Insurance remains an important starting point in any financial plan. If the risks to which we are all exposed are not discussed and steps taken to remove them then discussing an investment strategy may turn out to be a complete waste of time.
It is possible that in the event of long-term illness, and where there is no income insurance policy in place, that retirement savings will have to be used to keep the family situation going.
If that scenario does come to pass, then financial independence in retirement may have been dealt a severe blow.
In comparison to the financial risks faced by a family, income insurance is generally very affordable (and tax deductible). But to insure one’s income is not yet common practice for the majority of New Zealanders.
We do not hesitate to insure our cars, our houses and often our lives so why not insure our ability to earn an income, potentially our most valuable asset - try multiplying your current income by the number of years you have to go to retirement.
The statistics do show that serious illness or accident is a reality for many New Zealanders prior to age 65.
And without income insurance a family may find that at the very time income is disappearing medical expenses have increased substantially.
Accidents are covered by ACC but it is not always prudent to rely completely on this source. In addition New Zealanders are more likely to be off work for a serious illness rather than an accident.
Whether you are employed or self-employed income insurance is relevant.
There are a variety of policies on the market today. Important policy issues include –
• What does the definition of disability say? Definitions do differ between policies and can effect the timing and amount of payments.
• How does the policy allow for the lost income to be calculated? The calculation method can have a significant effect on the amount to be received, for instance: will any ACC benefit be deducted from the gross amount of pre disability income or from the insured amount (generally only 75%).
• Does the policy provide for rehabilitation expenses and vocational retraining?
• Will any benefit you receive cease at age 65 or continue on?
• What is the cost? Some cheaper policies lack good policy wordings. Others start off cheaper and become rapidly more expensive.
Insuring your income is an important step towards ensuring your family’s ongoing financial independence.
