SOME INSURANCE CALCULATION EXAMPLES

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1 SOME INSURANCE CALCULATION EXAMPLES To help you understand how your insurance needs are determined two example calculations have been provided. In the first example the insurance needs of a young single female member are determined while the second example looks at the insurance needs of a middle aged member who is married with children. Example 1. This example looks at the life insurance needs of Laura, a 25 year old nurse. Laura is not in a relationship, has no dependants and does not own any property. Example 2. The second example is based on Mark, a middle aged member married with two young children and currently paying off the mortgage on his family home. To make it easy for you to run through the examples below yourself we have provided screen-by-screen images to follow at each step. Example 1: Laura s Insurance Needs Personal Details Screen The image below is of the Personal Details screen after Laura has input her age, relationship status and confirmed that she has no dependant children. When Laura clicks the Next button she moves onto the Financial Details screen where she now has to enter details on her income, expenses, assets and liabilities. Laura enters her information directly rather than using the wizards which drill deeper into her financial circumstances. She enters her income, expenses, assets and debts as shown in the screen below.

2 Laura does not change any of the assumptions and clicks the Calculate Now button on the right of the screen above. The screen below displays her insurance calculation results.

3 There is a large difference between Laura s calculated Death Cover ($20,000) and her calculated TPD cover ($1,208,000). This is typical for young members who are not in a relationship and / or do not have any children. Further clarification on these results is provided below. Death Cover As Laura has no dependant children, if she were to die unexpectedly her estate would have to provide for her funeral costs and for any debts that cannot be met from selling her assets. The two components to Laura s death benefit are therefore: 1. A funeral benefit (which is defaulted to $20,000); and 2. The excess of her total debts over her total assets. Because the value of Laura s assets exceeds the value of her debts, her total death cover is simply her funeral benefit of $20,000. Total and Permanent Disability (TPD) Cover However if Laura was to suffer from a disability that made her totally and permanently disabled, then her insurance would have to provide her with enough money to maintain her current living standards for the rest of her life. So Laura s TPD cover will be significantly higher than her death benefit. There are three components to her TPD benefit: 1. An amount to provide for meeting her current expenses into the future; 2. An additional amount to provide for the expenses associated with any disability she may suffer; and 3. A deduction in her TPD benefit to prevent cover duplication with her Income Protection (IP) benefit. 1. Amount for Future Expenses This is made up of three individual components. Laura s current expenses into the future until she reaches retirement (defaulted to age 65 in the assumptions); A lump sum equivalent of the future superannuation contributions Laura would have made had she not become disabled and continued working until retirement; and Provision for her current debts. For Laura this is calculated as the excess of her total debts over her total assets. 2. Extra Disability Expense If Laura was to become disabled it is expected that she would incur additional expenses to: assist her in treating the cause of her disability; or alleviate the complications of her disability and improve her quality of life. The amount required is uncertain and will depend on the type and severity of the disability she might suffer.

4 TAL estimates the annual cost of being disabled for Laura to be 29% of her total income. This amount is then summed over each year into the future until retirement age and displayed as a single figure. The percentage can be changed if Laura feels a different benefit is needed. 3. Removing Cover Duplication with IP Benefits If Laura has both TPD and Income Protection cover and suffer a disability that made her eligible to claim a TPD benefit, under the current policy terms and conditions Laura would also be eligible to claim an Income Protection benefit too. To prevent any duplication of cover, the value of any future income protection benefits are deducted from the sum of the first two TPD components. This should ensure that Laura maintains the appropriate levels of cover that she needs at a more affordable cost. This means that Laura s total TPD benefit provides for: Her future expenses until she reaches retirement; The equivalent superannuation benefit she would have accumulated had she continued working until retirement; A payment to provide for the value by which her debts exceed her assets; A further payment to provide for additional expenses likely to be incurred if she was to become disabled; and The removal of any duplication with her IP benefit. Laura s total TPD benefit should therefore provide her with a reasonable estimate of the coverage she will need to maintain her current living standards into the future if she were to become totally and permanently disabled. Income Protection Cover The monthly benefit calculated for Laura is equivalent to 85% of her total income before tax, inclusive of 10% for superannuation contributions. In the event that Laura does claim an income protection benefit 75% of her current before tax income will be paid to her directly and 10% will be diverted into her superannuation fund. Laura has the option of choosing lower replacement and superannuation contribution percentages in the assumptions section. To provide an affordable and complete package for members, the calculator defaults the waiting period and benefit period for Income Protection cover to 30 days and 2 years respectively. Laura is able to choose different waiting periods and benefit periods in the assumptions section. If Laura was to continue to offset her TPD benefit with her Income Protection benefits, then choosing a different benefit period will also impact her TPD benefits..

5 Example 2: Mark s Insurance Needs Mark is 38 years old and married with two children aged 8 and 12. He is a manager at a manufacturing company and is paying off the mortgage for the house he and his wife bought five years ago. The image below is of the Personal Details screen after Mark has entered his information. When Mark clicks the Next button he moves onto the Financial Details screen where he now has to enter details on his income, expenses, assets and liabilities. The total family income is Mark s annual before tax income of $90,000 and his wife s income of $45,000 that she earns working part time. Mark is after a more accurate calculation of his insurance coverage, so he enters his expense, asset and liability information using the wizards. Expense Wizard The expense wizard breaks down total expenses into six categories: mortgage / rent, utilities, insurance premiums, living expenses, child expenses and miscellaneous expenses.

6 The details of Mark s expenses are shown on the screen shots below. 1. Mortgage / Rent 2. Utilities 3. Insurance Premiums 4. Living Expenses 5. Child Expenses

7 6. Miscellaneous Expenses Overall Mark and his wife incur a total of $94,020 in annual expenses to run their household. Asset Wizard Mark s total assets include the family home which is worth $800,000 as well as $15,000 in savings. Debt Wizard Total family debts are the mortgage that mark and his wife are currently paying off of $600,000 and a current credit card debt of $5,000. The screen below shows the Financial Details screen after Mark has entered all the required income, expense, asset and debt information.

8 Mark decides not to change any of the assumptions and clicks the Calculate Now button on the right of the screen above. The screen below shows his insurance calculation results.

9 Further clarification of these results is provided in the discussion below. Death Cover Mark s death cover is similar to his TPD cover because he is married with dependant children. In order for Mark s wife and his children to maintain their current livings standards in the event of his death, his family would need a benefit that is equivalent to Mark s current contribution to the household expenses each year into the future. Mark s death cover is made up of two components: 1. A funeral benefit (which is defaulted to $20,000); and 2. An amount to provide for Mark s current contribution of family expenses into the future. There are three individual components to provide for Mark s contribution towards future family expenses: Mark s current expenses into the future until he reaches retirement (defaulted to age 65 in the assumptions); A lump sum equivalent of the future superannuation contributions Mark would have made had he not died and continued working until retirement; and Provision for the family debts. This amount is calculated as Mark s portion of any property related debt (based on his share of total household income) as well as an adjustment for the amount by which the total non-property debts exceed non-property assets. The reasoning behind the debt component above is to provide for Mark s portion of any property debts (assuming his wife is still working and can continue to service her portion of the mortgage) and to also provide for the excess of non-property debts over non-property assets (to ensure that in the event of his death no property has to be sold to meet any other debts). It may also not seem intuitive to include a superannuation component in the death benefit. However Mark s wife may be relying on his superannuation contributions to support her during retirement, particularly if she is not working full time and / or has taken several years off to raise children. The amount to provide for Mark s future expenses makes up the majority of the calculated death sum insured of $1,041,000. Total and Permanent Disability (TPD) Cover If Mark was to suffer from a disability that made him totally and permanently disabled, then his insurance would have to provide him with enough money to maintain his current living standards for the rest of his life. There are three components to his TPD benefit: 1. An amount to provide for meeting his current expenses into the future; 2. An additional amount to provide for the expenses associated with any disability he may suffer; and 3. A deduction in his TPD benefit to prevent cover duplication with his Income Protection (IP) benefit. 1. Amount for future expenses This is made up of three individual components.

10 Mark s current expenses into the future until he reaches retirement (defaulted to age 65 in the assumptions); A lump sum equivalent of the future superannuation contributions Mark would have made had he not become disabled and continued working until retirement. Provision for family debts. For Mark this amount is calculated as the excess of his total debts over his non-property assets. 2. Extra disability expense If Mark was to become disabled it is expected that he would incur additional expenses to: assist him in treating the cause of his disability; or alleviate the complications of his disability and improve his quality of life. The amount required is uncertain and will depend on the type and severity of the disability he might suffer. TAL estimates the annual cost of being disabled for Mark to be the yearly income an individual member of his family needs to maintain their current standards of living and multiplying by 29%. This amount is then summed over each year into the future until retirement age and displayed as a single figure. The percentage can be changed if Mark feels a different benefit is needed. 3. Removing Cover Duplication with IP Benefits If Mark has both TPD and Income Protection cover and suffer a disability that made him eligible to claim a TPD benefit, under the current policy terms and conditions Mark would also be eligible to claim an Income Protection benefit too. To prevent any duplication of cover, the value of any future income protection benefits are deducted from the sum of the first two TPD components. This should ensure that Mark maintains the appropriate levels of cover that he needs at a more affordable cost. This means that Mark s total TPD benefit provides for: His future expenses until he reaches retirement; The equivalent superannuation benefit he would have accumulated had he continued working until retirement; A payment to provide for the value by which family debts exceed the non-property family assets; A further payment to provide for additional expenses likely to be incurred if he was to become disabled; and The removal of any duplication with his IP benefit. Mark s total TPD benefit should therefore provide her with a reasonable estimate of the coverage he will need to maintain his current living standards into the future if he were to become totally and permanently disabled. Income Protection Cover The monthly benefit calculated for Mark is equivalent to 85% of his total income before tax, inclusive of 10% for superannuation contributions. In the event that Mark does claim an income protection benefit 75% of his current before tax income will be paid to him directly and 10% will be diverted into his superannuation fund.

11 Mark has the option of choosing lower replacement and superannuation contribution percentages in the assumptions section. To provide an affordable and complete package for members, the calculator defaults the waiting period and benefit period for Income Protection cover to 30 days and 2 years respectively. Mark is able to choose different waiting periods and benefit periods in the assumptions section. If Mark was to continue to offset his TPD benefit with his Income Protection benefits, then choosing a different benefit period will also impact his TPD benefits.