How best to cover your kin
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Q What financial protection should I have in place to ensure my family are best looked after?
A When it comes to family cover, I find it interesting to observe the level of protection that is in place for a client and what they believe they need, going forward.
Generally speaking, the existing cover tends to be heavily loaded with life cover, typically because a client will have access to a workplace death in service scheme and they may have purchased personal life insurance, so that the mortgage is paid off on an untimely passing.
Life cover tends to appear relatively cheap and as such people tend to maximise this cover, meaning that, on occasion, there will be gaps in the protection required.
As an example, Kelly is aged 40, in full-time work earning £50,000 per annum and expects to enjoy inflationary based increases throughout her employment. She owns a home worth £300,000 with a mortgage of £200,000. Her money purchase pension scheme is worth £150,000 and both Kelly and her employer pay into this pension, using the salary exchange route. Kelly has four times death in service cover with her employer, and a personal life cover plan that provides level cover of £250,000, ending in line with the mortgage payment. Kelly therefore has £450,000 worth of life cover and this is her only form of protection benefit in place.
When asked what she expected her biggest asset to be over her working life, she answered her home and pension. Returning to Kelly’s earnings and her expected salary increases, I informed her that between now and age 60 she could anticipate cumulative earnings in the region of £1.3 million before tax, allowing for 2.5 per cent annual increases to her salary. Like many, Kelly had not considered the cumulative value of projected earnings and was slightly taken aback.
She acknowledged that the loss of this income would have a serious impact on her finances, and we selected a suitable income protection plan if she could not work due to either an illness or indeed an injury.
There are many variables to consider when selecting a suitable income protection plan, including the required benefit amount, when you need the plan to start paying out, if payments will increase, and the required term – up until retirement age or state pension age.
So you should make sure you seek independent financial advice so that they can tailor a plan to your own specific needs.
Income protection is a crucial element of comprehensive protection planning.
Get in touch to find out more. Paul McCabe is a certified and chartered financial planner at Acumen Financial Planning.[email protected]