Lots of people begrudge having to pay for insurance, but still do it because it’s an excellent risk mitigation technique.
Private health insurance, car insurance, boat insurance, travel insurance, home and contents and life insurance all exist to provide financial support and/or indemnity should you experience a negative life event.
Australians have low levels of Personal Protection Insurance
According to MediaNet1 72% of Australians have comprehensive car insurance, 62% have home and contents, 55% have private health cover, 22% have life insurance and only a mere 12% have income protection. What you insure really highlights what is most important to you or how you consider risk. For example, many of us have an “it won’t happen to me” mentality when it comes to injury, illness or sickness.
It’s very difficult to make generalisations when it comes to Personal Protection Insurance because premiums and cover are heavily based on your individual circumstances, instead we will use a case study as an example.
Income Protection vs Car Insurance
Damien has a BMW that he purchased for $60,000 a few years ago. He has comprehensive car insurance for the car at a cost of $2,300 per year. If the car is written off, the most Damien can expect to see from the policy is replacement costs of up to $60,000.
He also has income protection in place covering his $150,000 annual income. This policy will replace 75% of his income by paying him $9,375 per month every until the age 65, if he gets sick or injured and is unable to work. The premium on this policy is $2,400 per year (and may even be tax deductible).
If Damien had to claim on his policy from age 40 until age 65, he would receive a total of $2,812,500 from his insurer (or $3,332,500 if his insurer indexes the claim in line with inflation, which we have assumed to be 2.5% per year).
If Damien couldn’t work because of disability or long-term injury and didn’t have income protection, his income would cease and he would probably have to say goodbye to the BMW and the lifestyle he has come to enjoy. Instead of $9,375 each and every month at best, the most he could expect to receive is $944.30 per fortnight on a disability pension2 which doesn’t even come close to his pre-disability income.
What’s more important? Your car or your income which pays for your car and everything else?
Of course, car insurance is very important, particularly to ensure you aren’t out of pocket if something goes wrong.
But the question must be asked, what would you do if you couldn’t work due to sickness or injury? What if you could never work again?
Certainly something to consider for yourself and your loved ones.