Your money journey: What if…?
**** This is information only and not advice. Please reach out to an independent financial advisor (IFA) for specific advice.
Your financial life might not be so linear. I know mine isn’t. When I left my previous job, not only was I giving up a decent income, but I was losing a bunch of benefits and perks: Pension, health and protection insurance... I wouldn’t pay much attention to the latter. It was a small number in my payslip: My employer had negotiated the rate, and would subsidize it.
What was I protected against?
I was financially protected against catastrophic life events that would impair my ability to work. Critical illness insurance would pay a lump sum in case of a serious disease (like cancer), while Income Protection Insurance would provide a regular income if I couldn’t work for health reasons. I also had a life insurance that would pay a lump sum and an income to my beneficiaries in case of death.
Did I really need it?
Over the years, I had built an emergency fund. I previously highlighted the importance of building such a fund worth over 3 months of spending and outgoings to manage unexpected losses of income.
Was that enough? I didn’t worry too much about it. After all, I am relatively healthy: I don’t smoke, I am no sport junkie, but I work out or walk regularly. Realistically, what could happen? Luckily, so far, not much. But research shows that there is a gap between perception and reality of the likelihood of life changing events (Royal London & Pacific Life Re).
What if it did happen?
The big question was: what if it did happen? Would my savings and assets be enough to cope and deal with it? Plus relying solely on benefits would be undoubtedly insufficient. After all, they are designed to encourage you to seek work. They are also means-tested, meaning that you and your partner’s income and savings will be taken into account in assessing how much you are entitled to.
Protection Insurance
Protection insurance at the right price and at the right level of coverage could be essential if something bad did happen.
Will you have to pay for school and university fees?
What level of coverage?
In my post “Be Financially Aware”, I encourage you to gather the data about your financial situation: Your savings, assets and debts, your outgoings and your income. The standard of living you want and your expenses will help you gauge the right level of coverage: Will you have to pay for school and university fees? Are you able to downsize? Only you know what you might need.
Stay-at-home mums (and dads):
Not working at the moment? You should still get protection insurance!
Stay-at-home parents contribute hugely to the household, and not only because of the time and love that they give. Sunlife estimates a mother’s financial contribution at £30k, but some estimates are much higher. Caring, but also cooking, cleaning, driving the children around, all add up.
However, only the working partner, the “breadwinner”, usually takes out protection insurance. Yet they can bring in the bacon only thanks to the Mrs (or Mr) taking care of the rest. If they needed to cut back their work hours or hire a nanny, the family would take a significant financial toll.
This gaping hole in the financial plans of the family could cause hardship.
This gaping hole in the financial plans of the family could cause hardship if the worst came to happen. Sound financial planning should be inclusive of both partners’ contributions.
Let’s look in more detail at these insurance products!
Income Protection Insurance:
Income protection insurance provides you with an income, i.e. regular payments, if you’re unable to work because of an illness or accident, and sometimes unemployment. Bear in mind that a million people in the UK are unable to work because of an illness or injury each year (ABI).
When would you need it? If you don’t have savings to draw on, have dependants or sick pay is insufficient. If you’re self-employed, it’s even more important and you should get a reduced waiting period, so that you can start receiving the income sooner.
Critical Illness Insurance:
Critical illness insurance pays a tax-free lump sum in the event of a listed serious disease (e.g. cancer, heart attack or a stroke). It doesn’t matter if you are still able to work, as long as the condition is part of a list of conditions covered. you can use it to pay off a mortgage or additional medical and care bills. Interestingly, it can be taken out together with life insurance.
Life Insurance:
It provides financial support to your loved ones in the event of your death. French mortgage providers almost always require life and critical insurance coverage as a pre-condition for providing a mortgage. In the UK however, it’s much less common: only 20% of the 27 million households hold a life insurance policy (ABI).
Some common uses are to pay off a mortgage or debt with a lump sum, or to provide an income to deal with the bills, childcare etc. There are 2 main types: fixed term (e.g. for the term of the mortgage, or until your children reach a certain age), and whole of life. The latter is more expensive since it guarantees a payout. Interestingly, this policy can be cashed in for the “surrender value”.
Inheritance tax and trusts: In a nutshell, if the policy is written in trust, your beneficiaries will receive directly the payout, which is not added to the estate. This means that there is no inheritance tax to be paid on the proceeds of this insurance, and they will have access to the funds quickly.
What is a trust? It’s an arrangement whereby you (the settlor) can put assets in a trust in the name of the beneficiaries (your children and your partner for example).
Inheritance tax? It’s payable in the UK at 40% on the part of the estate over £325k. So, if you have a flat in London, your estate is very likely to go over the threshold.
This is not free! There are tax implications and running costs associated with setting up a trust. Seek advice, or at least read the contract carefully.
Underwriting:
It’s the risk assessment done by the insurer, to determine the level and price of cover they’re happy to offer you, whatever the type of protection insurance you’re looking to get. The risk factors are: age, smoking status, health history, build (BMI), Family history, drugs and excessive alcohol consumption, hazardous job or hobbies (like underwater diving), travels.
Death-in-service benefit:
Many employers provide death-in-service benefit. However, cover is linked to your employment. So, if you leave that job, you would need to buy a new life insurance. The underwriting will depend on your health and other risk factors at that point. Purchasing an additional private life insurance might seem like a good idea, but before, do weigh up the financial burden from the additional premiums and the security of the continuity of coverage.
Advisors and brokers:
Seeking advice from a qualified independent financial advisor can help in the planning process to determine the type and level of coverage, and the best way to implement your plans. If you have a pre-existing medical condition or you have any concerns, you shouldn’t hesitate to consult an IFA or a broker to assist you in the choice of the right policy and in the application process.
Lastly, I would like to say that I found it hard to write this post, as I struggled with this sensitive topic. When we think about planning our lives, we think about happy stuff: a new home, a baby, holidays. It is terribly hard to think about death and illness, but they might happen. So remember: It’s a gesture of love and care for yourself and your relatives to have given this a thought and have a plan ready!
Alternative financial protection
Without protection insurance, you will have to dip into your savings, pension and assets. What else do you have to fall back on?
- Jobseeker’s Allowance: a maximum of £74 per week (pw).
- Statutory Sick Pay: £95 pw for up to 28 weeks, but your employer might agree to pay more.
- Universal credit: Housing benefit, childcare etc.
- Employment and Support Allowance (ESA): if you have a disability or health condition that affects how much you can work.
- Statutory Maternity Pay (SMP): 90% of your earnings for the first 6 weeks, and the lower of £151 or 90% of your earnings for the next 33 weeks.
- the State Pension: Current maximum amount of £134 pw.
- Incapacity, disability and other state benefits
Maintaining your standard of living might be difficult if you rely solely benefits. Needless to say, this issue becomes even more pressing if you have dependants.
Some good Links:
- MoneySavingExpert.com: Consumer website all about finding the best deals and cutting bills. You’ll find some pretty good stuff on insurance.
https://www.moneysavingexpert.com/health-insurance/ - MoneySuperMarket: comparison website.
https://www.moneysupermarket.com/ - entitledto: One of the leading benefits calculator in the UK
https://www.entitledto.co.uk/?e2dwp=y - Citizen Advice: lists some benefits calculators.
https://www.citizensadvice.org.uk/benefits/benefits-introduction/what-benefits-can-i-get/ - Gov.uk: on benefits if you’re disabled.
https://www.gov.uk/financial-help-disabled - Consumer guide to critical illness cover, by the Association of British Insurers (ABI)
https://www.abi.org.uk/globalassets/files/publications/public/protection/consumer-guide-to-critical-illness-cover.pdf
