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In a very raw article recently, ‘The Conversation’ published the results of a survey of 1,100 Australians living with debt they cannot pay.
It’s compelling reading and some findings are particularly poignant.
Firstly, having a job is no guarantee against financial duress.
Secondly, unforeseen circumstances are often a tipping point for financial hardship. Being diagnosed with something like an autoimmune condition can not only affect your ability to work, but will eventually mean the medical expenses add up, leaving you with more bills to pay than actual money coming in.
In circumstances like this, no amount of budgeting wizardry will be able to solve the problem.
And PS. The government won’t help you.
Well, it helps to have a buffer zone. And by this, I mean savings, ‘a rainy day fund’ – so that you have some leeway if big expenses come along. Accumulating 3-6 months’ worth of wages in an account that you don’t touch unless you need to, means you’ll build financial resilience – the ability to cope when something unexpected happens – like you lose your job, or your car just won’t run anymore and you can’t live without it.
But another important protection is being adequately insured. Most people in their 20s don’t think about insurance and yet this is the perfect time to purchase a policy. Why? Because insurance premiums can be “locked in” at a young age and won’t increase each year as you get older. It is also much easier to get insured when you are young and fit and healthy and you don’t have any pre-existing medical problems. So, don’t leave it too late. And don’t make the mistake of thinking health insurance alone is enough. Here are three other policies you should consider:
Trauma insurance is sometimes called critical illness insurance.
It is the perfect back-up policy for when things such as a shocking health diagnosis or a life-changing accident occur. You set the cover, and trauma insurance will kick in, providing you with a lump sum.
This money will keep the lights on, food in the fridge and the roof over your head while you figure out what you’re going to do next. It can also be used to pay medical expenses if your health policy won’t cover them.
If you’re a parent you can also insure your children – for as little as about $10 per week – and then if someone gets seriously injured on the footy field or is diagnosed with one of the nasties, you have breathing space. You can take time off work and get your child the best medical help money can buy. You can focus on what’s important.
Conditions that you can insure yourself for will vary from policy to policy, but will typically include as standard various cancers, heart disease and/or heart attack and stroke. Beyond these common diseases, there are several dozen other conditions that may also be included. Some examples include major burns, organ transplant and motor neurone disease.
So you’ve insured your car, your home, your caravan. Have you ever considered insuring your income?
According to some published Australian figures, more than half of the working population doesn’t have income protection insurance. So, while we’re good at insuring our stuff in case it gets broken or stolen, we rarely think about insuring the very thing that makes all the ‘stuff’ possible in the first place.
Income protection works by providing you up to 75% of your gross income if at any point you are unable to work for a period of time due to illness or injury. And, the ATO will allow you to claim the cost of premiums for an insurance policy that protects against the loss of your income, but any subsequent payment received under such a policy will be declared as income.
With that in mind, income protection tends to be one of the generic types of cover within your superannuation. And that cannot be claimed as a tax deduction because premiums are deducted from your contributions which are already taxed at a lower rate.
Total and Permanent Disability Insurance (TPD) is the one we like to talk about the least, because it’s designed to provide cover if you suffer an illness or injury that leaves you totally and permanently disabled.
But here’s what many people don’t consider: if you are permanently disabled your life expenses are likely to increase – you might need a carer; you may need to make modifications to your home in order to remain there.
You may need to purchase special equipment to maintain a level of independence, and there will be prescription medicines to pay for, too.
Thinking ‘it will never happen to me’ is naïve. In my career as a financial planner I’ve seen enough cases to know that unexpected, traumatic life events can happen to anyone.
What’s more, all of the people interviewed in The Conversation’s survey said the anxiety of not being able to pay bills and drowning in debt only added to their day-to-day misery.
Financial hardship is incredibly stressful, and so it’s wise to do all you can to make sure it doesn’t happen to you. Take it from me, you need insurance. We all do. And if you need our help, contact us.
The information contained in this article has been prepared without taking into account your individual objectives, financial situation or particular needs – it is GENERAL ADVICE ONLY. Before acting on any information in this article, I recommend that you consider whether it is appropriate for your individual circumstances.