Important notice: We are not related to the payday loan company or any overseas companies using the name Clear Sky Financial. We are Clear Sky Financial Pty Ltd. A 100% Australian owned Financial Planning Company, with Australian-based advisers operating under Australian Financial Services Licence Number 246638.
Is insurance a sound investment?
Managing risk is an essential part of investment strategy to reduce the potential for losses. However, risk is not just associated with investing. Life can throw a curve ball or two – and insurance is one way to manage risk in a broader context.
It’s a matter of weighing up your risks and thinking about what you would do if the worst happened. Could you afford to build a new house, buy a new car or support your family if you became too ill to work?
Various insurance products or self-insurance can help to mitigate these types of risks.
Underinsurance:
While many Australians have some form of life insurance through their superannuation, the level of cover is rarely sufficient. The standard offering within the super framework is well below what your family would need to live comfortably, should you pass away or lose your ability to earn an income.
A Financial Services Council report, estimates that as many as one million Australians are underinsured for death and total permanent disability (TPD) and 3.4 million for income protection.i
Rice Warner estimates that insurance cover for a 30-year-old with dependents should equal eight times the annual family income for life insurance, four times the family income for TPD and 85% of the family income for income protection. The default superannuation offering falls well short of this figure.ii
Home and contents:
But it’s not just life insurance. There is also a fair amount of underinsurance in home and contents. With the growing incidence of bushfires, floods and storms, protecting your home and possessions with insurance, is now more important than ever.
The biggest mistake is insufficient cover to rebuild your property, particularly with the recent surge in building costs. You should also consider the costs associated with demolition and removal of debris, the cost of architects and builders, as well as the need to find alternative accommodation while your home is being rebuilt.
It’s important not to head for the cheapest policy, as this may fail to meet your needs. Read the product disclosure statement to make sure the cover delivers exactly what you need.
Health and travel:
Health insurance and travel insurance are also important considerations.
You will pay a Medicare Levy surcharge if you don’t take out private health insurance and have a taxable income above $93,000 for singles or $186,000 for a family, couple or a single parent (increased by $1,500 for each dependent child after the first child). This starts at 1% of your taxable income and goes up to 2.5%. So, it’s worthwhile weighing up whether taking out private health insurance is the better option for your needs.iii
When it comes to travel insurance, if you can’t afford it, you can’t afford to travel overseas, according to the Federal Governments Smart Traveller website.iv The cost of medical care in other countries can be exorbitant and you may need to be transported back to Australia. These expenses can be enormous.
Of course, travel insurance can also help to compensate for cancelled or delayed trips and lost luggage.
Self-insurance alternative:
An alternative to taking out an insurance policy is to self-insure. That means putting money aside regularly to build up a big enough fund to help keep a roof over your head or replace a vehicle.v
The upside is that these funds are yours and, properly invested, can grow over time. The downside is that you may not have enough money together when a disaster happens.
Insurance has the power to determine whether you bounce back from a setback or face life-altering outcomes. If you would like to explore your insurance options, please reach out to us for a conversation.
ii https://www.ricewarner.com/life-insurance-adequacy/
iv https://www.smartraveller.gov.au/before-you-go/the-basics/insurance
v https://www.investopedia.com/terms/s/selfinsurance.asp
Information contained in this document is considered to be true and correct at time of publication. In addition, the information provided is general information only, and does not take into account any individuals’ objectives, financial situation and needs. Before acting on any information contained herein, you should consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.
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