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Archives for September 2016

The Value Of Time

If you study any formal course in finance it won’t be long before you are faced with the concept of “time value of money”.  What it means is that there is a cost to the delay in receiving money, and so we say that “a dollar received today is worth more than a dollar received in the future”.

There are two reasons why it is better to receive a dollar today than a dollar in the future.  First, if you receive a dollar today, then you can invest it and get an additional return.  Second, there is always a risk that you will receive less than promised, or nothing at all.

For more numerate readers, that you might consider accepting 97 cents now, rather than $1.00 in a year time.  If with certainty, you could earn 3 cents in interest over the year, then (taxes aside) you would be just as well off taking the 97 cents now, as waiting a year for your $1.00.  If you could pay off a loan, say a credit card, with the money received now, you might be as well off taking 85 cents now, rather than wait a year and pay credit card interest.  Essentially, the more risk you might not receive the money in the future, and the greater the return you can gain from investing the money now, the less you would be prepared to accept now.

So in finance, time has a clear monetary value and as touched on above, the methods of working out that value are well-established.  But what about other ways of putting value on time?

Applying the time value of money concept, it’s quite clear that getting something signed off or delays in finishing a project can be costly.  That’s probably obvious when considering large constructions – delays in finishing a big hotel (for example) mean there is a lot of money sitting around earning nothing – but it applies just as much to day to day activities that we all undertake at work.

When the tax office stuffs you around, when the local council continues to vacillate over an approval, when legislative changes or indecision prevents you from making a choice, all of these things create risk and delay.  They stall the receipt of revenue, they create project risk and the burn time you could be spending on other things.  Sometimes these delays and problems are so bad that they involve employing additional people.  Overall, the delays themselves make it more expensive to do business.

Perhaps the monetary side of that is obvious, but there are personal and social costs too.  Not building an efficient road network or a high speed rail link between Sydney and Melbourne steals people’s time.  Small amounts each trip perhaps, but over one’s life, time that adds up – time that could be spent with the family, time spent fishing or at golf, time spent blowing the froth off a few with good friends.  Perhaps that sounds trite, but I put it to you that those people who create delay, who don’t do their jobs well, who don’t care, who give you the run-around, who are attending to their personal stuff while charging you, who go on strike during your holidays, these people are stealing your life.

In an era where for many of us work is demanding, and responsibilities of all types high, it’s time we started to take a stand on time-thieves.  It’s time business recovered some of the ability to select and fire employees, to insist that Government departments and officers are held accountable, simply to enforce the social contract implied through employment and regulation.  Failure to do this means business operators will have to change more and more for producing the same goods and services, and those that cannot will simply drop out.

That’s what you can look forward to if the current combination of individualism, workplace bias, and allergic reaction to productivity improvements is not addressed.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.

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What To Do About Insurance Claims

I’m looking to shed some light on insurance claims and hopefully shatter some illusions that insurance companies never pay claims.  We’ve all heard at least one horror story about an insurance company not paying a claim.  The most recent you may recall is the CommInsure scandal as reported by Four Corners in March 2016.  The story reported that claimants had suffered a trauma event, illness or injury and somehow did not meet the required definition to receive payment.

A recent independent study, across the main 13 insurance companies in 2015, shows they paid almost 90,000 claims totalling $6.9 billion.  These figures are up from 75,000 claims, totalling $4.9 billion in 2014.  This is a staggering increase in just one year, and it has been consistently rising in recent times.

Additionally, the insurance Big 5 stood up to their devastating reputation yet again in 2015 as leading causes for claims across all types of life insurance.  The Big 5 include: cancer, heart disease, mental health (e.g. stress, depression, anxiety), musculoskeletal (e.g. Osteoporosis, broken bones, torn ligaments) and neurological (e.g. Alzheimer’s disease, Multiple Sclerosis, dementia).

This year alone I have assisted with six new claims and one ongoing claim.  That’s one per month on average.  Six of these claims fell into the Big 5 category.  It’s so gratifying to know that these clients and their families are covered should the unexpected occur and their insurers have fulfilled their promises by paying the claims.

Something to contemplate when considering your own situation, how many of those 90,000 claimants do you think expected to claim?  How do you think their dependants would have fared if they didn’t receive the claim proceeds?  How will your dependants fare if you’re not insured?

To make sure you don’t become the next horror story, be sure to follow these three tips:

  1. Don’t give insurance companies a reason to not pay a claim – be truthful on your application form and disclose all pre-existing conditions.
  2. Consider taking out a level premium option – this means your premium will be the same price year-to-year, only increasing with CPI. By doing so, you will be able to hold the policy longer when your risk of claiming increases.
  3. Speak to an adviser – in most cases where an insurance company has not paid a claim the claimant has not had an adviser. An adviser will be able to assist you in making the right choices when considering life insurance.

If you or anyone you know have any questions regarding their own situation and are considering taking out or making changes to life insurance, please contact us know.  It would be unfortunate to see you make the same mistakes others have made before you.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.

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Diabetes & Insurance: Need To Know

Due to a curiosity for all things medical (and ongoing professional development requirements!), I recently attended a seminar in relation to underwriting and claims. Part of the presentation focused on diabetes which is becoming more prevalent in Australia, and is of increasing concern for life insurers from both an underwriting and claims perspective.

The facts:

With approximately 1.2 million people currently diagnosed with either Type 1 or Type 2 Diabetes, and an estimated 500,000 others who are undiagnosed with Type 2 diabetes, this chronic condition is becoming one of Australia’s greatest health issues.

Type 1 diabetes (known as insulin dependent diabetes mellitus or juvenile diabetes) is an autoimmune condition which is typically diagnosed under the age of 30, but can occur at any age.  Type 1 diabetes is often linked to family history and requires lifelong insulin replacement, usually via injections.  Insulin is a hormone produced by the pancreas which converts the glucose from food, and turns it into energy.  Type 1 diabetics create little or no insulin of their own, due to damage to the cells in the pancreas that produce insulin.

Type 2 diabetes (non-insulin dependent diabetes mellitus or adult-onset diabetes) is usually caused by genetic or lifestyle factors, and is a progressive condition whereby the sufferer develops resistance to the effects of insulin, and/or gradually loses the ability to produce enough insulin in the pancreas.  Type 2 diabetes represents up to 90% of all cases, and usually diagnosed over the age of 45, but is increasingly being diagnosed in children, teenagers and younger adults.

In Australia, 280 people per day will develop diabetes which is around 1 in every 5 minutes!

The impacts:

  • The estimated annual cost of diabetes in Australia is $14.6 billion.
  • 40% of Type 1 sufferers will develop serious kidney problems leading to kidney failure prior to age 50.
  • Diabetic Retinopathy damages the blood vessels in the eyes and is the leading cause of blindness in adults.
  • Diabetic Nephropathy damages the filtering units in the kidneys and is the leading cause of renal failure.
  • Diabetics have a 2 to 4-fold increase in the risk of stroke or death caused by cardiovascular events.
  • 8/10 diabetics will die from cardiovascular failure.
  • Diabetes can lead to damage to the peripheral nervous system in the feet and hands known as diabetic neuropathy.
  • High blood sugar can damage and weaken blood vessels in the limbs causing them to narrow and reduce the circulation of blood around the body, resulting in the death and decay of tissue. The only treatment is available is amputation of the affected body part.

Diabetes and insurance

Due to the long-term complications of diabetes, obtaining personal insurance cover when the illness is an existing condition, or there is a strong family history, can be difficult.  An underwriter may decline the application, excluding the illness, or increase the premiums for the cover.

The increasing presence of diabetes in Australia highlights the need for adequate personal cover.  Many of the insurers offer benefits under their Trauma policies for the diagnosis and complications arising from Type 1 and Type 2 diabetes.

If you would like to learn more about our life insurance services, please contact us today. One of our friendly advisers would love to speak with you.

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What Are Franking Credits?

With interest rates at historical lows, investors now have to work extra hard to achieve a decent return on their money. But don’t forget that it is the after-tax return that counts – which is why investors with money invested in Australian shares can benefit from gaining an understanding of the Dividend Imputation System and how Franking Credits work.

Dividend imputation was introduced in July 1987, one of a number of tax reforms by the Hawke/Keating Government. Prior to that shareholders suffered double taxation on their dividends. That is, first the companies paid tax on any profits they had made, then the shareholders were taxed again at their marginal tax rate when they received these tax-paid profits in the form of dividends. This double taxation was overcome through the introduction of the Dividend Imputation System.

The word “impute” means to “give credit for” and this is exactly what the imputation system does. It allows shareholders to receive credit for the tax already paid by the company at the 30% company tax rate, and pay tax only on the difference between that and their own tax rate. This means for an individual on the top marginal tax rate of 49% (including Medicare & Budget Repair Levy) will only pay the difference which is 19%.

Since 2000, provisions have been made to receive franking credits back as a tax refund where the tax rate is less than the company rate. Therefore, for a super fund in pension phase, where the tax rate is nil, the full franking credit will be refunded by the tax office.

Let’s take a look at this concept in more detail by using an example.

The Beauty of Franking Credits

Company XYZ Holdings Pty Ltd makes a profit from its business activities of $10,000 which is fully taxable. It pays tax at the current company tax rate of 30% which equates to tax paid of $3,000, leaving a $7,000 after-tax profit. The company can either reinvest some or all of this money back into the business or pay out some or all to shareholders as a dividend. In this example, XYZ Holdings Pty Ltd decides to pay out all profits to shareholders.

If there are 10 equal shareholders, each receives an after-tax dividend of $700, with a $300 franking credit attached (the tax paid by the company). Since the profits associated with the dividends have been fully taxed, the after-tax dividends are said to be 100% franked or fully franked.

The grossed-up dividend amount is $1,000 ($700 plus the $300 franking credit) and is included in the shareholder’s assessable income. Tax is then payable at the shareholder’s applicable marginal tax rate. The tax paid by the company (franking credit) is then used to offset the shareholders tax payable.

The table below shows the effects of taxation by comparing 5 individuals, all on different individual and superannuation tax rates:

Franking credits

*The above rate does not include the Temporary Budget Repair Levy; which is payable at a rate of 2% for taxable incomes over $180,000 to 30/06/2017.

Individuals 1, 2 and super fund members in accumulation or pension phase all receive tax refunds due to the tax rates being less than the company tax rate of 30%. The higher income earners, individuals 3, 4 and 5 have to pay tax on their $1,000 dividends but they have both reduced the tax payable due to the franking credits.

If you are interested in learning more, please contact us today. One of our friendly advisers would be delighted to speak with you.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.

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