Clear cut protection?

Taking a fresh look at your pensions and investments can often produce a pleasant surprise and over the past couple of weeks we’ve looked at pensions and investments. But now that you’ve accumulated your wealth and are on track with a financial plan, how do you keep it that way? The answer is protection. Protection is often cited as the cornerstone to any financial plan because without it the plan might collapse. My view is that I think everybody should have some kind of protection in place, but only if it’s necessary. At Time Financial Planning we often come across quite wealthy people who still have life assurance and protection policies. But we’re able to tell them that they don’t need to pay the premiums for cover because they’ve got so much wealth their family would be fine if they were to die. I also find that lots of people have life assurance but don’t have any other form of protection. One of the reasons for this is that everyone understands how it works; that if you die there’s a lump sum of money then available for their beneficiaries to pay off mortgages or provide childcare or whatever the need is. Another reason is that it’s really cheap. I’m not saying you shouldn’t have the cover, but it’s often bought instead of income protection and critical illness cover because it’s easily affordable. However, most people start off with a normal healthy life which enables them to buy inexpensive protection if they want to, because if they weren’t healthy they would have to pay more. But then some people don’t just die, they may get unexpectedly ill which is where critical illness policies kick in and then the wonders of modern medicine are quite good at fixing serious illnesses; but sometimes serious illnesses then become disabling conditions and that is where your income protection kicks in. Eventually we all die, which is when life assurance kicks in but in my experience it’s really unusual for people to take out life assurance and just die – they tend to get ill first. So actually having policies that pay out while you’re still alive seems to me to be much more valuable than having policies that don’t pay out until you’re not here anymore. People need to examine where their protection priorities should lie because sometimes, the financial consequences of survival may be far worse than the financial consequences of death. We can establish the level of wealth a person has then work out what we call a ‘cashflow model’ for them that predicts how that level of wealth is going to increase or decrease over time. We can then crash test that model based on removing their income from it. So, someone might be 50 and it looks like their retirement plans are all okay as long as they’re healthy and carry on working and carry on contributing to their pensions and savings. But if you take away their income that cashflow model often collapses which demonstrates a clear need for something that replaces their income if they fall ill. One thing that’s certain is that the area of protection is not as a clear cut as some people think but people are encouraged to buy life assurance cheaply, even across the supermarket cash desk these days. They buy it without receiving any advice and you’ve got to question whether that policy is really needed or not. No-one has assessed their financial situation and the supermarket checkout person is unlikely to have assessed how much cover you need or whether you need it at all. Next week I’ll take a look at about the value a financial adviser can add to your financial plan. Life Cover (non-investment) and income protection - The plan will have no cash value at any time, and will cease at the end of the term. If premium are not maintained, then cover will lapse Critical Illness - The policy may not cover all definitions of a critical illness. For definitions of illnesses covered please refer to the Key Features and Policy Documents Got a financial question you want Tim to answer? You can email him at tim@tfp.limited Time Financial Planning Limited is an appointed representative of The Whitechurch Network Limited which is authorised and regulated by the Financial Conduct Authority.