Question 1 (5 marks | Word limit: 100 words)
LO1: Identify, analyse and evaluate personal and small business tasks.
Explain each of the four (4) risk categories listed below and contrast each with its ‘paired risk’, including the provision of an example.
(a) pure vs speculative risks (2 marks)
(b) diversifiable vs non-diversifiable risks. (2 marks)
(c) examples of each risk (1 mark)
Pure vs speculative
diversifiable vs non-diversifiable
LO4: Undertake financial planning duties while giving consideration to ethics and the legal and regulatory responsibilities owed by the planner and the planner’s organisation to your clients and other stakeholders.
Briefly explain the consumer protection laws as they apply in the context of providing financial advice about insurance in Australia. Use examples of situations in which Consumer Laws may be called upon by clients to illustrate your answer.
Roberto is a professional, white-collar client and comes to you looking for advice on life, TPD and trauma insurance. Roberto has no significant medical history, no hazardous activities and a perfect family history; however, he has had an issue with recreational drug use in the past. What is the relevance of family health history, personal health history, occupation and a history of drug use to the underwriter when assessing an application for life insurance? (5 marks)
(b) If an underwriter is experiencing underwriting losses, what will the effect of continuously increasing premiums be on policy retention and risk concentration? (5 marks)
You have just met with a new client who has been referred to you for advice on her life insurance needs and has completed a fact find with the following information.
Courtney is age 38 and has one dependant child — her son, Frances, who is 10. She works as a commercial artist and earns a salary of $90,000 p.a. Her employer pays 9.5% superannuation guarantee contributions into its default superannuation fund, which has a current balance of $100,000. Courtney has no personal insurance cover (although her superannuation fund offers life, TPD and salary continuance insurance options).
After her husband died a year ago, Courtney used his life insurance payout to reduce debts to a more manageable level. She and Frances still live in their family home (estimated value $900,000). There is a remaining mortgage of $250,000. Courtney also has a car loan of $10,000 and credit card with a limit and current balance of $5,000. There is $60,000 in a cash management account, which is a combination of the remaining life insurance payout and Courtney’s savings towards Frances’s secondary school fees.
You have learned that Courtney’s goals are as follows:
• Courtney has confirmed she only wants advice on life insurance at this stage but is happy for you to provide her with information on other types of personal insurances she might consider later on.
• On her death, she would want Frances to inherit the house free of debt and have all of her other debts and any expenses incurred at that time paid. Courtney’s sister would act as Frances’s guardian and move into the house with him. You have discussed and agreed on an allowance for funeral expenses ($15,000), final medical expenses ($20,000), tax and legal costs ($15,000), and an emergency fund ($20,000).
• In two years’ time, Frances will attend a private secondary school for five years and university after that for three years (allowing $16,250 p.a. for this).
• So that Frances will not be a financial burden on Courtney’s sister, she wants to make provision for an annual living cost amount for Frances of $26,000 until he completes university.
• Courtney does not want you to include the $60,000 cash in your calculations but is happy for the superannuation balance to be included as an asset that could be used to pay out debt or provide for Frances.
(a) (i) What full lump sum life cover would be appropriate for Courtney? Ensure you provide full substantiation of your calculations. You do not need to apply a discount for future values. (11 marks)
(ii) Outline the premium strategy that would be most appropriate for Courtney and in substantiating your answer, ensure you provide the advantages and disadvantages of the different premium options available (premiums are not required to be calculated or shown). (5 marks)
(iii) What other personal insurance advice would you provide to Courtney? (9 marks)
(b) Outline the step-by-step process of how you would present and implement this advice with Courtney. This includes your client engagement, compliance and legislative requirements as well as the underwriting process. (10 marks)
For the following three life insurance contracts, identify if the premiums are tax deductible and for whom, and if any benefits paid are tax assessable and for whom:
(i) a term life insurance policy owned and purchased by the insured (1 mark)
(ii) an income protection owned by an insured with their employer paying the premium (1 mark)
(iii) a trauma policy owned and paid for by the insured (1 mark)
Note: specific tax rates are not required.
(b) When considering different types of business owners insurances, in what situations are premiums not tax deductible? Use an example to illustrate your answer.