up t 7.31% a gap of 2.11%. A reduction today from the RBA of 0.25% could see the term deposit rate fall to 4.95% and the standard variable rate fall to 7.11% (assuming the bank passes on a 0.20% cut) increasing the margin to 2.31%.

The question then becomes “how can I make the most of my savings” and the answer is quite simple – you try and beat the bank at their own game. As opposed to having your savings housed in a deposit, you have the money sitting in an offset account. The difference is that instead of earning money at a rate of 4.95% you are now saving money at a rate of 7.11%. As an added bonus, because you are saving money now and not earning money, you have to pay no tax.

A higher tax payer would need the equivalent of a 10% plus interest rate from term deposit to be able to compete with the higher rate of savings and savings on tax, and given we are in a cycle of rate cuts, that seems a very long way off at the moment.

If you would like to discuss this or any other financial planning matters, please contact HKS Financial Planning on (07) 3397 7315 or mail@hksfp.com.au .

Information contained in this blog is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you always obtain professional insurance, investment and taxation advice specific to your objectives, needs and financial situation before making any investment decisions or acting on any information contained in this article or on this blog.

HKS Financial Planning as an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning. ABN 40 003 677 334 AFSL 237641. Guardian Financial Planning is a part of the Suncorp Group.

2012 Expectations – Time to keep the faith

As we all move back into our daily routines following the festive season, we turn our attention to what’s happening around us and what impact these events may have on our lives.

If I remember back to the same time last year, the overall feeling with regards to the economy and markets was one of high expectation and positive sentiment, with most suggesting that 2011 was going to be a bumper year as the stock market rallied further from the low points seen in 2009. The sentiment lasted for only a brief period, as the toll left by natural disasters throughout the world in conjunction with political unrest in the US and a sweeping debt crisis in Europe began to take hold, culminating in one of the worst periods of volatility ever recorded through August, when swings of 5% were recorded in one day. As the market began to price in all of the unfolding developments, share prices fell and the mood once again returned to the gloomy days of 2008-2009 with word of an impending “GFC mark II”.

We are now into February of another new year, and thus far the sentiment is still rather negative as report after report seems to suggest that the onset of GFC mark II is imminent. At this point, it is worth remembering the feeling that was around at the same time – only one year ago, and how quickly things can change.

You see, although the press are reporting that the Greek debt crisis is on a knife edge, retail is in free fall and China is slowing – this is old news for global share markets, as these events have to some degree already been priced into current valuations.

It is for that very reason, despite all of the apparent bad news, that we have seen share markets the world over begin to rally throughout January and into early February. For all the bad events, the Australian, London and New York exchanges have seen gains of close to 5% whilst the German market has increased by over 10%.

What next?

The question now is are we through the worst? The short answer in terms of global events is probably not. The European debt crisis is not yet solved, but I suspect that throughout the course of this year the EU will continue to implement measures such as further austerity and perhaps seek some funding from the Central bank to improve credit, to improve the current position.

The US will continue its slow recovery from the deep recession that started in 2009, and global growth will continue although at a moderate level.  This however, is par for the course when coming out of a global recession, and although the growth maybe moderate, we should be celebrating the fact that it is positive instead of dwelling on the negatives.

I would expect however, given that the markets have already priced in some of this bad news, that we will see a fairly strong to moderate year for market returns – with the potential to become an exceptional year.

Continue with a long term approach

Often when we meet our clients for the first time, particularly over the last few years, the initial discussion tends to revolve around continuing losses and the clients needing advice on whether or not now is a good time to move to cash.

Our approach to this issue is to look beyond the immediate short term and develop a strategy that is suited to our client’s necessary time frame. More often than not, when dealing with superannuation, we would consider a long term time frame of over 10 years for investment purposes.

It is our role as advisers to listen to our clients needs and provide them with an independent view with regards to their financial situation, a view that is free of prejudice and that takes into account all the facts and figures in developing a strategy.

Whilst we are sympathetic to all those who have lost money in the last few years, we are yet to condone any clients moving to cash unless it is absolutely necessary or suited to their risk profile. The reason being that with a long term focus in mind, growth is often a necessary component, and although shares are volatile in nature (at the moment extremely volatile) no one can doubt the track record of shares over the long term.

Let’s take the last little period as an example. Following on from the dot.com bubble and September 11 attack the Australian index hit a low of 2,700 points in March 2003. Just over 4 ½ years later, the market had reached extraordinary highs of 6,828, representing a gain of 153%! However, as we have discovered, the market should not be measured on short term periods.

As we move beyond 2007 and into 2012, the market bottomed in March 2009 at 3,111 (down over 50% from 2007) back to a recent high of 4,971 in April 2011 and now recently closing at 4,365. Clearly, this demonstrates that the share market is volatile in nature; however the proof is in the pudding.

If we take that period in isolation (March 2003 to February 2012); the market has gained over 61%,meaning an investment of $100,000 during that period would be worth $161,666 today, below average for long time share market returns, however, this is still a pretty good result.

Comparatively, if we take the same money and invest into cash with an average return of 5% over the same period, we would have finished with a return of 40% or $140,000. Peace of mind would have cost us over $20,000 during one of the worst periods in market history.  In fact, if we look at the futures of both the cash and share market as they sit today they are heading in completely opposite directions. It appears on the surface, that after consecutive years of below average growth, global markets are poised for positive returns with optimistic views stating that there could be exceptional growth in the near future. Conversely, cash rates are falling – with the RBA implementing a rate cutting cycle that doesn’t look to end in the short term with each month potentially slicing more and more off of what was supposed to be a peace of mind investment.

Information contained in this blog is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you always obtain professional insurance, investment and taxation advice specific to your objectives, needs and financial situation before making any investment decisions or acting on any information contained in this article or on this blog. HKS Financial Planning as an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning. ABN 40 003 677 334 AFSL 237641. Guardian Financial Planning is a part of the Suncorp Group.

The Greek Debt Crisis- History Repeats Itself

Greece has dominated the news headlines in recent times for all the wrong reasons as it sits at the centre of the sovereign debt crisis that is worrying many global investors.  However, many may be surprised to learn that this is not a new phenomenon.

Investopedia records that the first default in Greece’s history occurred in the fourth century B.C., when 13 Greek city states borrowed funds from the Temple of Delos. Investors took an 80% loss on their investments when most of the borrowers never paid the money back.
 
Greece has defaulted on its external sovereign debt obligations at least five times in the modern era (1826, 1843, 1860, 1894 and 1932).  The first occurred in the early days of Greece’s war of independence and the last was during the Great Depression in the early 1930’s.

Looking at their most recent default, it is fair to say that many countries defaulted on their debt obligations in the early 1930s.  This occurred as the world economy contracted and entered the Great Depression.  Greece imposed a moratorium on paying its outstanding foreign debt in 1932.  This default actually lasted until 1964, the longest of any of the country’s five defaults.

It would appear that the sixth default for Greece is just a matter of time.  A European Financial Stability Fund is in the process of being increased to prepare for and deal with the likely default of Greece.  It is likely that the EFSF will be used to prop up the German and French banks most exposed to the E280 billion of Greece debt held outside the country.

As a result financial markets have adjusted the prices of tradeable assets such as shares by 10-20% over the past quarter.  The effects have been felt in Australia along with the rest of the globe.  However, a lot of the bad news is already priced into markets and if the EFSF is made large enough to deal with the crises then there could be a solid rally leading into 2012.

Information contained in this blog is of general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you always obtain professional insurance, investment and taxation advice specific to your objectives, needs and financial situation before making any investment decisions or acting on any information contained in this article or on this blog.

HKS Financial Planning as an Authorised Representative of Guardianfp Ltd trading as Guardian Financial Planning. ABN 40 003 677 334 AFSL 237641. Guardian Financial Planning is a part of the Suncorp Group.