How to make a financial safety net
First published 17 June 2015 • Updated 23 January 2017
Death, illness, money troubles… You can’t prevent the first, you can’t do much about the second, but you can protect against the financial problems that both of those can bring. Ray Tammam, IFA at Fairstone Financial Management, explains how.
It’s a question we’re not comfortable addressing: what would happen if we were to fall seriously ill or die?
If there are other people who rely on you financially, it’s important to take appropriate steps to ensure that they will be secure if you can no longer provide the same level of support. This might be because of your premature death, but it could merely be an illness or injury that temporarily prevents you from doing your job and earning money.
Fortunately, steps can be taken to protect against these sorts of crises. There are a number of protection options available but knowing which one can protect you under different circumstances can prove complicated. So here’s a summary of what’s out there.
Term assurance allows you to choose to cover yourself for a specific term, such as the term of your mortgage or expected working life. You can choose between receiving a lump sum or a regular annual payment.
The advantage of this type of cover is that it tends to be low cost; however, no money is returned at the end of the term if you don’t make a claim. On the plus side, payments to you will nearly always be substantially more than the premiums you paid in, and the younger and healthier you are when taking out cover, the cheaper it tends to be. Costs can be fixed for the whole term of the plan and pay-outs are usually tax-free.
As the name implies, whole-of-life cover insures you for the whole of your life – as long as you maintain premium payments. This tends to be used by people who want to pay for funeral costs or wish to pass on a lump sum to their family on death. There are other possible uses, however: such as mitigating a potential loss on an investment or property portfolio, or even to cover a family’s future inheritance tax bill.
Critical illness cover
Of course, the chances of dying prematurely are far smaller than the likelihood that you’ll develop a serious illness before you’re due to retire. This is why critical or serious illness cover has risen in popularity. This cover is relevant if you have a serious illness which may need ongoing medical care, or if the illness leaves you unable to work while you have continuing financial liabilities. As this is a situation that can affect anyone, it’s vital at least to get critical illness cover in place, given that it’s far more likely to be needed than life assurance. However, it’s better for your family of course if you have both.
Relatively new on the market, severity payments cover you in the event that you have a serious but non-life threatening illness which would not ordinarily be covered by critical illness cover. So if you’re looking for something that would still pay out a proportion of the sum assured for a less serious illness, you can pay a higher premium to include a severity based policy which will pay out, say, 50 per cent of the total cover.
Mr and Mrs Smith
Here’s an example to illustrate that kind of circumstances where cover can prove invaluable. Mr Smith was in good health, and took care of his wife who had a severe brain injury and was wheelchair bound, unable to speak. Mr Smith had an insurance policy but couldn’t get cover for Mrs Smith due to her very poor health. Then the unexpected happened: eighteen months later, Mr Smith died. Nobody could have predicted that he would be the first to go, but thankfully the life cover he had taken out helped to ensure that Mrs Smith could still be looked after from then onwards.
Finding the right level of cover
Life and critical illness cover is extremely important and generally proves cost-effective: if you end up not needing it, you still have the peace of mind it brings, and if you do need it then the benefits can be literally immeasurable. But there are many options available, so choose carefully. You should consult an Independent Financial Adviser (IFA) who will help work out how much cover you require, the right policy for you, the appropriate term and any additional options you may need, and also whether it would be advantageous to put the plan into a Trust.
We often ask ourselves ‘What if the worst happens?’ In this case, ‘the worst’ is leaving your family financially vulnerable. So long as you have suitable protection, ‘the worst’ need not happen at all.
Ray Tammam is an Independent Financial Adviser, Mortgage Broker and Estate Planning Consultant at Fairstone Financial Management Limited.