When estate planning, most people focus what will happen to family and assets after they pass, often neglecting to consider what would happen if they were to become ill or incapacitated.
Falling ill can be a very stressful and traumatic time for you and your family, particularly if you are the main financial provider for your household. Taking the time to become prepared and evaluating your financial situation can help you to future proof in the event you are out of work for health reasons. It is important to ensure you know of every entitlement available should you become sick or incapacitated.
Income protection is a form of insurance that pays you a regular cash amount if you are unable to work as a result of a sudden illness, covering up to 75% of your income for a set period of time. You can insure your income through agreed value, where you decide the amount you wish to receive each month, or indemnity, where you prove your income at the time of claim rather than during application. Generally, you can claim part or all of your income protection insurance premiums that are taken outside of your super as a tax deduction, helping you save more on your tax bill. However, you are not entitled o deductions for a policy that compensates for a physical injury. Other insurance policies include health insurance, trauma cover or total and permanent disability (TPD) insurance.
Incapacity planning is a process through which capable adults make choices and plans about future events that are a possibility. It addresses what you would want to happen in relation to health care decisions and financial matters should you lose your ability to make or express choices. In the event you are seriously injured or develop an illness such as dementia, you may not be able to pay bills, file taxes or manage your assets and investments. Incapacity planning allows for those types of things to still be done by someone with the authority to handle them. An incapacity plan should contain the following documents:
- Living Will: states what kind of health care you wish to receive, or refuse to receive, should you lose consciousness or capacity. Unlike a last will and testament, your living will has nothing to do with what happens to your property after you die.
- Financial power of attorney: allows you to choose someone who will have the legal authority to manage your financial affairs if and when you lose the ability to do so yourself.
- Medical power of attorney: allows you to choose someone to have the legal right to make medical choices on your behalf if you cannot make them on your own. You should discuss your wishes with the chosen representative before you are incapacitated and they need to make medical decisions.
Early release of super:
There are very limited circumstances in which you can access your super before you retire. You may apply for early release on the grounds of:
- Incapacity: if you suffer permanent or temporary incapacity.
- Severe financial hardship: if you have received Commonwealth benefits for 26 continuous weeks but are still unable to meet immediate living expenses.
- Compassionate grounds: to pay for medical treatment if you are seriously ill.
- Terminal medical condition: if you have a terminal illness or injury likely to result in death within 2 years, as certified by two registered medical practitioners, at least one of whom is a specialist.
Understanding asset allocation in your superannuation
Most superannuation funds let their customers elect how their balance is invested, meaning you get to decide what assets you want.
Your superannuation is a trust that usually invests in one of two ways: investment strategies or by specified asset allocation.
Asset allocation refers to how money is divided between different types of assets or how much of a person’s portfolio is invested in asset classes. These can include shares, cash, property, fixed interest or international investments. Asset classes have varying levels of risk and potential return. This means that a super fund’s asset allocation directly influences the level of risk and return in a portfolio. By diversifying amongst each of the asset classes, the overall risk of the portfolio can be reduced.
Getting involved in asset allocation can provide the ability to further customise the mix of assets that your super fund is invested in and the proportions of your balance that are invested in each asset. While there is no ‘one size fits all’ approach to smart investing, there are a number of common guidelines that individuals may choose to consider when going forward in an asset allocation strategy.
One of these is related to growth assets. These assets are high-risk and high-reward, such as shares and property. This guideline states that if you subtract your age from 100, that is the percentage of your super portfolio that should be made up of growth shares. It is based on the idea that when you are younger, you will end up with a higher percentage of growth assets with this approach. This is because you can afford to take risks as you have a longer period of time to make up any of your losses, while as you get older you need to adopt a more conservative approach.
It is worth keeping in mind that everyone is different, and consider what type of asset allocation is most appropriate for your situation. Choosing an asset allocation that matches your risk profile, investment timeframes and objectives can be complex, so it may be worth seeking professional financial advice.