I was chatting with a friend over dinner the other night and she was talking about how she had dropped back from full-time to part-time work so she could pursue her goal of opening an online kid’s clothing store. She is still bringing in an income (and hopes to eventually leave her part-time job and just work on the store), but it’s her partner that is currently “doing the heavy lifting” in terms of their cashflow.
It’s so good when people take the plunge and go after their dreams (I still remember what it was like for me opening Monarch and that was nearly seven years ago), but it does often mean one half of a couple becomes the primary earner. Even if you’re not taking time out to start up a new venture or raise kids, it’s usually the case that one person will earn more than the other.
There is absolutely nothing wrong with this. But it’s so important not to underestimate the value of that secondary income.
It’s not uncommon to hear people say that their second income goes towards child care (so both parents can go back to work) or ‘lifestyle’ expenses – clothes, nights out, holidays, gym memberships, etc. There is a belief that, if something should happen, they would be able to survive on just one income.
But in reality, most people couldn’t maintain their current lifestyle for more than two years if the secondary income earner was unable to work*.
And this figure doesn’t take into account the added expenses that come with serious illness or injury.
This is why couples need to have the right mix of insurance in place. Life insurance isn’t just for paying a lump sum to your family if you pass away. There are also insurances that replace your salary (Income Protection) or are designed to cover large medical expenses/treatments (Trauma).
Here’s a rough guide as to how a financial planner might look at creating an insurance plan for my friend and her partner:
- Get a complete picture of their finances, including total expenses and debts and what proportion of each person’s income goes towards these.
- Ask about the couple’s future plans and what money will be needed to achieve these goals (like the costs associated with setting up the online clothing store).
- Based on these factors, calculate what types of insurance are needed to protect the couple’s current lifestyle and future plans if something should happen to either of them.
- Specify how much of each type of insurance cover is needed and for how long (for example, if the online business is successful, the couple’s income balance will probably change over time).
- Research all the available products on the market to find out which has the most appropriate features for the couple at the most appropriate price for their budget.
- Present a few options to the couple to choose from.
All this happens before an application is even lodged!
This is the value a financial planner brings to the process of purchasing life insurance.
If you want to find out what your ideal insurance mix is, or you just need someone to help you work out the value of your secondary income, give the Monarch team a call.