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How to insure yourself against life’s big disasters

Nicole Pedersen-McKinnon

A metaphorical Monopoly “go to jail” card can mean the financial onsequences linger indefinitely. So let’s look at the most common “holy sh*t!” situations and how best to contain their damage:

1. Being made redundant

There’s a bit of this going around, although I realise the swingeing cuts are in industries that need desperately to adapt – think manufacturing, retail and, gulp, media.

How to protect yourself? Beyond doing all you can to be indispensable, this requires a cash stash. Three months’ salary is recommended, but safer still is six months. That way you have half a year’s grace before you get worried about new employment.

The best place to keep this is an instant-access offset account attached to your mortgage. Savings rates are lower than home loan rates so you’ll make less than you’ll save in mortgage interest – and you’ll pay no tax on the latter.

There used to be a big market in redundancy protection insurance but, as the incidence increased through the decades, this has shrunk. What’s out there is often designed to cover specific bills, mortgage or credit cards for 12 or fewer months.

Top tip: Don’t be fooled by the name – income-protection insurance pays out only on accident or illness.

2. Becoming sick or injured

This is where you do want income-protection insurance. It replaces up to 75 per cent of your salary if you are physically unable to work, potentially up to age 65.

Predictably, this is extra expensive, so consider cutting costs by opting for a longer waiting period before payments begin. If you have that six-month salary buffer, you could wait six months. Income-protection insurance premiums are also tax deductible (payments are taxable) which reduces the cost.

Don’t forget to ensure your partner is covered as, should you have to stay home to look after them, your own earning power would be curtailed.

Top tip: It’s now possible to insure a person doing the unpaid, unrelenting job of parenting. Replacing this role would be costly indeed.

3. A death in the family

It’s all getting a little grim, but life insurance is also a must. The last thing you want is financial trauma on top of emotional.

Life insurance pays a tax-free lump sum, which needs to be large enough not just to pay out debts, but to also replace income and cover the forecast cost of raising kids. You need a lot more than you might think.

Life policies are often sold with total and permanent disability insurance, which pays a lump sum in the event of just that. This is worth having too, but check it wouldn’t offset against any income-protection payments.

Top tip: Look for a life policy that pays out early on diagnosis of a terminal illness. The money could be crucial to meeting medical costs.

4. Loss of belongings

What do you reckon is the replacement value of your house today? How much is it insured for? If you’re like about 80 per cent of Aussies, it won’t be enough. Check you have a total replacement policy or jump on ASIC’s website moneysmart.gov.au to see if you are exposed.

Also make sure your contents policy is up to date and you’ve listed and documented all valuables so you might get a claim paid.

Top tip It’s vital contents covers liability outside your home, say in case you’re in a costly incident on a golf course.

5. An unexpectedly massive bill

Termites feasting on your home, an enormous special levy from your strata – such financial face slaps can sabotage the best laid plans. Insurance won’t help you here but diligent saving and investing throughout life will.

You need to keep a decent chunk accessible (a mortgage offset account is once again gold).

It’s also not bad to retain access to some form of borrowing, just in case. The cheapest way is by never quite discharging your home loan – leave a bit owing so you could up the debt if absolutely necessary.

Top tip: Money is both for enjoying AND for emergencies. Far from lamenting the wealth depletion one might inflict, the ability to financially cope is the mark of successful management.

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