As the famous world heavyweight champion boxer, Joe Louis once said, ‘Every fighter’s got a plan – until they get hit.” In a similar manner, many people’s best laid financial plans do not hold up well when misfortune strikes.
A smart boxer will keep his hands up to protect his head, which happens to be both his biggest asset and his area of greatest vulnerability. And for many people wanting to achieve their financial goals, it will also make sense to protect their biggest asset from being vulnerable to the effects of ill health and disability.
What may that asset be? The answer of course, is you, or more specifically your ability to generate an income. Your income earning potential has been built up over many years as a result acquiring education, training, and experience and building your reputation in your industry. It is of significant value. Consider a 40 year old earning $100,000 pa – let’s call her Jane. If Jane works until age 65 and receives an annual salary increase of 3% her income potential is $3.6m, easily making it her most valuable asset today.
While we don’t question the need to insure the things our income allows us to buy (houses, cars, contents), only a few of us know how well our income potential is protected. It only takes a few moments of reflection on the financial consequences of not being able to work for any extended length of time due to illness or injury to realise the importance of doing what you can to reduce this risk.
So how can you protect your income earning potential? Income Protection Insurance is one solution that pays you an income in the event that you are unable to work due to illness or injury. It is designed to replace around 75% of the income you receive from employment and to help you and your family maintain your lifestyle and focus on getting well and back to work.
When considering any type of insurance, your goal shouldn’t be to cover every possible risk as the costs become prohibitive. Instead, look to self-insure the risks you can handle and then use insurance for the more significant risks that you are exposed to. An example of this approach would be to have a month’s salary as a cash reserve in the case of short term disability (self-insurance) and also an income protection insurance policy to commence replacing your income if you were still unable to work after a month, and possibly up to retirement age.
There are many moving parts to consider in income protection policies, such as the monthly benefit, the waiting period and the benefit period, to name a few. What is best for you will depend on your own personal circumstances. For more information, call your adviser on 07 3219 4670.