When people come to us to discuss their financial plan, the first things that spring to mind are pensions and savings… and the need to have a long-term time horizon. After all, the last few months have given us all a stark reminder that volatility can wreak havoc on the markets.
But it's worth remembering that – no matter how unpleasant it is to consider such things – volatility can wreak havoc with your life as well. What can you do to mitigate stress and anxiety before anything terrible happens?
You probably have some cash set aside for emergency boiler repairs or replacing a leaky roof. You’ve been diligently paying money into your pension so that you can enjoy a comfortable retirement. But what about any money you might need if you suddenly fell ill or sustained an injury? How much might those costs amount to? And how long would you have to keep shelling money out from your cash savings before you were well enough to work again? Would you be able to pay the bills? How much of a hit would your income take?
There are, needless to say, state benefits available as a safety net if you suffered a sudden loss of income. There is such a thing as a Disability Living Allowance – it is made up of two parts (care and mobility), and how much you get will depend on how your disability or health condition affects you. But the maximum you can get is less than £93 per week. For many, such a drop in income would simply be too great to maintain their standard of living.
In many households, the income of both partners is needed to pay monthly bills. And many fail to consider the impact that losing one of those incomes might have on their standard of living. We've discussed life assurance in previous Strategic Insights articles, and people usually recognise just how useful it is (for their spouse or other beneficiaries) for paying off their mortgage and other debts if they die. But people do not always give that much thought to how their family would continue to cover outgoings if they became ill, got injured or found themselves unable to work for a prolonged period.
The pandemic has made us all think more carefully about this. As of April 2022, statutory sick pay is barely £100 a week. And many small companies just aren’t in a position to pay long-term sickness cover. It’s sensible to have enough in the way of investments and savings set aside to provide for the long term and retirement, and it’s also a good idea to have three months’ worth of easy-to-access cash for the unexpected. But you should also have arrangements in place should the worst happen. Let’s face it – nobody likes thinking about serious illness, injury or long-term incapacity. But it makes good financial sense to do exactly that – no matter how unpalatable it may be.
A key component in the whole process of our getting to know you is cash flow modelling. This involves us sitting down with you and exploring different versions of your plans to see if they can withstand everything from having to perform caregiving duties for your parents to purchasing a second home. We also test them against game-changing events – like getting injured or losing your job. And we work out how much you and your family would need in such circumstances. The whole exercise factors in your savings and any other income you might have. We work out what you're spending each month – from household bills and school fees to general living costs. And time and again, we find that not everyone has enough set aside to manage financially for long periods of illness.
This is particularly the case if this money has been earmarked for other things – like retirement or helping your children through university. That's where insurance protection comes in. There are a variety of options that could help to cover specific costs, or replace income, should you find yourself unable to work. Which product or solution is right will depend on individual circumstances. Various factors including age, health and lifestyle will affect the cost of premiums. Some of these premiums may be quite high. But it’s very much like car insurance: the best cover is for insurance that you don’t actually need – simply because you have not fallen or sustained an injury.
Income protection insurance should give you the peace of mind of knowing that you have an alternative source of income should you be unable to work due to illness or injury. Typically, a policy will pay out after a “deferred” or “waiting” period. The amount you receive will be a percentage of your salary until you are able to return to work, or until you reach state pension age… or until you die.
Critical Illness cover is a type of insurance that pays out a tax-free lump sum if you are diagnosed with (or undergo surgery for) a critical illness. However, it is vitally important that you purchase such cover from a high-quality firm. And it is certainly worth paying more money for a decent policy – a surprising number of illnesses and conditions (bafflingly) do not fall under the “critical” definition. You will find that payment of your lump sum is contingent on your circumstances meeting the policy definition. The one thing that is guaranteed to go at least some way towards taking away the stress of being sick… is money. It won't help specifically with whatever condition you have, but it will allow you to focus on your recovery without having to worry about how your bills will be paid.
Life assurance policies pay out a lump sum to a named beneficiary if the policyholder passes away during the policy term. And if you are diagnosed with a terminal illness and are not expected to live longer than 12 months, some policies will even provide the money before you die. Fundamentally, it is there to provide financial support for your dependents after your death. Financial support might mean paying off the mortgage and other debts or simply maintaining their standard of living. Clients are usually surprised by just how relatively inexpensive these policies are… and how fast pay-outs are made (significantly faster than probate). So life assurance can even be seen as a good strategy for reducing the impact of inheritance tax on your beneficiaries.
If you have a treatable condition, then private medical insurance is very useful for paying your private healthcare costs. The costs in question could be overnight care, outpatient treatment, diagnostic tests or scans, or post-surgery care: you can get the specialist treatment you require, in comfortable surroundings, when you need it. Varying levels of cover are available at various premiums to cater to your specific circumstances.
You may try and sugar-coat all of this with euphemisms and metaphors. But fundamentally, nobody likes talking about the possibility of dying prematurely, getting a serious illness or sustaining an injury. But being prepared can help you to avoid money worries for both you and your family.
