Are you an employee or a self-employed business person dependent on income derived by sweat of the brow? Do you carry any personal debt or debt over your principal place of residence or investment properties? Do you have dependents that rely on you to provide for their financial security, today and in the future? Chances are for most of us the answer to at least one of these questions is a definite yes.
You are then left to make a choice. Do you accept the risk and hope that you will never become sick or disabled and have to stop working or that you will not die prematurely leaving your dependents with substantial amounts of debt and inadequate financial resources. Or, do you plan for and manage the risk by taking out appropriate insurance.
For most of us the prospect of losing our ability to earn income and dying prematurely may seem a little unlikely to give it due consideration. After all it is human tendency to waiver on the side of optimism on such issues and assume that ‘it will never happen to me’. But the reality is that it does happen to people just like you every day of the week. So, how can you plan for and manage these risks? Well, there are a range of different insurances specifically designed to meet these specific risks, the combination of which can provide a comprehensive risk protection plan. Below is a brief overview of the most important personal insurances for property investors.
Income Protection Insurance
Income protection insurance can provide you with an income in the event that you become totally or partially disabled and are unable to work. Income protection insurance provides up to 75% of your pre-disability income. Benefits are payable after the expiry of a selected waiting period and apply for a predetermined period (the benefit period) providing you remain totally or partially disabled.
If you are dependent on earning a salary or wage to support your current lifestyle and to create wealth for you and your defendant’s future than income protection insurance is a must. If you own negatively geared investment property then your need to protect your income is even greater than for most other individuals. Whilst negative gearing is an appropriate strategy for certain investors its success as a strategy revolves solely around your ability to continue earning income. If you lose that ability and do not have income protection insurance then chances are you will be flat out supporting you and your dependent’s lifestyle without your usual income, let alone supporting a negatively geared property portfolio.
Life insurance won’t do much for you as the insured but it will do a lot for those dependents you leave behind. Life insurance provides your dependents with a lump sum that may be used to pay off any debts you have (e.g. credit card, home loan, personal loans, investment loans etc.), pay for funeral expenses, and to provide an investment amount sufficient to generate enough ongoing income to support your dependents.
If you carry debt (like most property investors) and do not yet have enough financial resources to support your dependents if you were to prematurely die, then life insurance is absolutely critical for you. Losing someone close can be one of the most traumatic experiences in life and one additional pressure that your dependents could do without is that of servicing debt without your income and facing the prospect of going to the market with your investment properties to free up some money to meet living expenses. Given the relative illiquidity of property it may very well take several months before your dependents can liquidate your properties and retire the debt. All of this during a period that should otherwise be spent grieving, not scratching around for money to meet living expenses or dealing with real estate agents and creditors.
Total and Permanent Disability Insurance (TPD)
TPD insurance provides you with a lump sum payment in the event that you become totally incapacitated through injury or illness and satisfy the policy’s definition of TPD. TPD insurance can be used to pay off existing debts, to pay for any medical costs not covered by your health insurance, to pay for any necessary modifications to your home or vehicle, and to provide you with an investment amount sufficient to generate ongoing income to compensate for your lost income.
Once again, if you carry debt and do not yet have enough financial resources to support yourself and your dependants if you were to become disabled than TPD is an absolute necessity, even if you have income protection insurance. Remember, income protection insurance only provides up to 75% of you pre-disability income which for most people is insufficient to support both their existing lifestyle and wealth creation objectives, let alone their increased cost of living as a result of their disability.
When making a decision on personal insurance there is a lot to consider including the types of insurance you require, the amount of insurance you require, the price of the insurance, policy ownership, whether to purchase inside superannuation or outside superannuation etc. Discussion of these issues is beyond the scope of this article but hopefully you now have an appreciation of the importance of personal insurance, particularly as a property investor.
If you don’t have an adequate risk protection plan in place and would like assistance in creating one then seek professional financial advice. With a bit of luck you will never be on the receiving end of a personal insurance benefit, but if the unthinkable does occur, your financial responsibility and wise forethought will make an otherwise difficult time that little bit more tolerable for you and your dependents.
By Luke Andersen
Partner of Positive Property Strategies and co-author of ‘Residential Real Estate Development: A Practical Guide For Beginners To Experts.’