Life seldom happens in a straight line, and as investors, we should expect to face a number of curveballs along our wealth creation journeys. While many potential risks may be unforeseeable, there are mechanisms available to mitigate these risks – in whole or in part – with long-term insurance being most notable among them.
Income protection cover, which is occupation-based insurance, is an effective way to protect your future earnings in the event of temporary or permanent disability. While this type of cover can be expensive, it serves an important role in replacing any income lost as a result of illness or disability and ensuring that your future living costs can be covered.
That said, when determining the appropriate level of lump sum disability, ensure that the underlying assumptions used in capitalising your retirement income needs are realistic for your circumstances. Specifically, assumptions regarding anticipated investment returns, inflation, and life expectancy need to be carefully considered and stress-tested.
In the event that you become permanently disabled and claim your capital disability benefit, the proceeds of the policy would need to be appropriately invested to provide for your future retirement needs. If you’re disabled early on in your career, you will naturally have a longer investment horizon which may allow you to take a more aggressive investment approach that reduces in risk as you approach retirement.