How to make sure you're financially protected at every life stage
How to make sure you're financially protected at every life stage
Let’s be honest, none of us like to think about dying as it is too depressing. But when you consider figures from Royal London, which show that nearly six out of every 10 of us die without a will, it seems like when it comes to passing away, few of us accept that it will ever actually happen.
But by putting our heads in the sand about topics that we feel are too morbid, we can leave our family – and our livelihood – at risk.
Here’s how to make sure that you are covered should the worst happen – and how to face your fears to protect your finances.
So, what should we be doing exactly?
Have you ever considered how would you keep a roof over your head if you couldn't work due to ill health?
While we’d all like to take a "it-will-never-happen-to-me" mentality, being prepared is easier than you’d think – and the peace of mind will be priceless.
The best place to start is with financial protection policies, which are designed to pay the bills when you can’t. This means you may need different insurance depending on where you are in your life.
It’s always better to consider this in advance rather than looking back and wishing you’d done things differently.
The need for protection policies is driven by debt and dependents, usually mortgage and children. As you get older, you’re likely to acquire more of both.
What does the jargon mean?
Let’s have a look at some of the terms you’ve probably heard. ‘Life insurance’ is the most well-known form of financial protection. It pays out a lump sum if you die.
‘Critical illness cover’ pays out a chunk of money if you get seriously injured or get a diagnosis of a life-threatening illness such as heart attack, stroke or cancer. It’s based on the idea that these things stop you from being able to work for a period and helps you cover your costs while you recover. The payment is tax-free.
Meanwhile, ‘income protection’ is a type of insurance designed to cover you if you can’t work because you are too sick. You’ll receive somewhere between 50% and 70% of your salary through regular monthly payments for as long as you need – possibly right up until a set retirement age.
When you’re starting out
When you first leave home, you may feel footloose and fancy-free without a partner, kids or mortgage to tie you down.
Without dependents and every chance of a long life ahead, you might not need any financial protection.
But what happens if you got too sick or injured to work and your income stops? How would you pay your bills?
Expert Ali Crossley from insurer Legal & General suggests that even the young and single should consider taking out income protection insurance.
“Unless moving back in with your parents is an option, you will still have to pay rent and other bills,” she says.
The good news is that policies are priced according to your age, general health and the amount you want to receive if you must make a claim – the younger you are, the cheaper it is.
When you start a family, you should revisit your financial protection policies as soon as possible
When you’re looking to protect your family
When you start a family, you should revisit your financial protection policies as soon as possible.
Figures from the Childhood Bereavement Network estimates that, sadly, every 22 minutes in the UK, a parent dies, leaving dependent children. In other words, 111 children lose their mother or father every day.
“You need to make sure you have enough life insurance, so your kids are financially cared for if you pass away," says Sarah Coles from investment services company Hargreaves Lansdown.
Many people take out life insurance designed to pay off their mortgage debt if they die, but if you increase the sum insured to more than you owe on the property, you can add enough cash to keep food on the table as well as a roof over the family’s head.
Not sure how much cover will be enough? Check out Compare the Market’s handy calculator, which will work out the minimum amount of insurance you’ll need.
You’re five times more likely to go off on long-term sick leave than die during your working life
According to figures by brokers Lifesearch (partners of Compare the Market), you’re five times more likely to go off on long-term sick leave than die during our working lives.
For most families, even those who are divorced, the loss of income from either parent due to death or illness would have extremely serious financial implications.
Parents depend on each other in all sorts of ways that go beyond earning a salary and paying the bills.
In many cases, the surviving parent would have to leave their full-time job to care for the kids. Or, if they choose to continue to work, the extra childcare needed would become very expensive.
According to figures from the CORAM Family and Childcare survey, the monthly cost of part-time nursery care for a child under the age of two in England is an average of £138 per week or over £7,000 per year. Wow.
What's more, parents must consider the value of their unpaid labour in their home as the cost of outsourcing it can be eyewatering.
Figures from the Resolution Foundation show that women spend 28 hours a week doing unpaid work such as cooking, cleaning and taking care of children.
Some critical illness policies also provide cover for your children.
This means that should your child became seriously ill and you had to stop working as a result, you’d have extra cash to pay your bills which means that you can concentrate on caring for your little ones.
The good news is, that this can be added to an existing policy that you may have taken out when you were younger, so there is no need to make a new lengthy application when you become a parent – all it takes is a telephone call for the extra peace of mind.
Parents must consider the value of their unpaid labour in their home as the cost of outsourcing it can be eyewatering
When you’re looking ahead in retirement
By the time you are living it up on a pension, you might no longer need income protection and critical illness cover because you are mortgage-free, and your children have long flown the nest.
However, if you wish to leave money to clear any debts, pay for funeral costs or provide an inheritance, for instance, there is another type of insurance worth a look.
A ‘whole of life’ policy will pay out whenever you do eventually die so long as you are still paying the premiums. Whole of life policies are complex financial products, so if you don’t understand what a policy is offering or you’re unsure what would be best for you, always speak to a financial adviser before you buy.
However, if you only want a policy to last for a certain period of time, such as 5, 10 or 25 years, then ‘term life insurance’ can be more cost-effective – this only pays out if you die during the policy term. There is no lump sum payable at the end of the policy term.
The trouble is that the older you get, and the more health conditions you accumulate, the more expensive the premiums become for traditional life insurance. If you have a serious health condition, your life insurance might not pay out for cause of death related to that health condition. So it’s always important to check the terms and conditions of your policy to see what is covered.
One alternative is over 50s insurance. This is a type of cover that doesn’t require you to answer any questions about your health and means that the cost of your policy isn’t affected by your medical history.
While those who are fit and well may find it a pricier option, those who have had health problems could find that it is not only more affordable, but it could be your only option.
Over 50s cover pays out a limited cash lump sum when you die depending on how much you paid for your monthly premiums.
Typically, you must have paid the premiums for a couple of years first for these policies to pay out in full if you die.
The drawback with over 50s life cover is that the policies may not be great value if you live for many years. You could end up paying more in monthly premiums than the payout afterwards.
If you specifically want to protect your nearest and dearest from hefty funeral bills, then a prepaid funeral plan lets you decide the arrangements and pay in advance at today’s prices. This allows you to fix the cost.
The plans usually guarantee to cover services provided by the funeral director but may only pay a contribution towards third party costs such as cremation fees.
They won’t pay anything towards extras such as a gathering afterwards. If you want a big party, you’ll have to find another way to pay for the knees-up.
How much cover is enough?
While when it comes to insurance, it’s often better to be overprotected. Not all budgets will stretch to cover the premiums you pay out regularly but doing something is better than doing nothing.
“I would prioritise income protection over critical illness cover, but in an ideal world, you would have both,” says Carr.
When calculating how much cover you need, it makes financial sense to consider all the monthly outgoings you pay every month.
So, as well as your mortgage, rent or loan commitments, make sure you cover everyday essentials such as council tax, utility bills and the weekly food shop.
If you don’t, you could still end up in debt trying to pay your bills.
The information in this article is not to be taken as financial advice. Before making any financial decisions, always do your research or speak to a financial adviser.
Get a move on. The good news is that policies are priced according to your age, general health and the amount you want to receive if you must make a claim. (The younger you are, the cheaper it is.)
Be completely honest in your answers to all the questions on the application, such as your medical history for example, otherwise the policy could be worthless. You might feel that you are over-sharing. You’re not! If you hold something back, it could really affect whether the insurer pays out in the event of a claim.
Look into putting your life insurance in ‘trust’ which means the value of your policy is generally not considered part of your estate and should not be liable for an Inheritance tax charge. Putting a life insurance policy in trust is straightforward and your loves ones will get faster access to the money.