Insurance & Superannuation – the uncool kids at personal finance school?
What exactly is it about insurance and superannuation (aka 401k, pension, etc.) that people are so determined to ignore, deny the need for, delay, put their head in the sand about and generally procrastinate over? Perhaps with insurance it’s like writing a will – somehow, people seem to feel that acknowledging the fact you’re going to die somehow makes it more likely it will occur sooner. Or my favourite one – “you don’t get anything for your money!”.
And superannuation… really – what’s everyone’s issue with that? Hot tip folks, retirement is the longest holiday any of us are likely to take. How is that not seriously exciting?
The fact is, even if all your debt is paid off and you’re quietly working towards your way towards being financially independent, stable and even well-off, you’re actually not in a very good place at all if you haven’t considered the “uncool” parts of personal finance like insurance and superannuation.
Consider this: you’ve dug yourself out of a credit-ridden hole, you’ve got a budget in place and you’re on track to achieving your financial goals. What would happen if you were injured and couldn’t work in your current role any more? How would your bills be paid and what would your family do? If your house burnt down, could you afford to replace it? Realistically, even if you never have to claim on your insurance (and I hope you never do), insurance buys you peace of mind – knowing that if the worst should happen, you’re completely covered.
After the bushfires we had in Victoria earlier this year, a lot of victims were said to have been underinsured. Underinsurance is rampant in Australia, with up to 80% of the population reported to be underinsured. What a lot of people don’t realise is that underinsurance has huge impacts when you come to make a claim. Many people expect that if their home and contents is worth $500,000 and they only insure it for 75% of the replacement value ($375,000) then that’s what they’ll get should they need to make a claim. I believe the thinking here is that you won’t need to replace everything in your home, so this way you keep premiums down. Unfortunately, what this means is that the insurance company will only pay 75% of the replacement value of any damages. So, if your home suffers an assessed $250,000 in fire damage, the insurance company will pay out $187,500 (75% of the cost to repair the damage) leaving you to cover the remaining $62,500. Remember, this is based on the assessed value of the damage – not what you report.
For a comparatively small amount of money that is tax deductible in some circumstances, insurance allows you to ensure (and insure!) that anything life throws your way won’t interrupt you achieving your goals or put you heavily in the red. And who doesn’t want that sort of reassurance? You can get insurance for almost everything from your common health and home & contents insurance to life insurance, trauma insurance, TPD (total permanent disability) insurance and income protection insurance.
Superannuation on the other hand, is a different sort of guarantee. The earlier you start planning the better, and it’s a way of maintaining the lifestyle to which you’ve become accustomed in your working life. So, when you finally do take the longest holiday of your life, it’s one that you want. The easiest way to know how much to aim for is to take a look at the industry-recognised Westpac-ASFA retirement standards which outline how much you’ll need for a ‘modest’ or ‘comfortable’ retirement. (No points for working out comfortable is better than modest). The other rule of thumb is that you need approximately 10 times the annual ’requirement’ for your chosen lifestyle when you retire. Personally, rather than working toward a dollar figure in the bank, I’ve decided to work toward a passive income of the annual amount I want in retirement. I find more security in this as it means two things: 1) I can retire whenever I hit that volume of passive income, 2) I don’t have to worry about running out of cash before I kick the bucket!
So, next time you’re thinking you want to get your finances in order, or if you feel you already have, ask yourself if you’ve considered all elements of the personal finance equation. It’s not just about saving, budgeting and paying for things in cash. There are lots of other areas that can impact your finances just as much.
