An Investigation of Personal Insurances
By Helen Cooke, managing director, de Carteret Wealth
THE problem with the unexpected is that it is exactly that – unexpected! Most of us accept that we will have occasional moments of personal crisis as we go about our daily lives and, on the whole, we take these in our stride, but there are some things that are simply too big to deal with without help. Even if you have a strong network of friends and family to rely on, the financial consequences of a sudden, dramatic change in circumstances can be catastrophic, so just consider what a difference it would make if your finances were taken care of, leaving you to concentrate on the important stuff.
I’m the first to admit that this can be an uncomfortable subject and often forces us to consider things we generally don’t want to think about, such as death or serious illness. However, whether you are single with no dependants, a young couple buying your first home, or someone approaching retirement with the kids moved out and your mortgage nearly repaid, there are many reasons to buy financial protection. There are also any number of ways to ‘buy’ the cover you need and, with so many companies offering similar products, it can be really hard to work out what you need and how you can afford it.
So, what do we mean by ‘protection’ and what does my daily skinny soya latte have to do with it?
When we do think about buying financial protection, most of us start by thinking about what our financial obligations are. Those outstanding debts, such as your mortgage and any loans, and how you might maintain the payments if your income were to stop coming in. What about things like childcare, school fees or higher education costs. And that’s all before you include utility bills and other day-to-day living expenses. You and your family would quickly eat into your emergency savings if there was a sudden reduction in income, especially if this were prolonged.
Many of us have had a life insurance policy at some stage of our lives, most commonly linked to a mortgage or other easily defined obligation. However, in far too many cases this is the only type of cover that people think to take, possibly owing to the fact that this is generally the cheapest option. Yet your sudden death is, statistically, the least likely thing to happen and there are other factors which are much more likely to put your income and your financial security at risk.
Life cover is the simplest to understand. This is a policy which pays a benefit on your death either to your estate or to the joint owner of the plan, usually your spouse or partner. Very few plans are directly linked to a mortgage these days so your beneficiaries would have some control over how the money is applied.
You can also add in cover for serious illnesses. This means that if a serious, or ‘critical’, illness strikes, you can receive a financial payment for you to use as you see fit, which might allow you to reduce your mortgage, cover an extended leave of absence or fund a career change into a less stressful role, give you the option of getting private medical care or even pay for an amazing holiday to celebrate your recovery.
One thing that is often forgotten is that a critical-illness payment might also allow your partner or a family member to take extended unpaid leave to help care for you in your recovery. So, I would argue that this is a flexible but really important part of your protection needs. Yes, it’s more expensive than life cover but adding in a small amount, perhaps equal to a year’s income, could make all the difference in the world.
It is also possible to protect your income. Many people tell me that their employer will look after them if they are ill, and keep paying the salary almost indefinitely. However, that is simply not true. While many employers will keep paying your income for a few months at least, after that time you will be on your own. So, having some extra money coming in if your salary dries up will hopefully allow you to maintain those important daily expenses so you can concentrate on getting better.
Then, there are all the small but potentially invaluable extras such as indexation of benefits, children’s critical-illness cover or global treatments. These are all modern enhancements that have been designed to benefit your specific needs and your budget. All these things would be explained by one of our protection specialists.
When we meet clients to talk about their protection needs, a useful, but hard-hitting part of our research process, is to carry out a risk reality check. Based on your age, and anticipated retirement age, and using statistics gathered by insurance companies from actual claims history, we can give our clients a few numbers which really give pause for thought.
For instance, a non-smoking 35-year-old male has a 4% chance of dying before retirement age. Most of us would probably say we could cope with those odds. However, the same person has a 14% chance of suffering a critical illness before retirement age and a 30% chance of being off work for two months or more in that time. In fact, there is a 42% chance that any of these things could happen before retirement age. Unfortunately, the chances of all these things happening increase to 56% for a female of the same age. If you smoke, then the odds really do start to look uncomfortable.
So, life insurance remains more popular than critical-illness cover or income protection – but there is a much bigger chance of being diagnosed with a critical illness and/or facing a long-term absence from work.
Therefore, this suggests that it is the cost that puts us off. Well, that’s where we get back to that daily frothy coffee.
The couple I referred to above met me recently. We looked at a plan which offered them a little of everything. Cover for their mortgage, some critical-illness cover for each other and their children, plus some protection against loss of income, all for the equivalent of £1.31 each per day.
Of course, the cost of your cover is affected by many factors such as the amount of cover you require, the length (term) of the policy, your age, your health, your lifestyle, and whether you smoke. Faced with clients who have a strict budget, we often have to reduce the overall level of benefits to make sure that the premium remains within their budget. However, when it comes to affordability we can see from the £1.31 per day that most us could manage that cost.
This is why thinking about protection is not a one-off. Once you’ve taken out some insurance, don’t just stash the paperwork in a drawer and forget about it. You should regularly review the amount of cover you have so that it still offers sufficient protection if your circumstances change. For example, if you move to a bigger property, have another baby, or get divorced, you may need to extend or reduce the cover you have.
Please remember that life insurance is not a savings or investment product and has no cash-in value unless a valid claim is made. As I often say to clients, ‘I truly hope this is a waste of your money and something you will never need to call upon,’ but don’t underestimate the difference that even a small amount of benefit, with minimal cost, could make to you and your family in the event of death or serious ill-health.
lIf you would like an informal discussion about reviewing the protection needs of you and your family, please contact Helen and the team at de Carteret Wealth on firstname.lastname@example.org or 860660.
lPlease note that the risk factors quoted in this article were taken from those quoted by Royal London based on research from The Institute and Faculty of Actuaries’ Continuous Mortality Investigation.
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