What insurance do I need? Failing to answer this question can unfairly ruin even your best-laid plans and goals. All too often, we people have a complete lack of a contingency plan for situations that are out of their control — situations that could have been mitigated with the right type of insurance.
Insurance is not an enjoyable conversation to have. It requires a discussion on worst-case scenarios and grim outcomes. The business owners and ambitious individuals we work with are naturally optimistic, so it can be un-natural and uncomfortable to plan for a negative outcome. As uncomfortable as it may be, it’s a crucial part of a smart plan.
Sophisticated planning with sound financial advice involves detaching yourself from the emotion and looking at the facts and statistics, then deciding on what precautions you take. Liston Newton Advisory can help you along this path.
Do I need life insurance?
Yes. Life insurance can be an invaluable method of assistance to your family in the event of your death. It can help cover funeral expenses, and help your family recover financially from any loss of income suffered by your departure, ensuring that they can still reach their financial goals.
Do I need income protection insurance?
Yes. Income protection insurance protects your family in the event that you cannot work from sickness or injury. It covers up to 75% of your earnings, and can be used to pay for bills, covering mortgage, and putting food on the table.
Do I need trauma insurance? And how much trauma insurance do I need?
Yes. Trauma insurance goes beyond income protection to protect you against the financial fallout of serious injury or longterm illness. It can pay for medical costs, living expenses, therapy, housing, and debt, to name just a few.
How much trauma insurance you need depends on your assets, and what you need to protect. Your financial adviser will be able to assist you in deciding on the right policy for your situation.
Planning with insurance in mind
Proper planning will help you reach your goals. If your goals are realistic and you have an intelligent strategy in place, you can (and should) achieve them. The usefulness of insurance is to hedge a plan that would otherwise succeed.
With a good strategy, the only thing that stands in the way of achieving your goals is getting sick or injured and being unable to generate an income.
An excellent reference for the stark reality of facts is a recent Zurich White Paper ‘The cost of care’. The paper provides in-depth research on the odds of getting sick or injured, and the true cost of care and recovery.
Cancer is the most common disease which we are affected by in Australia. It is estimated that 1 in 3 men and 1 in 4 women will get diagnosed with cancer before age 75.
A worked example
Steph is 37 years old. She owns and runs a successful graphic design firm that employs 13 staff members. It’s a stressful business, but Steph loves the challenge. Steph is married to David, and they have two kids, aged 7 and 4.
Every year, just after New Year’s Day, Steph and David spend a day planning their future.
Things are looking pretty good.
- They already own their own home, and last year they purchased an investment property. Both homes have debt on them, but Steph and David can meet the repayments with their combined income.
- This year, their focus is on building up their cash savings to allow for more investments in the future. To date, most of their income has always gone back into the graphic design business and meeting their loan repayments.
Steph and David have come up with a realistic plan to start putting money away. They have also dreamed up a 4-year goal for Steph to sell the business and spend more time with the kids before they get too old. As long as Steph can keep growing the business and improve profitability, a $1m valuation is within reach.
Later that month Steph visits the doctor and is shocked to hear that she has been diagnosed with breast cancer.
Scenario 1: No insurance
- The average cost of breast cancer treatment is $36,040. Steph will likely be out of pocket close to $6,000 in medical costs.
- Due to the intensity of the treatment, Steph is advised by her specialist to take six months off work to give her the best chance of recovery. Without her working in the business and generating revenue, she cannot afford to draw a salary.
- Steph and David are forced to sell their investment property to pay for treatment and to get through the next 6 months on one income. They settled at 10% less than what they paid for it due to the pullback of the property market.
- Over the next 6 months Steph gets treatment and is now on the road to recovery; however, without her being in the business everyday things have gone backwards.
- The business has not won any new work since Steph stepped away, in fact, they have lost 3 of the top 4 clients. Steph had to let go of 4 staff members to keep things afloat.
- The business is still going, but Steph is back to where she was four years ago. There is a lot of hard work ahead to get the business and the family’s financials back on track.
Total cost of insurance: $0
Scenario 2: With insurance
- The diagnosis is stressful, but Steph knows she has a contingency for this sort of thing. Steph and David’s New Year’s planning takes a backseat, and Steph’s insurance plan kicks in.
- Steph has $250,000 of trauma insurance in place. Given her diagnosis, she will receive the full $250,000 within 14 days of her diagnosis. This is a huge burden lifted.
- Steph’s also knows if the worst-case scenario happens and she doesn’t survive the cancer, her family will receive a $2m lump sum. This amount would achieve all the future financial goals Steph and David have planned for the family.
- Steph sets aside $100,000 of her trauma cover to make sure she can get the best treatment possible and to create a cash buffer for the family. She decides to use the other $150,000 to headhunt and pay a year’s salary for a replacement for her in the business.
- Steph also has income protection to insure 75% of her annual income ($9,375 payout per month). This will kick in 60 days from when she stopped working and will continue to pay her income until she returns to work.
- Steph gets treatment over the next six months and looks to be on the road to recovery. During this time her replacement has continued to grow the business and has actually proven to Steph that she doesn’t need to be so hands-on.
- The timing of this realisation couldn’t be better, the cancer has given Steph a new perspective on life and she decides to retain her replacement and stay one step removed from the business to spend more time with her family.
Total cost of insurance:
- Income Protection = $137 per month for $9,375 per month of cover.
- Trauma Cover = $63 per month for cover of $250k
- Life Insurance = $650 per annum (paid via Steph’s super fund)