01 Feb The golden rule when it comes to the golden goose
Remember the story about the goose that laid the golden eggs? It’s a pretty simple story and there’s really only 1 rule you need to know about it:
Q: If you owned the goose that laid the golden egg, which would you protect – the goose or the golden egg?
A: The goose, of course! As long as you have the goose, you can get more golden eggs!
Alright, enough with the metaphors. What I mean is that when people think of their most important asset they usually think of their house, investment property or even their car. What some people continually fail to acknowledge though is that these assets could not exist at all without the income to support them. A person’s greatest asset is their ability to earn an income, plain and simple. You are a gorgeous golden goose and don’t ever forget it!
It sounds obvious but think of all the things regular income actually provides for you – mortgage repayments, investment property costs, rent, personal debt, bills, child care /chool fees, food and many more everyday things that are dependent on you bringing home the bacon, let alone costs for special things like your hobbies and fun.
What I find scary is that of the 57% of Australians who regular put money away into savings, only 33% of those people have saved specifically for an emergency. Yes, I know statistics are ‘damned lies’ but this is something I see from my clients with a startlingly regular occurrence. They have cars, houses, credit card debt and less than $5,000 in the bank for a safety net.
So what would happen if your income had stopped yesterday? Let’s say yesterday you were hit by a bus and need 3-6 months minimum recovery in hospital. I often say to my clients “no mun, no fun” when exploring protection concepts. Forget about fun, where is your regular income going to come from?
Do you have cash on hand to pay for costs over and above Medicare/private health such as a wheelchair accessible vehicle ($100,000 on average)? Do you have enough savings to see you through minimum 6 months of tough, grinding recovery, more likely 12 months or longer once you can start working again?
The reality is that the view of personal insurance (life and disability cover) in Australia seems to be one of short-sighted proportions. People will willingly protect their home and their car, but not themselves.
Its common sense that a person will insure their car because if their car is involved in an accident, it needs to be fixed or replaced so that person can continue to function in their everyday life – it would be hard to get to work without that car! However what if a person suffers a massive stroke, is left unable to work for the rest of their life and did not have any or adequate insurance to provide income replacement for them? We’ll explore that concept further on.
But before you email me and tell me that strokes and car accidents are not comparable and that it won’t happen to you consider that in Australia in 2012/2013 cardiovascular disease resulted in 518,536 hospitalisations and played a role in an additional 680,000 hospitalisations. Cardiovascular disease also kills 1 Australian every 12 minutes. Even I didn’t think it was that high.
- 71% of Australians have motor vehicle insurance – average monthly premium $89.42
- 60% of Australians have house insurance – average monthly premium $57.52
- Only 16% of Australians have death cover – average monthly premium $25.81
- Only 6% of Australians have income protection cover – average monthly premium $130.02
For the Financial year ending 30/06/2014 the Australian life insurance industry paid out a whopping $4,997,382,815 in in claims to Australian families for death, total and permanent disability, critical illness and income protection policies. Re-read that figure and digest it for a moment – $4.9 billion dollars. These people had the good sense to have taken responsibility for their financial future. Can you imagine the government being able to support all those claims? Let’s all stifle a jaded laugh. Let’s then compare that to the figures from financial year ending 2008, where the claimed figure was $3,045,333,112 – almost $2 billion dollars less. The need for proper insurance advice is clearly on the rise as more people are claiming.
And yet, people still avoid protecting that golden goose. At heart I believe this is due to a lack of education over anything else so let’s investigate what your options are if you’re not adequately protected in the event of death, serious illness or injury.
- Get Support from Relatives: this plan could work for a few months, maybe even a few years. However you and I both know deep down it is not sustainable unless that relative happens to be a millionaire, likes you and is willing to help.
- Sell your Assets: Fire sale! Get rid of the investment property! That will create some cash! But why would you do that? Why would you send your financial future backwards when you can have a personal insurance policy to protect your assets for future growth? At the end of the day this option will create more stress and potentially less cash than a personal insurance payout. That is even if the property can be sold, it may sit on the market for months when you need that money now! Stress!
- Go on Government Assistance: these benefits are barely enough to support an individual and/or family as it is. How is anyone going to live on that and also have enough to pay back mortgages or medical bills? We’re talking about needing to exercise these options because you’re sick or injured (or you’re dead and your family is in this position) so you’re going to need quite a bit of money.
I’m not trying to back you into a corner here, but good financial sense is partly about taking responsibility. If you want to avoid the options above then personal insurance strategies are the only simple and effective solution that I’ve come across in my years as an adviser.
It’s time to stop running around like a headless chook and make sure you give due attention to your protection strategies as part of your overall wealth management plan.
1 Roy Morgan Research 6 months to April 2009, Australian population aged 14+. Motor vehicle insurance includes comprehensive, TPP and CTP.
2 Home and Car Insurance assumes a 35-year-old male (age 36 next birthday) home owner, degree-qualified accountant, non-smoker lives in a double brick house (with deadlocks and external security doors and a garage for his car) in Parramatta (2150). He has taken out the Insurer’s residential Package with building ($350K) and contents ($75K), and is based on a $300 excess. He drives a 2005 Holden Commodore Executive VZ sedan 4A V6, with comprehensive car insurance with 65% no claims discount and a $600 excess. He has held his licence for 15 years, Restricted Drivers access and there is no finance on the vehicle. The premium rate for his Home and Car insurance includes all statutory charges. Monthly premiums are quoted as at 2 July 2009
3 Life, Income Protection, TPD and Critical Illness insurance assume a 35-year-old male (age 36 next birthday), non-smoker, degree-qualified accountant, annual income $150,000 stepped premiums; Life cover of $500,000, $10,500 monthly Income Protection benefit (including $1,125 super continuance), $200,000 TPD (any occupation) and $200,000 Trauma cover. Monthly premiums are quoted as at 2 July 2009.
4 Risk Store Analysis