There are many risks in life; when we get into the car and drive this could be risky; when we own a house there are risks that things can go wrong
Recently I have been writing about what is important to us, and how we can create achievable goals.
There are many risks in life; when we get into the car and drive this could be risky; when we own a house there are risks that things can go wrong. Of course, if we have a mortgage we are expected to have buildings and contents insurance, and if we have a car we must have insurance. So without even thinking about it, we automatically protect ourselves against these risks.
But strangely, one of the biggest risks we know will happen is death; yet it seems we are slow to protect ourselves and provide for those who are left behind. Unlike our car and house, we are not obliged to do anything! In this blog, I want to touch on some of the aspects of protection not only in terms of death but inheritance, loss of income, critical illness and long term care.
Protection – death
Providing protection on death applies whether we are young and have dependants, or we have an estate that might be subject to Inheritance Tax.
Inheritance tax planning
If we take the latter, by 2020-21 a married couple could leave their beneficiaries a combined estate of up to £1 million without incurring inheritance tax. However, for those with an estate above this then tax will likely be due; this means that the eventual amount which is paid out will be less due to inheritance tax.
Life assurance can be set up to cover some or all of an inheritance tax bill, and provide piece of mind that on death, family and friends are not left to face a large liability.
Protecting the family
For families, this can be really important; there are different permutations of what might be needed. Perhaps the easiest is to take a family where one partner earns less than the other, there is a mortgage and young children.
In this case, it is about understanding what is needed to clear any debts, and then what is needed to fund ongoing living expenses. An example would be perhaps where one partner earns £15,000 and the other £50,000. They have a mortgage of £200,000 and two children under 10. Immediately, if the higher earner dies there is a shortfall in income of £50,000 and a mortgage debt of £200,000.
Once we have this base we can work out what is available and what protection can be put in place.
Protecting the business
We talk about protection on death in terms of inheritance and the family but what about the business? What happens when a key employee dies? This could be to replace lost profit, train a replacement employee or to buy out the shares of a director who has died.
Other types of protection
This list is far from exclusive but outlines some of the other options.
Long term care insurance
Perhaps it is a nice problem to have, but the reality is that we are all living a lot longer these days. It does however mean we are likely to have some form of illness during our lives, and will perhaps even need care.
There are different ways this can be funded; the local authority might help but their resources are limited. We may be able to fund care through selling personal assets which can include the family home. However, there are ways to insure against long term care needs which would mean that assets are protected, and can still be passed down.
Loss of income through illness
Critical illness cover can often be linked with life assurance and ensures that a lump sum benefit is paid when one of a range of specific illnesses is diagnosed. Income protection pays a taxable income in the event of any illness which stops someone from working for more than a set period of time.
Although we have a brilliant health service the reality is that it can take time to receive treatment and this cover is a means of getting private medical help quickly.
This is not an exhaustive list but it highlights that in planning and investing, protection forms an integral part of the remit. Whether it means inheritance tax planning or protecting the family, it is as important (if not more so) than protecting the car or house because ultimately these events can have serious financial implications which need to be protected.
Of course, it is not always cheap to arrange cover, therefore it is about identifying what is the highest priority to us, and how that fits with the other requirements we have.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.