Have you protected your most valuable asset?
Have you protected your most valuable asset?
Most people insure their motor vehicles, their homes and their home contents. These are valuable assets that, in the event of various catastrophes, they want to be able to replace or repair without significant financial loss.
But when it comes to what is many people's most valuable asset their ability to earn future income they are woefully positioned to cope financially with catastrophe. Research completed in 2006 indicated that only 55% of Australian families had any life insurance, with an even lower 31% having income protection.
Even for those with some personal risk protection, the amount of cover is generally inadequate. There are numerous reasons for this unwillingness to adequately insure, including such "rationalisations" as:
I'd prefer not to think about negative possibilities;
I'm healthy, it won't happen to me;
I'm covered by my super, workers compensation, health insurance, "the government" etc;
Insurance is just too expensive.
We help our clients achieve their version of financial independence. But no family can ever consider itself financially independent if the death or disability of a family member requires a significant adverse change in lifestyle expectations, due to inadequate financial resources.
The reality is that many families, particularly those with breadwinners early in their careers, just cannot afford not to purchase personal risk insurance. And sometimes lot's of it, as we discuss in the case study below.
A life insurance case study
Let's consider the hypothetical case of Mr John Professional. John is 35 years old and intends to work until age 65. He is the expected sole income earner in his family, also comprising his wife and two young children. The Professionals currently have no net investment wealth all their current wealth is tied up in lifestyle assets (i.e. residence, cars etc).
Listed below are some other assumptions relevant to considering John's life insurance requirements:
Current income after-tax (in today's dollars):
$300,000 p.a.
Growth in after-tax income (after-inflation):
1.50% p.a.
Family lifestyle expenditure (in today's dollars):
$200,000 p.a.
Retirement expenditure (in today's dollars):
75% of pre-retirement expenditure
Growth in expenditure (after-inflation):
1% p.a.
Family expenditure if John dies:
80% of Family lifestyle expenditure estimate
Investment return (After-tax and inflation):
3% p.a.
The following chart shows what happens to income, expenditure and investment wealth, assuming the Professionals' lifestyle expectations are not affected by personal catastrophe.
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