What would happen to your family if your income were to stop suddenly? What would be at risk; your house, your lifestyle, your children’s education? Of course, most of us don’t like to think about injury, accident, or death, but many Australians have their head in the sand when it comes to protecting their biggest asset – future income. In fact, only around 4% of Australian families have adequate life insurance.
Unfortunately, working in the financial services industry, we see the financial and emotional devastation that underinsurance can lead to. We often hear the refrain “I have life and income insurance in my super”. And because it’s currently an opt out rather than an opt in situation, you most likely do.
But the reality is that most of us have not looked at the cover we have, and many of us forget that we are actually paying for a premium from our super each year.
Three questions to ask yourself
Most people won’t look at these policies – until they need to, and then, it’s too late. If you answer no to, or worse, can’t answer these questions, then it’s time to take a closer look:
- Will your insurance pay enough to cover your debts and maintain your/your family’s lifestyle?
- Will your income protection cover enough of your income to cover your cost of living?
- How long will your income protection insurance continue to pay you?
We commonly see included insurance policies that won’t cover existing debt, let alone maintain lifestyle. Many income protection policies have short maximum pay out periods, in some cases as little as two years, and only cover a small percentage of your actual income.
And if you take a moment to think about what that could mean for your loved ones, it is frightening. Not only would they face the awful reality of your injury or death, they would have the additional burden of significant lifestyle change – such as having to move out of the family home, maybe even out of the area and away from family and friends, your children may have to leave their school and their friendships behind, and your partner may have to take on additional work to get by.
How much cover do you need?
When it comes to how much cover you’ll need, there are three main points to consider:
- How much debt do you have?
- What is your earning potential?
- How much will it cost to raise your children to adulthood?
For example, if you are 39, earn $150,000 and have a $600,000 mortgage, and one child aged twelve who is in public education, you’ll need $600,000 to pay off the mortgage and around $131 300 to raise your child from ages 12 to 18. If your child is in private education, you’ll need to factor in those costs on top.
Your earning potential at your current salary working until you’re 65 is $3.9 million. While you may not need to provide that much to your spouse, you’ll need to think about how their earning potential may be limited or their costs of living significantly escalated if you are no longer able to contribute.
Essentially, your life insurance should cover off any debt and enable your family to carry on the same standard of living until you could reasonably expect your partner’s cost of living to reduce and be able to resume full-time employment, such as when the children finish school.
Your income insurance should be enough to provide you with around 75% of your income for your entire working life to age 65.
Getting the most out of your cover
In the digital age, it’s easy to think that we can do our own research and source everything we need online, but when it comes to insurances, an expert who is not affiliated with a particular insurer can save you considerable amounts of money while making sure you are adequately covered.
The first thing I do with my clients is look at their needs in detail; from their debts to all the facets that make up their lifestyles to ensure whatever cover we look at will be the right one. And that’s where professional advice really comes into its own. We can help you design your insurance policy – covering everything you need and removing the excess features that aren’t necessary for you.
It doesn’t have to affect your hip pocket
We also help our clients to determine whether it makes sense from a financial and tax perspective to continue paying premiums directly from superannuation or pay from income, either increasing the level of cover with the existing super provider or changing insurers.
Around half of my clients find that they are paying the same amount or less than they were with their included premiums, but now have an adequate level of cover and a peace of mind that their spouses and children will live a comfortable life in the event of the unthinkable.
General Advice warning
The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.
