One slip proves the wisdom of income protection cover

Your income is an asset just like your house, and needs insurance.

OPINION: No-one knows what our lives will bring; that’s why it’s important to have a solid financial plan. At Rival Wealth we reckon there’s nine steps you need to take.

So join me every fortnight in our second series on how to get financially sorted. Our three client case studies are fictitious but their issues are common to many of us. Step five is income protection.

Talia

Talia is about to retire so if she wants to maintain a comfortable lifestyle, she needs to carefully manage her investment income.

With $1 million at her disposal from the downsizing of her house in Auckland, she is looking to invest it in a conservative portfolio which has the potential to earn an assumed 6 per cent.

To protect the value of her investment against inflation, Talia intends to leave 2 per cent of her return each year in the portfolio.

She hopes the portfolio will provide around $25,000 income, and that, combined with her pension, will give her a total of $45,000 after tax each year to live on. On top of this, she’s set aside $50,000 in a separate account as a rainy day fund.

Some would say Talia is lucky to be in such a comfortable financial position but, realistically, she has worked hard for it. Furthermore, she has been wise and planned her retirement well. The timing of her house sale was important, with the Auckland property market still so hot at the moment, and this has created a perfect end to her working career.

Top tip: Start planning your retirement well in advance so you can cope with future challenges.

Jeff and Nicki

Before their divorce, Jeff and Nicki had thought about their income replacement if one of them got sick, and decided they had each other to fall back on.

Now that everything has changed as they have separated, they need to look at how they’re going to protect their incomes, essentially their largest assets.

Jeff can save more than 40 per cent on income protection premiums if he opts for a 13-week stand-down period. His parents will help fund him through the stand-down period if necessary.

Although Jeff is certainly up against it financially, his dad was quick to point this out: Why bother insuring your car, house and life if you’re not going to cover your income? If you can’t earn a crust, how are you going to pay your bills and run the business?

Jeff’s father was a self-employed builder and knows first-hand how important income protection cover can be. Fifteen years ago, when installing a window in his own house, his hand slipped and went through the glass. His tendons were severed so badly it took two years of surgery and rehabilitation before he could return to work. Due to his taxable earnings, ACC cover was minimal so he was very grateful to have income protection.

Top tip: Having some income protection cover with a longer wait period in place is better than nothing at all.

Ben and Keira

Ben and Keira are self-employed and, like hundreds of thousands of other Kiwis, their greatest risk is injury or illness preventing them from earning an income.

Because they’re just starting out and have no earnings history they don’t qualify for standard income protection, as they are considered higher risk. They will only receive minimal ACC as they have no earnings to claim ACC against. The variable nature of their farming income means proving their earnings to ACC will take a reasonable amount of time.

Farming is regarded as a relatively high-risk venture, so Ben and Keira need to move quickly to protect themselves.

In 2014, ACC had 11,650 claims just from sheep and beef farmers alone. If Ben was one of these claimants and unable to work on the farm due to illness or injury, their operation would quickly become very vulnerable with minimal ACC cover.

Ben and Keira need professional advice and private insurance that’s specifically tailored to their new business venture so the farm can keep going in the event of an accident.

Top tip: It’s vital you look at how to protect your most valuable asset – the machine that makes your family money – your ability to earn an income!

ACC cover was minimal so Jeff’s father was very grateful to have income protection.