Managing risk is an essential part of your investment strategy to reduce the potential for losses. Risk is not always just associated with investing, though – life can sometimes throw a curve ball, 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 something 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 ease these types of risks.
The challenges of being underinsured
While many Australians have some form of life insurance through their superannuation, the level of coverage is not always enough. The standard offering within the super framework is usually below what your family need to continue to live comfortably should you pass away or lose your ability to earn an income.
Rice Warner estimates that insurance coverage 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.
Home and contents
It’s important to understand that life insurance isn’t the only type of insurance you should have. There is also a lot of underinsurance in the home and contents sector.
With the growing occurrence of bushfires, floods and storms, protecting your home and possessions with insurance is more important than ever.
Insufficient cover to rebuild your property, particularly with the recent increase in building costs, could become extremely challenging. You should also consider the costs associated with demolition and removal of debris, the cost of architects and builders and the need to find alternative accommodation while your home is being rebuilt.
It is important not to go for the cheapest policy as this may not meet your requirements. Reading the product disclosure statement is essential to making sure the cover provides exactly what you need, should you ever need it.
Health and travel
Health insurance and travel insurance are also important considerations.
You will pay a Medicare Levy surcharge if you do not 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 is worthwhile weighing up whether taking out private health insurance is the better option for you.
When it comes to travel insurance, if you can’t afford it, you can’t afford to travel overseas, according to the Federal Government's Smart Traveller website. The cost of medical care in other countries can be very expensive, and you may need to be transported back to Australia.
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.
The upside is that these funds are yours and, properly invested, can grow over time. It’s important to understand, though, that this alternative may not provide you with enough money to cover everything.
Next steps
Insurance can be the difference between successfully recovering from an event and changing your life forever.
To ensure you’re always ready for what’s next, speak with your local Nexia Adviser today to discuss what insurance options are best for you and your family.
