Disaster protection is part 2 in a 3 part series. Part 1: know your numbers can be found here and part 3: invest wisely can be found here.
So you’ve got your percentage splits sorted, and you're on the road to creating your freedom fund. The next step is making sure that you, your wealth and your family are protected should something bad happen.
Not the most fun subject to think about, but the stats are pretty scary when it comes to our chances of getting ill. Despite this, it’s incredible to think that we are twice as likely to insure a pet than we are our partner!
It’s also important this is prioritised above investing (step 3) because we are protecting our loved ones, the money we’ve already accumulated and the money we have the potential to accumulate.
There’s no point saving for 15 years, building up a nest egg, then having to use it all in an emergency. Equally, the last thing we want is to interrupt the wealth creation process. Just think, if you earn £50k per year and still have 20 years of work ahead, your personal earning potential is £1million. Any time off work due to an accident or illness can have significant impacts on your future lifestyle.
So, step 2 to money success is disaster protection. This falls into two brackets:
Life insurance to cover the surviving partner or children should the unthinkable happen
Income protection / critical illness to protect the money you’ve accumulated or have the potential to accumulate. This essentially provides peace of mind should a serious accident or illness occur
To calculate how much life insurance you need, think about what you would be losing financially should different scenarios happen. So, for life insurance, calculate:
Your total debts such as mortgages, loans and credit card balances
The cost of a funeral (in the UK this is around £3k - £5k on average)
What amount the surviving partner will need each month and how long for
So for example:
In addition to life insurance and to protect you, your family and your savings there are a couple of options:
Income protection - pays you a monthly income for a set period of time should you be off work due to a predefined illness. The amount is generally limited to 60% of your gross monthly earnings
Critical illness - this pays a lump sum should you be diagnosed with a critical illness. Some people like to have enough cover to pay off their mortgage, others are happy with an amount that would cover them for a few years, should they need to be off work or make adjustments to their house
Applying for life insurance, critical illness or income protection can, in some circumstances be a lengthy process. Headline rates you see on some comparison websites are not necessarily the final amounts you will pay. Underwriters often ‘load’ policies due to medical conditions, smoking status, alcohol consumption or above average BMIs.
Because of this we would generally recommend approaching underwriters before applying to one insurer. That way, you already know a pre-underwriting decision, and can go with the insurer with the least amount of loading (if there is any at all). For critical illness and income protection It’s also worth analysing the payout history of the insurer too.
Free insurance review
If you’d like a free review of the insurance policies you have in place, or some guidance on what to go for, please get in touch.
Next up, part 3: Investing wisely.