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Taking out a policy for life insurance, critical illness cover (CIC) or income protection is a big decision. Not only is there a monthly cost to factor into your finances, but there is also a range of checks which are required to ensure that the protection in question meets your needs.
In this article, our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire offers six crucial areas to check before taking out any form of financial protection.
We hope you find this content useful. If you’d like to speak to an independent financial adviser about this subject or another area of wealth planning that affects you, then you can reach us via:
T: 01282 772938
How sustainable are your short-term savings?
As crucial as a life insurance or similar policy can be, it isn’t the only way to protect your wealth and finances. In fact, typically the best place to start is to ensure you have an appropriate set of short term savings – acting as a safety net in case of emergency expense (e.g. a failed heating system which needs replacing suddenly in winter).
A good rule of thumb is to try and build 3-6 months of living costs should you unexpectedly face a big outlay, or a fall in your income. Various insurance policies can help in such situations, yet a strong cash reserve can offer you more flexibility under abrupt financial pressure.
What is the nature of your current policies?
Before you go hunting for new policies, it’s wise to check your existing ones. Quite often, people have financial protection in place without realising it – such as private medical insurance (PMI) via their employer. Taking time to review your protection could save you from “doubling up” and taking out unnecessary policies later.
What kind of protection do you need?
Once you’ve taken these initial steps, consider why you need financial protection. After all, there are different types of financial protection to serve distinct purposes. Do you need a lump sum to pay off the mortgage should you die prematurely? Alternatively, would you prefer a regular flow of income to help your loved ones cover their living costs? Here, it can be tricky to decide which policies are best suited for your goals. Sometimes it is necessary to take out a range of different protection plans to compliment each other. This is where the professional advice of a financial planner can be helpful.
How much cover is necessary?
Financial protection cannot completely remove financial strain in the event of serious accident, illness or death. It is designed to help alleviate strain on your income and wealth. As such, you need to decide how far you want this pressure softened. Bear in mind that the more protection you want, the more you will likely need to pay in premiums.
Here, it can help to start by checking how much it costs to pay the monthly bills. From here, you can work out the extra needed to maintain your quality of life in the event of a disaster scenario. Make sure you take other income streams into consideration. For example, you may not need a large amount of cover if you can rely on your partner to keep bringing in significant earnings.
What about the protection duration?
The length of time you need the protection for depends on the purpose it serves. For instance, do you mainly need it to help pay off the mortgage? If so, then you may wish to take out a life insurance policy which mirrors the remaining loan duration. Alternatively, perhaps you mainly wish to ensure there are enough funds to cover your children’s costs for as long as they are dependent. In which case, cover which lasts until the youngest reaches 18 might be a strong solution. Or, maybe you wish to use an insurance policy to mitigate an inheritance tax (IHT bill. In which case your age, health and other factors will play a big role in your choice of cover.
Is the protection financially viable?
Of course, regardless of the cover you eventually decide upon, it’s important to check that you can afford the monthly premiums comfortably – for the foreseeable future. However, it’s also a good idea to check how the eventual payout compares to what you expect to pay, in total, for the cover. For instance, suppose you want to use life insurance to mitigate your expected IHT liability. How does the size of this IHT bill compare to the sum of the premiums you will pay for the policy over its lifetime? If the latter is likely to be cheaper than the former, then this might be a good financial decision (provided it is set up within an appropriate trust structure). If not, then perhaps you are better off simply paying the bill out of your estate – provided you have assets of sufficient value and liquidity to do so.
If you are interested in starting a conversation about your own financial plan or protection, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938