Life cover: More essential than ever

Living through COVID-19 has brought many challenges and shifting priorities as we deal with the financial impacts of the pandemic, and that includes the issue of life insurance.

On the one hand, the pandemic has highlighted the importance of life cover. On the other, those who may have lost a job or lost income are questioning its necessity.

Many Australians continue to view life insurance as a discretionary item. This is in stark contrast to car or home insurance which are seen as necessities. It seems we are willing to insure our property but not the thing that matters most – our life and our ability to earn an income.

Conflicting priorities

survey by KPMG found that only 35 per cent of Australians thought life insurance was essential and just 30 per cent believed they needed income protection. But when it comes to car insurance, 79 per cent viewed cover as essential and yet, during COVID-19, car usage reduced as many were working from home and restricting their movements.

As the COVID-19 health crisis has reinforced our vulnerability in terms of health and the fragility of life, the need for life and income protection insurance has probably never been greater.

What would happen if you became too sick to return to work or if you passed away? Who would pay the mortgage, living costs, health insurance and utility bills for you or the family you left behind? For those with outstanding debt and dependants, life insurance will always be an important consideration.

It should also be remembered that the current health crisis does not rule out people getting sick with other illnesses, some linked to COVID-19 and some not. Mental health is one these health issues and is becoming increasingly prevalent.

Claims on the rise

In the June quarter, the life insurance industry reported a net after-tax loss of $179 million on its individual income protection products, driven largely by claims for mental health issues in the wake of COVID-19.i Mental health claims are expected to grow even further as it is thought most people take more than a year to report such issues.

With claims on the uptick, this has meant the insurance industry is either looking to increase premiums or already has. This, in turn, may discourage people from keeping their cover.

Indeed, the KPMG survey said that 38 per cent of policy holders were looking to cancel their income protection insurance in the next 12 months, and 25 per cent were planning to drop life cover.

On the plus side, many Australians have some level of life and income protection insurance in their super. However, if you were to lose your job, then paying premiums on your insurance in super would come out of your fund balance, reducing your retirement savings over time.

Also, your insurance might well cease when you lose your job unless you opt to take out a private policy. You generally have 60 days to take up this option.

Redundancy payments

If your income protection insurance is outside super, then be mindful that not all policies include redundancy claims. And those that do may have restrictions. For instance, there is usually a wait period of up to 28 days before any payments will be made.

If you are thinking of taking out a policy now to cover you in case of redundancy given the current economic environment, then you will probably have to go through a six-month no-claim period before you can benefit. During that six-month period, there must be no indication from your employer that redundancy may be on the cards.

Many insurance companies recognise the financial and personal difficulties many people currently face and some have offered to reduce or even suspend premiums without any loss of continuity to your policy.

One alternative may be to look at reducing the cover you have so that your premiums reduce. But it’s important to be mindful of your needs and ensure you have adequate cover.

The road ahead

The insurance industry, like many others, is being forced to look at a different way of doing business in a post-COVID-19 world, with simpler policies and flat premiums all being discussed.

In the meantime, making quick decisions on whether you still need insurance, or your current level of insurance, may prove a mistake. If you are thinking about altering your cover, get in touch with us first to discuss your insurance needs.

i https://www.fsc.org.au/news/income-protection

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.






Housing Market: Shaken But Not Stirred

With Australia in a COVID-induced recession, residential property is not immune to falling economic activity. Yet housing prices are proving surprisingly resilient.

Only months ago, economists were forecasting a housing price slump of 20 per cent or more. Now, most have revised their forecasts to price falls of between five and 10 per cent.

The more optimistic predictions are due to Australia’s success at containing the coronavirus, the gradual lifting of restrictions and government stimulus aimed at keeping Australians in work. The most recent of these measures is the HomeBuilder package.

Housing stimulus

The Morrison Government’s HomeBuilder package, announced on June 4, offers homebuyers a grant of $25,000 to build a new home worth less than $750,000. The grant can also be spent on renovations valued between $150,000 and $750,000 to an existing home valued at no more than $1.5 million.

The scheme is limited to owner-occupiers (not investors) on incomes below $125,000 for singles and $200,000 for couples. The amount of money on offer is uncapped, but the government expects it to cost about $688 million for roughly 27,000 grants.

To be eligible, renovators must sign a contract with a builder by the end of 2020. They will need to have plans drawn up, finance approved, and any building and development approvals secured.

The package has been well-received by the housing industry, which hopes it will encourage buyers to bring forward purchases and support construction jobs. While critics argue the HomeBuilder package is too limited in scope and time to make a significant impact, it is more likely to support house prices than harm them.

House prices marking time

According to CoreLogic, national home prices edged up 0.6 per cent in the three months to the end of May, at the height of the economic shutdown. Melbourne was the only market to lose ground during that period (-0.8 per cent) but all regions lost momentum.

However, sales activity bounced back by an estimated 18.5 per cent in May after a drop of 33 per cent in April. The rise in sales coincided with an easing of social distancing restrictions, the arrival of JobKeeper payments in people’s pockets and growing consumer confidence.

On an annual basis, national home values rose 8.3 per cent in the year to May with Perth (-2.1 per cent) and Darwin (-2.6 per cent) the only capital cities where prices are still lower than a year ago.i

Rents and yields falling

Rents in every capital city except Perth fell in the two months to May. Falling rents are welcome news for renters, especially in cities like Hobart where a booming property market and the conversion of long-term rentals into short-term Airbnb lets had priced many out of the market.

However, falling rents are not so good for property investors. Rental yields were 3.8 per cent nationally in May, although higher in regional areas (4.9 per cent) than capital cities (3.5 per cent).

According to CoreLogic, there is a strong chance that rents will fall more than housing values, putting further pressure on rental yields. Yields in Sydney and Melbourne are already at or near record lows.i

Looking ahead

While the outlook for the property market is brighter than feared, there are still challenges ahead.

One test will come after September when JobKeeper payments and loan repayment holidays are removed. There is a risk that mortgage arrears and distressed sales could increase at that time. While unemployment is now expected to peak at around 8 per cent, not 10 per cent as previously forecast, it is not expected to return to pre-pandemic levels for at least two years.ii

On the positive side, interest rates remain at record lows. The OECD expects the Australian economy will bounce back by 4.1 per cent next year (if the coronavirus is kept under control), after a contraction of 5 per cent in 2020. This is a better economic performance than almost any other nation.iii

While the outlook for property is still uncertain, the stirrings of economic activity are encouraging. If you would like to discuss your property strategy in the light of current market developments, please get in touch with one of our financial planners on 03 5120 1400.

https://www.corelogic.com.au/sites/default/files/2020-06/CoreLogic%20home%20value%20index%20June%202020%20FINAL.pdf

ii https://www.businessinsider.com.au/australian-unemployment-forecast-government-treasury-covid19-2020-6

iii https://www.afr.com/policy/economy/australia-leads-on-economic-recovery-oecd-20200610-p5514b

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Cash Is King In A Crisis

Most of us understand the importance of saving for a rainy day, but sometimes it takes a crisis like the current pandemic to make us act on it.

With so many jobs lost and the outlook unknown, having a cash buffer means you are more able to manage unexpected expenses or the loss of regular income.

While it might be more challenging to establish a cash buffer in this current crisis, it does underline the importance of making sure you are not living from one pay cheque to the next.

For those in a position to save, it’s important to have cash reserves that can be accessed at short notice. So how much is enough to provide a reasonable level of short-term financial security? The answer will depend on whether you are still in the workforce or retired.

While you are working

Some say the equivalent of three months’ pay is a good start for those still working. Others simply put a figure on it, with $10,000 often suggested.

So, what is the best way to work out what is right for you?

Firstly, calculate your monthly expenses. How much do you need to cover your mortgage, utility bills, phone and internet, insurance, food, transport, health insurance and childcare? Once you know what your commitments are, then you are in a better position to budget for that rainy day.

Consider monitoring this expenditure for two to three months to allow for quarterly bills and other one-off commitments.

Build your cash buffer

The next step is to decide how you will achieve your cash buffer.

There are various savings methods. One of the easiest is just to take an amount – either a percentage or a fixed sum – automatically out of your salary each month or each pay cycle and put the money into a separate account. After all, what you never have, you never miss.

Or if you have a mortgage, you could consider putting the money in a mortgage offset account or redraw facility. This has the added benefit of helping pay off your mortgage faster, however you need to be disciplined not to touch your savings.

Now that you know your expenditure, look for new ways to trim some fat to help reach your savings goal sooner.

Realistically to build up your buffer quickly, you would need to save a minimum of $50 a week. Even then the figure would only be $2,600 at the end of the first year.

Tax refunds or other windfalls such as inheritances could be put directly into your savings fund.

If you are retired

The landscape changes once you retire. Rather than needing just three months as a buffer for emergencies, you probably need a longer time frame.

Some say you should have two to three years of cash, although 12 months is more often suggested.

Having ready cash available in retirement means you are less likely to have to sell growth assets like shares to cover your living expenses. This is particularly important if selling coincides with a falling sharemarket.

One strategy is to employ the bucket method, where you split your savings into three separate buckets for different time frames.

A bucket strategy

The first bucket is to provide money for the first two to three years of retirement. This money should be held in cash investments so it is easily accessible.

The second bucket is for the medium term. Its key role is to top up bucket number one. Investments here should still be quite conservative, perhaps low risk quality stocks and/or bonds.

The third bucket is where you take more risk to cover your longer-term living expenses. This could be investments in local and international shares or other growth assets. The balance may fluctuate from year to year, but over time it should continue to grow.

To help maintain your savings, the government has also temporarily halved the minimum amount you are required to withdraw from account-based superannuation pensions and annuities for the 2020-21 financial year. The minimum percentage payment is determined by your age.

Never has a cash buffer been more important. If you want to discuss a strategy that works to future proof your finances, contact us on 03 5120 1400.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

FASEA Exam

RGM sends our congratulations to our Financial Planning team, all of whom recently passed their FASEA exams. 

The Hayne Royal Commission has completely changed the landscape for providing Financial Advice. Part of this is the requirement that all Financial Planners must pass the FASEA exam. It has caused much angst among professionals in the industry. 

The FASEA exam tests advisers on the latest financial regulatory requirements, advice construction and ethical reasoning. Changes to the study requirements and the exam have seen many advisers leave the profession. 

Here at RGM, we pride ourselves on remaining up to date with our technical expertise so that we can provide the best possible service to our clients. Whilst advisers had until the 1 January 2022 to pass the exam, our advisers were proactive in ensuring their compliance with the latest regulations. 

Our Financial Planning team are committed to providing quality financial advice and wealth management solutions to help you achieve your goals. By choosing RGM, you’ll be working with a professional advisor who can provide you with advice on retirement planning, insurance, self-managed super funds (SMSF) and investments to keep you abreast with the latest developments in the industry.

Concerned about your superannuation and retirement plans? Speak to one of our Financial Advisers about how we can help you meet your financial goals on 03 5120 1400.