Set and forget and live in regret, says HLB Mann Judd

Looking for a compass in a storm
March 17, 2019
Leaders of today may not be winners of tomorrow
March 21, 2019

MEDIA RELEASE Australians are ignoring a golden rule of financial management – every time a life milestone is passed, existing insurance cover should be re-evaluated, says Andrew Kennedy, risk adviser at HLB Insurance Services.

 “People are generally good at protecting assets like property, contents and vehicles, but not so good at protecting the most valuable asset of all – their ability to earn income over their working life.

“They get promotions, change jobs, get married, start a family and move to new cities, but they often overlook updating their insurance to ensure their loved ones are adequately protected.

 “Most of us work in order to earn enough income to lead a comfortable or aspirational lifestyle. But our lifestyle is always at risk financially and should be protected with a mix of loss of income, trauma and life insurance,” says Mr Kennedy.

 He says that adequate cover means being able to pay off, or reduce, any mortgage to manageable levels, as well as taking care of living expenses.

“Anyone who is the family’s main income earner should ask themselves how would their family manage financially if they lost their income through accident, sickness or death. Would they have to leave the family home? How would they manage their living expenses?

 He provides the example of a husband and wife, both aged 30 with two children, and the different financial situation they find themselves in when the wife – who is the main breadwinner – is involved in an accident and unable to work again (see attached case study).

 “In the first scenario, with inadequate protection, the family faces financial ruin and their lifestyle may never recover.

 “In the second scenario – through a package of appropriate insurance cover – while the family’s future would be undoubtedly changed, their financial security would be taken care of.”

 However, insurance can not be a set and forget process.

 “As people’s circumstances change, their need for risk cover can also increase and is often overlooked. Insurance is not something you can set and forget, and shouldn’t be something you put off until ‘you’ve got time’.

“Some of the issues of surrounding insurance in super and financial advice following the Royal Commission may have put people off considering their own position. It’s a good idea for anyone who has insurance cover in super to find out more about it and ensure it still suits their needs.

He added that for those who run their own business, ensuring adequate insurance is even more important

 “Anyone running their own business should also have Key Man Insurance, ensuring the primary family asset is protected,” he concludes.

 Case Study

 Take the case of a husband and wife, both aged 30, with two primary school aged children. The wife works full time earning $100,000 a year while the husband maintains the family home and provides full time care for the children.

 The wife is travelling home from work on a Friday afternoon when she is involved in a serious motor vehicle accident that means she is unlikely to work again in the future.

Scenario 1.

If they have no insurance, or inadequate insurance, the family’s main source of income will likely cease after sick and annual leave benefits are exhausted with the employer.

There might be a small amount of compensation payable, but it is unlikely to be enough to provide for the family’s lifestyle.

 Mortgage payments, car loan payments, credit card debts, and bills quickly start piling up. The only way for this family to replace the wife’s income is for the husband to return to work – after being out of the workforce for some time, his skills may no longer be current.

 The family could be forced into selling their home to extinguish the mortgage and/or pay for the wife’s medical treatment. They will most likely be reliant on government benefits and the NDIS for the wife’s future care.

 The children might have to move from private schools to the local public school, once an affordable home or rental accommodation is found.

 The family’s entire future plans may have been derailed in one driver’s momentary lapse in concentration. 

If the worst were to occur, and the wife succumbed to her injuries, while there may be a superannuation lump sum benefit and even insurance through the fund, this would be unlikely to support the family for the rest of their lives.

 Scenario 2

The family’s financial position has been properly protected using a full suite of personal insurance cover.

 Within a few days, the insurance company could be processing a trauma claim based on being in intensive care, or due to injuries resulting from the car accident. The trauma benefit could include an amount to cover the family’s regular living expenses for 6-12 months, and also some money to pay for the wife’s medical or rehabilitation costs.

Within a few months, income protection benefits will commence, replacing up to 75% of the wife’s employment income with a monthly benefit that will continue to be paid until the expiry of the benefit period (usually around age 65). This will take care of the majority of the family’s living expenses on an ongoing basis.

If the wife’s injuries are so severe that she is medically unable to return to work ever again, a TPD claim may be payable. This lump sum benefit could be used to repay the mortgage and pay for medical or rehabilitation costs and adaptation of the family home to suit the wife’s needs. It could also provide an investment lump sum which would top up the family income, restoring it to the pre-disability levels (all with the mortgage repaid).

If the worst were to occur, and the wife succumbed to her injuries, a life insurance benefit would provide for the husband and children financially for the remainder of their lives. 

While the family’s future would be undoubtedly changed, their financial security would be taken care of through a package of appropriate insurance cover.