Financial planners drive me crazy sometimes.
I don’t know about yours, but mine seems to have an insatiable thirst for coming up with the words possible “doomsday” scenarios.
Now don’t get me wrong – we need them to do that. But seriously, that kind of thinking can give the calmest person on earth an anxiety attack!
It’s just not fun to think about these things. Take insurance for example.
We all know it’s important. But can you put your right hand on your heart and honestly tell me you enjoy weighing up your insurance options and coverage?
Of course not!
That’s why in a rush to close a deal, many investors charge ahead with inadequate (and sometimes – nonexistent) insurance coverage.
So I asked Jolene and Matt Sukkarieh – property investors and financial planning experts at My Financial Group – to help us all understand:
- How to figure out what coverage you need, and what coverage you can stop paying for (based on how risk-averse you are, the financial resources you have, and the strategy you’re implementing)
- How to check if your current coverage is adequate (are you taking too much risk?)
- Can you use pre-tax money to pay for insurance and improve your financial outcome without changing anything else?
- Are there payouts you’re entitled to without even realising? (and how to claim them!)
Begin With Understanding Your Comfort Zone
“Our process starts with highlighting the risks that exist,” says Jolene. “After everyone is aware of the risks, we can assess their comfort level and determine if they need to take out a third-party policy or can cover themselves.”
The type and amount of the insurance vary depending on your particular situation.
Some factors that may influence your insurance decisions are:
- The coverage your bank requires to approve your load
- The type of property you are acquiring (commercial, residential, multi-unit, land, etc.)
- Your plans for the property (passive investment, development, renovation, etc.)
- How long you plan to hold the property
- Whether you will be renting to tenants
- Personal factors (dependent children, health, age, etc.)
“It’s Not About The Risk – It’s About Whether You Can Survive If It Does Manifest”
For example, Jolene asks her clients with tenant properties what will happen if the tenants don’t pay rent or trash the property. “Do you have a cash flow buffer that will allow you to survive for three years or quickly make repairs if needed?”
If they say ‘yes’, they can self-insure. But if non-payment of rent or significant repair costs will cause cash flow problems, Jolene will recommend the client to consider landlord’s coverage and property insurance.
Is Your Current Coverage Adequate?
Insurance professionals can help property investors by making sure they understand the terms of the coverage they already have and point out perceived risks that may require additional coverage.
“People often think they have insurance for things that they don’t,” Jolene tells me. “From a personal perspective, when relying on superannuation funds for coverage, or from a property perspective, when they haven’t read the fine print.”
Insurance professionals will review the details of each policy in relation to your current situation and determine if the policies are relevant to your perceived risks.
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Key Things To Look Out For
“You need to pay attention to the definitions in each policy – as these can vary widely – even within the same policy type. But usually, only people like us read the fine print!” Jolene says.
“Some policies, such as landlord insurance and insurance purchased through institutions, can be yearly renewable,” she adds. “This means that the insurance company may change the definitions on a policy each year. Super funds also may change the insurer or change the automatic coverage amounts each year.”
So if you’re not paying close attention, you could roll over on a policy that no longer covers what you think it does – leaving you high and dry when you file a claim.
One of Jolene’s clients was paying $13,000 for two-income protection policies. After reviewing the terms of the policies, she found that both plans wouldn’t have paid out at the same time – and the client was just throwing money down the drain!
What About Joint Ventures?
Jolene says she receives a lot of questions about insurance in joint-venture agreements. Her approach is to first figure out the role of each of the parties in the arrangement.
She asks her clients to think through what would happen if they lost an individual or lost money and what that would mean for the project. “In that capacity, everyone can make a joint decision whereby they understand what the risks are,” Jolene said.
“Then they can make an educated decision on whether they want to cover each scenario and what contingencies exist if they don’t.”
Paying Insurance With Pre-Tax Money
You can setup pre-tax insurance premium payments for particular types of policies in any super fund, including self-managed super funds (SMSFs).
Matt says he often recommends putting a life insurance policy in place through superannuation when clients have dependent beneficiaries. This setup is ideal because you can pay premiums with pre-tax funds and there are no tax implications if a lump-sum payment is made to beneficiaries.
“Total and permanent disablement also can be partially structured using superannuation, but there may be tax implications on payouts. However, it is possible to make the premium payments tax-effective, Jolene said. “Your financial professional should look at your circumstances to help you get the best outcome for tax planning,” she summarised.
Do You Need An Insurance Professional?
In addition to assessing your risks, suggesting appropriate types and amounts of insurance and making sure you understand your existing coverage, your insurance professional can help you find a balance that is right for your situation.
“Based on your income, what percentage are you willing to spend on insurance or self-insurance?” Matt asks. “If you have a financial event, you want to make sure you have coverage.”
Jolene says that it is easy for financial advisors and insurance brokers to enter the industry, so you want to make sure your advisor understands claims.
“Horror stories are where you pick up a lot of knowledge as an insurance broker,” Jolene says.
Having claims experience can pay dividends, too. Matt recalls at least five instances when he reviewed a client’s circumstances and realized that they were entitled to insurance payouts that they were not receiving!
In one case, the client was diagnosed with cancer and thought that they had to die to claim their insurance policy. After Matt’s review, he found that the client could make a claim based on the diagnosis alone.
As a result, the client collected $200,000 in cheques from the insurance company.
The bottom line is simple – a qualified insurance professional is a critical component of your property investment team. It’s the one thing you never want to be sorry about not getting right!
Have any questions about your current coverage? Need an experienced professional to take a look before you sign your next one? Reach out to My Financial Group and speak with Matt and Jolene.