What would you say is your most valuable asset? The answer to this question could be quite different to different age groups. A younger person may say their car or a valued possession, such as a musical instrument, is their biggest ticket item.
As we get older and start to settle down, our home becomes top of mind when we think of what is of greatest value to us. Toward the latter part of your working life, your super may start to rival the home as the prime asset in your financial life.
While all of these answers may have some element of truth about them, the real answer is something that may surprise you. It’s your ability and capacity to earn income that outstrips the value of any other physical or financial asset that you will ever own.
Putting a value on your income potential
To illustrate why income earning capacity is your greatest asset, let’s look at an example.
Bob is a 40-year-old engineer, married with 3 children. He owns a car worth $45,000, his home is worth $750,000 his super accumulation is around $650,000 and his income is $120,000 p.a.. If Bob intends to retire at age 65 he has 25 years of working life left.
Based on these figures, Bob stands to earn $3million in income between now and the time he retires – and that doesn’t make any allowance for the inevitable wage increases and inflation that will occur during that time. In fact his income earning potential amounts to a much greater figure than all the other assets combined.
So is your most valuable asset at risk?
Despite it being such an enormous figure, Bob’s income earning potential is not something he has ever considered as an asset, nor is it something he has ever considered insuring.
While Bob wouldn’t dream of leaving his $45,000 car insured and would never miss a renewal date on home insurance for his $750,000 home, the reality is that his greatest asset is critically exposed to risk of loss. His car and home are insured for full replacement value, but his income is left unprotected.
What are the risks?
The sudden loss of your income earning capacity can happen at any time and can be totally unexpected. The most drastic event might be your premature death, which would see the immediate and complete loss of income occur. Other than this, a major illness or injury could leave you incapacitated for an extended period, or even unable to ever return to work.
While you may feel that the risks of such events are remote, this does not mean they should not be dealt with. You may decide you ride your luck and take your chances, but consider the consequences if something does happen. Everything you have worked for, the security of your family, your ability to pay your mortgage and living expenses, and your ability to fund your retirement will suddenly be left in jeopardy and you may be helpless to do anything about it.
The risks may be small, compared to the risk of a car accident, but the enormity of the scale of loss, if premature death or sickness or injury strikes, is staggering and potentially irreversible. This makes it essential to act on protecting yourself with adequate life insurance.
A comprehensive life and disability insurance plan can help you retain income security for you and your family’s future. It can replace your income earning potential simply and economically by providing lump sum and/or income stream benefits that will kick in if disaster happens.
Consider a professional assessment
If you are concerned about your exposure to such tremendous risks, then it may be wise to seek the assistance of a professional financial planner to make an objective assessment of your risk exposure situation. They can help you quantify and prioritise risks and source economical insurance solutions that can protect you and your loved ones from a potential financial devastation.
What are your feelings about financially protecting against risks of losing your income earning potential? Share your thoughts below.