If you read my earlier blog, you will know that 2019 is the year to complete my ‘to do list’. Last month was all about my Will and this month is all about my Protection Portfolio.
So, what is Protection? Protection, otherwise known as ‘insurance’, is a way of financially safeguarding yourself or your family (or any chosen beneficiary) at a time of a critical illness or death.
Your Protection Product can be paid for monthly or annually. The regular payments to the Protection Provider (which are called ‘premiums’ in the Financial Planning world), pay for your ‘sum assured’ amount (your chosen financial benefit amount), which on a successful claim will be paid out to you or your chosen beneficiaries.
Why is it important?
I like to think of protection as a ‘Financial Safety Net’. In a time of unexpected need, the ‘Financial Safety Net’ can provide you with peace of mind when it comes to your finances.
There are 3 key areas which I strongly believe require protection which I will detail below:
My biggest asset is myself (sounds a bit big-headed but let me explain further). I own a house with a mortgage and a car, and these are usually what people call their ‘biggest assets’, however I disagree with this. Without my income I couldn’t have even purchased my house, car and most of the items I own. I could not continue to pay for my house, I could not pay the costs to run my car (along with all the other expenses in life I have). Personally, I enjoy my current lifestyle and want to be able to sustain as much of it as I can, even if I couldn’t work.
2: Biggest Financial Liability
My biggest financial liability is the mortgage on my House. Like most people, my mortgage is my biggest monthly expense and I am currently on a 30-year term, with 27 years remaining to continue to pay this monthly expense. If I were to get a Critical Illness, I would not want to worry about my mortgage. If I were to die, I would like my family to be able to inherit my house mortgage free.
3: Loved ones
This is where tailoring to individual circumstances is required, as we all have family or beneficiaries in different forms we want to financially protect. I am not married, I have no children, but I do have a family (siblings, parents). I didn’t grow up financially well off, and my siblings and I now help my Mother financially (this is quite common in families from talking to different people). If I were to die before my Mother, I would want to be able to provide for her financially, so that this financial burden would be removed from my siblings and she would have enough money to live comfortably.
What did I want and what did I do?
I wanted to protect the three key areas above. My income, my mortgage and my Mother. So I spoke to my Financial Planner and this is what we did:
Income Protection. The first thing we did, is get quotes for Income Protection. There are different options available based on your monthly budget, for e.g. you can get an Income Protection plan to benefit you for a maximum of 2 years if you were to claim. The monthly premiums for this are cheaper than an Income Protection Plan which runs until your Retirement Age. Personally, I wanted to pay for an Income Protection plan that would provide me with a monthly benefit until I turned 65. I don’t want to assume the State will look after me if I can’t go back to work after 2 years (and to be honest I probably want more money than I would be able to get).
Decreasing Mortgage Cover. Now I already had a Decreasing Mortgage Cover in place but at the time of buying my home, I picked the cheapest monthly premium I could find, and the Provider track record on this plan isn’t that great. I also had a Life Only plan, so if I got a Critical Illness, I would not have any ‘Financial Safety Net’ to help relieve me of my mortgage. We looked at various options, however I wanted a plan that had both a Critical Illness and a Life benefit, so if I were to claim on my Critical Illness, the Life portion of my plan would still be intact and payable to my beneficiary on my death.
What was very important to me, was that my Critical Illness cover was comprehensive. Working in Financial Planning, I see a lot of Protection Claims for Critical Illness, because unfortunately Critical Illness is becoming very common. These days the medical research is very advanced so many people now survive (which is great). However, this is one of the reasons a Provider may not pay out a claim to a client, as the Critical Illness you might get may not be covered on the policy because the survival rate is so high and the illness is not considered life threatening anymore.
The Critical Illness you get, may also not affect you performing your job role, so your Income Protection plan may not be paid out to you (as this is payable if you cannot perform your current role). So, you may find yourself in a position where you have a Critical Illness, yet you cannot claim on your Critical Illness policy and you cannot claim Income Protection. If I get a Critical Illness I do not want to be in that position.
I would rather be able to claim on my Critical Illness Policy, because my perspective on life might change and I may decide to move to Cornwall to open that ‘Dog Rescue Centre’ I often dream of. Luckily, my Financial Planner was able to compare providers costs and their propositions on a system called ‘CI Expert’ which went into a lot of factual detail about what each provider covers. From this, we chose the provider with the most comprehensive Critical Illness cover.
Family Income Benefit. As explained before, I want to be able to provide for my Mother financially if I were to predecease her. Initially, I was thinking to get a Plan which would pay out a lump sum amount when I die as I thought this would be the best option. However, my Financial Planner asked me why I needed to provide my Mother and why she didn’t have enough to financially support herself. The reality is, my Mother was a single Mother to 4 children, and she is and always has been terrible with money. My Financial Planner then asked me, why I thought in a time of grief, my Mother would be able to handle a large lump sum amount. I didn’t even think of this and it stopped me in my tracks.
In my mind, I thought of the financial disasters I may potentially create by giving someone who is terrible with money, a lot of money when she would be in a bad frame of mind. My Financial Planner recommended a Family Income Benefit Plan. Instead of providing a lump sum amount, this plan would pay out an annual (or monthly) amount to my Mother tax free, effectively providing her with a Salary.
I decided on an amount of £25,000 per year, so she could stop work if she wanted to and live comfortably. If my Mother dies before me, I can change the beneficiary of the plan so the yearly amount I intended for my Mother can be paid to someone else I choose (and as my financial dependants could change in the future, this flexibility is important).
So how much did this all cost me?
I am young (or like to think I am), and by creating a comprehensive Protection Portfolio now, I have secured lower cost premiums (the older you get the more expensive protection becomes). So, in total I am now paying approximately £70 per month for my 3 very comprehensive Protection Policies. This amount will not increase in the future, as my Financial Planner has secured the premiums as guaranteed (there are various options on your monthly premiums and how much they cost now and, in the future). My Financial Planner was also able to help me with a Budget Planner to see if there were any sneaky direct debits, I was paying for that I didn’t need anymore.
Embarrassingly there was the £35 monthly Gym Membership which I really do not use so that has been cancelled. My previous Protection Policy of £12 per month was also cancelled. By doing this, the £70 per month I needed to find in my monthly ‘surplus amount’ for my Protection has gone down to £23 per month as I have replaced £47 of it with existing direct debits I no longer need.
What did I learn and how valuable was my Financial Planners involvement?
By setting up my Protection Portfolio with my Financial Planner, I was asked questions and given scenarios that hadn’t even crossed my mind. These ‘stop and think’ moments were hugely valuable to me. I also learnt more about the individual policies I was applying for (each provider has different varieties available) and what the ‘small print’ meant.
I learnt that a ‘lump sum’ pay out isn’t always the best option and it is completely dependent on individual circumstances. My Financial Planner had the ability to show me a comprehensive comparison of the different propositions, and they also held me accountable for my monthly outgoings by completing a Budget Planner and helping me to understand my expenses and my spending habits.
Could I have done this myself?
Well the answer is yes, I could have put protection in place by myself, however the meeting I had with my Financial Planner has proven to me, that I might not have put in place the best cover for me or my family. The whole point of my Protection Portfolio is to have my ‘Financial Safety Net’ in place, if I had done this myself without my Financial Planner, I probably would have created a few holes in my net. When I meet with my Financial Planner annually, these policies will be reviewed so they always remain relevant to me.
How do I feel now?
I really do feel relieved and comfortable. Another point on my list has been successfully ticked off.