For many people who read this headline, you may be thinking that the answer to this question is reflected in the value of your balance sheet i.e. your net assets minus liabilities. Well it isn’t this time. For the purposes of this conversation, we looking at your future earnings capacity and quantifying the economic cost if your household no longer received an income.

Do you have a Plan B? Unfortunately most people don’t, but that’s where insurance comes in.

Counting the cost of a curve ball

Curve balls. They’re unexpected, often deceptive and it’s impossible to predict their trajectory. That’s why they’re so devastating – in sport and in life. There’s some interesting data now available about the kind of curve balls that can impact your life, your finances and your retirement.

The headline figure is this: one in three Australians could be disabled for more than three months before turning 65*. If you combine this with another startling fact – that 60 per cent of Australian families with dependants will run out of money if the main breadwinner can no longer bring in an income – you can see the problem.

Curve balls are pretty common, but so few people are prepared for them. With the mortgage to pay, school fees to fund and day-to-day living expenses to meet, you could run down your savings very quickly and face financial difficulty.

The table below shows what’s at stake in terms of potential earnings to age 65. For example, if you are currently 45 and earn $80,000 per annum, you could earn around $2.15 million over the next 20 years. Isn’t that worth protecting?

Assumptions: Income increases by three per cent per annum. No employment breaks. Figures rounded to nearest $10,000.

What kind of Plan B do you need?

The last thing you need to worry about when you’re dealing with a curve ball is your finances. That’s where insurance comes into its own. It’s a well-known saying that you only realise the value of insurance when you need it – and you don’t have it.

Taking out income protection insurance could provide you with a monthly benefit of up to 75 per cent of your income to replace lost earnings while you recover. Most income protection policies offer a range of waiting periods before you start receiving the insurance benefit (with options normally between 14 days and 2 years). You can also choose from a range of benefit payment periods, with a maximum cover period generally available up to age 65.

Protect your Lifestyle

For anyone with a mortgage – which is probably significant for anyone owning property on the East Coast – and reliant upon their job to assist repay that debt and put food on the table, then Income Protection insurance is the easiest way to protect your lifestyle – and that of your family – both now and in the future.

Other things to consider

Income protection insurance
premiums will generally be lower if
you choose a longer waiting period
and shorter benefit payment period.

If you don’t have sufficient cash
flow to fund the income protection
premiums, you may want to arrange
the cover in superannuation, where
the cost will be deducted from your
account balance.

Other curve balls you may want
to insure for include critical illness
(such as cancer and stroke), total
and permanent disability and death.
These curve balls can be covered
by different types of life insurance,
which you may want to consider.

* Calculations based on data from the Institute of Actuaries of Australia 2000. Interim Report of the Disability Committee. IA Aust: Sydney. Source: MLC