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Protecting your assetsThe importance of insurance cannot be underestimated – whatever age you are. What insurance should I have? Then, you need to make a judgement call: First – how likely is it that I could lose this asset? And second, what would be the financial consequence of losing this asset? If you lost it but you can live without it and you don’t need to replace it – then you probably don’t need to insure it. If the likelihood of loss is insignificant, then again you may choose not to insure it. But if loss could happen – and that loss could really impact on your future lifestyle if that asset needs replacing – then it should probably be insured. Hidden asset: your future income The biggest asset that most young people have is usually their future income stream. If something happens to you when you are in your 20s to prevent you from physically earning your future income stream, you’re unlikely to have other assets to cover that gap, such as accumulated superannuation or other major assets such as shares or property. Your future income stream also disappears with your death, of course. If you have dependants, your death could seriously impact their future. However, for young people without dependants, life insurance is less important. All young investors should consider protecting their future income through Total and Permanent Disablement (TPD) insurance. TPD insurance is often offered in combination with life insurance. Premiums may be lower if that insurance option is available in your employer’s superannuation policy. Another protection for your future income stream is insurance against short-term disablement. An injury or long illness which is recoverable may still prevent you from earning an income for a few months to a few years. Income protection insurance can replace your income stream on a regular basis, or a relatively new cover called trauma insurance can provide a lump sum payment under certain circumstances. Under-insurance and over-insurance – what are the issues? Under-insurance happens when you take out an insurance policy that doesn’t cover the full cost of your loss. An example is having your house and all the contents destroyed in a fire – and having the rebuilding and replacement costs higher than your insurance cover. You should check your insurers’ Product Disclosure Statement as penalties may also apply for under-insuring so you receive even less than the actual insured amount, therefore further adding to your financial burden. Over-insurance is also an issue. It doesn’t matter how much your policy covers, most insurers will only pay the cost of replacing the item insured. It’s important to review your insurance each year to make sure you are insured for the right amount.
How much insurance should I take out? Start by writing out an insurance plan. Work out the value of your assets and their replacement costs. Then, work out your income protection needs. List your commitments – outstanding debts or regular payments such as car or housing loans. How much would you need to cover those if you faced losing your income over one or two years? What about if you faced permanent disablement? You would need a lump sum that would be equivalent to your future income stream. Deduct from that the sale of any assets like savings or property, and your existing superannuation benefits. The gap remaining should be covered by insurance.
Check before changingIf your superannuation policy currently offers insurance (as some Russell SuperSolution employer
packages do) – think carefully before switching funds. Life and TPD policies are usually cheaper
and easier to arrange through your superannuation fund. There is a group rate, giving you lower
premiums, and medical evidence isn’t always required. Switching funds could mean you lose
your insurance – and it is generally not automatically available even if you decide to switch
back. Health evidence is often required.
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Achieve is issued by Russell Investment Management Limited (RIM), ABN 53 068 338 974, AFSL 247185. In preparing this information we haven’t taken into account your own personal circumstances, including what you want and need for your financial future. It is important for you to consider these matters and also to obtain and read the relevant PDS before you decide whether to acquire or to continue to hold a product. Go to www.yoursupersolution.com.au to download a PDS. Interests in Russell SuperSolution are issued by Total Risk Management Pty Ltd.
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