As the last 2 years have shown us, life can throw us many curve balls. While we cannot prepare for everything, there are notable steps that can be taken to help protect yourself and your family from the unforeseen that may pose financial stress.
Diversify your Income Sources
Diversification is one of the most reliable risk management strategies. Having multiple income streams may lessen the financial burden if one income is temporarily or permanently lost. Income streams can come in many forms such as rental income and portfolio dividends. Additionally, these passive forms of income may not be lost if you are unable to work as they are generated autonomously.
Consider Income Protection Insurance (IP)
Income Protection insurance is intended to replace a percentage of your monthly income if you are unable to work for a period of time due to injury or sickness. It’s aim is to cover your day-to-day living expenses and loan repayments, so you are not left high and dry in the event that you cannot generate an income. Income Protection Insurance helps provide you financial peace of mind to focus on what’s more important – your recovery.
It is important to review and consider if you have an multiple Income Protection policies through your superannuation account or an employer. In the event of a successful claim, you can only be paid out for one IP at a time and therefore, you may be paying for a policy you cannot use.
As of 1 October this year, there have been wholesale changes to Income Protection policies industry wide to provide more sustainable cover. As such, it is even more important you seek advice from a licensed financial adviser to ensure your existing policies are still viable and any new IP policies suit your financial needs.
Having a substantial savings buffer
A simple yet effective method to protect yourself from future financial risks is to have substantial amount of cash put aside in savings. These funds can be used as a short-term solution to remedy unforeseen events such as loss of employment, urgent medical bills and any other financial burdens that were not expected. A savings account also provides high liquidity and flexibility which is highly beneficial if you need to quickly access funds.
Building a strong savings account can be as simple as setting aside a small portion of your income each week dedicated for unforeseen events. Understanding your cash flow will help improve your ability to save It is important to note this is not a long-term strategy and should be utilized as a temporary fix.
Consider Life, TPD and Trauma Insurances
Applying for lump sum life and Total and permanent disability (TPD) insurance is a great way to clear your outstanding debts, pay for funeral costs or assist with your rehabilitation costs i.e. home modifications. This can take the financial pressure off your family in the event of your death or disability. Another benefit of Life and TPD insurances is that they can be held inside or outside of your superannuation account. Holding Insurance inside superannuation can help to elevate pressure on your cashflow as the premiums would be paid via your superannuation funds as opposed to your personal funds.
Critical Illness Cover (Trauma) is another lump sum policy that may provide you funds in the event of a specified traumatic event i.e. Cancer or a stroke. This cover is intended to assist you to maintain your standard of living and make any required adjustments resulting from the trauma.