When we think of our most valuable assets, our home, superannuation or other investments often spring to mind first. Yet our ability to earn a regular income is probably the most important asset of them all. Having that income cease due to illness or injury would severely impact most people’s lives. That makes income insurance a vital part of a sound wealth creation plan.
Your income - your most valuable asset
For most of us, our regular wage or salary is the thing that keeps our lives ticking along. It provides a steady cash flow to pay bills, maintain mortgage repayments and lay the foundations of future wealth.
But stop and think for a moment how your life would be if your ability to earn a regular income was cut short through illness or injury. Income and future earning capacity is our greatest asset. All of our dreams and ambitions are generally tied to our ability to earn, and with this income gone these dreams may not be achievable.
For many Australians, a loss of personal income would be financially devastating. More than just impacting our lifestyle, without a regular income we could face the loss of our homes and lifestyle, maybe even bankruptcy. Income protection plays an essential role in maintaining your lifestyle.
If you have doubts about the value of your income, consider this; a 30-year old worker earning an annual income of $85,000 can expect to receive lifetime earnings of $2.2 million after tax by age 65.
Source: Rice Warner Actuaries May 2011
Protecting your ability to earn an income can be easy
There is a cost effective and simple way to protect you and your family from the financial hardship that follows a loss of income. Income Protection Insurance replaces up to 75% of your income (and 100% of your superannuation contributions) while you are unable to work at your full capacity due to sickness or injury. This insurance enables you to continue to pay rent, make mortgage payments, cover living expenses, pay for vital medical expenses, as well as continue to save for retirement.
You can avoid the financial stress of drawing down on assets or taking on more debt simply by taking out Income Protection. Income Protection can be easily purchased either inside or outside of superannuation. A financial adviser can discuss the options for how best to set up your policy, depending on your financial situation.
Case study: Income insurance safeguards your future
Robert protects his family and his lifestyle after financial disaster strikes
Many of us take our income for granted. But stop for a moment to consider how you would cope if you were unable to earn a regular wage or salary due to income or illness. Your income may stop but the regular bills don’t.
That’s where income insurance plays a vital role in your financial wellbeing. It offers vital protection from the financial hardship that may arise if your income were cut short. By purchasing income insurance through your super fund, the premiums are cost effective and the process of arranging cover is simple and streamlined.
To see how this works, let’s take a look at Robert, and how he coped following a prolonged illness that left him unable to return to work.
We’ll say that Robert, aged 40, earns $85,000 annually. His wage rises by around 4% each year, bringing his total earnings potential to around $1.577 million after tax by age 65. If Bill had an accident at age 50 that left him unable to work, his potential earnings for this period would tumble to $905,000. That’s a shortfall of $672,000 from his otherwise achievable salary - enough to make a huge difference to his lifestyle, and threaten his financial security, possibly even including mortgage default.
However, if Robert bought income insurance through his super fund, he would receive income support worth 75% of his final annual salary from his disablement at age 50, and his earnings for the period from age 40 to 65 would be $1.295 million. This would let Robert far more comfortably maintain his lifestyle and support his family until he retires.
To find out more
Find financial advice to protect your greatest asset?
Need a financial adviser or just want to talk through your options? At BT we can give you general and limited advice on how to invest your super. Or we can help you find a registered financial adviser who can help you with personalized financial advice. Just call us on 1800 104 800 to discuss your insurance options.
Things you should know
Calculations assume a benefit amount of 75% of gross salary, 4.0% benefit indexation for a male, white collar worker. All figures are correct as at June 30 2011. Disability support pension $18,619 pa in 2010, indexed at 4.0%. Consider your personal objectives, financial situation and needs before acting on the information. Past returns are no guarantee of future performance.