When thinking about our family insurance needs, a basic error or trap is to focus mainly on life cover without giving enough thought to gaining adequate income-protection insurance.
To a degree, this is because life insurance is the core headline cover for Australian households with super funds providing at least some level of life insurance for 13.5 million individuals.
And it is a fundamental personal wealth issue to consider whether our life insurance cover is adequate for our family to maintain its living standards, repay debts and keep savings together in the event of death of a principal breadwinner.
However, it is an extra step – that many people don’t seem to take – to think about what could happen to our family finances if we are temporarily unable to work because of illness or injury. That’s where income-protection insurance is designed to pay benefits.
However, a recent INSIGHTS newsletter published by actuaries Rice Warner further highlights once again the typical inadequacy of income-protection cover in Australia, making these points:
- The median income-protection cover meets just 16 per cent of Australia’s income-protection needs. By comparison, median life cover meets 61 per cent of basic needs (and 37 per cent of the amount required for depends to maintain living standards).
- Only 40 per cent of working Australians have any income-protection insurance – and whether that cover is adequate is another question.
Rice Warner estimates that young families with parents aged 30 need an average of $4300 a month in income-protection insurance whereas older families with parents aged 50 need an average of $5000 a month in cover.
How does your level of cover, if you have it, measure up?
Income-protection insurance has a crucial but probably much-overlooked role in enabling families to keep saving for retirement – or at least keeping their retirement together – if temporarily unable to work.
Just think about the impact of, say, two years without your income could have on your retirement savings, let alone on meeting your day-to-day living expenses.
The link between protecting your income and helping to protect your portfolio through income-protection insurance should not be underrated.
