PICTURE this case: a woman, late 30s or early 40s, hasn’t worked for some years. She and the two children have been dependent on the salary earned by the husband and father.
He gets cancer in his prime earning years and dies. The distraught widow is comforted by the fact that her husband had taken out income protection insurance.
They had just managed on the income protection policy that paid them 75 per cent of his salary after the sick leave ran out. (That 75 per cent is top limit for payouts, otherwise there would be less incentive to get back to work.)
That monthly salary replacement payment stops when the man dies (sometimes immediately, at most after three months), but the late husband fortunately had the foresight to also take out a trauma insurance policy. So there is a cheque paid out once he is dead. It is for the full $150,000 of the trauma policy purchased.
There is only one problem: the family still has a mortgage of $400,000. Now what?
Keith Moynihan, product manager at TAL, has seen plenty of cases like this.
“Yet people like this feel lucky. A lot of people don’t have any of this insurance at all.”
In Britain, it has been estimated that about a third of the workforce have only enough cash in their bank accounts to last them 11 days after the pay packets stop. The Yorkshire Building Society found that the average person had enough savings to last 52 days without an income, but 36 per cent wouldn’t last beyond 11 days.
The most usual causes of disruption to income are illness or accident. Contractors and casual workers typically are not covered by sick leave, and even those who are covered usually have a specific number of available sick days. So, for everyone, the pay cheques are going to stop, either immediately or after a few weeks. A report issued last month by Defaqto, a British company that compiles financial industry statistics in that country, says there is a one-in-20 chance of dying between 30 and 65, but a one-in-seven chance of suffering some form of long-term disability during your working life, a disability that lasts longer than six months.
There are no hard figures for Australia, but the view in the insurance industry is that many people would have trouble lasting a month just on their savings. A small minority would be able to go beyond six months. This applies just as much if you’re 23 as it does when you are 53.
“Your income is your independence,” says retail products boss at ING Australia, Gerard Kerr.
“Your income is your greatest risk factor.”
With a 23-year-old, the risk is usually only to themselves, although not being able to pay the rent is just as lifestyle changing as not being able to pay the mortgage if the person is 33 or 43.
But for those with mortgages, and families, there is always the lurking risk of illness and death.
That means that covering immediate income disruption is one aspect; trauma and life insurance are part of the same picture.
Research in 2005 reported by the Investment & Financial Services Association shows that 4400 people with dependent children died in Australia each year.
The research by Rice Walker Actuaries says that average full-time workers in their mid-thirties, with young children, needed insurance cover to provide at least 10 times their taxable earnings to ensure security for their families. But only 4 per cent of such families have that cover.
Of course, the insurance industry saying most people do not have enough insurance falls into the “they would say that, wouldn’t they?” category.
But talk to insurance people and they all make one telling point: you insure your house, your car; why wouldn’t you insure the income without which all that is impossible?
As ISFA figures show, 84 per cent of car owners fully insure their vehicles, yet only 31 per cent of the labour force gets cover to ensure that their income stream is assured.
And it is not just a matter of convincing the public. It is also a matter of, once convincing them, getting them to do something about it. Even for self-employed people, it is often a case of insurance being something they will worry about next week.
David Evans, head of products at MLC Insurance, says US research shows that, of people who have investigated life insurance, only 10 per cent had taken out a policy within the following 12 months.
But there is another aspect to income protection — and it is a contingency that no insurance company can cover. Getting the sack. Just read the headlines. Companies collapsing, loan portfolios turning sour, big question marks over global growth, threat of — depending whose opinion you value — runaway inflation or grinding deflation, stock prices in the basement, and properties unsaleable.
Whichever way you cut the news, all trains of thought are leading to the fear of recession. Some even use the D-word. Some sort of economic slowdown is now generally accepted. You would have to search high and long for anyone predicting bullish economic growth in the next year or two.
The Reserve Bank of Australia would not now be cutting interest rates unless it foresaw economic clouds on the horizon.
Recessions mean only one thing: job losses.
By the time the tap on the shoulder comes, it is too late to put plans in place.
If a redundancy agreement is available, then the immediate impact is softened. There is money to pay the mortgage, the credit card bills, the school fees, the health insurance, the supermarket expenses — at least for a while.
But for the self-employed, the casual and contract workers, the money supply can stop almost immediately.
So, apart from taking out policies to protect your income while you have a job, it might be an idea to provide a buffer should there be no job at all.
Not only do people lose their jobs in tough times, they can’t get other ones. The unemployment benefit won’t cover average mortgage repayments, let alone clear the Visa or MasterCard.
The most useful tip in this case: have as large as possible a balance in a savings account.
Source The Australian Business Robin Bromby
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