01 Jun Calculate the essentials of protection
[blue]Article by Jason Clout – The Age – http://www.theage.com.au/money/calculate-the-essentials-of-protection-20120526-1zbia.html [/blue]
Imagine that you had a machine that pumped out $100 notes. Would you insure this miracle device? You’d be nuts not to. Well, that is analogous to what the main breadwinner in a family does, points out Jordan Hawke, executive general manager at Asteron Life, “yet they often won’t insure themselves”.
Industry research suggests that protecting the family’s lifestyle after death or permanent incapacitation – or even protecting the weekly wage while off work for a shorter term – has not been a priority for many.
And that’s because Australians traditionally have been ”more interested in accumulating wealth than protecting it”, Hawke says.
Actuaries at Rice Warner calculate a young couple aged 35 with children needs $500,000 to provide even the bare minimum should the higher-earning partner of the pair die.
For older families, the figure is about $410,000, again just to maintain the basic necessities. (Have a look at the table, right, for how much cover you might need.)
The question you should be asking yourself, according to Hawke, is this: how much value do you put on your life and your family’s lifestyle?
Not that much, according to industry research, or at least not enough: the average life insurance claim is $131,000 – less than half the average home loan of $264,000.
In the absence of expert advice, we tend to underinsure ourselves to an even greater extent. That same industry research shows that the average sum insured when bought through an adviser is $300,000, but only $99,900 when bought directly from an insurance company. Time to ask yourself: do you have enough?
COUNT YOUR COSTS
”The situation with the main income earner in the family passing away [or being permanently incapacitated] often leaves two big problems: the debts associated with the mortgage and your lifestyle expenses,” says a director at accountancy firm Hayes Knight, Greg Hayes.
And with a mortgage of $500,000 to $700,000 and an income of about $120,000, the amount of cover you may need to meet those payments could be as high as $2 million.
One of the issues is the surviving partner may not have the earning capacity of the deceased.
Often another stumbling block to the surviving partner boosting their income is the need to look after children, which can limit the available job options.
”A key question is what is going to be your lifestyle after such an event; you need to consider what could be the level of expenditure for school fees, for example,” Hayes says.
CHECK YOUR POLICY
There are a few of us who are wealthy enough to self-insure. And even diligent savers who see that as their insurance can quickly be in for a shock.
You may have $20,000 or even more in the bank. But while it is a good first line of defence, it’s probably not going to save the family home or lifestyle.
For most people, that leaves an insurance policy as your best protection against unexpected calamities. There is often a life insurance component in your superannuation policy but you need to check the extent of that coverage.
In fact, checking your life insurance policy is essential according to Hayes. ”It is an area where you need to be absolutely sure of what you are getting.”
That means you need to consult someone who is knowledgable in these areas, such as your financial planner or accountant.
”Insurers will tend to be happy to take your money in the first place. But you need to ask questions about their claims record as well. How soon they pay out on claims is very important as some are slower than others,” Hayes says.