I sometimes ask people “what do you consider to be your most important asset?”. The common responses I get are their home, their business, their super fund and perhaps their investment portfolio or properties. In many cases these assets can be worth multiple millions of dollars. However, in many cases what people tend to overlook is how they came to be able to own such assets.
Typically, people have borrowed money to purchase these assets, paid down their debt along the way as their assets appreciated and also saved money to put towards other investments such as their super fund or personal investment portfolios or properties. The key factor that many people overlook is that all of these strategies of wealth accumulation are completely underpinned by one’s ability to earn an income. Without the ability to earn an income, we could not save up for a deposit, we could not borrow money to purchase assets, we could not service those loans, we could not pay them down and we could not contribute regular savings to our other investments.
So, it begs the questions; shouldn’t we be considering our ability to earn an income our most important asset?
In fairness, the future earning capacity of a person is dependent on their age and the number of years left before they choose to retire. For example, someone in their sixties might only have a few years left before they choose to retire, at which point they will hopefully be able to rely off the wealth they have accumulated over the course of their working life. For them, their most important asset likely would not be their ability to earn an income. However, for someone in the thirties, forties and possibly fifties, their ability to earn an income is far more important.
In simple dollar values, if a thirty year old person were to earn an average income of $100,000 per year over the next thirty years, that would represent a $3,000,000 asset. However, in the likely event that the same thirty year old person were to use their income to borrow money to purchase other assets, paid down their debt along the way and contribute regular savings to our other investments, all of which will grow in capital value, the value of their future earning capacity would be well in excess of the simple $3,000,000 valuation.
Given the importance of one’s income, often as their most important asset, it is a surprising that so many people do not insure their income. We all insure our cars and our homes, but not all of us think to insure our incomes against potential injury or illness rendering us unable to work. The last car I owned was an old Nissan Pathfinder valued at $6,000. My car insurance for it was roughly $600 per year, which means that the insurance cost was 10% of the value of the asset. A decent income protection policy for someone earning $100,000 per year might be $2,000 per year, which means that the insurance cost is 2% of the asset value.
Furthermore, good quality income protection insurance policies cover you through until the age of 65 years old (if you are unable to return to work for that long due to injury or illness), which, according to my example earlier, would represent an asset value of at least $3,000,000 bringing the insurance cost to just 0.06% of the asset value. In my opinion, that is a very reasonable cost to live with.