Why do I need protection cover?
Many people’s first contact with a financial adviser is a discussion about protection insurance, usually as part of a mortgage transaction. Rarely, parents send their recently employed offspring to us to try and get them to save or get protected before something goes wrong, although this is a trend I would like to encourage.
Protection insurance is all about using the power of collective action, where the premiums paid by the many are used to offset the disasters of the few. The usual perils covered by protection insurance include critical illness like cancer, the inability to work, unemployment and ultimately death. Any of them are likely to have a devastating impact on normal life, but are sufficiently rare for insurance to be affordable.
Theoretically, the rise of the Welfare State, with help to the sick, the unemployed and the widowed, would reduce or remove the need for protection insurance, but in practise, demand has risen, perhaps reflecting our increased affluence.
Advisers spend much of their time pointing out the “blindingly obvious”, so here are the general points that anyone without a very large trust fund needs to bring to mind:
State benefits are limited; if you want more than a subsistence existence, you need to work for your living
Access to almost everything you want depends on your ability to work day to day. You can insure your income against illness for a limited period or alternatively up to retirement age, depending on the insurance contract
Temporary unemployment will seriously damage your finances in the short term. You can insure your income against unemployment for a limited period
State benefits are geared around living expenses, not paying off capital debt. Not being able to service debts through death or illness will result in the loss of the asset purchased on borrowed money, so your home, car, furniture and electrical goods are at risk. Simple life cover will eliminate that risk
Serious illness, like cancer or a heart attack may not kill you, but will reduce your ability to earn money permanently or for several years. You can insure against critical illness to offset this potential loss
Money borrowed on a mortgage is repayable on death; if another mortgage cannot be arranged, then the house will need to be sold. Life insurance will stop your family losing the house if you die
Protection insurance set up when you are young and healthy is comparatively cheap, as the risks of a claim is low. Although the premium would be seen as “dead money”, it is also true that you cannot get protection insurance after the event. Either take steps to manage the peril or accept the consequences without any mitigation.
If you are unsure of what is available and how it may be incorporated into your life plan, ask to speak to an adviser and make an appointment for a protection review. There is no fixed, right answer, as the best protection solution will depend on your personal resources and your situation. There is little point in an over-complex expensive solution for all perils if it is unaffordable, just as too little cover would provide false confidence, if an unpleasant reality struck.
Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.
If you know you need formal advice, have a look at http://bankfield.net/protecting-you-your-family/, or ask around for a recommendation, it might even be me.