{"id":50945,"date":"2020-07-09T15:22:20","date_gmt":"2020-07-09T05:22:20","guid":{"rendered":"https:\/\/riskinfo.com.au\/news\/?p=50945"},"modified":"2020-07-14T14:03:13","modified_gmt":"2020-07-14T04:03:13","slug":"self-funding-mechanisms-for-income-protection","status":"publish","type":"post","link":"https:\/\/riskinfo.com.au\/news\/2020\/07\/09\/self-funding-mechanisms-for-income-protection\/","title":{"rendered":"Self-Funding Mechanisms for Income Protection"},"content":{"rendered":"
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BT’s Ben Martin reflects on a few different strategies advisers might consider in the wake of the disappearance of Agreed Value IP cover from the Australian market. Ben’s focus in this article revolves around alternative funding mechanisms for self-employed clients…<\/h3>\n<\/div>\n<\/div>\n

<\/p>\n

Clients with fluctuating levels of income possibly lost the most from the removal of new agreed value income protection (IP) contracts earlier this year (see: Structuring Income Protection Cover…<\/a>).\u00a0 And while an indemnity IP policy can provide some cash flow certainty in the event of disability, the actual monthly insured benefit may be of little value if the illness has happened amid, or following, a prolonged slump in business income.\u00a0 This will be even more profound given the restrictive APRA-prescribed calculation of pre-disability income set to apply from mid to late next year.<\/p>\n

To address this risk, it may be prudent to put in place dedicated \u2018funding mechanisms\u2019.\u00a0 These could help normalise cash flow if and when the monthly insured benefit has been severely impaired by reduced levels of business income in the period leading up to the trigger event.\u00a0 This paper explores several of these funding mechanisms.<\/p>\n

It is acknowledged that the design of these \u2018next generation\u2019 IP policies is far from final.\u00a0 However certain planning points are beginning to emerge which don\u2019t involve a significant departure from conventional technical\/strategic planning, while at the same time fundamentally respecting the policy intent of the APRA measures.<\/p>\n

Utilising existing corporate structures<\/strong><\/p>\n

Take self-employed clients that have an existing company\/corporate entity within their group structure.\u00a0 The company may be the entity out of which the business is operated; or it may have been set up as a passive investment vehicle, separate and quarantined from the operating entities of the business, capable of receiving distributions from other entities within the group from time to time.<\/p>\n

If cash flow permits, and in consultation with the client\u2019s accountant, there may be merit in directing extra capital\/distributions to that company over time.\u00a0 This effectively builds a pool of capital within a vehicle that allows access to funds if and when required.\u00a0 Ultimately, the capital retained within the company may provide comfort that funds are readily accessible, as a counter to the impact of lower levels of business income on the calculation of a future monthly insured benefit.<\/p>\n

…funds could be \u2018streamed\u2019 out of the company to qualifying shareholders<\/p><\/blockquote>\n

When required, funds could be \u2018streamed\u2019 out of the company to qualifying shareholders, which may be the policyholder and\/or members of the policyholder\u2019s family group.\u00a0 That may provide a useful boost to cash flow during a temporary illness.\u00a0 Expert advice would of course need to be obtained to determine the impact that this arrangement may have from a tax and claims perspective.<\/p>\n

Having a pool of capital to draw down on may also provide a meaningful safety net, given the stricter disability definitions that APRA wants insurers to explore, in order to better manage the risks of longer payment periods.<\/p>\n

Super contributions<\/strong><\/p>\n

Alternatively, if the life insured and their spouse is of (or near) preservation age, then there may be merit in simply maximising contributions to either of their super accounts where this is not already occurring.\u00a0 Some qualifying clients may even be able to utilise unused portions of the concessional contributions cap from 1 July 2018.\u00a0 Being of preservation age, there would be an ability, at the very minimum, to draw funds out via a non-commutable income stream if funds are required to normalise cash flow during a temporary disability.<\/p>\n

Sole traders<\/strong><\/p>\n

For sole trader clients without elaborate group structures and entities, it may be a case of simply building a pool of capital in the name of a lower-income tax paying spouse.\u00a0 It\u2019s clean, transparent and simple to explain to the client.\u00a0 A degree of asset protection is also afforded.<\/p>\n

There may be an array of other funding mechanisms that could work for you and your client.\u00a0 The aim here is to provide a starting point by examining some intuitive options, taking into account the current entities and structures that self-employed clients are likely to already have in place.<\/p>\n

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\"\"<\/a>Benjamin Martin is Senior Manager – Product Technical, Life Insurance, BT<\/p>\n

\u00a0<\/em><\/p>\n<\/div>\n

Back to Adviser Focus Main Page…\u00a0<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

BT’s Ben Martin reflects on a few different strategies advisers might consider in the wake of the disappearance of Agreed Value IP cover from the Australian market. Ben’s focus in this article revolves around alternative funding mechanisms for self-employed clients…<\/p>\n","protected":false},"author":3,"featured_media":50947,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6868,8,4,5622],"tags":[],"class_list":["post-50945","post","type-post","status-publish","format-standard","has-post-thumbnail","category-adviserfocus","category-compliance-regulation","category-products","category-superannuation"],"_links":{"self":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/posts\/50945","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/comments?post=50945"}],"version-history":[{"count":0,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/posts\/50945\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/media\/50947"}],"wp:attachment":[{"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/media?parent=50945"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/categories?post=50945"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/riskinfo.com.au\/news\/wp-json\/wp\/v2\/tags?post=50945"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}