Generational risk management – what’s it all about?

Personal risk management is a critical foundation stone of any financial plan.

The key personal insurances are:

Life insurance. This pays a lump sum benefit when you die.

Total and permanent disability insurance (TPD). A lump sum is paid if you meet the policy definition of being totally and permanently disabled.

Income protection (IP) insurance. If, after the selected waiting period, you are unable to work due to injury or illness, depending on your policy you will receive a regular income either until you can return to work or the end of your selected benefit period.

Trauma insurance. Also called recovery insurance, trauma insurance pays out a lump sum if you suffer from one of the medical conditions specified in your policy.

Each of these insurances plays an important but different role in protecting you and your family from the financial consequences of death or disability, and the appropriate mix of cover depends to a large extent on where you are on your journey through life.

Carefree 20s. Good job, no kids or other dependants? Why do you need insurance? Well, even in your 20s illness or injury can strike, and any prolonged periods off work can have a huge impact on your current lifestyle and financial future.

Income protection is the key insurance in the ‘carefree’ 20s. Trauma and TPD could useful add-ons. But as soon as you have children, or significant debt, life insurance should also be considered.

Indebted 30s. Typically, this is the decade of buying a home and starting a family. Life and income protection insurance remain the top priorities. However, trauma and TPD insurance should now be seriously considered, particularly for full-time homemakers who are not eligible for income protection cover.

It’s also worth exploring if young children can be added to a parent’s policy to provide serious illness cover. This can help if a parent must give up work to care for a child (income protection insurance doesn’t cover this), and also assist with meeting out-of-pocket medical expenses.

Consolidating 40s. With years to go before the mortgage is paid off, and young children turning into expensive teenagers, the same risk management priorities apply as to the Indebted 30s. A homemaker returning to employment should spark an insurance review.

Fabulous 50s. The mortgage is under control, the kids are becoming independent (hopefully) and you’re starting to build a serious investment portfolio. However, with this decade often being the peak earning period it remains important to protect your biggest asset – your ability to earn an income. And until you reach the point of true financial independence, life, TPD and trauma insurance should all be part of the mix. It’s important to keep in mind that as you get older the likelihood of claiming against your insurance increases significantly.

Another important issue to consider: do your now independent adult children have adequate personal insurance cover? If not, should they become ill or disabled, you may end up having to help them out financially, thereby impacting on your future plans. If they are unable to pay for adequate cover themselves, a better option might be to assist by paying their insurance premiums.

Triumphant 60s. You’ve made it! While we are working later into life the 60s remains the popular decade for retirement. It delivers financial independence to many, and it may seem that there is little justification for maintaining personal insurance cover. However, many policies are renewable until age 65 or 70, and with the growing risk of death or serious illness, maintaining some level of cover may provide additional peace of mind. With premiums often ramping up rapidly later in life, it’s a matter of finding the right balance between the cost and the potential benefit.

While age has some bearing on personal insurance priorities, individual circumstances must be considered. Your financial adviser is ideally placed to help you design the risk management plan that’s right for you.