The first step is a stocktake of our current financial position. Next we decide on our financial goals, our time frame and the amount of risk we are prepared to take to achieve the goals.

A plan is prepared that uses the most effective strategies and breaks the goals down into small, achievable steps. Then all we need do is stick to the plan and we will achieve our goals, at least in theory, hopefully in practice too.

What if something seriously bad happens along the way? What if we are disabled, suffer a debilitating illness, or die?

Financial plans use insurance to protect our position on the journey when we are far from financial independence.

When we have few assets, large debts and young children, insurance is extremely important. It fills the financial gap that will occur if we are taken out and protects the position of those who depend on us.

Life insurance pays a lump sum if we die. If the death of a financial contributor to the family occurs a lump sum can pay off the family’s debts and help raise children until they are self-supporting.

Calculating the ideal amount of cover involves tallying up the current debts. Next an allowance is made for each child based on their age and time frame until they are self-sufficient. Then there is the cost of a funeral and final expenses.

Total and permanent disablement cover (TPD) will pay out if a person is rendered unable to ever work again. There isn’t the need for the funeral but the same debts must be paid and the same children raised. Extra money will also be required to support the disabled person.

It is very important to understand the varying definitions of TPD used by insurance policies. Financial planners can help. 

In the event of a TPD event Centrelink will provide support. The Disability Support Pension is $669.60 per fortnight. That is $17,410 per annum, and is only paid if the spouse’s income is less than $292 per fortnight. Most family’s current income is several times that. 

Trauma cover pays a lump sum to help a person deal with a dread disease – serious cancer, heart disease, multiple sclerosis and so on. The payout can meet medical costs and ensure the person receives the best possible treatment. It can also help with the family’s living costs. 

We all rely on our income so we need to insure it. Income protection insurance will replace three quarters of our income if we are unable to work due to illness or injury. Living on three quarters of our income would be a challenge for many but would be far better than none.