Have you ever asked yourself what you would do if you got sick or were injured and couldn’t work for an extended period? How would you pay your bills or your mortgage? How would you put your kids through school? How would your family survive?
Without a doubt, the most valuable asset that you possess during your lifetime is your ability to earn an income. The present value of an average professional’s after-tax earnings from age 25 through to age 60 is estimated to be over $3.5 million. While most of us will insure our home or our car, surprisingly, there are many of us who haven’t insured our income.
While we would hope that the likelihood of losing our ability to earn an income for an extended period is relatively low, the truth is that it does happen. A quick search through any crowdfunding website will show you plenty of examples of individuals and families who have suffered an injury or sickness and are experiencing financial hardship as a result.
The biggest risk is long-term incapacity. If you broke your leg and couldn’t work for 6 weeks, chances are you would be able to make ends meet during that time. Perhaps you have some leave built up. Or if you weren’t being paid, perhaps your savings would see you through. If, however, you were involved in a car accident and couldn’t work for the next 8 years, the likelihood is that you would suffer financial hardship as a result.
Then there is the question that no one wants to ask themselves. What would my family do in the event of my death? Of course, no one wants to imagine meeting an untimely end. But if your family depend on you financially, it is one of the most important questions you will ever ask yourself. How long could your family afford to stay in your home? Would they have to sell the house and other assets? Would they need government benefits? How would they pay for food, clothes, school fees and general living costs? Would your partner be able to step into your shoes and cover your earnings? And if so, who would look after your children?
There is certainly plenty to think about, and it doesn’t end there. What about if you were permanently incapacitated and could never work again? What if you were diagnosed with cancer or had a heart attack? These are real scenarios that happen to Australian families every day.
A key aspect of any prudent financial strategy is providing for situations where things could go wrong – i.e. mitigating the risks. Personal insurances such as ‘income protection’, ‘life’, ‘total and permanent disablement’ and ‘trauma’ are the tools that you can use to give yourself peace of mind that yourself or your beneficiaries will be provided for in a time of need.
Below is a brief summary of these different types of personal insurance, what they cover and how they are used:
Income protection insurance (also known as salary continuance) is designed to provide a regular income in the event that you are unable to work due to sickness or injury. Generally, income protection provides an income for a pre-determined, agreed benefit period. The benefit amount payable is usually up to 75 per cent of your income.
Income protection benefits are used to cover your ongoing cost of living while you are unable to earn an income.
Life insurance provides a lump sum benefit to your beneficiaries upon your death.
This lump sum can be used to repay any outstanding debts, provide for your childrens’ education costs or be invested to provide an ongoing income for your family.
Total and Permanent Disability cover provides a lump sum benefit in the event that you suffer an illness or injury which totally and permanently incapacitates you, preventing you from ever working again.
The lump sum benefit provided by this type of cover may be used to repay debts, invested to provide an ongoing income stream, used to renovate the family home to cater for your needs (wheelchair access etc) or used to cover ongoing medical expenses.
Sometimes referred to as Critical Illness insurance, provides a lump sum payment in the event that you are diagnosed with a serious, life threatening illness or condition. This could include suffering a stroke, diagnosis of cancer or a heart attack.
A trauma benefit becomes payable when an insured condition or illness is diagnosed, providing funds which may be used to meet the often substantial medical expenses which are incurred. The lump sum benefit may also be used to provide for rehabilitation expenses, lifestyle changes and the repayment of debts, or to allow a partner or carer to take time off work.
Personal insurance products are wide-ranging and often complex, with massive variations in price and quality from one product to the next. Insurers consider many aspects of your life when deciding to offer you cover. Your income, your health (physical and mental), your smoker status, your occupation and its risks, even your lifestyle are all considered. If you want to be sure that you are fully covered in the way that you need, its not enough to say “I have some cover in my super so I’ll be fine”. Insurance held in super can be limited. Furthermore, the level of cover you have may not be adequate to fully cover you. When considering applying for personal insurance, it is important to seek advice so that you fully understand what type of cover you need and how much of it you should be applying for. Otherwise, you could end up paying for more cover than you need or even worse, being under-insured.
For any questions relating to your personal insurance policies, or if you are thinking about applying for cover, give us a call on 9011 7889 for a free consultation.
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