In this episode of The Purposeful Investor, Aden is joined by wealth advisers David Andrew and Michael Hayward to explore the often-overlooked but critical role of personal insurances in a well-rounded financial plan.
From life insurance to trauma and income protection, they discuss how these “necessary evils” provide a safety net for families facing unexpected health events or financial crises. Whether you’re planning for your family or your business, learn how to assess the right insurance mix to safeguard your future.
- 0:00:01 – 0:02:06 Introduction
- 0:02:07 – 0:07:13 Different types of personal insurances
- 0:07:14 – 0:13:26 The purpose of personal insurance in a financial plan
- 0:13:27 – 0:18:02 The psychological and practical aspects of insurance coverage
- 0:18:03 – 0:23:53 The importance of insuring adult children and the hazard involved
- 0:23:54 – 0:32:14 Key takeaways on the role of insurances in a comprehensive family wealth management plan
Read the full transcript below
Aden:
Welcome to The Purposeful Investor, a podcast for successful families in search of true prosperity. And I’m your host, Aden Wilkins. Thanks for joining us on another episode of the The Purposeful Investor podcast. Today we’re going to be talking about the role of personal insurance in a financial plan. And we’re pleased to announce that this topic has come from our client, Gary. So we thought to talk us through that topic, I would get Capital Partners founder David Andrew to join me, but also Gary’s adviser, Michael Hayward. Gents, welcome to the podcast today.
00:35
David: Thanks, Aden. Nice to be with you.
00:36
Michael: Thanks Aden. Great to be here.
00:37
Aden: Before we get into the nitty gritty of the role of personal insurances, as always, we like to start the podcast off with our little win or our positive focus of the week. So, Michael, since you’re our guest, why don’t you start us off with your little win?
00:49
Michael: Thanks, Aden
. My win is I am very grateful to my wife Karen for organising tickets to the Cirque du Soleil for Father’s Day. It was brilliant and such a great experience with the family. Highly recommend it.
01:03
Aden: Dave, what about you?
01:04
David: Mine is spring. I don’t know, by the time this, this podcast is released, it might have. Things might have evolved, time might have passed a little bit. But just reflecting on how beautiful it is to move out of the first sort of the end of winter into the first few weeks of spring. It’s just been beautiful.
01:22
Aden: Yeah, I’ve got a professional one this week. So starting yesterday, kicked off some sessions with the, the guy group that we’re a member of, some adviser training sessions with people from all parts of Australia, New Zealand, England and really enjoyed. It was more of an introductory session yesterday, but they’ll be running monthly so, yeah, really keen to absorb some knowledge from different parts of the globe.
01:45
David: Yeah, that’ll be fascinating because you’ll get to talk to other advisers in Stockholm and Montreal.
01:54
Aden: Yeah, really looking forward to it.
01:56
Aden: So before we get into the content, I thought it might be useful, Mike, for you to give a little bit of an overview of who you are, how, how long you been at Capital Partners and just tell us a little bit about yourself or tell the podcast audience about yourself.
02:08
Michael: Yeah, thanks, Aden. So I’m a principal and wealth adviser here at Capital Partners. I’m actually coming up for my 20th anniversary this year, which is very exciting. I’m really passionate about building long term relationships with clients, helping them steward and protect their wealth, both for their benefit and, you know, for the next their next generation, their kids or even grandchildren. Outside of work, I’m a pretty good – I think I’m a good family man. You know, Karen and I work very hard on being present as much as we can for our boys, Toby and Ethan, and supporting them in their endeavours at school and in sport and music.
02:56
Aden: Love it. And so if you’re coming up on 20 years, what number does that make him in terms of longevity now, Dave?
03:03
David: Oh, gee, well, there’s only a handful of us that have done 20 years, so Mike’s a real survivor, you know, it’s very cool. You know, he started when he was 12, so…
03:18
Michael: Still a bit older than that.
03:20
Aden: He’s still got the baby face.
03:23
Aden: So, to start off the podcast, I thought we’d frame up and give our listeners insight to some of the different types of personal insurances. And then as we go through it, we’ll unpack what are the purposes of these insurances? How this is how the thinking around insurances has played out over time, but also how we actually assess them within the broader financial plan for a whole family group. So to start us off, our listeners, you’ve probably heard of life insurance, total and permanent disability insurance, trauma insurance, income protection insurance, and maybe business and business protection insurance. So, Dave, what, what are these personal insurances actually protect against?
04:03
David: Yeah, I think I’d wrap them all up in the category of being a necessary evil almost in terms of the household budget.
It’s one of those, one of those reflections that you really think, well, this is not going to happen to me, but it’s going to happen to someone. And I think what happens is when we as young families in particular evolve to a point where we’re taking on really significant personal financial commitments like, you know, mortgages and so forth, the idea of a health event or, God forbid, death befalling anyone in the family, mum or dad, really does trigger that sense of what do we do about that? Like, how do we plan for that?
You know, obviously for anyone who suffered loss of a loved one at that age, it’s just devastating. And yet an injection of capital, some significant financial support during a period of just intense, deep crisis for the family, I think changes the game to such an extent that, you know, families can pick up the pieces and move on with their lives. Now, death, life insurance, that’s pretty easy.
You know, everyone knows the diagnosis for that. So a lump sum payment in the event of death for mum or dad is a really, really important underpinning of a programme. And then Death and total permanent disablement, I think was the second one you mentioned. That is when you’re alive, but for all intents and purposes, your life has been irreversibly changed. You’re in a wheelchair, either it’s a paraplegic, quadriplegic, and life will never be the same and potentially work will never be the same. And so again, this is a lump sum payment that fills a gap for the family to be able to pick up and move on.
06:34
Aden: What about the other couple there, Michael? So trauma income protection, what do those involve?
06:41
Michael: Yeah, so trauma is designed to pay a benefit, a lump sum benefit in the event that the insured suffers a specified medical event. So there might be a list of 30 odd spec, you know, actual medical events to claim on that policy. And it’s really, it’s designed to provide the family with immediate funding, you know, for medical expenses and recovery and treatment.
07:13
David: So we’re talking about what the big four: Heart attack, cancer, stroke and so on….
07:19
Michael: Yeah, exactly.
07:20
David: And I guess you’d have seen this in your financial planning practice for clients. Just the impact of that injection of funds during treatment for one of those is pretty significant.
07:42
Michael: Definitely I have, Dave, and it’s tough. I’ve seen a family go through a tragedy, a loss of the husband and.
07:56
David: At what sort of age?
07:58
Michael: Late 30s. So, you know, mum and dad, professional careers, three young kids, really young kids, mortgage, sudden loss. So he died and fortunately, fortunately he had received advice and had life insurance in place and it got paid out and it just enabled her to take extended leave off work and be present for the kids in such a tragic circumstance. It was just. Yeah, powerful.
08:39
David: That’s a hell of a story. And I suspect a lot of our listeners have experienced this sort of thing firsthand.
08:46
Michael: Yeah. The next insurance was income protection, and really it covers a proportion of your salary in the event that you cannot return to work for a period of time, whether it’s temporary or longer-term, to age 65.
09:03
David: Yeah, and just on that, that was an interesting one because I never thought, as a young dad, I’m now in my late 50s, very late 50s. Um, but as a young dad, the income protection, the one was the one that I sort of valued the most because it was the one that I could relate to the most in that if I get sick, how is the family going to pay the bills? So I never really thought too much about if I’m not here, if I were to die. But I think getting sick and still being able to pay the bills is something we can all connect to pretty strongly.
09:39
Michael: Absolutely. Continue paying the bills, continue paying those mortgage payments, continue with the kids going to school. You know, it just, I think it just enables the family to continue the status quo, albeit you’re unwell.
09:55
Aden: And I think one that resonated with me when I have explained income protection insurance. When I first finished university was sort of, you spent all this time getting this formal education through schooling, university, and one of your biggest assets is your ability to earn an income into the future. And you’re just protecting against that risk. And I thought, oh wow, I’d never thought of it that way before. And I was like, yeah, that makes complete sense to me.
10:16
David: Yeah, so that’s right. At the core of financial success is when you’re young and you have finished university, your human capital is arguably at its greatest point. And as over time, as each day goes by and each paycheck arrives, you’re spending down that human capital. And so the corresponding graph that needs to work is that as the human capital is spent down over time, the financial capital is building up. So if that process gets cut short, what fills the gap? And that’s essentially insurance. In fact, what we might do is put that human capital financial capital graph on the show notes so people can have a look at it if they want to.
11:03
Aden: Yeah, I think that’s a great idea. And just to round out the types of insurances because one that maybe not all of our listeners will have heard of, but it’s probably more relevant for some of our business owner clients is business protection insurance. So what are the key things you’re protecting against there, Dave? So key person risk revenue.
11:19
David: Yeah. So you know, we’ve got a lot of firsthand experience of this within our business, but also for and on behalf of clients. So key person risk is essentially the person in the business who if they were not there, it would be a crisis. So, you know, you might have some life insurance on that key person so that you can bring appropriate skills in at an appropriate time to fill a gap.
I think much more importantly, maybe not importantly, but I think this is a critical one for business owners, SME owners is succession planning insurance. So for example, you know, let’s say you’ve got a partnership of three people owning a business together and one dies, all of a sudden that business is in limbo, you know, does it continue on with the family of the deceased being part of the business decision making.
What buy, sell insurance or business succession insurance enables you to do is to create a liquidity event so that the surviving partners continue on and take the business forward and the deceased partner’s family is able also to move forward. They sell less shares in the business, but they receive fair and reasonable compensation for that at the time.
12:46
Aden: Yeah. Is that normally something you see play out in discussions with shareholders agreements and the like?
12:51
David: Exactly, yeah, exactly.
12:54
Aden: So just to sort of round that out, we’ve gone through all the different types of insurances. But, Michael, if I could get your summary to sort of say, what’s the. What do you see as the purpose of personal insurance is in a broader financial plan?
13:08
Michael: Aden, I would summarise it by saying the insurance is safeguarding your financial security. It’s the backstop. It’s providing your family with assets at a time of need.
13:26
Aden: And then I’d be interested to get your view on this, Dave, because you’ve been involved in the profession for so long. But how has there been any changes to how people view insurance over time with the need for it, the calculations. So what. What did it look like back in the day?
13:39
David: Yeah, so theres a vision of the old school life insurance agent who, as I look back, played an incredibly important role in society because there was far less. There were far fewer government benefits available, for example, in the 1960s. Social Security has taken on a whole new meaning in recent times, although in these crises, these are families that do without insurance, get left high and dry.
So the 1960s, an earlier view of life insurance was that it was a life insurance salesman, and essentially there was very little advice involved. It was, how much can you afford? I’ll give you as much insurance as I can give you for the amount that you can afford. So it was pretty. I’d say it was pretty rudimentary.
When I started in financial services in about 1987, the rule of thumb for life insurance was that it needed to be about 20 times your income. So let’s say someone earning $100,000 a year, you’d need $2 million worth of insurance. You know, if you’re earning $200,000 a year, you’d Need $4 million worth of insurance. And I guess that’s a pretty useful rule of thumb.
When we talked about that the other day, I went away and did a few little calculations and you think, okay, someone earning $200,000 a year, how big would their mortgage be? And you know, and et cetera and et cetera. And that amount of life insurance is probably not far from the Mark, the big thing that I saw shift was in the 90s and early 2000s when financial planning really became a thing like fee based, real financial planning, the sort of advice that we have always sponsored and aspired to rather than a product sale.
What happened then was that the process of advising on insurance became far more precise. It became a financial calculation. So, okay, what’s the future value of your earnings if you’re not able to earn that? What are the liabilities of the family going to be going to have your mortgage and your ongoing living expenses and so forth? And so we were able to calculate out the value of the life insurance programme required with far more precision than ever happened previously. And I think if I come right up to now, the thing that I see that’s most impactful is that the cost of life insurance has gone up a lot.
Mike, I might get you to comment on that a bit further. You’re closer to the work than I am, I guess, in that I don’t know what’s causing that. I think there’s a lot of claims that are made that are a little bit close to the line. And the way media works these days, if you make a big enough complaint through the media or through complaints channels and that sort of thing, you’ll get paid out for a claim that you may not have. Get paid, may not have got paid out for in years gone by. And that may or may not be a good thing. But what it does do, more claims means that premiums have to be higher.
17:22
Michael: Yeah, that observation’s correct, Dave. And that’s what I’ve been seeing with clients that hold insurance themselves. Particularly in the trauma, particularly in the trauma and income protection space. From what I’m hearing and reading is there are a lot of, a lot of claims. That’s typically where the claims exist in those, you know, looking at all the insurance covers, what gets the most claims is income protection and trauma. So naturally those premiums will be higher than your life and total impermanent disability cover.
17:56
David: There’s not a lot of incentive to claim on a life insurance policy, is there?
18:00
Michael: No, no, that’s right. But yeah, you’re still alive. And whether there’s, you know, not false claims but claims that are on the margin, whether there’s a lot of that going on, I’m. I suspect there might be, but just with our population and ageing population and health and conditions like that, you know, it’s becoming more and more that we’re getting more claims, we’re seeing more claims in that space.
18:30
Aden: Yeah. And I think I’m actually just thinking back to a few years ago, I was playing golf with someone and I hadn’t met him before and he sort of get a few holes in, he says, oh, what do you do for work? Well, and his arm, actually, I’m not working at the moment on income protection claim. And I’m like, oh, what happened is I have something to do with my wrist as he stands over his tee shot, swings, gets through the ball with no pain at all. So it’s sort of just. It flagged with me. But I think like you touched on, that’s sort of part of the contributing factor to the ingoing of the up. Upping of premiums in income protection insurance. I guess.
Would it be right of me to say that your need for insurance, generally speaking, decreases over time as you repay debts? You might have children that start moving out of home. How do we see that in the long term financial planning process?
19:16
Michael: Yeah, that’s exactly right.
19:18
Michael: You know, when you’re, typically when you’re young and I’d call it, you’re establishing and you’re accumulating or you’re paying off debt, your need for insurance is probably at its highest, your assets are low, your debt is high, your need for that income is absolutely there. Perhaps you’ve got young kids schooling that all, you know, your expenses are really high at that point in time. Then what happens is over time your debt reduces as you pay it off, your investment wealth grows as you’re accumulating, your kids grow up, you know, you know, they finish, get to that end of the schooling and then we see the need for the insurance cover that you had at the start of your life. Call it life reduces. And you know, it might not be a big lump sum reduction, but it might be a gradual reduction that you implement over time.
20:15
Aden: Yeah, and I’d like to just touch on that a little bit further because I know there’s a couple of conversations that we’ve both had in client meetings where you go through maybe the financial projections and show and a client’s in a really, really strong position, their need for insurance has diminished significantly. But there’s a psychological aspect of you’ve paid these premiums throughout your lifetime a lot of money to protect yourself, but to actually start reducing or stepping down that cover, there can be quite a big psychological barrier there. And how have you seen that play out?
20:44
Michael: Yeah, that’s Right. We’ve seen both sides to it, haven’t we? We’ve seen some clients say, thank goodness you’ve told me that we’ve got enough, I can cancel this cover, we are done with it. Been paying it all our lifetime, we’re finished with this insurance. Fantastic. But yeah, you get the other of the story as well, where clients have been paying for this insurance cover their whole life. It’s a safety net, it’s always been there for them. And it can be, it can be daunting to say, well, you know, I’ve had all this insurance cover, what happens if I reduce my cover tomorrow and then something, I get you by the bus or something happens the day after, you know, it is, it is absolutely about that mindset at that point in time.
21:28
David: Yeah. So in the spirit of full disclosure, Michael is our adviser and that’s exactly the conversation we’ve been having. And it’s not, you know, I don’t feel gypped by the fact that I’ve paid all this money or not. Not got to claim, you know, not claiming has, is a massive bonus. Of course, it’s more once I give it up, I can’t get it back. So I want to be doubly sure that the decision to let go of the life insurance is a good decision. And one of the things that Mike helped me with was, and I think a former colleague of ours actually helped us with this idea, he said, look, go get a detailed medical exam, you know, get the doctor to tell you you’re okay. And that might give you a bit more comfort that you’re doing the right thing.
And then the other thing that was suggested that I really liked is that we did it progressively. So it was over a five year period. We progressively gradually reduced the COVID so that as our financial position kept improving over time, you could make sense of it. You could make sense of letting go of a bit every year over five years. But I have to say, when it finally did happen and I saw those transactions disappear, it was great. And you do have a sense, I think, of we’ve kind of arrived, we’ve actually done okay in the sense that we’ve got to.
Might not have every duck lined up from a financial point of view, but we’ve certainly got to the point where that cover is no longer as necessary as it used to be.
23:14
Aden: And the first point you made there, I just want to highlight the importance of that, of actually going for a medical cheque before you cancel it one, because it’s just a really good thing. To do as you get older and you can pick up things that you might not know there. But also there’s. There’s been occasions where we’ve had clients who’ve done that and they’ve picked something up that would have probably gone unknown, but they got a benefit paid out at that point. So really prudent approach to make sure. If you’re thinking of reducing cover just to book in that health cheque.
23:40
David: That’s incredible, isn’t it, that you. You’ve got all these emotions going on or, oh, do I reduce it or don’t. And then you go off, have the medical exam and you end up claiming because they find something that’s quite extraordinary.
23:52
Aden: Yeah. So where I’d like to move the conversation to now is, is when we were having our preparation for this podcast, we talked a lot about the need for insurances. And as you build up your investment wealth, your need slowly declines in terms of your own personal affairs. But where I’d like to take this conversation is what abouts for adult children and the moral hazard involved in that?
24:15
Davud: Yeah, I think we need to answer this together, Mike. I see this as a big issue. There was a change made in the industry. Super funds, or the. What are they called? The MySuper, the automatic funds. You know, the funds you get given automatically when you go to work.
24:36
Michael: Yeah, the default super funds.
24:37
David: Default. Thank you. Thank you. It used to be that in a default super fund, you would be granted a default amount of life insurance. And I always thought that was a really good thing because you didn’t have to demonstrate good health in order to be given that baseline level of life insurance. But what happened politically was that lots of workers had lots of employed people who didn’t pay attention to their finances, had like 10 superannuation policies.
So therefore they had 10 life insurance benefits. So all of their superannuation money got eaten up by life insurance premiums. And so the government, in its genius wisdom, said, okay, we’re going to ban that. And now when you get given a default life insurance programme, you don’t get any automatic life insurance. So I’m not bagging the government any more than I normally would. But the upshot of that is that there are thousands of young Australians with no life insurance cover at all. And at least they had some. And I guess all I would encourage our listeners to do is to prompt their adult children to have to think about this, to have this conversation, because there is a moral hazard associated with this.
Many of our clients have the investor personality or the money Personality of being sort of family guardians or they’re vigilant, you know, they want to make sure everyone in the family is going to be okay. So you get to yourselves, I’m talking about mum and dad here, the older couple, they get themselves to the point where they’re financially independent, they’re thinking about reducing work, they may have stopped work.
All of a sudden one of their children, adult children, close family member, has a critical health event, God forbid, dies. What happens next? And they have no life insurance. Are you expected to step in and fill that void? And that has really big implications for the adult child’s family, but also for our client’s family who are looking to retire. Because all of a sudden every plan they’d ever made is in flux. And this is the thing about risk is you can’t really see the big risks happening. We talk about this a lot where the stuff just comes completely out of left field. But life insurance and these sorts of planning, this, this can be planned for. Right. So this is a really important conversation. And I assume, Mike, you have this conversation with your clients who are in our sort of position around saying, well, what, what insurances have you have your adult children got in place to protect your financial plan?
27:47
Michael: Yeah, like you say, it’s a much broader conversation than just focusing on mum and dad and their insurance cover. It’s looking at the entire family and.
27:57
David: They’re just their retirement at that stage of life.
28:00
Michael: Yeah, yeah, that’s right. It’s a critical conversation. And with the context of, I mean, you’re not only protecting your clients and their financial position in the event that something like that was to occur to their kids, but you’re helping their kids protect themselves as well and their families. So it’s such a broad conversation and really, really important for clients.
28:28
David: And this is where this whole idea of intergenerational advice becomes so important, is watching out for each generation as it comes along. So the youngest of the youngest, we’re thinking about providing them with some financial literacy and some good decision making skills their parents were thinking about. Okay. Get the first foot on the ladder of financial advice, get your life insurances sorted out, make sure your mortgage is under control, make sure you’re planning for the long term, even though it might be the last thing you really want to be doing at that age. And then for the parents of the parents generation, it’s okay, let’s make sure your retirement’s secure. But also making sure we close off any obvious gaps down the generations.
29:17
Michael: Yeah, absolutely. It’s such a Such a broad conversation. Yeah, absolutely, yeah.
29:22
Aden: And I think like you said before dav, I can’t remember who the quotes by. It might be Morgan Housel. But risk is what you don’t see coming. So if you were expecting it, you protect against it. So it’s why it’s so important. And I think the concept of making sure adult children or the broader family have personal insurances is quite often one that might get missed by people who will think about protecting, or you might help grandkids with their education costs. But if there’s no risk protection in place, it’s sort of, it defeats the purpose of that. So really important that I’d encourage all our clients to actually have a think through that. And how would that impact their financial plan if, if something, God forbid, were to happen like that?
29:58
Michael: And Aden, just expand, even just expanding, as I think about it, you know, it’s not just the insurance, but what are the other risks that you need to be covering off on? And I know it’s not a subject for today, but quite simply, I think about estate planning and I think about cyber security just as a couple of things that come to mind.
30:15
David: Well, there’s all sorts, you know, physical assets like properties, making sure they’re adequately insured because it’s very easy to let that slip. And all of a sudden a house that you think, oh yeah, we could replace that for $800,000, no way could that be. So there’s all sorts of things we need to be paying attention to.
30:36
Aden: So I think, at least in my perspective, the role of insurances in a financial plan is an ongoing discussion and it’s sort of ever evolving as things change throughout your lifetime. But if you were to sort of summarise or give our. Give our listeners with a key takeaway to how to think about insurances and the role that it plays in their full family wealth management plan, what would that be?
30:56
Michael: For me, it’s a security. It’s a security net whilst you’re accumulating. And at some point you will look to reduce the COVID as you won’t need it anymore. But in a couple of words, Aden, it’s a safety net. For me, it’s a safety net.
31:16
David: And for me, I don’t think this would happen to our clients, but we have many listeners who are beyond our client group. I’ve seen many professional people over the years, lawyers, doctors, accountants and the like, who are still paying huge amounts in life insurance premiums when the need for the insurance is actually past. And so paying attention to what’s going out the door, particularly in the business context. You know, it’s easy to look at a line item. So yeah, we need. That’s the insurance, we need that. That’s the insurance. We need that year after year, when in fact, I think actively managing these expenses is a really important part of the financial planning process.
32:06
Aden: Yeah, some really good insights there from both David and Michael. Thanks for joining me on today’s podcast and I will encourage our listener community to share the podcast with a friend or family member or anyone you think would really benefit from these discussions. And like I said, we had a great conversation topic from Gary today. So if there’s any other listeners that want us to unpack any other topics in a bit more detail, please feel free to send them through to myself or the Capital Partners podcast email address, which is askapital-partners.com David, Michael, thanks for joining me.
32:36
David: Thanks, Aden.
32:39
Aden: We love being able to share our insight and guidance, so if you know someone in your community that may enjoy our podcast, please share it with them. As always, we encourage all of our listeners to share their questions and ideas that they would like to know more on. You can email us@askapital-partners.com that’s askapital-partners.com David, Andrew and myself, Aden Wilkins, are authorised representatives of Capital Partners Private Wealth. ABN 270-866-70788 AFSL 227148 thank you and see you next time.
