What would you do if the main breadwinner in your household could no longer bring in an income?
Do you have a Plan B? Most people don’t.
An essential part of any financial plan is an asset protection strategy. You work hard to accumulate assets, NOT to have them jeopardised when life throws you a curve ball.
A question I often ask clients when trying to work through their priorities is “What is your biggest asset?” Your house, right? Car? Superannuation? The answer for most people is not that straightforward.
For most people, their single biggest asset is their ability to earn an income.
The table below shows what’s at stake in terms of potential earnings to age 65. For example, if you are currently 45 and earn $80,000 per annum, you could earn around $2.15 million over the next 20 years.
|Current income (per annum)||
|$40,000||$3 020 000||$1 900 000||$1 070 000||$460 000|
|$60,000||$4 520 000||$2 850 000||$1 610 000||$690 000|
|$80,000||$6 030 000||$3 810 000||$2 150 000||$920 000|
|$100,000||$7 540 000||$4 760 000||$2 690 000||$1 150 000|
Assumptions: Income increases by 3% per annum. No employment breaks. Figures rounded to nearest $10,000.
For many it is unthinkable that the $450,000 home or the $30,000 car is left uninsured. Is an asset that could produce $2.15 mil over the next 20 years also worth insuring?
Illness or injury that can prevent you from working can and does happen. The headline figure is this: One in three Australians could be disabled for more than three months before turning 65#. If you combine this with another startling fact – that 60% of Australian families with dependents will run out of money if the main breadwinner can no longer bring in an income – you can see the problem.
What could Plan B look like?
When you get sick or have an accident, the last thing you want to worry about is your finances.
Taking out Income Protection insurance could provide you with a monthly benefit of up to 75% of your income to replace lost earnings while you recover.
Most Income Protection policies can be tailored to your individual circumstances, allowing you to select from a range of waiting periods before you start receiving the insurance benefit (normally between 14 days and two years) and from a range of benefit payment periods, with a maximum cover generally available up to age 65.
Policies can be arranged via superannuation (which tend to offer very basic cover) or owned personally (with premium costs that are generally tax deductible). Many Industry and Employer Super Funds offer a “default” level of protection upon joining. As usual, don’t leave these things to chance, obtain professional advice so you are confident you have the protection that suits you.
- Income Protection insurance premiums will generally be lower if you choose a longer waiting period and shorter benefit payment period.
- If you don’t have sufficient spare cash flow to fund the Income Protection premiums, you may want to arrange the cover in superannuation, where the cost will be deducted from your account balance.
- Other “curve balls” you may want to insure for include critical illness (such as cancer and stroke), total and permanent disability and death. These curveballs can be covered by different types of Insurance
- You can structure your insurance so that the earlier you commence a policy, the less you pay over the long term.
# Calculations based on data from the Institute of Actuaries of Australia 2000. Interim Report of the
Disability Committee. IA Aust: Sydney.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.