Money

COVID-19: Spending less on Finance & Insurance

Published on April 16, 2019 6:11 am, by

The key to saving money in this category is:

  • understanding what you need
  • understanding what you have
  • aligning the products and services you have with what you need (but be careful if you plan to switch products that you don’t lose benefits you need)
  • making sure you are getting the best value for your money
  • regularly reviewing what you have and whats on offer from other providers (but be careful if you plan to switch products that you don’t lose benefits you need)

Examples of money saving opportunities include:

  • Realising you have financial or insurance products you didn’t know you had and you don’t need. We’ve seen examples of people who found life insurance they didn’t know they had and didn’t need and duplicate car insurance policies
  • Adjusting financial and insurance products to better reflect what you need. We’ve seen examples of people who have been paying for more life insurance than they need and reducing the amount they are insured for has reduced their premiums. We’ve also seen examples of people who were able to make sensible decisions to increase the excess on their car insurance to reduce their premiums
  • Regularly reviewing your financial and insurance products – particularly your general insurance products (think car insurance, compulsory third party, home building, home contents policies) and taking advantage of the cheaper offers providers use to attract new customers. Unfortunately most financial services providers don’t reward loyalty

You also need to be prepared to spend more. This can happen when you review you insurance needs and current insurance products and find you are ‘under insured’. Under insurance is a big problem in Australia. If you find you are under  insured you should be able to use the tactics discussed in this article to make sure you get good value for the extra money you need to spend. Not closing under insurance gaps can be catastrophic if things go wrong.

Finally, make sure you read the Product Disclosure Statement and Terms and Conditions for the products you have and for any products you consider getting or switching to. You should be naturally skeptical about any financial product that is cheaper and make sure you take the time to properly understand the benefits and features and exclusions before making a decision to switch.

If you need help you should consider engaging a licensed financial adviser or broker to help you.

Life Insurance

Life Insurance is insurance that pays someone an amount of money in the event you die (or in some cases if you are Totally and Permanently Disabled). Typically the life insurance payment is used to cover:

  • your funeral expenses
  • the ongoing education of your children
  • the living expenses of your family
  • the payout of any mortgages or other debts you currently have

So the best way to think about your spend on life insurance is to think about it as spending the right amount rather than minimising your spend.

Deciding how much life insurance you need is generally pretty straight forward.

Here are some calculators to get you started:

Once you know how much you need, compare it to what you have. Make sure you check your superannuation funds, especially if you have more than one superannuation fund, Many people will have life insurance through their superannuation fund. Often without even knowing it.

When you know what you need and you’ve checked what you have you can start thinking about the changes you want to make. Some key things to consider are:

Will you have life insurance inside or outside  your superannuation fund? A major benefit of holding it within your superannuation fund is the premiums won’t impact your day to day cash flow because it’s paid from your superannuation balance and contributions. A major disadvantage is that it will reduce you overall retirement savings. You can read more about this decision here.

Will you pay level or stepped premiums? Stepped premiums start lower but increase each year as you get older. Level premiums start higher but are steady for the life of your policy, although they will go up due to inflation or price adjustments from the insurer. Stepped premiums are often cheaper initially however as you age, they will be more expensive. If you have a policy with a stepped premium, you may find value in shopping around and finding something cheaper. Level premiums will normally start out more expensive to begin with and then be less costly (compared to stepped) as you age. If you have had a level premium for some years, and look to find something cheaper, it will often be difficult as the premium price you are going in at will be higher due to your age.

Be clear about about any exclusions in your cover. Make sure you ask about exclusions and check in the PDS as if a claim is being made you would like it to be successful.

Tax Paid

We aren’t going to get into detailed tactics to reduce your tax – we can’t because we aren’t a tax practitioner. If you do want detailed tax advice head to the Tax Practitioners Board web site and look for an appropriately qualified and licensed Tax Adviser.

However we can help you claim all the tax deductions you are entitled to. The key is:

  • make sure you know the deductions you are entitled to
  • keep track of your deductions and make sure you claim them

You may also be able to reduce the tax you pay by making use of Salary Sacrifice arrangements.

Expenses will generally be tax deductible if you incur them in the course of earning your income. Typical examples include things like vehicle and travel expenses, clothing, laundry and dry-cleaning expenses, home office expenses, self education expenses, tools, equipment & other assets and other work-related things like books, periodicals & digital information, election expenses, income protection insurance, mobile phone and internet. You may also be able to claim a deduction for things like accountant and tax agent fees, adviser fees, interest expenses and other costs relating to investments and some contributions you make to your superannuation fund.

You can also generally claim a tax deduction for charitable donations. For more information on this you should refer to the guide for reducing spending on Gifts and Donations.

To claim a work-related expense:

  • you must have spent the money yourself and weren’t reimbursed
  • it must be directly related to earning your income
  • you must have a record to prove it (usually a receipt)

You can use the MoneyBrilliant app to help you identify tax deductible transactions and track them. more information on the Manage My Tax Deductions feature is available here.

You should also familiarise yourself with the conditions and record-keeping requirements at the ATO Website.

Salary sacrifice

You may be able to reduce the tax you pay by entering into Salary Sacrifice arrangements with your employer. When you Salary Sacrifice you ask your employee to deduct an expense from your income before they pay it to you. This way it comes out of your income before deducting tax. Since the tax is calculated on a smaller amount of income you end up paying less tax. Your employer may also pass on the benefit of not paying GST on the goods and services.

This seems pretty straight foward but it is complicated by Fringe Benefits Tax. In many cases Fringe Benefits Tax would be payable on the salary sacrifice arrangement and while FBT is paid by the employer, most employers will pass on the cost of FBT to the employee, which negates the benefit of salary sacrificing.

Salary sacrificing is particularly effective in two scenarios:

  • You salary sacrifice good or services that are specifically exempt from Fringe Benefits Tax
  • You are employed by an organisation that has Fringe Benefits Tax exemptions

Goods and services that will often be exempt from FBT and therefore attractive for salary sacrificing include portable electronic devices, computer software, protective clothing, briefcases, tools of trade and superannuation payments. Generally speaking they must be used primarily for work, you can only claim one per year and for superannuation payments you need to understand your contribution caps.

You can read more about FBT and exemptions on the ATO Website.

Retirement Contributions 

Retirement contributions incorporate the deposits your employer makes to your superannuation fund, any additional personal contributions that you make as well as any concessional contributions that you make.

For most of us this isn’t an expense – it’s an investment in our future – so hopefully you don’t need to think too much about reducing your retirement contributions.

What you might want to think about is getting the most value for the retirement contributions you make. There are a number of ways to try and do this:

  • If you can, make concessional contributions – which means have your employer deduct the contributions from your salary before you pay tax on them. This way, because of the tax benefit, you may be able to afford to make higher retirement contributions
  • If you are entitled to a tax deduction for your personal contributions, again make sure you claim it. This reduces the net cost ‘cost’ of your contributions
  • Make sure you don’t exceed your contribution caps – if you do you may have to pay penalty tax on the contributions
  • Think about other tactics like spouse contributions and contribution splitting

You can find more information about retirement / superannuation contributions on the ATO Website.

Investments & Shares

Again, the transactions in this category are likely to be investments rather than expenses.

If you have transaction expenses like brokerage fees you should look to minimise your fees by shopping around.

Share trading is very competitive these days and the major online brokers and new entrants have driven down the price of trading over the past decade. Shop around, but one of the cheapest deals for share trading is the Self Wealth platform where trades are $9.90

If you are buying or selling managed funds you might want to look at Exchange Traded Funds as a cheaper alternative.

Income Protection

Income protection insurance usually pays you a proportion of your salary, after you have satisfied any waiting period criteria, for a specified period of time in the event you are sick or injured and cant work. Some people think of it as an insurance policy for your most important asset – your ability to work and earn an income.

Just like other types of insurance the key with income protection insurance to understand what cover you need, make sure you get the best value for money you can and make sure you understand any exclusions and terms and conditions.

To decide how much cover you need you should think about your current and future income, what commitments you have (things like mortgages, school fees and living expenses and other sources of income you have or assets like emergency funds.

The key things that will influence how much you pay for income protection and therefore might give you some options for reducing the cost are:

  • the amount and type of cover you have – there are two types of policy. Indemnity value policies pay you a proportion of your salary at the time you make a claim. Agreed value policies pay you an amount that is agreed when you take out the policy. Obviously the higher the amount of cover you have the higher your premiums will be. Usually you can reduce the value of the cover you have to reduce your premiums, but make sure you have enough cover to meet your needs
  • the benefit period – the longer the time you are paid under the policy the higher the premiums. You can generally choose benefit periods of between 6 months and to age 65
  • the waiting period – the longer you have to wait before making a claim the fewer claims are likely to be made and the lower your premium will be. Waiting periods are dependent on the actual policy you have but are usually between 14 and 720 days. Of course you need to make sure you can survive without working for the duration of the waiting period. This might be an option to consider if you already have an “emergency fund” saved or you have sufficient sick leave and annual leave to see you through the waiting period
  • the type of premium you have – there are two types of premiums – Stepped and Level. With stepped premiums the premiums start quite low when you are young and increase as you get older. Level premiums stay more or less the same as you get older

Another option you can consider is holding your Income Protection insurance inside or outside your Superannuation Fund.  The main advantage to holding it insider your Superannuation Fund is that you might get a cheaper premium (based on a ‘group’ pricing scheme) and the premiums are paid from your superannuation contributions rather than from your day to day cashflow. The main disadvantage of holding Income Protection insurance inside your superannuation fund is that the premium payments will reduce you retirement savings.

Income Protection insurance can be taken out inside the Superannuation environment or outside. This  article provides more information information about taking insurance out inside and outside your superannuation fund.

Home & Contents Insurance

The key to getting your spend right on Home and Contents insurance is the same as all other types of insurance:

  • understanding what you need – this is mainly about how much cover you need, which is determined by the cost of rebuilding your home and replacing your contents. You should also consider the types of risks you face. For example, if you live in a flood prone area or an area with a high bush fire risk you will need to look for policies that provide good cover for these types of risks
  • shop around to get the best value – unfortunately most providers price their products to attract new customers rather than retain existing customers. This means you will usually get a better price by switching providers regularly rather than staying with the same one. Shopping around means doing some online quotes or calling the call centres of some of the providers
  • make sure you understand the policy exclusions, terms and conditions and key definitions (for example what constitutes a flood or what kind of fire damage will you be covered for)
  • regularly review the market to make sure you are getting the best deal

Apart from the provider, the key drivers of premium prices include:

the amount of cover – if you reduce the amount of cover you have this will reduce the premium. Be careful to make sure you don’t end up ‘under insured’

the excess – the higher the excess the fewer the claims you are likely to make and so the lower the premium will be

Insurance

Like any form of insurance:

  • be clear on the cover you need – if you don’t need it get rid of it, if you need more of it get more!
  • make sure you get the best value for your money
  • be certain about the exclusions and any other terms and conditions that might apply.

You need to review all of your insurance products at least annually. In most cases, particularly for general insurance (think car, home, home contents) you need to be prepared to switch every year or so to get the best prices. Unfortunately very few providers reward loyalty and pricing is generally geared toward attracting new customers rather than retaining existing ones.

Make sure you get any discounts you are entitled to as well. Check for things like multi-policy discounts and discounts through associations, motoring clubs, workplaces

Accountants/Tax Fees

Professional services fees for things like Accounts and Tax Agent will generally be negotiable, at least to some extent. Often the cost of these services depends mainly on the complexity of your affairs and the time taken to complete the work.

If your accounting and tax affairs are relatively simple you might be able to save some money by doing the work yourself. There are now plenty of simple to use, online accounting systems such as Xero and MYOB that sole traders, trades people and small businesses can use cost effectively. There is also a massive network of service providers like book keepers that has developed around these systems if you need help. If you want to look after you own tax affairs and they are relatively simple you can now lodge your own tax return through the mygov portal

If your needs are more time consuming but still relatively simple you might consider engaging a book keeper who can do the work for you. usually book keepers will be much cheaper than an accountant or tax agent.

If your needs are complex you are likely to need an accountant or tax agent. Negotiating the price of these services can be difficult because its difficult to get an accurate quote for these kinds of services. But its worth a try.

You may also be able to negotiate the price down by agreeing to do some of the work yourself. The less work your accountant or tax agent needs to do the less they should want to charge you.

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Peter is the CEO of MoneyBrilliant. He has over 20 years experience in banking, insurance and accounting. Peter has three sons, ranging in age from 16 to 3, is a sport and fitness fanatic and a volunteer firefighter. He is passionate about improving people's lives through making financial services more accessible.

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