I went to see a financial adviser about investing. They tried to sell me insurance. Why is insurance advice part of a financial plan?
I’ve heard versions of this plenty of times over the years, and I understand why people feel that way.
You go in wanting to talk about investing, super, retirement and building wealth, and suddenly you’re having a conversation about life insurance. It can feel completely unrelated.
It is a strange part of the world I live in as a financial adviser. I spend a lot of my time investing money for people and helping them build wealth, but I also recommend and set up personal insurance.
Part of that is historical. Financial advice and life insurance have been linked for a very long time. We’ve moved a long way from the old image of the door-to-door life insurance salesman turning up with his briefcase (and yes, they were pretty much always men!) but insurance still sits firmly within financial planning.
And there is actually a very good reason for that.
Most financial plans are built around one fairly important assumption: you keep earning an income.
We don’t really think of our income as an asset because it just keeps turning up. It lands in the bank account, the mortgage gets paid, groceries are bought, school fees and bills are covered, money goes into super and investments and, hopefully, there is enough left over to enjoy life as well.
The whole system works quite nicely while that income continues.
The question is what happens if it doesn’t.
If you lose your job, hopefully you have an emergency fund that gives you some breathing room while you find another one. If you can’t work because of illness or injury, you may have sick leave available and then savings to fall back on.
For a short period, that can be perfectly manageable. The problem comes when a few weeks turns into a few months.
People often assume they would simply cut back, and of course you can. You can cancel a holiday, stop eating out, get rid of subscriptions and pause your regular investing. And if you’re thinking Centrelink will fill the income gap, it probably won’t. But usually that isn’t where the real pressure sits.
It’s the fixed costs.
Your mortgage or rent, school fees, debt repayments, rates, utilities, groceries and all the basic costs of running your life don’t disappear just because your income has.
Once sick leave has run out and the emergency fund starts getting low, the money has to come from somewhere. Quite often that means people start looking at investments that were never intended to fund their everyday living expenses.
That’s where I start to get concerned as an adviser.
You might have to sell investments when markets are down, create a tax bill you weren’t expecting, stop contributing towards long-term goals or start drawing on money that was meant to fund your retirement.
You can end up undoing years of wealth building, not because the investment strategy was wrong, but because you suddenly needed cash.
And that, really, is why insurance is part of a financial plan.
It is there to put some distance between “
I can’t work” and “I now need to start dismantling my financial future to pay the bills.”
When I’m putting together a financial plan, I’m obviously thinking about how we grow someone’s wealth, but I’m also looking at what could derail that plan along the way.
One of the simplest things you can do is ask yourself:
If my income stopped tomorrow, how long could I keep everything going before I had to start selling investments, accessing long-term savings or using debt?
For some people the answer will be a year. For others it might be three months. Sometimes it is much less than they expected.
Insurance can be a pivotal part of your backup plan because the real risk isn’t being without income for a few weeks. It’s being without it for months, or even years.
But it is worth knowing the answer before you’re in the middle of the problem.
We spend a lot of time talking about how to build wealth. A good financial plan should also make sure one difficult period doesn’t undo everything you’ve spent years building.
If your income stopped tomorrow, would your financial plan hold up?
Book a Clarity Session and let’s stress-test your Back-Up Plan.
What you need to know
This information is provided and produced by Lush Wealth. The advice provided is general advice and information only, as we did not consider your investment objectives, financial situation or particular needs in preparing it. Before making any financial decision based on this information, you should consider how appropriate the advice is to your particular investment needs and objectives. You should also consider the relevant Product Disclosure Statement before deciding on a financial product.
