It is said that the best insurance policy is one that is never used. Whilst this is true, the cornerstone of any financial plan should be protecting against any possible downside.
This short piece will cover the main personal insurances or ‘protection policies’ that individuals could consider when putting together a financial plan.
The Protection Need
When people think of their assets or rather losing them through unforeseen circumstances, they will typically seek to insure their property and personal possessions. This is a reasonably straightforward task and requires little underwriting: a matter of establishing what the market value of the asset is today and what would be the cost of replacement. Unfortunately however, people often fail to insure their most valuable asset, the driver of virtually all wealth into their financial plan: themselves!
So how do you value yourself? Your worth, in financial terms, could be defined as what your sector would remunerate someone of your age, qualifications, expertise and experience on an annual basis. Your employer puts a value on you and so too should your household. You may well be the biggest ‘income generating asset’ in your household because your efforts generate the essential cash that pays for all current expenses, such as mortgages, food, children’s education, as well as saving for future expenses when earned income stops in retirement.
Once you have established what you are worth today, you need to understand what impact a reduction or complete loss of income would do to your household. A partial or total cessation of income can destroy an existing financial position and ruin any plans for the future.
If we assume that you are capable, competent and in demand, the single issue that will bring all your dreams crashing down is ill health. It doesn’t matter how good you are at your job or how enthusiastic you are about doing it, ill-health or worse death will prevent you doing it.
Money that has been diligently saved over a number of years is very quickly spent if your earned income stops. Until an individual has a significant body of capital to fall back on or even generate sufficient income from, pooling risk using insurance is a cost effective way to avoid short term financial problems.
The Protection Solution
So what could happen and what cover can you put in place to repair or alleviate the potential damage?
1. Death (life cover)
Abraham Lincoln was half right: you can actually mitigate a fair bit of tax but we still can’t help clients avoid death. Cheat it, put it off perhaps, but avoid it – definitely not.
Putting Lazarus aside for the moment, there is no come back from death. It kills your income. If you are single with no debts or dependants, death isn’t really too much of a concern. Conversely, leaving secured debts and people behind who depend on your income to survive will have damaging consequences. Fortunately, a simple life cover policy means that causing financial hardship for others on death is now unnecessary and preventable.
2. Near Death (critical illness cover)
Two hundred years ago if you caught a cold you were done for; even today most modern sneezes are followed by the mandatory blessing. Nowadays modern medicine attempts to keep us alive no matter what, if you speak to most of the retired community they are more machine than man.
These days we face illnesses that don’t kill us but render us less capable of functioning to our full capacity; this can lead people to conclude that they would be better off dead. In situations like these, a backup, replacement income to bridge the gap or an injection of capital in the form of a lump sum to clear debts or boost retirement assets can have a huge influence on quality of life.
3. Ill, but none of the Above (income protection or sick pay)
So you’re not dead (even your boss should be able to tell this), and you have managed to avoid getting anything that would render you critically ill; what if you are off work with a sporting injury or stress? You may be unfortunate to suffer ill-health that keeps you off work for a short or prolonged period of time. Income Protection policies provide a solution here by paying out a monthly income during sickness at a level similar to net earned income.
4. The alternative NHS (private medical insurance)
When you have adequate and necessary provision in categories 1 to 3 above, and some money left to spend to hedge more risk, it is worthwhile looking at private healthcare. For many this cover is first on their protection wishlist and yet this is the main area in which there is a viable state alternative, which you have already paid for: the NHS.
Rather than insuring the iPad, insure the income that bought you the iPad, then insure the iPad. Be proactive, not reactive, when it comes to your protection needs; no one will give you cover when it is too late. When you have all the cover you need, you can relax knowing you couldn’t have done anything more.
Paying for insurance is unexciting but vital; it is a necessary companion on the road to riches, and something you can disregard only when you have more money than you know what to do with. The reasons for taking out different protection contracts have not changed over time because what can happen to us as humans hasn’t changed: we die, we get a little bit sick or very sick. A relevant, affordable suite of protection products won’t cure all ills, bring people back to life or change the course of history; what it should do though is push the issue of money down the agenda when tragedy strikes and it’s the last thing you want to think about.