It's all in a name when it comes to family finances
IS your name David or Susan? If so, you may be glad to hear that you are in the running for being the most typical householder in the country.
It appears that the typical family home of today is a three-bedroom semi with one bathroom, built in the 1930s and owned with a mortgage*.
That mortgage is likely to be in the name of David and Susan – the most common names for householders – the house, if it has a name as well as a number, is most likely to be called ‘The Cottage’, and the car out in front there is most likely to be a Ford Focus.
Does this tick any of your boxes?
Well, then let’s look at how you are likely to be fixed in terms of the financial security of your personal ‘Cottage’ and your normal family life, especially if something untoward were to happen. (And as we all know – ‘something untoward’ usually happens, sooner or later!)
As families, we tend to agree that we love our homes, with almost a third (28 per cent) agreeing that we feel emotionally attached to our home, and with over half of us (55 per cent) wanting to make improvements to it.
Yet despite this, Aviva’s Family Finances Report shows that millions of families are potentially failing to protect the roofs over their heads as they don’t have adequate insurance in place in the event of a loss of income.
While over a third (35 per cent) of families have life insurance in place, offering financial protection if one of the household’s breadwinners should die, only one family in 10 have critical illness cover (11 per cent) and only 1 in 12 (8 per cent) have income protection to cover a salary should they become ill or injured and unable to work.
This amounts to an alarming 11.7 million unprotected households.
This is a serious consideration, because no matter whether your family is paying a mortgage or renting, if you stop work, the bills and direct debits, unfortunately, do not stop.
On average we’re paying £505 each month for our homes, either in rent or mortgage repayments, and we know that by failing to protect our incomes, we risk losing not just our family’s financial security, but also potentially putting our family home in jeopardy.
Almost every week we hear about another unfortunate family where one parent loses their income quite unexpectedly – and it doesn’t have to be through sickness or accident, it can include redundancy too.
There are various insurances that can go together to form a safety net to protect our family against just such an unexpected event. Let’s take a quick look at them.
The first I’ll mention is ‘Accident, Sickness and Unemployment Insurance’ or ASU, because ASU is remarkable in that it is one of only two types of insurance that cover you against redundancy.
You have to think ahead, though, because ASU policies normally have a built-in condition saying they won’t pay out, if you claim within three to six months of taking the policy. This is to discourage applications from people who, having left it too late, rush to insure their wage, when they already know their jobs are likely to go.
ASU is not a long-term insurance, it is designed to give you a breathing space – typically of one to two years – to find a new job, or have a period of convalescence, before returning to work.
The other one that covers redundancy is mortgage payment protection insurance, or MPPI, which specifically covers your mortgage payments in the same situations - when you stop work though redundancy, sickness, or accident.
There are other insurance types that cover your salary, not for redundancy, but for having to give up work for health reasons. These are particularly worth thinking about if you are self-employed.
Income Protection Insurance, or IPI, provides an alternative income, typically equivalent to around half of normal income, tax-free, and pays out alongside any other benefits you may receive.
Then there is critical illness insurance or CI, which pays out a lump sum if you are struck down by one of a list of serious health events such as a stroke, cancer, a heart attack, or the need for major surgery. You can set up your CI to cover your income and healthcare costs for a chosen period, or to pay off your mortgage.
If you are a David or a Susan, and even if you’re not, you have to admit it could be worth securing your family routine, driving your Ford Focus up to The Cottage, for what will hopefully be many years to come!
*Aviva Family Finances Report 2015, based on government and company data from 26,000 families
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 7188 6005.