If you passed away suddenly or suffered an illness or injury that prevented you from working, how would your family fare financially? Furthermore, how do you protect your family when you’re no longer there or unable to provide for them? Depressing as it is, it’s really important to think carefully about this, and not leave it too late. Hard to believe but the average age of claimants for Total and Permanent Disability Cover through a major company in New Zealand is 49 years old. Luckily there are lots of good options available to provide you and your family with peace of mind should disaster strike.
Lets take a look at three different life scenarios.
David & Aroha
David and Aroha are both in their mid 30’s living in Wellington with their 2 young children. David is an employed IT Consultant while Aroha works part time teaching. They have a $380,000 home loan with no established savings or retirement funds.
David and Aroha are at a stage where most people feel the greatest financial pressure of their lives. They have high debt combined with reduced income, while they raise their young children. A rainy day fund is therefore really important to have stashed away for any surprises that should happen. The financial pressure is hard enough without having to worry about how the mortgage is going to get paid because of redundancy, so 3 months’ expenses should be the goal for peace of mind.
With children and a busy schedule, having a weekly meal planner could save David and Aroha both time and money. If they shop for their groceries online they’ll buy just what they need, and avoid the impulse buys on things they don’t!
Communicating this financial pressure is also key to spreading the burden, and a money date is a relaxed way to get some time out from the children. At this date it’s important they look at reviewing their spending over the last three months and identify areas where they are over spending. It’s amazing how much can be saved just by cutting down the morning café call – one coffee per working day is $1,170 per year! They should focus on changing one expense each time they sit down.
TOP TIP – Spending is a lot easier than saving but if you know exactly where your money is going, reaching your financial goals will be much simpler.
Martin & Stacey
Martin and Stacey are in their early 50’s living in Napier. They’ve owned a successful retail business for the last 12 years. They have a $75,000 home loan plus a freehold rental property in Taupo and have started to save into shares. Their 2 adult children both live and work in Christchurch.
Martin and Stacey have transferred the mortgage on their house, which means they no longer require personal life insurance. But if one of them should pass away or become permanently disabled they’ve left enough cover in place to exit their business without any financial stress.
Their business debt protection cover has been structured correctly in that the debt is protected by a separate policy, owned and paid for by the business. Their level of cover is aligned to the amount of their business debt of $285,000 which is under a personal guarantee . To protect the guarantor, Martin and Stacey have ensured that the policy would completely clear the debt.
In doing so, this protects the business from a situation whereby the debt provider might recall the debt due to concerns say about a remaining director’s influence. This will enable the business to continue to operate.
They also have a small amount, $60,000 of Key Person cover. If Martin or Stacey died or were unable to work ever again, their business could quickly derail. This type of cover can help fund the cost of replacing key people’s productivity in the business by injecting
TOP TIP – While it’s important to insure business assets against loss, it’s equally important to insure specialist people who create business profitability.
Robert & Marilyn
Robert and Marilyn are mid 60’s and have recently retired. Robert was a lawyer in Auckland while Marilyn raised their family. They have 3 children and 7 grandchildren. They are debt free, own 2 rental properties and have substantial funds on deposit for retirement.
Since reviewing the cost of their medical insurance, Robert and Mari-lyn have also been looking into their life insurance policies. As a result, they’ve just cancelled a term life policy for $200,000 that covered a mortgage they had 10 years ago and no longer need.
They’ve also reviewed a policy they took out in the 1970s called ‘Whole of Life’. This policy pays out a lump sum at time of death no matter how old the policy owner. With premiums over $1,000 per year, Robert and Marilyn no longer need this protection. They have no debt and earn enough passive income to maintain their standard of living if either of them should pass away.
Whole of Life provides investment as well as insurance by offering bonus rates. While this provided a good return in the high interest rate decade of the 1980s, today’s bonuses have diminished significantly, in line with lowering interest rates. In fact, last year’s bonus rate was under 1%.
However, if Robert and Marilyn surrender the policy, they’ll lose a large chunk of their bonuses accrued. So they’ve taken advice and decided to turn their Whole of Life policy into an Endowment Policy that matures in 5 years. This way they still receive the accrued bonus-es but won’t be paying for unnecessary insurance into their 90s.
TOP TIP – Don’t get complacent and pay for life insurance that you don’t need as your risks change with age.
Thank you to Tim Fairbrother from RIVAL Wealth for providing this article.
This information is of a general nature and is not intended to be personalised financial advice.