In our previous article we discussed the importance of insurance as a lifestyle protector, with unemployment and disability insurance being two of the most important types of cover you may need. These types of insurance policies are also called income replacement cover and are designed to protect your income in case you lose your job or become disabled.
Income Replacement Cover vs An Emergency Fund
Regular readers of our Northwood articles may remember that we recommend an emergency cash fund as one of the first steps to financial freedom. This fund should have a value equal to a minimum of 6 months’ salary and can be a life-saver if you should lose your job. Having saved up this amount of money in cash, do you really need income replacement cover? The answer is yes.
Although an emergency cash fund will tide you over for a few months while you look for another job, there will come a time when the fund is depleted. If you find yourself unemployed in a bad economy, as many people around the world have experienced since 2008, or if you are injured or disabled and can’t work for several months or even years, you will soon find your emergency fund drained.
To avoid this unfortunate situation, income replacement cover will provide you with a monthly pay-out that will vary depending on your premium. You could opt to insure yourself for the full value of your monthly income, or just enough to cover your monthly expenses. Remember that if you only cover your expenses, you won’t have surplus cash to invest for the period that you are unemployed.
Choosing the Right Cover
If you work in an industry where physical injury in the workplace occurs regularly, you owe it to yourself to take out income replacement cover. Knowing that you’ll be able to take care of yourself and your dependents if you are injured at work, you’ll be able to focus on your daily tasks without any unnecessary stress or worry.
Even if you spend your day behind a desk, you should investigate your options and choose an income replacement policy that suits your budget and provides you with the right amount of cover. If you’d prefer to pay a lower premium in exchange for less cover, make sure that you invest the money you save each month so that your investment portfolio grows each year.