Focus on wealth protection

Advisers should be looking at income protection insurance to protect their client’s greatest asset — future earnings.

Property Planning Australia director James McFall said future income outweighed other assets such as superannuation and the family home.

“It is the most important asset and there should be insurance in place to protect against a loss of income,” he told the audience at the CPA Congress in Melbourne.

According to McFall, a 45-year-old presently earning $60,000 a year will earn $1.6 million until they retire at 65.

Similarly, a 25-year-old earning $40,000 today will earn $3 million before retirement.

“Income is making wealth creation possible, so any loss has an impact on retirement,” he said.

McFall said, according to the Institute of Actuaries, the average duration of a disability that causes the insured to stop working is nearly five months.

“Being injured and it resulting in a disability often leads to the loss of a job, and then the client’s wealth creation plans will get worse,” he said.

Based in figures from the Institute of Actuaries, 31 per cent of males and 10 per cent of females have lost their jobs through an illness or injury in the last 20 years, McFall said.

Advisers need to assess what insurance their clients will need in the short, medium and long-term.

Income protection insurance should be taken out to cover 75 per cent of income till 65 and critical illness protection to cover 25 per cent of income, again till 65.

McFall said total and permanent disablement (TPD) insurance should be taken out to cover 25 per cent of income, plus debts, to cover for permanent disablement.

However, the cost of the insurance should also be included in the equation, as it is expensive for an older person to buy certain types of cover.

McFall said a balance has to be achieved between stepped and level premiums.

If income protection and critical illness cover are taken out at an early age, a level premium should be the chosen payment method.

“Level premiums are expensive in the beginning, but are cheaper in later life,” he said.

For life and TPD cover in the medium term, the client will probably have to pay stepped premiums, although again, if the insured takes out the policies at a young age, a level premium can be negotiated.