Would you prefer Life Insurance to pay the family an income?
One of the innovations in life insurance in recent years that remains a bit of a mystery to many is a type known as “Family Income”, or “Family Protection”. It is life insurance that works the same way as other types of life insurance to get a claim, but the method of paying it out is very different. Instead of paying one large lump sum of insurance to a grieving family, it pays it out an agreed rate per year, for an agreed number of years.
Many families would far rather receive a regular income over a period of time, rather than that one large lump sum. For many, it seems as though the money magically lasts longer as it is far easier to budget and use the payment wisely. When a family has a life insurance claim, no matter which family member it is that has passed away, it is a time of the worst emotional stress.
Income Insurance pays a monthly benefit if you are unable to work because of a total disability.
Ask yourself this –
If you had an accident or became very ill and were no longer able to earn an income, how would you manage financially?
In some circumstances you may receive financial assistance from the Government. The bad news is that it's unlikely to be enough to maintain your current lifestyle, let alone allow you to plan for your future – pay off the mortgage, your children's education, retirement savings, holidays etc.
Income Cover provides you with a regular income, allowing you to live the life you want to live. You will remain financially independent, regardless of whether or not you are able to return to work.
Most people take it for granted that they will work until they can afford to retire – and for many of us that means we will still be working until we are at least 65, when government super commences.
It's worth thinking about how much you are likely to earn over your lifetime - because if something happened and you were unable to work, then that's how much you risk losing.
Let's say you are 30 years old and you earn $60,000 per annum. You have an Income Cover policy worth $45,000. If you suffered a total disability and were unable to work, here's an idea of how much income you would lose - and how much your claim would be worth:
We take our ability to work very much for granted, even though we often wish for the day when we don’t have to work. Getting to that day when we no longer have to work is going to depend on our ability to keep working, earning and saving however – and this is where income protection comes in.
Imagine if you couldn’t work because of illness and suddenly your income stops after just a few short weeks. Many New Zealanders will be worrying within a month about where the money will come from for the mortgage, electricity, phone, rates, food, the list goes on. You would quickly forget about the plans you had for holidays, entertainment, future lifestyle choices and and purchases.
There is no doubt that for the majority of people the ability to work and earn and ongoing income is their single biggest asset.
One of the problems we create for ourselves too is that the more we earn the more our lifestyle expectations increase...the more we spend on having a better life.
Maybe we think of ourselves as indestructible, but statistics tell us we are far more likely to have a disability lasting more than three months than we are to have our house burn down. Yet we pretty much all insure our house...and cars...
Assessing the risk here is relatively simple. If we assume that as of today your income stops, it is simply a matter of working out if you can meet your commitments from a sickness benefit? There is the question of course as to whether you’d actually qualify for a sickness benefit – what if you are a double income family and only one income stopped because of sickness? Would it matter which income stopped? If you are single would you have to move in with your parents or live in a boarding house with others that cannot afford to live independently?
That is the risk in its simplest terms. If you want to reduce that risk you need to consider income protection insurance, which (in general terms) will provide you with an agreed amount or proportion of your lost income in the event of being unable to work due to illness or accident.
Once you decide to look into getting some income protection cover though, it gets complicated and there is absolutely no substitute for working with a professional adviser who understands the difference in types of contracts and how they would work at claim time. No two products are exactly the same. And it is not as simple as “any Income Protection is going to suit you”. Some will not suit you and your circumstances at all.
Some of the factors that will affect the choice of what income protection cover will work best for you will be things like:
Whether you have a salary or are self-employed
How much you have in savings, investments, leave entitlements
If your income fluctuates from year to year
If you get fringe benefits you rely upon (e.g. get a company car?)
Do you have business expenses that continue while you are disabled
Do you split your income for taxation purposes
Even with the help of a professional adviser who can work out which contract is most likely to be right for you and work at claim time, there is no guarantee that the cover you selected will be right forever more. You have to review it regularly and make sure the cover you chose is still going to be the cover that works for you.
If you had a machine in your lounge creating money for you... wouldn't you insure it?
Unless you're retired you do, it's called you!
Alongside your health, your ability to earn is your most important asset and for a small portion of your current income you can help protect this. All income protection policies are specifically designed for each client with the ability to choose from a range of options.
We can help you to identify the most appropriate options for your individual situation and provide you with peace of mind that you will be financially secure should you lose the ability to work.
Contact Jonathan York on 07 578 3863 to discuss or arrange a free no obligation insurance review.
Are you prepared for the unexpected?
- An estimated 17% of the total population live with a disability.
- For adults aged 15 to 44, accident or injuies are the most common cause of disability
(source Statistics New Zealand 2006 Disability Survey)
Insurance that provides a monthly payment covering the cost of your mortgage if you can't work due to a total disability.
Protecting what is for most people their greatest personal asset
Does your mortgage (or the prospect of one) feel like a weight on your shoulders? Imagine how much heavier that weight would feel if you were unable to work and couldn't meet your monthly repayments?
Consider that you may be forced to sell your home – something no one wants to face when they are unwell.
Protecting your mortgage is common sense – it's the one thing you can do to ensure that no matter what happens to you, your home and family is secure.
Imagine if your employer gave you choice in the salary package that you could take.
For example, what if you were given the following to choose from?
a. Annual Salary = $50,000 plus 4 weeks annual leave, plus 7 days annual sick leave; OR;
b. Annual salary = $48,500, plus 4 weeks annual leave, plus 7 days annual sick leave PLUS 75% of your income is guaranteed until age 65 if you get too sick (or hurt) to be able to come back to work again.
Think about your choice carefully.
You could get paid the top salary and take all the risk yourself of being able to go to work each day and continue earning an income. Or you could forego a little of the income – but not your other employment benefits – in return for a guarantee that regardless of what happens to your future health you will keep earning money through your working life.
That is an enormous amount of potential risk that you can pass to somebody else if you want to, or you can choose to keep all the income and all the risk for yourself.
Put some simple numbers around it to help weigh up the options. If you are 45 and earning $50,000 p.a. through until age 65 then that is an even $1,000,000 in future income at risk – all dependent on you staying healthy and being able to go to work of course. Would you be willing to trade perhaps 3% of that to secure most of your future income for the rest of your working life?
Your employer wouldn’t ordinarily give you this choice, but you can arrange the package with a little help. The difficulty most of us have is not actually making the choice; it’s knowing what choices we have. Working out what is really at stake, what the chances are of different things happening, and working out what “risk management” strategies can be used is where [we] [THE ADVISER] can help.
Income Protection Insurance is not the only consideration. Your entire personal financial situation is critical in identifying the right moves – Bill Gates doesn’t need insurance, but he still uses a financial adviser to work out what his choices are. In working out your best strategy you will need to take into account things like ACC and other benefit assistance. For example, WINZ provide a Sickness Benefit – if you are a single person you can get $225.03 per week (before tax), which might be enough. If you are married the benefit is much more generous at $375.04 per week (before tax).
If the benefit assistance doesn’t seem enough for you then you might want to review what is enough. Calculate what is actually at risk, what choices you have for managing it, what the cost of transferring it to another party is, and then be able to make an objective decision about the best “package of benefits” you can give yourself.
The ability to have salary certainty even if you are unable to work because of illness or accident during your working life is not actually something your employer can take care of for you. It is your choice on how you use your salary package, and what risks you keep though. It is also without doubt an area where sound financial advice can provide enormous certainty and value for you.
Reference: Sickness Benefit details Work & Income NZ, at 1 April 2011