The Secret To Financial Security ….. Insure Your Income!

 

We are all familiar with the term “less is more”.  Sometimes in life we tend to over complicate things.

I know from my experiences with the people that I come across in the industry, personal insurance can be a little overwhelming.

This may be due to the number of different products available on the market, each with their own options.  As advisers sometimes we tend to focus a little too much on features & benefits rather than the purpose of the cover!

Without an income not only are we unable to meet our financial commitments but we are also unable to maintain our standard of living!

Therefore the secret to financial security is to insure your income over the short, medium & long term!

There are two important areas that need to be considered.  Temporary income replacement due to serious illness or injury & permanent income replacement due to premature death or permanent disability.

Statistically speaking, temporary illness or injury is more likely to occur than permanent disability or premature death.  Unfortunately we don’t know what’s around the corner so we must prepare for all scenarios!

In regards to temporary illness or injury, you are expected to recover at some stage & either return to work or resume your usual duties.

Your period of disability may last 4 weeks or it may last 4 years depending on the severity of your condition.  Whatever the duration, financial assistance is required while you are unable to work or perform your regular duties.

Trauma & income protection insurance will provide valuable funds through either a lump sum payment or regular income payments.

The benefits received will help replace lost income, reduce debt, assist with the regular bills & expenses & more importantly allow you to maintain your lifestyle!

What about permanent disability or premature death?

I’ll use a family as an example, however the same principles apply for a couple.

In this scenario income is still required however for a longer period.  Income needs to be replaced for the entire family in relation to permanent disability & for the surviving family members in relation to death.

In these circumstances there are a few variables involved in determining suitable sums insured.

Each adviser may have their own view in regards to strategies & recommendations.  My view is that two main areas need to be considered.

The elimination of debt & an ongoing income stream for a specified period of time.  By eliminating all major debt you are reducing your financial commitments so therefore improving your cash flow.

Extinguishing all debt would be recommended for both permanent disability & premature death of the life insured.

We now need to focus on an adequate income stream for either the entire family or the dependents left behind.

The level of income needed each year will vary depending on the situation.  A higher income will be needed in the case of permanent disability when compared with the death of the life insured.

This is because there may be post disability costs involved including adjustments or medical expenses along with the usual expenses that existed prior.

Even though all debts have been cleared I would still recommend the replacement of 100% of the insured’s income, to allow for any post disability expenses in the event of permanent disability.

A lower income may be required on the death of the life insured as there is one less person to factor in cost wise.  A figure of  between 75% – 100% of income would be sufficient for the family to live off given that the debts have gone.

Now, how long do we need this income for?

This will vary as each persons situation is unique.  As a general guide I would project the income through to the age that the insured was planning to retire.

In most cases this is age 65, so if the insured is 40, 25 years worth of income would be needed.

A calculation would be required to allow for both inflation & interest on earnings together with the annual income to come up with a suitable sum insured.

In regards to permanent disability & premature death, life, Total & Permanent Disability (TPD) cover & possibly income protection cover would be used to achieve financial security.

A combination of the types of cover mentioned above would ensure that a guaranteed income would continue for you & your family providing financial peace of mind!

 

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Tom George
My role as a Life Risk Adviser involves educating, assisting and providing advice in the area of personal insurance. Follow me on Twitter | Linked In Profile

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