What is your greatest asset?

At first glance, this question seems incredibly simple. But is it really? Most people think it’s their house, their superannuation or investments. Unless you are retired, you couldn’t be more wrong!
Your greatest asset is your ability to earn an income.
Stop and think about the question again for a moment. How do you pay for your house or your lifestyle? How does the amount of money in your bank account increase? How do you pay for food, bills and clothing, among other things? Unless you inherited your wealth, you have probably worked very hard for it.

A person earning $100,000 pa at age 30 will earn $5,492,821 by age 65, assuming an annual increase 2.5%. This is your greatest asset!

Death and disability

Let’s have a look at some key statistics:

• Australia’s life expectancy is among the highest in the world. For females, life expectancy at birth in 2012 was 84.3 years and for males it was 79.9.
• The most common causes of death and disability in Australia are cardiovascular and cerebrovascular disease (most notably stroke, dementia and lung cancer).
• Injury death rates have fallen markedly over the past several decades, but injury is still the leading cause of death for people under the age of 45 and accounts for around 40% of all deaths in this age group.

Source: “Australia’s Health 2014 — the 14th biennial health report of the Australian Institute of Health and Welfare”.

How can you manage the risk of losing your greatest asset?

Most likely you already have several types of insurance cover in place, such as insurance for your house, contents and car. What about the money making machine at your home though? Yes, that’s YOU! Remember, your ability to earn an income is your greatest asset. Appropriate insurance can reduce the level of the risk; therefore, you should consider the following types of insurance:

• Income protection insurance – this cover provides an ongoing income when you are unable to work due to illness, accident, injury or disability. Income protection usually offers cover for up to 75% of your employment income for a nominated time period (e.g. 2 years, 5 years, to age 60 or 65)
• Critical illness insurance – also called trauma insurance, this cover provides a lump sum in case you experience a serious illness which makes it difficult or impossible for you to continue to work for a period of time. These policies cover a number of different medical conditions, including major illnesses or injuries such as cancer, heart attack or a stroke.
• Total and permanent disability insurance – provides cover if you are totally or permanently disabled by paying out a lump sum. Total and permanent disability policies can have different definitions for ‘own’ occupation and ‘any’ occupation. If you have ‘own’ occupation cover you will receive a payment if you are unable to work in your specific profession anymore. While an ‘any’ occupation policy will only pay you if you cannot perform any work at all for which you are reasonably qualified by education and experience.
• Death cover – also known as term life insurance or life cover, this insurance pays a set amount of money when the insured person dies. Policies will pay the money to the people you nominate as beneficiaries on your policy.

The importance and appropriateness of different types and levels of insurance cover depends on your personal circumstances and your stage of life.

You should also consider a few tips which can help with the insurance choice:

• Consider packaging all policies together as you may be entitled to discounts on the premiums.
• Depending on your cash flow, consider purchasing income protection, total and permanent disability and life cover through your superannuation fund. In this situation the payment will be deducted directly from your superannuation balance rather than from your pocket. However, before you decide to use superannuation funds to hold insurance you need to remember that this will decrease available funds at retirement.
• Remember to adjust your level of cover as your circumstances change, e.g. birth of a child.
• Don’t underestimate the financial needs of your family.

Why are Australians underinsured?

According to the Underinsurance Report conducted in 2010, 95% of people do not have the right level of cover across all types of insurance.

Australians are generally underinsured. Usually they do not have sufficient insurance in place. The reason for this might be linked to affordability of premiums or the lack of value attached to the cover. Australians are also under a misguided belief that superannuation funds, which generally include a basic level of insurance cover, is sufficient. Furthermore, people tend not to believe that a tragic event may occur to them and a serious medical illness or injury can often affect a family more financially than a death. Not only can the family be exposed to cumulating everyday living expenses but also to additional expenses associated with the illness.

Research undertaken in 2014 by KPMG (Underinsurance: Disability Protection Gap in Australia) shows that the level of underinsurance for disability by employed Australians is $304 billion per year. According to this research, the average employee needs insurance cover equal to 84% of their income until retirement if a disability event occurs. The study also found that 35% of people do not have any disability insurance cover at all. The most underinsured group is the 45–64 age group.

Don’t let you and your family be counted in this statistic. Here at Tidswell Financial, we can assist you and your family have the adequate cover in place to protect your most valuable assets. Contact us today for a review of your insurance needs.

References
1. Australian Securities and Investment Commission (ASIC), Income protection November 2016
2. Lifewise/Natsem Underinsurance Report – understanding the social and economic cost of underinsurance, February 2010
3. KPMG 2014, Underinsurance: Disability Protection Gap in Australia
4. Australia’s Health 2014 — the 14th biennial health report of the Australian Institute of Health and Welfare
5. Daley, J., Wood, D., Weidmann, B. and Harrison, C., 2014, The Wealth of Generations, Grattan Institute