Your ‘House of Wealth’ needs solid financial foundations
Several years ago, I worked with a group of people to create a model called the House of Wealth: a graphical representation of your financial planning. The foundations of the house include all the basics everyone should consider having in place to safeguard their (and their families’) future, we never know what’s around the corner.
There are eight elements to the foundations in total: three are essential (an emergency cash reserve, a will and a lasting power of attorney), and five are optional. They’re very important for some people, but unnecessary for others.
It’s worth checking those five to see if you could benefit from the protections they offer.
1. Life insurance
We’re insuring a risk with life cover: if you were to pass away, what would happen to your family unit or those you leave behind? If you’re a single person with no debts, you probably don’t need life assurance. But if you’re in a relationship and you’ll leave someone behind who would be financially disadvantaged by a loss of income, you should consider it.
There are two broad types of policy you should consider:
Mortgage payment protection insurance
- This is a term assurance policy which will cover the balance of your mortgage. As your balance reduces over time, the policy value reduces accordingly (it’s also known as decreasing term assurance). This is generally the cheapest way to have your mortgage paid off in the event of death.
- You can also arrange what is called a level term assurance, if you have an interest-only mortgage. Premiums are generally higher because you’ll still owe a substantial amount at the end of an interest-only mortgage term.
Family Income Benefit to replace the loss of income
- Repaying the mortgage on death is one thing, but there are still bills to pay, so replacing this loss of income can also be important.
- If your dependent receives a lump sum on your death, they’ll probably need to seek financial advice to invest it to ensure it lasts over time, we think this carries an additional level of risk and uncertainty and that’s why we generally prefer to use a family income benefit plan.
- A family income benefit plan pays out a regular payment each month for the term of the policy, like a tax-free salary. It can go up in line with inflation, the premiums are cheaper, and is generally a more secure way to protect against loss of income for those you leave behind, in the event of death.
- As with all life assurance, lump sum or income, it’s generally better to arrange individual policies rather than a joint one with your partner. This allows for the policies to be tailored to each person’s needs, which can be very different. In addition, the benefit pay-out can be left in a trust, which can help speed up a payment in the event of a claim and keeps the benefits out of the estate for inheritance tax purposes.
Who’s it for? Anyone who would leave behind a partner or dependants should consider it.
2. Disability insurance
This covers you if you’re unable to work due to an accident or long-term illness. This type of policy will pay a proportion of your income – typically between 50% and 75% – tax-free in such a scenario.
Policies are usually deferred before they begin paying out. It’s often good practice to set that deferral according to however much you have saved in an emergency reserve; if you have 12 months of expenditure set aside, then deferring the policy for a year means you’ll pay lower premiums that if you have it set to pay out after a month.
The policy pays out until you either return to work or until the end of the term, which generally is your retirement age.
Who’s it for? Everyone should consider it. Even if you have no dependants, you still need money coming in if you can’t work due to an accident or long-term illness. Some larger employers, particularly for executive roles, will include this type of cover as part of their terms of employment.
3. Critical illness cover
Critical illness policies offer a tax-free payment and become payable on diagnosis of a specific list of conditions, including the likes of brain injury, organ failure and surgical treatments such as a heart bypass.
They can be set up as monthly payments like a family income benefit plan, but generally are taken as a lump sum, typically to clear a mortgage. You can set the amount of the lump sum, with higher sums attracting higher premiums.
Who’s it for? This should only really be considered once you’ve paid off all unsecured debt.
4. Private medical insurance
We’re lucky enough to have the NHS, and that’s an organisation that many people are so fond of that they’d never consider private medical insurance, regardless of their personal wealth.
But if you need to get back to work as quickly as possible after your circumstances change, private medical insurance will generally reduce the waiting time to be seen by a specialist and receive non-emergency treatment. It may also provide you a private room after an emergency procedure.
There can be an excess on these policies, much like car or home insurance. Around £250 is a typical excess, which will roughly cover your first consultation with a specialist. The higher your excess, the lower your premiums.
Who’s it for? Particularly valuable for the self-employed, but relevant for anyone. Again, some larger employers will offer it as part of their standard employment terms as a benefit in kind.
5. Household insurances
This is the likes of buildings and content insurance on your home, car insurance and travel insurance.
While most people have these already, what’s important is to regularly check the amount you’re insured for, especially on home contents policies. So many people are under-insured, which doesn’t come to light until you make a claim. Make sure all your jewellery and technology is covered, and itemise things on the policy if you’re not sure, especially for taking them away from your home.
Documents (and photos of receipts for expensive items) should ideally be kept either in a fireproof box or safe, or online in cloud-based storage.
Who’s it for? Everyone with a roof over their heads, car outside or holiday booked!
Insurance isn’t fun – but it’s vitally important to get right for your circumstances. Once a year, it’s worth reviewing you’ve got everything in place you need… and then you can forget about it for the next 12 months!