Protect your income - it’s an asset worth millions
OPINION: Do you have a solid financial plan in place to create, protect and grow your wealth? What if something unexpected occurred? What would happen to you and your family?
Rival Wealth’s third series examines the nine fundamental steps we believe you need to take to achieve financial health.
So join me and our three new fictitious case studies each fortnight and get yourself sorted. Step five is income replacement.
Renee
Renee is relishing her success at work, and, like most parents, is working hard to balance her career with the needs of her family. Her single income is vital to her children’s welfare and she’s grateful that she’s very rarely needed to take any sick leave.
She knows ACC would cover her if she had an accident but what would happen if she did have to take extended time off due to a serious illness? How would she cope financially?
At just 28, she has at least another 37 years of work to look forward to. On her current salary that’s a potential income of more than $2.5 million. That’s a lot of money to miss out on if she was struck down by illness.
Relying on benefits would mean a significant change in lifestyle. For example, the New Zealand sickness benefit pays about $210 per week; that’s less than what she currently pays in rent alone.
So she’s decided to take action and book a meeting with a financial adviser. Income protection can be expensive but there are options to make this type of cover affordable.
Top tip: Remember, the sickness benefit is means tested so if you have a partner earning over $20,000 per year, you won’t receive any sickness benefit from the Government.
Warren and Judith
Warren and Judith have always been grateful for Warren’s army insurance scheme which includes income protection cover.
Over the years, the couple have tailored this cover to suit their needs. When the kids were young, they elected to have a shorter stand-down period of eight weeks. As life progressed, they increased this to 13 weeks, which slashed their premiums by 2 per cent.
Now that they’re focused on their retirement goal, they’re keen to reduce their costs even further.
However, they don’t particularly want to increase the wait period. Is this possible?
For Warren, yes. Most insurance policies have an option to protect the beneficiary’s income until they reach the common retiring age of 65 – this is called the benefit period.
But because Warren is intending to retire at 60, his policy does allow him the option of altering his benefit period. He’s 55 now so if he drops to five years instead of 10, he can significantly lower his current premiums by at least another 20 per cent.
However, Warren needs to be aware that changing his cover can affect his future insurability, especially if their plans to retire at 60 were not achieved.
Warren and Judith’s early retirement hangs on their ability to pay off their home loan, so finding ways to reduce costs in other areas is vital at this stage.
Top tip: The cost of living in New Zealand can be high. Make sure your income protection policies are aligned with your current circumstances.
Darryl and Christine
Running a restaurant can be a volatile business with seasons, prices and earnings varying substantially each year.
To date, Darryl and Christine have been very successful with their restaurant and are currently earning a good income of $160,000 per year.
Darryl and Christine have ACC Cover Plus for accidents but have just realised they’re significantly under-protected for serious illness.
Managing risk is a key part of running your own business so Darryl was surprised to learn that you are far more likely to be unable to work due to an illness rather than an accident.
Instead of relying solely on ACC or a specific insurance product, the nature of Darryl and Christine’s potentially variable business demands a tailored solution. So they’ve been advised to change their ACC cover to Cover Plus Extra for self-employed people.
This means they can now negotiate an agreed level of loss of earning cover. In other words, they only pay for the cover they need. On top of that they also need suitable income protection and key person insurance, once again tailored to their specific situation.
Top tip: By lowering your ACC benefit amounts, your ACC fatal entitlements such as a payout on death will also decrease. Make sure you compensate for this through your personal insurance.
Direct questions to Tim Fairbrother at 0800 4 RIVAL (0800 474 825) or rivalwealth.co.nz. This information is of a general nature and is the opinion of this authorised financial adviser. This is not intended to be personalised financial advice. A disclosure statement is available on request and free of charge.
You are far more likely to be unable to work due to an illness rather than an accident.