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The hidden insurance risk that could derail your property portfolio
Most investors insure their properties and other tangible assets, but the smart ones are going one step further to protect their wealth, taking out life, income, and disability insurance.
While many investors focus on building their wealth, protecting themselves with personal insurance ensures their repayments can be met when the unexpected occurs.
In a recent episode of The Property Nerds podcast, Solace Life managing director Chris Seneviratne said that while investors often viewed their properties as their greatest assets, the value of human life was estimated to be between $7.5–$10 million.
Because of the risk of becoming critically injured or disabled, and losing the ability to make an income, Seneviratne said personal insurance ensured investors and their families could continue covering their debts, securing their wealth in the long run.
“The vast majority of people who have mortgages and investment debts are the ones who actually need this the most,” he said.
According to Seneviratne, personal insurance consisted of life insurance, trauma coverage, income protection, and total permanent disability (TPD).
He said he knew cases where personal insurance had allowed mortgage holders to keep on top of their repayments while removing pressure to work while sick.
In one instance, a woman battling cancer was able to have her income replaced, her debts paid off, and she and her husband could afford a regular lifestyle for their family.
“That insurance carried her through to remove the financial burden of that mortgage or that debt from the husband’s neck, and hers as well.”
For investors wanting to carefully consider how to pay for insurance, Seneviratne said there was the option to deduct the funds from their super, but they needed to understand the tax implications and other setbacks.
“The other side to it is you can have it personally covered too, which you would fund out of your personal cash flow. So you can do it both ways.”
He said the premiums were often variable depending on the amount of cover each individual required, and how much investment debt and mortgages they had to pay.
In comparison to other insurance types, such as car coverage, he said individuals may actually pay a lower price for personal insurance, resulting in better value.
“If someone’s earning, say $100,000, I would assume in most cases that you could get them covered for between 3 to 6 per cent of their income.”
“The most important thing is that people are comfortable with what they’re paying, the premiums are not of significance where it’s causing them stress.”
Despite younger people being less likely to become unwell or injured, Seneviratne said getting insurance at one’s healthiest was the best time to ensure they were prepared for the worst.
“It’s a little bit like anything. If you didn’t insure your house and you waited until something was to happen to it, it’s too late – nobody’s going to insure you, you’re going to lose money and capital,” he said.
Seneviratne also said that if an individual waited until they developed health issues, they may be refused certain benefits, but when they were healthy, they had the best chance of being accepted for any level of coverage.
“Once those policies are in place, the features, benefits, and the contractual arrangements with the client cannot change, so the insurer cannot make it worse off,” he said.
According to Seneviratne, by assessing their situation annually and increasing their premiums if needed, investors can ensure their coverage was proportionate to the amount of debt they had.
“As time goes on, there might be a point where you start to pull back on your insurance because your debts are getting repaid and things like that.”
“You tend to see that more when people are in their late 40s, 50s, etc, but at the beginning, people are taking on more debt, so I would say at least once a year it’s important to do.”
Listen to the full episode here.
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