Safety net for high debt

Implementing risk protection for a young family with high investment property debt and tight cash flow.

Phil and Leonie were referred to us by their accountant, who was concerned at the level of debt they had incurred at a relatively young age. A crook had been advising them of the sure-fire benefits of buying additional properties using the equity in their existing properties, including the family home. As a result, at age 35 with two young children, they now owned three rental properties in regional Queensland and were in debt to the tune of $1.3 million, of which $600,000 was against the family home.

Due to tenancy issues, cash was very tight, despite Phil having a good income. Leonie had returned to full-time employment, in an effort to stem the increasing line of credit, but childcare costs were a big burden.

The accountant noted that there was no claim for Income Protection when preparing returns and queried whether they had adequate cover. Their response was a common one – “we are not sure?”

We conducted a review of their protection, with the primary focus being risk protection. They were comfortable with their current approach to investment, but acknowledged that in the event of illness, injury or death they were uncertain if they could retain the portfolio.

Our first task was to check for all sources of insurance, in particular, their superannuation funds.

We then discussed Phil and Leonie’s concerns, and helped them to understand the dangers we perceived and explained the various forms of insurance cover that could alleviate their concerns. Between us, we came up with what would be the optimal forms and amounts of insurance.

Every benefit has a cost. Cash flow was acknowledged to be tight, so premiums would be an important consideration. Ultimately, it was agreed that some element of self-insurance was necessary i.e. we could not fully cover the risks with insurance. Once this was agreed, we were able to implement a comprehensive insurance plan that took into account the small amounts of existing insurance. Judicious use of superannuation and taxation benefits also helped to minimise the overall effect on cash flow.

The outcome was very positive, as they were both now safe in the knowledge that the family’s financial position would not be devastated in the event of the death or injury to either or both of them.