Prior to age 65, three out of every four Australians will suffer a serious illness or injury. As an example, the financial impact of a person suffering cancer is estimated to be between $10,000 to $60,0001 (lost productivity and out of pocket expenses). This does not take into consideration the continued costs of paying off a “typical” mortgage of $350,0002. Individuals require additional financial resources when unexpected events occur, like injury, illness, incapacity, or even death. There are a number of financial resources a person can rely upon: charity (Salvation army, St Vincent de Paul, Wesley Mission etc), family, Centrelink benefits, savings, or life insurance.

Charities play a vital role in society, providing support services such as housing, counselling, job skills, and care. However, rarely are charities able to provide cash and financial support to families over extended periods.

 Families are a common source of support for individuals who are experiencing financial difficulties. Unfortunately, many parents do not have the resources to provide cash and financial support to their adult children – with the one alternative being extended families living under one roof

The Centrelink Disability Support Pension provides up to $14,814.80 per year if a person meets strict disability criteria (A Guide to Australian Government Payments – 1 July 2009 to 19 September 2009). This payment is subject to both an income test and an assets test, along with a residency requirement. The Disability Support Pension only provides approximately 25% of Average Weekly Ordinary Times Earnings (AWOTE). This is a significant reduction in a person’s standard of living.

In the event of injury, illness, or death, saving for the “rainy day” is a prudent strategy, but not necessarily a cost effective one.

Life insurance is the most cost-effective means of risk transfer. As an example, a client requires $500,000 to meet the additional out-of-pocket medical expenses and to repay all debt (mortgage, credit cards etc). Let’s compare the cost of saving for the “rainy day” versus life insurance (combined policy with term, trauma and total and permanent disability).

From the table, we can see that annual premiums are less than 1% of the sum insured for $500,000 worth of cover. Even after 10 years, the cumulative premium is still less than 11% of the sum insured. The typical savings ratio of an Australian family is 6.6%, or approximately $7 for every $100 earned. While this sounds impressive, a person earning $100,000 per year would need to save for more than 70 years to save up the “rainy day” fund of $500,000!