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Welcome: Site Map: Adviser Updates: Publications and Documents:
Business Succession Planning: Need for Asset or Buy/Sell Strategy Need for Liability or Key Person Strategy
Simple Succession Plan:
Complete Succession Plan:
One Page Strategy: Simplifying the Valuation Issue
Multiple Policy Approach:
One Page, Two Policy Strategy:
Other Issues:
Sole Proprietors and Families: Third Party Buy/Sell Strategies Estate Equalisation Strategies
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Personal or Estate Planning Insurance (Personal or "Green" Needs)
Purpose of Personal Cover Personal Cover is designed to fund:
Green Needs On the One Page Risk Analysis Worksheet, the Life Insured's Personal Needs are coloured Green.
Determining the Capital Amount Required to Fund Living Expenses When the Life Insured has repaid their Personal Debts and Liabilities (either during their lifetime or out of Insurance Proceeds payable upon the occurrence of an Insured Event), the focus of their needs is the funding of Living Expenses. It is customary to determine a capital amount, which when invested at, say, 5% per annum will fund the desired amount of Living Expenses per annum. Thus, if a Life Insured wishes to fund Living Expenses of $50K per annum (without eroding their capital), then invested at 5% per annum, they require a capital amount of $1M.
Investments and Superannuation Contribute to the Capital Amount Usually, the amount of Personal Cover will take into account the amount of any investments, superannuation and cash held by the Life Insured. Thus, if the Life Insured has no investments, they require Personal Cover of $1M to achieve their goal. If their investments, superannuation and cash total $400K, then they require Personal Cover of $600K to meet their target capital amount.
Insured Purchase Price Contributes to the Capital Amount If the Life Insured is a Business Proprietor who also has Buy/Sell Cover, the net Purchase Price of their Equity (after the payment of any Capital Gains Tax and Transactional Costs payable by the Estate or Vendors) in the Business will contribute to the amount of capital that will fund their Living Expenses. Ultimately, their Equity is one of the investments that needs to be taken into account in determining whether they have a shortfall that can be addressed by Insurance Cover. If your Personal Needs exceed the Net Sale Price of your Equity in the Business, it may be necessary to obtain additional Personal Insurance to meet your needs. As a result, the Personal Cover of a Business Proprietor meets their Living Expenses Need to the extent that the Insured Purchase Price is inadequate. In effect, it is a "top up" over and above their Buy/Sell Strategy .
Aggregate of Purchase Price and Personal Cover In the case of a Complete Succession Plan, the Life Insured's family will normally receive the aggregate of:
The aggregate of the Blue and Green Cover will fund the Living Expenses, regardless of how it is characterised in the Succession Plan or Agreement. In a sense, under a Complete Succession Plan, the Life Insured will receive a Blue Cheque and a Green Cheque. What matters is the aggregate of the two.
Determining Your Personal Needs The following issues should be taken into account in determining your Personal Needs:
One Policy Strategy Click here to read about the One Policy Strategy.
Dual Role of Personal Cover Click here to see how your Personal Cover can create a "warehouse" or "comfort zone" for future growth of the Sale Price of your Equity in the Business. In a sense, a One Policy Strategy helps you realise that your "Green Cover" can be "Future Blue Cover". |
Adviser Tip Your Personal Cover can be the "warehouse" or "comfort zone" that allows you to fund any increase in the Purchase Price.
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