Protecting the Bank of Mum and Dad
June 29th, 2016
Be honest Gen X and Y – at some point in our early adult lives, most of us have visited the bank of Mum and Dad. Borrowed money for a holiday, asked for help with a bond for a rental property or maybe asked them to help out in periods where we have been in-between jobs. A great many parents will step in and help out when they can if their kids need it. To help cover the mortgage, pay the bills and put food on the table. But what does this mean for your parents when they are getting closer to retirement or have retired from work?
Borrowing a couple of hundred dollars a week to get you through tough times could mean them not being able to retire when they want to, or having to put off that holiday they’ve been planning for years. Let’s not even begin to imagine if their retirement savings run out and they need to move in with you! If your parents are getting to the end of their working life and they have to keep dipping into their savings to help you and your family, that spare room might not be empty for long.
So, what can you do to help protect the bank of Mum and Dad – and help your own financial freedom at the same time?
Start with insurance.
Many of us have insurance on our car or our home and contents, but we don’t have any cover to protect our income or family if something happens and we are unable to work. And no, Mum and Dad are not a financial insurance policy. Have a look at your latest superannuation statement to see if you have any insurance within your superannuation fund. Most superannuation funds offer Life, Total and Permanent Disablement Insurance and Income Protection (also known as salary continuance). Take a little time to read the fine print – understand what you are actually covered for and what you can actually make claim on.
You also need to be aware that there can be a big difference in the type of cover you have depending on whether it is held within or outside of your superannuation (an insurance policy held within a super fund means the premiums are paid from your super account funds. Outside of super means the premiums are paid from your cashflow). For example, most Income Protection policies held outside of superannuation will pay you a benefit without meeting the waiting period if you for example, fracture your wrist or ankle (whereas many policies within superannuation will enforce a waiting period).
An important type of insurance you won’t find within your superannuation fund is Trauma Insurance. This cover pays you upon diagnosis of a significant illness such as cancer and is designed to help you pay for your medical expenses. While it’s not nice to imagine, it’s really important to make sure you have enough cover to meet your living expenses and pay any additional medical expenses should the need arise. The costs can be really high, and Mum and Dad can’t cover them.
Then, start saving!!
It’s a very parent thing to say, but you know they’re right... you really do need to put a little money aside for those things that pop up out of the blue. Having money to pay for that new car battery, to fix that leaking roof or replace the washing machine when it goes bang.
One of the best strategies to employ early in your career is to open up a high interest savings account and set up an automatic direct debit to save 10% of your income each pay. If you start early, you really won’t miss it, and your savings will accumulate over time to give you that important safety net that protects you from life’s lumps and bumps.
If they’re anything like mine, your parents have been working hard to give you every opportunity they possibly can. Don’t raid their retirement fund when there are simple things you can do to cover yourself and make sure their life savings are protected too!
If you’d like a hand to figure out a financial security plan, even at the very start of your career, we’re very happy to have a chat with you over a cup of coffee! Book via the “Book Me In” button or feel free to call the office.
Glossary:
Life Insurance: Pays a lump sum to your loved ones when you pass away or become terminally ill.
Total and Permanent Disablement Insurance: Pays you a lump sum if you are deemed totally and permanently disabled and are unable to work.
Income Protection Insurance: Pays you a percentage of your income (commonly 75%) if you are unable to work due to an illness or injury. Generally, you will need to meet a specific waiting period and then the insurer will pay you a monthly benefit until you are able to return back to work or until the end of the benefit period.
Trauma Insurance: Pays you a lump sum upon diagnosis of a critical illness as defined within your policies product disclosure statement.
Disclaimer:
This advice is general advice only and has been prepared without taking account of your objectives, financial situation or needs; and because of that you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs.
