Do You Really Know How Much Insurance You Need?

Christmas, and the start of a new year, has once again been and gone. After these times of reflection, festivities, family, fun and great times, let’s take some time to consider the idea that an excess of anything has consequences.

Too much food? A tummy ache… or maybe an extra notch on the belt line. Too much alcohol? A fuzzy head the next day or maybe some family amends to make.

But spending too much? That’s not something that can be solved with a Panadol and a lay down.

In Financially Fit Bootcamp, Dr. Tony reminds us not to take a break during this part of the year. In fact, discipline is required now more than ever.

So, with the holiday season now over for 2016, let’s stop to reflect and put some healthy financial habits in place for 2017.

Creating Your Financial Safety Net

One of the most important steps to take in 2017 is to create your Financial Safety Net—if you haven’t already. Dr. Tony talks about this in Module Four, but I’m going to provide a brief explanation here of what it takes to Protect Yourself and build a Financial Safety Net for you and your family.

When going through the Four Money Principles, many people want to avoid thinking about putting protections in place. Either they prefer to believe nothing bad will ever happen to them, or they simply don’t want to face the truth that “Sometimes bad things happen to good people.”

But a Financial Safety Net isn’t something to catch you when you’ve had a few too many drinks. A safety net underpins your entire financial plan and journey. It’s a critical piece of your financial puzzle we hope you never have to use but is always there providing protection.

The challenge is deciding how much is enough to provide the security you need.

How Much Insurance Do You Need?

The “experts” quite often have an underlying agenda around insurances—and not necessarily a good one. Insurance salaries are usually based on commissions. The salesperson gets paid based on how much they can sell you. Sounds like a good way to give you the optimum levels of cover….not!

So how do you get the right levels of cover without being oversold?

First, it starts with you.

Make sure you have a solid grasp of your finances. Know what your baseline expenses are, automate your accounts and make sure your spending is efficient. Even more important? Making sure your debts are being extinguished.

Second, work with an expert who has your best interests at heart…not their back pocket.

As an example, this is how I work with my clients:

First up: Income Protection

This covers 75% of your income.* Your income is the critical piece that pays you now and into the future. If nothing else, you must have this piece of protection in place.

Next: Life Insurance

This covers your family if you pass away.* This should cover loans, debts and, if necessary, provide an ongoing income for your family. One note, Income Protection won’t pay out if you die, while life insurance does.

Pro Tip: Paying debt down is important, because your insurances will be cheaper.

This third step is where I differ from many advisers.

Total and Permanent Disability

Total and Permanent Disability covers you if you cannot go back to work after an injury or if you are permanently or totally disabled. As with all insurances mentioned, there are intricacies involved that need professional input.

A lot of advisers recommend Trauma Insurance Cover instead at this point. On face value, this type of insurance can be sold to you as a good idea. It’s also the most expensive cover and can become very costly as time goes on. In my way of thinking, trauma insurance is a nice to have not a need to have.

If you have the first three in place, with adequate cover in each, you’ll make it through an event with your plan intact. Insurance isn’t designed to be “one power ball, and I’m out of here.”

Finally: Trauma or Critical Illness Insurance

Trauma or Critical Illness Insurance provides you with a lump sum payment in the event you suffer a serious medical condition. Most insurers will cover up to 50 different conditions including but not limited to:

  • Heart attack
  • Cancer
  • Stroke
  • Alzheimer’s disease
  • Blindness
  • Major head trauma

I quite often see many clients with very high levels of cover in this area even forgoing the others to afford this one. Eventually, people catch on to the amount of money they’ve wasted and drop this cover around 45 years of age. But this is actually when many claimable events (that are now not covered) occur—just a few years after they drop the cover.

Just The Right Amount

We believe cover should be adequate, effective and affordable for the long-term. At Your Wealth Matters, we usually calculate a sufficient Financial Safety Net as the total amount of coverage you need for around 12 – 18 months of owner-occupied mortgage repayments/rent, as well as out-of-pocket medical expenses. Of course, we tailor each plan to your specific requirements, but this is roughly how we calculate adequate coverage. In the end, this is usually a lot less than some advisers try to sell you.

The key is to clearly understand what you need, how you are covered and why you need each type of insurance. If you are not clear on these three elements when an advisor is trying to sell you insurance coverage, walk away.

Understanding what you need and how much isn’t a guessing game.

If you have too much cover, you jeopardize your ability to pay your future self the maximum amounts and lengthen your journey to Financial Freedom . If you have too little cover, you can lose everything during an emergency or unexpected life event, just not immediately.

Stay safe over the new year, and I look forward to seeing everyone get closer to Financial Freedom in 2017. If you need help, we’re always available at

Julian Musgrave

* This calculation is based on Australia, and may differ slightly where you are, but the principle is solid.

This is a sponsored post by Julian Musgrave. The views expressed in this article are their own. To learn more about Julian, visit our Specialist Panel.

image credit: Bigstock/CebotariN

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