Are you somebody who would be concerned about your loss of income if you suddenly fall critically ill or if you are contributing to the household income but passes on?
Chances are, if you say yes, you would have already protected your income.
If you fall in the 'Not Really' or 'No' category, this article is for you.
In this article, I explain why people who neglect income protection planning are gamblers albeit bad ones because the pay-off from their decision making is really unattractive.
What is income protection planning?
Income protection planning as the name suggests protects a person's income in the event of unforeseen circumstance. Usually this is applicable to death, disability and when we are critically ill. There's logic to why these 3 outcomes.
Death - Imagine if we have dependents (children, elderly parents, disabled siblings, non working spouse) depending on our active income for livelihood and are expected to do so for the next 20 years of our working lives, our dependents would suddenly be without a means to survive if we unexpectedly pass on.
Disability - Our ability to draw our current salaries is highly dependent on our ability to perform our jobs. In the event of permanent disability, we might not be able to carry out our current jobs competently and thus lose the income we are presently earning. *We might be able to do a job of lower income, but the consideration here is whether we are willing to let a loss of income affect our quality of life.
Critical Illness - Likewise, in the event of illness, the question is whether we will have the energy to perform our roles competently to draw the same salary. Critical Illness has a very wide range of illnesses and depending on severity and type of illness, we may not be able to perform our roles during our recuperation and that period might result in no income.
One relevant article: I have hospitalisation insurance, do I still need critical illness coverage?
There are living examples and it can happen to anyone. Click article to read.
Here's what Chew Chor Meng says about how his illness affected his career.
Click on image to read the full article.
So why are Most people who don't plan for income protection gamblers?
When we don't make provisions for such potential known risks, we are essentially gambling on optimism.
Optimism that nothing bad will happen to us.
Is there a possibility that we might pass on prematurely, fall critically ill or lose our ability to function properly? Definitely. This is why most responsible people cater for these risks in the form of life, critical illness and disability insurances.
Those who don't or don't cater a serious risk mitigation amount typically are betting on optimism, otherwise translated to hope.
What is the difference between gambling and calculated risk?
If you interview anyone queuing in the lottery queue, and ask them what motivated them to buy a lottery ticket and how they are sure they won't lose their money, they would tell you they don't know.
In Chinese there's this saying, "有买有希望， 没买没希望 (if you buy, there's hope. if you didn't buy, you have no chance)". This is purely luck dependent.
Calculated risk on the other hand is odds dependent. A person who makes a calculated risk can tell you the percentage possibility of loss and make decision based on favourable odds.
In the case of income protection risk management, those who cannot afford to lose their incomes but have no protection are clearly in gambler zone. Those who have a sufficient savings that can self insure would be in calculated risk category as they will be in a position to assess if it is worthwhile to use their own money to weather the storm should something happen.
Why would anybody bet on optimism?
Just like in lottery, the pay-off is usually so substantial compared to the cost that people are willing to buy into hope. In the case of income protection insurance, the perceived cost savings if they don't buy the insurance appears substantial compared to the cost of insuring the risk because betting on optimism blinds people to the possibility of something bad happening.
Now, is the perceived cost savings really worth the gamble?
Let's look at the above image and call the character John. A lot of times, people who do not wish to cater for income protection needs typically believe they would be able to better utilize their funds compared to buying something they do not wish to use (insurance).
In the above scenario, John would have gained $64,234 by 50 in investment returns based on the premiums he saved from not buying the insurance. However, in the event of illness, he faces a possibility of wiping out all his investment & savings and at age 50, may not have the timeline to save up another sum of money for retirement. On the other hand, paying for insurance would have allowed him to focus on his recovery and keep his savings intact.
Another scenario would be in the event of death. If John passes on at 50, his family would lose his $6,000/month income for good. Their reliance would then be on his assets. Based on his existing investment returns and savings, he would have left behind $124,234 in cash assets. Comparatively, his family would have gained $1,060,000 in cash assets if he bothered to protect his income.
Now what if he stays healthy?
He would have gained $188,354 in investment returns at 5% if he invested the premiums as compared to having spent $81,000 on buying a peace of mind.
Here's why people who opt out of income protection planning are BAD gamblers
If you look at the figures, the total investment is $81,000. The only issue is whether one chooses to spend it on insurance or investment. If nothing happens, the return on investment at 5% annualized gain is technically $107,354 after you less off the original capital. On the other hand, if something happens and one doesn't cater for income protection, the cost may result in a potential loss of income ($72,000 to $1,080,000 based on $6K monthly income) to working under very uncomfortable conditions just to retain the income.
The pain of working when the body is unwell may be pricier than $81,000 saved because there might be longer term health implications that may require people to incur unexpected cost like hiring a maid and even impacting recovery so badly that one passes on.
On the flip side, the potential gains from the income protection incurred at age 50 (as per the example), $959,500 in the event of death after we less off the paid premiums, $319,500 in the event of critical illness (less paid premiums) and $175,500 in the event of early critical illness (less paid premiums). The ROI is a minimum of a 2 time multiple of your premiums paid. Hence a better gambler would have preferred to bet on falling ill, dying or consider the risk worth hedging against.
Summary
In conclusion, if one chooses to bet on optimism and forego the cost involved in protecting their income, their potential gains are much smaller compared to their potential cost if their bet goes wrong. On the other hand, people who purchase insurance are actually hoping they remain healthy. In the event they are right, their cost of protecting themselves is small relative to their enormous gains if they fall ill or passes on.
Saving money on risk management doesn't improve your quality of life much because the truth is, the premiums of insurance plans can be structured in relatively affordable ways that doesn't make a person that much poorer if they purchase them. On the flip side, a potential risk event might unintentionally make a person rich.
After reading this article, you may have some questions or may want to find out more about income protection planning through a conversation with me. You can reach me by dropping me a message. Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about income protection planning. About Janice I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here. I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram. Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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