WE can all be plagued with procrastination on sticky subjects and finances is up there with ‘super glue’ sticky. If there is one subject, however, that should nudge its way to the top of our box ticker into the new year, it is that of protection of the family or business in the event of a death or even a critical illness.
A friend asked me once how much he would need to retire if he wanted to, so I asked how much he would like to win on the lottery to hang up his boots.
Naturally the number was beefy at around £5 million, but, when I followed that with how much life cover he had, it was marginal, in fact less than a 10th of that. Why would he need so much if he wasn’t working (ie his retirement number above) but get away with so little when once again not working (passed away) but also unable to do anything about it?
If there is a loss in the business, or at home, the immediate drop in income is crucial in many ways. At home, the mortgage company would want to know their debt is repaid and is going to be paid in full each month. Bills and normal living also still need to happen.
In the business, lenders will move very quickly if they see a key person in the business such as the owner has passed away, and they will immediately want to see how those debts are to be repaid. They may often expect the worst and move in to call in the loans.
Many postpone taking out life cover when, in effect, it is pretty inexpensive. £500,000 of cover for a 43-year-old couple can be around £70 per month for a 20 year plan. Remember, an independent financial adviser simply puts your details into a quote system and finds the most competitive company in the UK. The price difference between number one on the list and number eight is nearly double, hence the need to use the broker.
To keep costs lower, the above cover could be changed to a decreasing life insurance policy which falls as the mortgage decreases. That cost for example would drop by over £30 per month.
At home, ensuring the mortgage is repaid is crucial and a bare minimum, but adding extra cover on to protect the family in the event of such trauma is, in my opinion, equally as crucial. Another simple plan that is also very cost effective is a family income benefit plan which pays out an annual income to the family, supplementing the loss from the deceased.
You decide how long you want to be protected for (normally until the children are not financially dependent) and insure yourself for that length of time and the correct income amount. As the plan is specific in its protection amount and time, the longer you survive the less the amount to be paid out, as the income is for shorter. Hence, the cost at the beginning becomes more cost effective.
The level life insurance that I mentioned at the beginning is the most costly to an insurance company as the amount you are insured for on day one is the same as the amount covered the day before the end of the policy.
In 34 years in financial services, nothing is as traumatic financially as an early passing, particularly where that person is the main breadwinner.
Looking back at protecting a business, debts should immediately be protected to avoid a bank calling that loan in, but also a simple arrangement can be put in place to protect other areas. If one partner dies, and the surviving partner doesn’t have the money to buy them out, the business would now inherit the widow/widower as a business partner. It is very simple to insure against that and to provide a lump sum for the surviving partners to buy out those shares, as well as giving the widow/widower some well needed financial support.
It’s up there with boring stuff to procrastinate on, but well worth the trip to your independent financial adviser for peace of mind.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query or would like a complimentary quotation for life cover, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit wwfp.net.
