This is an area that many people forget about in their financial plan, partly because they do not wish to face such issues, and partly because protection does not necessarily advance their goals. However, we see this as a vital foundation for your future financial prosperity, because if something goes wrong this can be devastating on your future financial stability. At best, this can take time to recover; at worst, it can completely derail your financial plans.
What is family protection?
This part of your plan should examine the likely effects on your finances is some sort of disaster happens to the family. Usually, this means protecting the family against the effects of the death or serious illness of one of the breadwinners.
This needs to be balanced because family protection will be an expenditure (which could otherwise go towards your goals), but ultimately your plan should aim to provide a safety net should the worst happen.
The main risks
These will focus around:
Death of a breadwinner
If someone within the family dies, most people would want security for their family’s home, so paying off debt should be a major priority. However, the future needs of the family should also be considered. For example, if one member of a couple dies, how will the child care arrangements be addressed? Some families may need child care to be paid for, thus allowing the surviving partner to work. If so, an ongoing income may be required.
Illness of a breadwinner
This can be extremely debilitating. Imagine how you would cope if one of the breadwinners became too ill to work for an extended period. How would this affect your income? Of course, with a reduced income, this could ultimately affect your ability to meet your goals.
Another risk is that a breadwinner is made redundant. Again, think about how your family would cope if an income stops.
The following methods may be used to protect your family against the main disasters:
The basic protection should be a fund to cover the main family expenses for 3-6 months, which should be available in an instant access account. This should tide you over through most short-term problems. Don’t spend your life chasing the best rate, just find a convenient account.
This is a form of insurance which pays out a lump sum in the event of the death of a breadwinner. Many people use this to cover their mortgage, but you can also use it to provide a fund for future family income.
Family income benefit
This is a form of life assurance which pays out an income in the event of the death of a breadwinner. The income would be paid for a specific term, perhaps until the children are old enough to leave home.
Critical illness cover
This is a form of insurance which pays out a lump sum in the event of a serious named illness of a specified severity. This can be used to provide cover against debts, for income, or to provide a lump sum to make alterations to the home in the event of disability.
This is a contract which pays out an income after an initial period for as long as the insured is too sick to return to their former work. Thus, an income can be replaced while you are too ill to work, but will cease when you are well enough to return.
Employed people can cover their major expenses for a limited period (say 12 months), if they are made redundant by their employer.
Private medical insurance
You can provide cover for non-emergency operations through private healthcare. This can mean that you are seen more quickly than on the NHS, which could mean a quicker recovery; this might be particularly useful for the self-employed.
Other areas to consider
Everyone should have a will as this ensures that you will know how your assets are distributed on your death. Most people do not have a will, and many are not regularly updated to take account of changing circumstances. The only way to be sure of providing for your family is to make a will with a qualified professional.
Lasting powers of attorney
This is a legal document which allows a trusted person to take control of your finances if you are incapacitated for some reason. This could mean mental illness, but could also be something like a serious car accident, which puts you in a coma.
If you own a business you should think about making plans for succession and how your assets are treated in the event of serious illness or death.
Find out what levels of cover you may already have in place. This may be personal insurance policies, cover through work like death in service, or sickpay arrangements, plus lump sums from pensions etc.