It never ceases to amaze me in my job as a financial adviser how many people I come across who seem to think they’re bulletproof when it comes to sickness or accidents.
“Oh no, those things happen to other people but I’ll be just fine” or what was a classic comment I heard from someone recently that I was arranging a large home loan for and who had absolutely zero life insurance???…”I don’t have any intentions of getting sick or dying any time soon?
Not only was this said in complete seriousness (along with arrogance) but also that particular person had a young dependent family who he seems to think will be able to cope financially if something happens to him.
I’ve also had numerous finance/home loan clients who borrow as much as they possibly can, stretch their income to pay for the home loan and make payments for house and car insurances without giving even a thought towards insuring their lives and their ability to earn an income through something like income protection insurance.
Then when I happen to mention they should take out life insurance cover to provide financial protection to their family, they say they can’t afford it because of everything else they’re paying.
My question to people is this; if you can’t afford to have some life associated insurances in place to protect the debt you have, then you really can’t afford to have the mortgage, can you?
So many people will insure their house and contents, their cars, boats and caravans but completely neglect their own lives and income earning capacity, which enables them to have these things in the first place.
For my mind, unless a person has some health related reason why they simply can’t get life associated insurance in place, then these insurances are the absolute first priority to consider before taking on debts such as home loans, investment loans, car loans etc.
Lets face it; we all will suffer some type of illness and/or accidents in our lives and a little bit of forethought about the financial consequences this will have on our family and loved ones will go a long way towards providing much needed financial protection for them.
So, what are life-associated insurances anyway?
Life-associated insurances generally consist of four main types of insurance cover being; life insurance, which pays a lump sum if you die. Trauma insurance, which generally pays lump sum if you suffer traumatic health setbacks such as cancer, heart attack, stroke etc.
TPD (Total and permanent disability), which also generally pays a lump sum if something happens that, renders you with an ongoing disability and then there is income protection cover, which, as the name implies, covers you for sickness and/or accident to protect your income.
Now of course, a person can have all of these insurances in place for a comprehensive financial protection package or just one or two perhaps if affordability becomes an issue.
So what would be the best insurances to have in place if you couldn’t have all of these four?
Lets look at statistically what insurance covers are claimed on the most and it what order; Apart from life cover which should be fairly easy to determine; i.e. if you dead, then you’re dead!
After that in order it goes income protection claims followed by trauma claims then TPD claims.
So, if you have some debt such as a home loan for $500,000 lets say, then it makes sense to have at least $500,000 worth of life cover to pay out the amount of the home loan if you were to die.
Then it makes sense to have your income protected doesn’t it, as it’s your ability to earn an income that enables you to pay for the home loan repayments in the first place?
After that of course, we come to trauma cover and TPD. One would suspect that if you’ve made an income protection claim for a sickness and/or accident event then it flows on to making a claim for a trauma event and maybe at a later stage TPD.
When you look at it like this logically then, you should have income protection, life cover and trauma in place if nothing else.
Hang on a minute; I can hear you saying that life cover was supposed to be the first priority followed by income protection and so on.
You’re right, I did say that but it’s also important to take note that statistically when we die, 9 out of 10 of us die slowly not quickly so there’s a big chance you’ll probably need income protection and/or trauma claims before you’re estate will rely on a death benefit to pay out all of your debts including your home loan.
I’m not for one minute saying we should go through our lives focusing on how mortal we really are, not by any means.
But it is important to be realistic about how life in general really is and that none of us is bulletproof and when (not if) something unfortunate happens, then you want to be sure your family can at least not be burdened by additional financial problems that you may have inadvertently left them with.
Get the right financial protection in place and get peace of mind as well.
* The author of this article, Gary Fabian, is the Principal of Precision Advisory; Licenced finance broker, risk insurance and superannuation adviser.
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