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 Protection – how important actually is it?
Its amazing how different people’s opinion is regards the importance of protection of their financial liabilities and income. The reality is that the majority of people either do not have enough cover or worse, none at all. The main reason for this being, that it is human nature to presume that nothing untoward will ever happen; well to us anyway, it’s always the other person.
Well I’ll start with a few interesting facts: 1 in 4 men and 1 in 5 women in their 20’s and 30’s will suffer from cancer, a heart attack or other critical illness before reaching the state retirement age. 1 in 5 men and 1 in 3 women aged 25 will be off work for more than 6 months due to a long-term sickness or accident before the age of 60 (1).
So suppose you were unable to work long term because of an illness or accident, who would pay the bills? Of course you do get some help from the state, but not a lot. Long-term incapacity benefit is just £74.15/week*, with a whopping extra £44.35/week* if you have a dependent spouse. Any other benefits are means tested, and not payable if you under 60 with assets of over £8000*!
When you actually sit down to think what would happen if you could not earn an income or died, leaving dependents to struggle on their own, it does not take long to realise that having some form of protection is a financial planning priority, unless you have very large savings that can be accessed quickly, or a generous and rich uncle.
So what should you have, and who should provide it?
Life Assurance is a simple contract, and pays a lump sum on death, normally if it occurs during a specific period of time. The company chosen is based generally on the premium, as you are either dead or alive, a fact, which cannot be disputed. Some contracts though include terminal illness cover and have flexible options, which may be important to you.
Critical Illness Cover on the other hand is a very different ball game (though like Life Assurance) it pays a lump sum, if you have an illness during a specific period of time. There are normally 7 basic core conditions covered, which include stroke, cancer, heart attack, multiple sclerosis, kidney failure, organ transplant and coronary arterypypass. An extensive policy though will include more, up to an additional 33 conditions, as well as flexible options and total permanent disability cover which pays out if you are totally and permanently disabled, as a result of a bad fall or car crash. Hence, the cheapest provider is not always the best.
In addition, other considerations to take into account as well as the number of claimable events, is the claims history of the company, their terms of payment and importantly the definitions of a “claimable” illness, which can vary hugely.
All of these factors will ultimatley dictate if a claim will actually be paid, and so are very important. However, recent advances in science and medical treatments are meaning that some Critical Illnesses are no longer included, and are being removed from the illnesses covered altogether. An example of this is Angioplasty, which is now considered a non-life threatening and almost common keyhole operation.
Permanent Health Insurance is very different to Life Assurance and Critical Illness cover, as it provides a monthly income to a selected age or until you return to work, if earlier. It pays out in the event that you are unable to work due to an accident or long-term illness, for example a car crash, serious fall or critical illness. However, you might be interested to know that the two most common reasons for a claim are bad backs and stress related disorders.
As you can only claim up to about 60% of your earned income, you would normally elect to defer the policy paying out until any work related sick pay has stopped. We believe it is also good practice to index any benefit you will receive, so it rises each year in line with inflation, as the policy can pay out to retirement, which may be a long time. Like Critical Illness cover, the contracts and terms vary hugely from company to company, so always look for the best value for money option, not the cheapest provider.
What makes a good protection contract?
There are some general contract terms that you need to watch out for, two of the most important being the premium bases and occupational class. Firstly, always make sure the policy, if possible, is set up on a “guaranteed” premium, so that it cannot be increased or reviewed at a later date. This is a big issue, as the protection market is facing huge claims from an aging population who live longer but are more unhealthy, and I am sure will pass on the increased cost onto whoever they can.
Secondly, ensure if possible the contract is set up on an “own” occupation rating, which looks at your ability to do “your” job in the event of a claim, rather than any job. This is very important also, as the provider will then look at your ability to do your job, rather than any job. For example, loosing your arms in a car accident may mean you are not able to be an artist, but could mean you can still work in a call centre, answering a phone with a foot pedal, which would void any claim paying out. These key elements will help make sure you get value for money long term, and hopefully see you to a successful claim in the unfortunate event.
I think most people agree that everybody should have some cover, at least for their financial commitments, and I say that mainly because the consequences of not having it, are in most cases, catastrophic. If you would like your current plans reviewed or are interested in a quote, please contact your financial adviser.
Please note that the views expressed above do not constitute financial advice, and you should seek independent financial advice so that your own individual circumstances can be considered.
* These figures are accurate at the time of publication (December 2004) and are likely to change in the future.
.1. Source, GE Frankona RE, Dec 1998
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The new yearis nearly upon us. New Year’s resolutions are a tradition and so why not make one of your resolutions to review your finances?
There is a lot of uncertainty around at the moment, regarding both the housing market and stock market. Various major banks and building societies have recently published reports about their views of ‘what is going to happen to house prices’ and it certainly is enough to stir some emotions. It is important to have a long term view regarding property. There will always be blips in the market, but over the long term we believe it is wise to have property as a part of your portfolio. There are a lot of factors that influence house prices. These are: property type, location, season, interest rates, inflation, demand, supply, confidence in the market and political issues.
Many experts believe that there will not be a ‘crash’ but that there may be a correction in the housing market. One of the most pessimistic reports is from Barclays who have estimated a 20% fall in the next 3 years.* If you are concerned about house prices, or indeed possible interest rate rises, then it important to address this and contact your adviser at The Mortgage Professionals Ltd. There are competitive rates on the market, and it may be in your interest to change lender, consolidate debt or re-structure your mortgage to suit you.
The stock markets can be a minefield, and saving for a rainy day is often something that is put on the back burner. The golden rule of thumb is to remember that saving money is a good thing no matter how much it is. Evaluation of your savings vehicles is also very important and it is best to have an IFA review your savings products at least once per annum.
‘Saving’ can mean simply leaving monies in your bank account, or another deposit based account. It can also refer to ISA’s, Bond, Endowments, Unit Trusts, Pensions etc. If your attitude to risk supports having monies invested in the stock markets, i.e. you are prepared to take some risk for the potential of a higher reward (than you would get in a deposit account), then it is crucial to review the policies you have and to take advice. Are you in the right funds for your risk profile? Do you have a well structured portfolio of funds? What are the charges? What flexibility does the product have? What are the tax implications?
The FTSE 100 (Financial Times Stock Exchange) lists the top 100 UK companies and their share prices to give an index. The FTSE was first introduced in 1984 and the base level (opening value) was set at 1000. Since then it has risen as high as 6930.2 on Dec 30th 1999 and as low as 3287 in recent times on March 12 2003. In November 2004 the FTSE broke the 4800 mark.
As part of a balanced portfolio it is important to have some money invested in equities, (if your risk profile supports it) especially if you want to beat the effects inflation. It is important to have a well-structured portfolio of funds within your savings product, be it an ISA, a pension or a unit trust – something that we can do for you, based on your attitude to risk.
The moral here is that saving is about being in the markets first of all – ‘you have to be in it to win it.’ Equity ISA’s, and Unit trusts should be regarded as medium to long term savings vehicles, of at least 10 – 15 years to give the markets time to grow. Bonds can be 5 or 10 year products, and Pensions are long term savings products.
The best set up is to have a combination of products; make sure that your risk profile is accurate, and have constant reviews to make sure that you are in the right funds at the right time. We offer regular reviews via our fee planning service
Money is very psychological and emotive. Most people somehow tend to spend what they earn no matter how much it is. Being strict with yourself, and having the sense to save a percentage of your monthly pay, will mean that your retirement will be potentially earlier and more fruitful; that you will have money for a rainy day, and will always be in the black and not the red – start saving today.
* Barclays bank statement on BBC website
** This is Money website
Your home may be repossessed if you do not keep up repayments on your mortgage
By consolidating your debts into a mortgage you may be required to pay more over the entire term than you would with your existing debt.
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