With the majority of Australians still dangerously underinsured, is it time you reviewed your cover?
When most people are asked to identify their biggest asset, their first thought is often the family home. Then, depending on your life stage, it may be investment properties, favourite toys like boats or cars, even superannuation savings.
Yet all those assets are made possible by just one thing: your income. And while most of us wouldn’t leave home without ensuring that our biggest assets are insured, not many give a thought to insuring the one thing that makes it all possible.
If your income were to cease today due to ill health or an accident, do you have plans in place to be able to continue to make payments long term on mortgages and loans? Do you have sufficient savings to tide you over for a few months to a few years or would things suddenly become very tight?
Take the example of Geoff. He is a clean-living 55-year-old who makes time for regular exercise, doesn’t smoke, makes sure he enjoys a healthy diet and only indulges in a few drinks on weekends.
But, as life has a tendency to throw curveballs, things changed suddenly for Geoff when he awoke late one night to find he couldn’t breathe. His wife immediately called an ambulance and he was rushed to hospital, where he was taken straight into life-saving surgery for the heart attack he had just suffered.
Naturally enough, Geoff was in deep shock after waking from surgery.
He knew there was a family history of heart disease, but he had gone to great lengths personally to prevent the illness himself and he had definitely not thought through how his family would cope without him.
While recovering, Geoff reviewed his superannuation fund’s life insurance and discovered that, like many Australians, in the event of death his family would receive just $300,000. This amount would barely pay off their mortgage, let alone provide for daily living expenses, loans, his children’s education costs, his wife’s low income or their low amount of savings. There was also no provision for income protection and his sick leave only covered a few weeks, not the few months he would need to take off to relax and recover.
Struggling back to work early was now a very real possibility as the bills kept coming in, even when the income didn’t.
Had Geoff insured his income, which in Australia provides a tax deduction on premiums, 75–85% of Geoff’s income would have been replaced after his waiting period for as long as he’d insured for. At a minimum, 2 years, but with the option of being covered to age 65 or 70. Now with a chronic medical history, cover is unlikely for Geoff, or will at least come with much higher premiums, exclusions or loadings. (Payments received are treated as taxable income.)
Unfortunately, Geoff’s story is not a positive financial one and his health issues have brought about dire financial consequences.
After some time, and in better health and back at work, Geoff chose to speak with a financial adviser and has taken out additional life insurance, albeit at a significant premium following his heart attack. He and his adviser are also looking into critical illness cover, which would pay out a lump sum should he suffer another sudden illness. Income Protection is something he desperately wishes he’d considered earlier.
In Australia, Geoff’s story is not uncommon. Insurance is the last thing on many people’s minds. Our culture of ‘she’ll be right mate’ has led to a chronic under-insurance problem. In fact, surveys have shown Australia has much lower levels of insurance than other developed nations including the United States and the United Kingdom. The required level of life insurance is now on average, about $680,000, while the typical default cover in superannuation funds is approximately $258,000 — a very significant gap.
Ask yourself a few questions to see how your family would cope without your income. Could your family, even you, make ends meet if you were unable to work? How would your loved ones cope if you died? Here are some things you should consider:
- Mortgage or rental expenses, including negatively geared investment property costs
- Daily living expenses — food, bills, transport, insurances, personal grooming, hobbies
- Childcare, school and university fees
- Other expenses — house repair costs, medical expenses, replacement of goods, maintenance, personal loans
It may be wise for you to make an appointment with your financial adviser to discuss your insurance needs and ensure you are adequately covered. Investing 1–2% of your annual income in premiums is usually tax deductible and of great value when needed. Income Protection plays a vital role in ensuring you remain financial despite serious long-term illness or injury.
- Lloyd’s Global Underinsurance Report 2016
- Rice Warner Underinsurance Research Report 2014