Following on from the first blog post on what to think about for your financial future, we’re going to look at some things you need to consider with your finances.
Some basic insurance
The first thing you need to think about and do is to put in place some protection against disaster – the second of the three fundamentals.
A decent life insurance programme is the firm foundation on which any financial plan is based. There’s no point in planning for your future if at the first sign of disaster the whole thing is washed away. Having a firm foundation that the financial plan is built on is your first priority.
There are three things you need to think about protecting: what happens if you die, what happens if you suffer a critical illness but don’t die (i.e. cancer, heart attack, stroke, multiple sclerosis), and what happens if you can’t work due to accident or illness?
These are the three main elements of protection. For a singleton, critical illness and income protection are more important than life cover. The concern, if anything, is what happens if you’re still here, rather than what happens if you’re dead.
It’s important to think about what happens if you’re still here, but a catastrophic event has happened, rather than if you’re no longer here and you don’t care. How much life insurance should you have and what should you think about?
Let’s look at life insurance first. With protection, always think about what would happen and what the implications of you dying would be. If you have any debt, such as a mortgage, credit card balances and so on, you don’t want that to be left to someone else to deal with.
You can clear off any debt with some dirt-cheap term life assurance. If you’ve got a mortgage, it’s worth getting rid of that if the worst were to happen. You may be thinking: “But the house could be sold, and the mortgage paid off that way”, and that’s a valid thought, but life assurance is so cheap, it may well be worth it, even if your eventual beneficiaries are charities.
You’ll have to choose executors for your will anyway (you have made a will, right?). If you have no family at all, it may well be a solicitor who deals with your will, and in this instance, you might just let the house be sold, pay the mortgage off that way, and not bother with life insurance.
Let’s look at an example with some figures: Your house is worth £150,000, with a £100,000 mortgage on it. When the mortgage is paid off, there’s £50,000 left to distribute according to your will. Is that enough, or would you want more to be left to a person or to a charity?
Could you consider taking out a life assurance policy to pay off your mortgage, and then when the house is sold it’s all distributable, with money there because the mortgage is gone? Think about what you’d like to happen if you were to die.
If you do take life cover out, make sure you put it in trust. Putting a life policy in trust has a couple of benefits – one is that it’s generally paid out much more quickly, because your estate doesn’t have to get to the probate stage first.
Putting your life assurance policy in trust essentially removes it out of your estate, and if it’s a large policy with a big payout, can potentially save you some tax too. In trust is the default state, and it means the money is there for your trustees to pay mortgages off in only a couple of weeks, rather than potentially months.
What about critical illness?
You need to think about what would happen if you got something nasty, as outlined above. Would you want to have to work while you’re recovering from cancer, or would it help for you to take off as much time as you needed to make sure you’d recovered properly?
The ideal situation is for you to take out enough critical illness insurance so that all your date is paid off on diagnosis. However, that can get expensive, so a compromise is to buy yourself, say, five years of mortgage payments. For example, if your mortgage payment is £500 per month (£6,000 a year), then take out £30,000 worth of critical illness cover, so at least your mortgage will be paid for five years and you don’t have to worry about it.
You could think, “Well, I’ll take out enough critical illness over to cover two years’ worth of TOTAL living expenses” e.g.: you’re total living expenses are £1,500 a year or £18,000 a year, you’d take out £36,000 critical illness cover, which is two years of expenses. You know you can live for two years without worrying about expenses and concentrate on getting better.
Ideally, pay off all your debt, and take out enough critical insurance to pay off the whole thing, so you’ll be debt-free and get it out of your mind if you’re dealing with a nasty illness. If that’s too expensive, then compromise, with mortgage payments or total living expenses over a set time. Get some advice and have a look online to find out about premiums.
In the next post, we’ll look at other things you can do to help yourself prepare for any eventuality.